<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|_| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
|X| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to section 240.14a-12
ALTEON WEBSYSTEMS, INC.
-----------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
-----------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box)
|_| No fee required.
|X| Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1. Title of each class of securities to which transaction applies:
NORTEL NETWORKS CORPORATION COMMON SHARES
No par value
2. Aggregate number of securities to which transaction applies: 105,870,894
3. Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum Amount of
Title of Securities Amount to be Offering Aggregate Registration
To be Registered Registered Price Per Share Offering Price Fee
------------------- ------------- ---------------- ----------------- ------------
<S> <C> <C> <C> <C>
Nortel Networks Corporation Common
Shares, no par value.................... 105,870,894 N/A $8,037,848,508 $2,121,992
</TABLE>
The proposed maximum aggregate offering price of all Nortel Networks common
shares registered is $8,037,848,508. Pursuant to Rule 457(f) and 457(c)
under the Securities Act of 1933, as amended, the maximum offering price of
the shares registered upon the initial filing of Registration Statement No.
333-12392 was calculated by multiplying the aggregate number of shares of
Alteon WebSystems common stock that Nortel Networks then expected to
exchange in connection with the merger (48,067,740 shares) by the average
of the high and low prices of shares of Alteon WebSystems common stock as
reported by the Nasdaq National market on August 11, 2000 ($137.50). This
maximum offering price was $6,609,314,250. Similarly, the maximum offering
price of the additional shares registered in connection with an amendment
to the Registration Statement was calculated by multiplying the aggregate
number of additional shares of Alteon WebSystems common stock that Nortel
Networks expects to exchange in connection with the merger (9,738,457
shares) by the average of the high and low sale prices of Alteon WebSystems
common stock as reported by the Nasdaq National Market on August 24, 2000
($146.69). This maximum offering price of the additional shares was
$1,428,534,258.
4. Proposed maximum aggregate value of transaction: $8,037,848,508
5. Total fee paid: $2,121,992
|_| Fee paid previously with preliminary materials.
|X| Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
6. Amount Previously Paid: $2,121,992
7. Form, Schedule or Registration Statement on Form S-4 No.: 333-12392
8. Filing Party: NORTEL NETWORKS CORPORATION
9. Date Filed: August 15, 2000, as amended August 25, 2000
<PAGE> 2
LOGO
ALTEON WEBSYSTEMS, INC.
50 GREAT OAKS BLVD.
SAN JOSE, CALIFORNIA 95119
August 28, 2000
Dear Stockholders:
I am writing to you today to ask for your vote on our proposed merger
agreement with Nortel Networks Corporation. In the merger, each share of Alteon
WebSystems, Inc. common stock will be exchanged for 1.83148 Nortel Networks
common shares. Nortel Networks common shares are traded on the New York Stock
Exchange and on The Toronto Stock Exchange under the trading symbol "NT."
You will be asked to vote on the merger agreement and various other items
at the annual meeting of Alteon stockholders to be held on October 4, 2000 at
9:30 a.m., California time, at Alteon's principal executive offices, located at
50 Great Oaks Blvd., San Jose, California. In order to complete the merger,
holders of a majority of the outstanding shares of Alteon common stock must vote
in favor of the adoption of the merger agreement. Certain officers, directors
and other stockholders of Alteon, who hold approximately 15.40% of the
outstanding shares of Alteon common stock as of the record date, August 16,
2000, have agreed to vote their shares in favor of adoption of the merger
agreement.
The accompanying proxy statement/prospectus provides detailed information
about Nortel Networks, Alteon, the merger and the other items that will be voted
on at the annual meeting. PLEASE GIVE ALL OF THIS INFORMATION YOUR CAREFUL
ATTENTION, INCLUDING THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE 13 OF
THE PROXY STATEMENT/PROSPECTUS.
We are very excited by the opportunities we envision for the combined
company. YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER IS FAIR TO YOU
AND IN YOUR BEST INTERESTS, AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE TO ADOPT
THE MERGER AGREEMENT.
YOUR VOTE IS VERY IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. To
vote your shares, you may use the enclosed proxy card, vote by telephone, vote
on the Internet or attend the annual meeting. To vote in favor of the merger
agreement, you must vote "FOR" the proposal by following the instructions stated
on the enclosed proxy card. If you do not vote at all, it will, in effect, count
as a vote against the merger agreement. We urge you to vote "FOR" this proposal,
a necessary step in the merger involving Alteon and Nortel Networks. In
addition, to approve the other proposals submitted for your approval, you must
vote "FOR" those proposals by following the instructions stated on the enclosed
proxy card, and we encourage you to do so.
Sincerely,
Orr Signature
Dominic P. Orr
Chairman of the Board and
Chief Executive Officer
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the Nortel Networks common shares to be
issued in the merger or determined if the accompanying proxy
statement/prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.
No securities commission or similar regulatory authority in Canada has in any
way passed upon the merits of the Nortel Networks common shares offered under
the accompanying proxy statement/prospectus or the disclosure contained in the
accompanying proxy statement/prospectus. Any representation to the contrary is
an offense.
The proxy statement/prospectus is dated August 28, 2000 and is first being
mailed to stockholders on or about August 30, 2000.
<PAGE> 3
ALTEON WEBSYSTEMS, INC.
50 GREAT OAKS BLVD.
SAN JOSE, CALIFORNIA 95119
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 4, 2000
To the Stockholders of Alteon WebSystems, Inc.:
The 2000 annual meeting of stockholders of Alteon WebSystems, Inc., a
Delaware corporation, will be held on October 4, 2000 at 9:30 a.m., California
time, at the principal executive offices of Alteon located at 50 Great Oaks
Blvd., San Jose, California, for the following purposes:
- to elect two Class I directors to Alteon's board of directors;
- to ratify the appointment of Alteon's independent auditors;
- to adopt the Agreement and Plan of Merger, dated as of July 28, 2000,
among Alteon, Nortel Networks Corporation, a corporation organized under
the laws of Canada, and Darius Corp., a Delaware corporation that is a
wholly-owned subsidiary of Nortel Networks, pursuant to which Darius
Corp. will be merged with and into Alteon. If the merger agreement is
adopted and the merger is consummated, Alteon stockholders will receive
1.83148 common shares of Nortel Networks for each share of Alteon common
stock that they hold, and Alteon will become a wholly-owned subsidiary
of Nortel Networks; and
- to act upon any other matters properly brought before the annual meeting
and any adjournment or postponement of the annual meeting.
Alteon's board of directors has fixed the close of business on August 16,
2000 as the record date for the determination of stockholders entitled to notice
of, and to vote at, the annual meeting and any adjournment or postponement
thereof. Only holders of record of shares of Alteon common stock at the close of
business on the record date are entitled to notice of, and to vote at, the
annual meeting. At the close of business on the record date, Alteon had
outstanding and entitled to vote 43,268,818 shares of common stock.
To grant your proxy to vote your shares, you may complete and return the
enclosed proxy card or grant your proxy by telephone or on the Internet. You may
also cast your vote in person at the annual meeting. Please vote promptly
whether or not you expect to attend the annual meeting.
By Order of the Board of Directors,
Orr Signature
Dominic P. Orr
Chairman of the Board
San Jose, California
August 28, 2000
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN
AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE
OR SUBMIT A PROXY BY PHONE OR THROUGH THE INTERNET BY FOLLOWING THE INSTRUCTIONS
ON THE ENCLOSED PROXY CARD.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER...... 1
WHO CAN HELP ANSWER YOUR QUESTIONS.......... 1
SUMMARY OF THE MERGER....................... 2
The Companies............................. 2
What Alteon Stockholders Will Receive in
the Merger............................. 2
Recommendation of Alteon's Board of
Directors to Adopt the Merger
Agreement.............................. 3
Opinion of Lehman Brothers that the
Exchange Ratio is Fair to Alteon
Stockholders........................... 3
Record Date for Voting; Vote Required of
Alteon Stockholders for Adoption of the
Merger Agreement....................... 3
Stockholder Agreements of Certain
Directors, Executive Officers and
Stockholders........................... 3
Material Federal Income Tax
Consequences........................... 4
No Appraisal Rights....................... 4
Regulatory Approvals...................... 4
Treatment of Alteon Stock Options......... 4
Markets and Comparative Market Price
Data................................... 4
Interests of Alteon's Directors and
Executive Officers in the Merger....... 5
Acquisition Proposals..................... 5
Conditions to the Merger.................. 6
Termination of the Merger Agreement....... 6
Termination Fees.......................... 7
SELECTED HISTORICAL FINANCIAL DATA OF NORTEL
NETWORKS CORPORATION...................... 8
SELECTED HISTORICAL FINANCIAL DATA OF ALTEON
WEBSYSTEMS, INC........................... 10
SUMMARY UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION............ 12
RISK FACTORS................................ 13
Because you will receive a fixed number of
Nortel Networks common shares for each
share of your Alteon common stock, and
because the market value of Nortel
Networks common shares will vary, you
cannot be certain of the value of the
consideration you will receive in the
merger................................. 13
The anticipated benefits of the merger are
dependent on the successful integration
of the businesses of Nortel Networks
and Alteon............................. 13
Directors and executive officers of Alteon
have interests in the merger that may
differ from their interests as
stockholders which may have influenced
their decision to approve the merger... 13
The termination fee and the inability of
Alteon to terminate the merger
agreement in favor of an alternative
proposal may discourage other companies
from trying to acquire Alteon.......... 14
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Forward-looking statements may prove
inaccurate............................. 14
NORTEL NETWORKS RECENT DEVELOPMENTS......... 16
Agreement to Acquire Sonoma Systems....... 16
Agreement to Acquire EPiCON, Inc.......... 16
Reorganization of Nortel Networks......... 16
COMPARATIVE UNAUDITED PER SHARE DATA........ 18
THE 2000 ANNUAL MEETING OF ALTEON
STOCKHOLDERS.............................. 19
Date, Time and Place...................... 19
Purposes of the Annual Meeting............ 19
Record Date and Voting Power.............. 19
Quorom.................................... 19
Required Vote............................. 19
Stockholder Agreements of Alteon's
Directors, Executive Officers and
Stockholders........................... 20
How Proxies are Counted................... 20
Voting and Revocation of Proxies.......... 20
Solicitation of Proxies; Cost of
Solicitation........................... 21
Recommendation of Alteon's Board of
Directors.............................. 22
THE MERGER PROPOSAL......................... 23
Background of the Merger.................. 23
Recommendation of Alteon's Board of
Directors;
Reasons for the Merger................. 24
Opinion of Financial Advisor to Alteon.... 26
Interests of Certain Persons in the
Merger................................. 34
Accounting Treatment...................... 35
Regulatory Approvals...................... 35
Resale of Nortel Networks Common Shares... 36
No Appraisal Rights....................... 37
U.S. Federal Income Tax Consequences of
the Merger............................. 38
Certain U.S. and Canadian Tax
Considerations Relating to Holding
Nortel Networks Common Shares.......... 40
Stock Exchange Listings of Nortel Networks
Common Shares.......................... 43
THE MERGER AGREEMENT........................ 44
The Merger................................ 44
Effective Time of the Merger.............. 44
Conversion of Alteon Common Stock......... 44
No Fractional Nortel Networks Common
Shares................................. 44
Exchange of Alteon Common Stock for Nortel
Networks Common Shares................. 44
Treatment of Alteon Stock Options and the
Employee Stock Purchase Plan........... 45
Employee Benefits......................... 46
Representations and Warranties............ 46
Conduct of Business of Alteon............. 48
Conduct of Business of Nortel Networks.... 48
Covenants of Alteon....................... 49
Covenants of Nortel Networks.............. 49
</TABLE>
i
<PAGE> 5
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Covenants of Nortel Networks, Alteon and
the Merger Subsidiary.................. 49
Acquisition Proposals..................... 50
Conditions to the Merger.................. 51
Indemnification........................... 52
Waiver and Amendment...................... 52
Termination of the Merger Agreement....... 53
Termination Fees and Expenses............. 54
STOCKHOLDER AGREEMENTS...................... 56
MARKET PRICES AND DIVIDENDS................. 58
Nortel Networks........................... 58
Alteon.................................... 59
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION OF NORTEL NETWORKS
CORPORATION............................... 60
NOTES TO THE PRO FORMA COMBINED FINANCIAL
STATEMENTS (UNAUDITED).................... 65
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT OF ALTEON........... 72
Section 16(a) Beneficiary Ownership
Reporting Compliance................... 74
BUSINESS OF NORTEL NETWORKS................. 75
DESCRIPTION OF NORTEL NETWORKS SHARE
CAPITAL................................... 75
General................................... 75
Common Shares............................. 75
Shareholder Rights Plan................... 76
Preferred Shares of Nortel Networks....... 77
Preferred Shares of Old Nortel............ 77
BUSINESS OF ALTEON.......................... 78
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS OF ALTEON...................... 99
COMPARATIVE RIGHTS OF HOLDERS OF ALTEON
COMMON STOCK AND NORTEL NETWORKS COMMON
SHARES.................................... 105
Vote on Extraordinary Corporate
Transactions........................... 105
Dividends and Distributions............... 106
Amendments to Charter..................... 106
Amendment to Bylaws....................... 107
Interested Shareholder Transactions....... 107
Dissent and Appraisal Rights.............. 108
Directors' Qualifications................. 109
Composition of Boards of Directors........ 110
Election of Directors..................... 110
Removal of Directors...................... 110
Vacancy on Boards of Directors............ 111
Directors' and Officers'
Indemnification........................ 111
Limitation of Directors' Personal
Liability for Monetary Damages......... 112
Special Meeting of Stockholders........... 113
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Quorum Requirements....................... 113
Rights Agreement.......................... 113
Inspection of Books and Records........... 113
Applicability of California Law to
Alteon................................. 114
ELECTION OF CLASS I DIRECTORS............... 115
Effects of the Merger on Alteon's Board of
Directors.............................. 115
Alteon's Nominees for Class I Directors... 115
Class II Directors........................ 116
Class III Director........................ 116
Alteon's Board of Directors Committees and
Meetings............................... 116
Compensation of Directors................. 117
Information Regarding Executive
Officers............................... 117
RATIFICATION OF SELECTION OF INDEPENDENT
AUDITORS.................................. 119
EXECUTIVE COMPENSATION...................... 120
Option Grants in Last Fiscal Year......... 120
Aggregate Option Exercises in Last Fiscal
Year and Fiscal End Values............. 121
Employment, Severance and Change of
Control Agreements..................... 122
Compensation Committee Interlocks and
Insider Participation.................. 122
Compensation Committee Report on Executive
Compensation........................... 123
Performance Measurement Comparison........ 125
Certain Transactions...................... 125
OTHER MATTERS............................... 126
Stockholder Proposals for Alteon 2001
Annual Meeting......................... 126
LEGAL OPINIONS.............................. 127
EXPERTS..................................... 127
SERVICE OF PROCESS AND ENFORCEMENT OF
LIABILITIES............................... 128
WHERE YOU CAN FIND MORE INFORMATION......... 129
INDEX TO FINANCIAL STATEMENTS............... F-1
ANNEXES
A. Agreement and Plan of Merger by and
among Nortel Networks Corporation,
Darius Corp. and Alteon WebSystems,
Inc. dated as of July 28, 2000......... A-1
B. Form of Stockholder Agreements, dated
as of July 28, 2000, between Nortel
Networks Corporation and the
stockholders listed on Schedule A
thereto................................ B-1
C. Form of Stockholder Agreements, dated
as of July 28, 2000, between Nortel
Networks Corporation and Matrix
Partners IV, L.P. and Matrix IV
Entrepreneurs Fund, L.P................ C-1
D. Opinion of Lehman Brothers Inc. dated
July 27, 2000.......................... D-1
</TABLE>
ii
<PAGE> 6
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: What do I need to do now?
A: Just vote your shares as described in this proxy statement/prospectus and
the proxy card included with it, so that your shares may be represented at
the Alteon annual meeting. If you do not vote your shares, your failure to
vote will have the same effect as voting against the merger.
Q: Should I send in my stock certificates now?
A: No. You will receive instructions for exchanging your stock certificates
after the merger is completed.
Q: If my shares are held in street name by my broker, will my broker vote my
shares for me?
A: No. Your broker can vote your shares only if you provide instructions on how
to vote. You should instruct your broker to vote your shares, following the
directions provided by your broker. Your failure to instruct your broker on
how to vote your shares will have the same effect as voting against the
merger.
Q: Can I change my vote after I have mailed my proxy card or provided
instructions to my broker?
A: Yes. You can change your vote at any time before your proxy is voted at the
Alteon annual meeting. This proxy statement/prospectus contains instructions
on how to change your vote. If you have instructed your broker to vote your
shares, you must follow directions received from your broker to change those
instructions.
Q: Do I need to attend the Alteon annual meeting in person?
A: No. It is not necessary for you to attend the Alteon annual meeting to vote
your shares, although you are welcome to attend.
Q: When will the merger be completed?
A: Nortel Networks and Alteon are working towards completing the merger as soon
as possible, and expect to complete it shortly after the Alteon annual
meeting on October 4, 2000 if Alteon stockholders adopt the merger
agreement. However, it is possible that delays in obtaining regulatory
approvals could require that the merger be completed at a later time.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you have more questions about the merger after reading this proxy
statement/prospectus, you should contact:
<TABLE>
<S> <C>
Corporate Investor Communications, Inc. Alteon WebSystems, Inc.
111 Commerce Road 50 Great Oaks Blvd.
Carlstadt, NJ 07072 San Jose, California 95119
Telephone: (877) 535-1140 Attn: Lynn Harper
Telephone: (408) 360-5644
E-mail: [email protected]
</TABLE>
1
<PAGE> 7
SUMMARY OF THE MERGER
This summary highlights key aspects of the merger which are described in
greater detail elsewhere in this document. It does not contain all of the
information that may be important to you. To understand the merger better, and
for a more complete description of the legal terms of the merger agreement, you
should read this entire proxy statement/prospectus carefully, including the
Annexes, and the additional documents to which we refer you. You can learn how
to obtain these additional documents in "Where You Can Find More Information,"
see page 129. Unless otherwise indicated, "$" shall mean United States Dollars.
THE COMPANIES
Nortel Networks Corporation
8200 Dixie Road, Suite 100
Brampton, Ontario
Canada L6T 5P6
Telephone: (905) 863-0000
Nortel Networks is a leading global supplier of networking solutions and
services that support voice, data and video transmission over wireless and
wireline technologies. Nortel Networks is focused on building the infrastructure
service enabling solutions and applications for the new, high-performance
Internet. Nortel Networks' business consists of the design, development,
assembly, manufacture, marketing, sale, financing, installation, servicing and
support of networking solutions and services for service provider and carrier
customers and enterprise customers. Nortel Networks' solutions and services are
used by customers to support the Internet and other public and private voice,
data and video networks.
Alteon WebSystems, Inc.
50 Great Oaks Blvd.
San Jose, California 95119
Telephone: (408) 360-5500
Alteon is 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. Alteon's 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. This combination of
capabilities is referred to as Web-working. Alteon's solutions are designed to
increase the performance, availability, scalability, manageability and control
of Web servers and Web data center infrastructure. Alteon provides Web-working
solutions to e-commerce companies, Web portals, content publishers, Web hosting
companies, Internet service providers, server vendors and enterprises.
WHAT ALTEON STOCKHOLDERS WILL RECEIVE IN THE MERGER (SEE PAGE 44)
In the merger, each share of Alteon common stock will be exchanged for
1.83148 Nortel Networks common shares. The exchange ratio will not be adjusted
to reflect any changes in the market price of either Alteon common stock or
Nortel Networks common shares.
Nortel Networks will not issue fractional shares in the merger. As a
result, the total number of Nortel Networks common shares you receive in the
merger will be rounded down
2
<PAGE> 8
to the nearest whole number. You will receive a cash payment, based on the
volume weighted average of the last sales prices of Nortel Networks common
shares during the five trading days prior to completion of the merger, for the
value of the remaining fraction of a Nortel Networks common share that you would
otherwise receive.
RECOMMENDATION OF ALTEON'S BOARD OF DIRECTORS TO ADOPT THE MERGER AGREEMENT (SEE
PAGE 24)
Alteon's board of directors has unanimously approved the merger and
recommends that you vote "FOR" adoption of the merger agreement.
OPINION OF LEHMAN BROTHERS INC. THAT THE EXCHANGE RATIO IS FAIR TO ALTEON
STOCKHOLDERS (SEE PAGE 26)
In deciding to approve the merger, one of the factors that Alteon's board
of directors considered was the opinion of Alteon's financial advisor, Lehman
Brothers Inc., that, as of July 27, 2000 and subject to the considerations set
forth in the opinion, the exchange ratio in the merger agreement was fair from a
financial point of view to the holders of Alteon common stock. Lehman Brothers'
opinion was provided for the information and assistance of Alteon's board of
directors in connection with its consideration of the merger and its opinion
does not constitute a recommendation as to how any holder of Alteon common stock
should vote with respect to the merger agreement. The full text of the Lehman
Brothers' opinion, which sets forth assumptions made, matters considered and
limitations on the review undertaken by Lehman Brothers in connection with its
opinion, is attached as Annex D to this proxy statement/prospectus. Alteon urges
you to read the entire opinion carefully.
RECORD DATE FOR VOTING; VOTE REQUIRED OF ALTEON STOCKHOLDERS FOR ADOPTION OF THE
MERGER AGREEMENT (SEE PAGE 19)
You can vote at the Alteon annual meeting if you owned Alteon common stock
at the close of business on August 16, 2000. Adoption of the merger agreement
requires the affirmative vote of holders of a majority of the outstanding shares
of Alteon common stock. As of the record date, August 16, 2000, Alteon had
43,268,818 shares of common stock outstanding. Each share of Alteon common stock
outstanding on the record date entitles its holder to one vote. As of the record
date, the directors and executive officers of Alteon and their affiliates held
common stock representing in the aggregate, approximately 15.40% of all the
outstanding shares of Alteon common stock.
STOCKHOLDER AGREEMENTS OF CERTAIN DIRECTORS, EXECUTIVE OFFICERS AND
STOCKHOLDERS (SEE PAGE 20)
Certain directors, executive officers and stockholders of Alteon have each
entered into stockholder agreements with Nortel Networks. These directors,
executive officers and stockholders are entitled to vote, in the aggregate,
approximately 15.40% of the outstanding shares of Alteon common stock as of the
record date. In each stockholder agreement, the relevant director, executive
officer or stockholder agreed to vote all of his, her or its shares of Alteon
common stock in favor of the merger and against any competing transaction. A
form of the stockholder agreement executed by each of the applicable directors
and executive officers is attached as Annex B, and a form of the stockholder
agreement entered into by each of the applicable stockholders is attached as
Annex C.
3
<PAGE> 9
MATERIAL FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 38)
The receipt of Nortel Networks common shares in the merger generally will
be tax free to Alteon stockholders for United States income tax purposes, except
for tax on cash received for fractional shares. Tax matters are very
complicated, and the tax consequences of the merger to you will depend on the
facts of your particular situation. We urge you to consult your tax advisor for
a full understanding of the tax consequences of the merger to you.
NO APPRAISAL RIGHTS
You will have no appraisal rights in connection with the merger.
REGULATORY APPROVALS (SEE PAGE 35)
The merger is subject to the requirements of the Hart-Scott-Rodino
Antitrust Improvements Act, which requires that prior to completing the merger,
certain information and materials must be filed with the Department of Justice
and the Federal Trade Commission, and a specified waiting period must expire or
be terminated. The required information was filed with the Department of Justice
and the Federal Trade Commission on August 15, 2000, and early termination was
requested on August 15, 2000.
In connection with the merger, Nortel Networks will file a notification
with, and submit information to the applicable regulatory agency as required
under each of the German Act Against Restraints on Competition and the Austrian
Cartel Act. It will be a violation of each such act to complete the merger prior
to clearance by the respective regulatory agency, or expiration of the requisite
review period.
TREATMENT OF ALTEON STOCK OPTIONS (SEE PAGE 45)
Nortel Networks will assume all Alteon stock options outstanding at the
time of the merger. After the merger, Nortel Networks will treat these stock
options as options to acquire Nortel Networks common shares. The number of
common shares and exercise price of the Alteon options will be adjusted to
reflect the exchange ratio.
MARKETS AND COMPARATIVE MARKET PRICE DATA (SEE PAGE 58)
Nortel Networks common shares are traded under the symbol "NT" on the New
York and Toronto stock exchanges. Alteon common stock is traded on The Nasdaq
Stock Market under the symbol "ATON."
We present below the per share closing prices for Nortel Networks common
shares as quoted on the New York Stock Exchange and Alteon common stock as
reported on the Nasdaq National Market. These prices are presented on the
following dates:
- July 27, 2000, the last full trading day before the public announcement
of the proposed merger; and
- August 24, 2000, the most recent date for which prices were practicably
available before the printing of this proxy statement/prospectus.
4
<PAGE> 10
The table also presents the implied equivalent per share values for shares
of Alteon common stock by multiplying the price per Nortel Networks common share
on the two dates by the exchange ratio of 1.83148.
<TABLE>
<CAPTION>
IMPLIED ALTEON
NORTEL NETWORKS SHARES OF ALTEON SHARE PRICE
COMMON SHARES COMMON STOCK EQUIVALENT
--------------- ---------------- --------------
<S> <C> <C> <C>
July 27, 2000..................... $78.625 $143.00 $144.00
August 24, 2000................... $81.563 $146.25 $149.38
</TABLE>
ALTEON STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR
NORTEL NETWORKS COMMON SHARES.
INTERESTS OF ALTEON'S DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER
(SEE PAGE 34)
When considering the recommendation of Alteon's board of directors that you
vote in favor of the adoption of the merger agreement you should be aware that
the directors and executive officers of Alteon have interests in the merger that
are in addition to, or different from, their interests as Alteon stockholders.
These differing interests relate to, among other things:
- a significant number of options to purchase shares of Alteon common
stock held by Alteon directors and executive officers which will become
vested and immediately exercisable on completion of the merger;
- a significant number of new options to purchase shares of Alteon common
stock which Alteon intends to grant to its executive officers, other
employees and new hires of Alteon prior to completion of the merger;
- employment agreements between Nortel Networks and certain executive
officers of Alteon that will become effective upon completion of the
merger; and
- directors' and officers' insurance coverage and indemnification rights
provided for in the merger agreement.
ACQUISITION PROPOSALS (SEE PAGE 50)
With limited exceptions and subject to the fiduciary obligations of
Alteon's board of directors, Alteon has agreed that neither it nor any of its
affiliates will:
- solicit or knowingly encourage inquiries or proposals;
- engage in negotiations; or
- have discussions with any person other than Nortel Networks;
in each case with respect to acquisition proposals from any company other than
Nortel Networks. Alteon further agreed to cause each of its officers, directors,
agents and advisors and those of its subsidiaries not to take these actions.
Nortel Networks required this non-solicitation provision in order to prevent
Alteon from seeking a competing offer for Alteon at a higher price. While this
provision reduces the likelihood of a competing offer,
5
<PAGE> 11
Alteon is permitted to engage in negotiations with respect to unsolicited bids,
and Alteon's board of directors has a fiduciary duty to stockholders to consider
any superior proposals.
CONDITIONS TO THE MERGER (SEE PAGE 51)
Nortel Networks and Alteon will not complete the merger unless a number of
conditions are satisfied or waived, including:
- adoption of the merger agreement by Alteon stockholders;
- receipt of material regulatory approvals and the absence of legal
restraints;
- continued accuracy of the representations and warranties of the other
party;
- performance of the agreements to be performed by the other party;
- the absence of events which have had or would reasonably be expected to
have a material adverse effect on the other party;
- issuance of opinions by attorneys for Nortel Networks and Alteon as to
the tax-free nature of the merger; and
- receipt of approval for listing the Nortel Networks common shares to be
issued in the merger on the New York and Toronto stock exchanges.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 53)
Nortel Networks and Alteon can jointly agree to terminate the merger
agreement at any time before completing the merger. In addition, either party
can terminate the merger agreement if:
- the merger has not been completed by February 28, 2001, if all
governmental approvals required for the completion of the merger have
then been obtained, or otherwise by April 30, 2001;
- Alteon stockholders fail to adopt the merger agreement;
- any governmental approval required for the completion of the merger is
finally denied; or
- the other party breaches any of its representations, warranties or
agreements, and those breaches are not or cannot be timely cured.
Nortel Networks can also terminate the merger agreement if:
- any United States or Canadian governmental agency imposes conditions for
regulatory approval having a material adverse effect on Nortel Networks
or Alteon or requiring Nortel Networks to dispose of any assets; or
- Alteon's board of directors withdraws its recommendation of the merger
agreement to Alteon stockholders.
Alteon can also terminate the merger agreement if any United States or
Canadian governmental agency imposes conditions on regulatory approval, as
described above, unless, after notice of Alteon's intent to terminate, Nortel
Networks waives its analogous right to do so.
6
<PAGE> 12
TERMINATION FEES (SEE PAGE 54)
Alteon could be required to pay Nortel Networks a termination fee of $225
million if the merger agreement is terminated under specified circumstances.
7
<PAGE> 13
SELECTED HISTORICAL FINANCIAL DATA OF
NORTEL NETWORKS CORPORATION
The following selected consolidated financial data as at and for each of
the five fiscal years in the period ended December 31, 1999 have been derived
from the consolidated financial statements of Nortel Networks Limited, a direct
subsidiary of Nortel Networks that was formerly known as Nortel Networks
Corporation. We refer to Nortel Networks Limited as Old Nortel. Effective May 1,
2000, Old Nortel participated in a plan of arrangement under which its
outstanding common shares were exchanged for common shares of newly formed
Nortel Networks, which assumed the name "Nortel Networks Corporation." As used
in this proxy statement/prospectus, unless the context otherwise requires,
"Nortel Networks" refers to Old Nortel in respect of dates prior to May 1, 2000
and New Nortel in respect of dates from and after May 1, 2000. Please see
"Nortel Networks Recent Developments -- Reorganization of Nortel Networks" for a
description of the plan of arrangement.
The report of Deloitte & Touche LLP, as of December 31, 1998 and 1999, and
for each of the three years in the period ended December 31, 1999, is included
in Nortel Networks' Current Report on Form 8-K, dated August 7, 2000, as amended
by Form 8-K/A dated August 18, 2000, incorporated by reference in this proxy
statement/prospectus. The selected consolidated financial data as at and for the
six months ended June 30, 1999 and 2000 have been derived from Nortel Networks'
unaudited interim financial statements and contain all normal, recurring entries
necessary for fair presentation, but are not indicative of the results for the
entire year. You should read the selected consolidated financial data in
conjunction with the audited consolidated financial statements and the notes to
the consolidated financial statements for Nortel Networks included in its
Current Report on Form 8-K, dated August 7, 2000, as amended by Form 8-K/A dated
August 18, 2000, its Annual Report on Form 10-K, as amended by Form 10-K/A, for
the year ended December 31, 1999, and in its Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000. See "Where You Can Find More Information" to
learn how you can obtain these reports. We have adjusted per share amounts to
reflect the two-for-one stock split of Nortel Networks common shares on January
7, 1998, the stock dividend of one Nortel Networks common share on each issued
and outstanding Nortel Networks common share as of August 17, 1999 and the
two-for-one stock split of Nortel Networks common shares on May 5, 2000.
<TABLE>
<CAPTION>
FOR THE
SIX MONTH
PERIOD ENDED
FOR THE YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------- --------------------
1995 1996 1997 1998 1999 1999 2000
-------- --------- --------- --------- --------- -------- ---------
(IN MILLIONS OF U.S. DOLLARS EXCEPT PER SHARE AND PER REVENUE DOLLAR AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS AND RELATED DATA
Revenues....................... $9,842 $11,919 $14,581 $16,857 $21,287 $9,567 $14,143
Research and development
expense...................... 1,630 1,870 2,221 2,532 2,992 1,411 1,862
Amortization of plant and
equipment.................... 397 396 413 436 526 285 305
Income tax provision........... 107 205 381 420 526 152 582
Net earnings (loss) applicable
to common shares............. 395 560 695 (1,282) (351) (444) (1,475)
Earnings (loss) per revenue
dollar, in cents............. 4 5 5 (8) (2) (5) (10)
Earnings (loss) per common
share, in dollars
-- basic..................... .19 .27 .33(1) (.56)(2) (.13)(3) (.17)(4) (.52)(5)
-- diluted................... .19 .26 .33(1) (.56)(2) (.13)(3) (.17)(4) (.52)(5)
Dividends per common share, in
dollars...................... .06 .07 .08 .08 .08 .04 .04
</TABLE>
8
<PAGE> 14
<TABLE>
<CAPTION>
AS AT
AS AT DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
(IN MILLIONS OF U.S. DOLLARS EXCEPT EMPLOYEE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL POSITION
Working capital..................... $ 2,055 $ 3,080 $ 3,489 $ 4,305 $ 5,074 $ 4,339 $ 7,402
Plant and equipment (at cost)....... 4,199 4,341 4,400 5,008 5,190 5,015 5,417
Accumulated amortization............ 2,420 2,460 2,490 2,846 2,857 2,861 2,787
Total assets........................ 9,207(6) 10,720(6) 12,250(6) 21,828(6) 24,007 21,972 34,035
Long-term debt...................... 1,516(6) 1,558 1,635 1,529 1,426 1,427 1,538
Common shareholders' equity......... 3,652 4,304 4,517 12,190 13,072 12,303 21,969
CAPITAL EXPENDITURES................ 523 543 549 628 795 326 700
EMPLOYEES AT THE END OF PERIOD...... 59,904 62,284 68,341 71,296 76,712 72,461 82,472
</TABLE>
-------------------------
<TABLE>
<S> <C>
(1) Includes the following:
one-time gains........................................ $ 102
one-time charges...................................... $ (95)
net tax impact on one-time gains and one-time
charges................................................ $ (1)
(2) Includes the following:
acquisition-related costs (the amortization of
intangible assets from the acquisition of Bay Networks,
Inc. and all subsequent acquisitions, and the
amortization of any in-process research and development
from prior acquisitions)............................... $(2,341)
one-time gains........................................ $ 441
one-time charges...................................... $ (447)
net tax impact on one-time gains and one-time
charges................................................ $ (2)
(3) Includes the following:
acquisition-related costs............................. $(2,075)
one-time gains........................................ $ 264
one-time charges...................................... $ (209)
net tax impact on one-time gains and one-time
charges................................................ $ 16
(4) Includes the following:
acquisition-related costs............................. $(1,078)
one-time gains........................................ $ 57
one-time charges...................................... $ (62)
net tax impact on one-time gains and one-time
charges................................................ $ (1)
(5) Includes the following:
acquisition-related costs............................. $(2,678)
one-time gains........................................ $ 687
one-time charges...................................... $ (264)
net tax impact on one-time gains and one-time
charges................................................ $ (271)
(6) Comparative amounts have been restated to conform with current
period's presentation.
</TABLE>
9
<PAGE> 15
SELECTED HISTORICAL FINANCIAL DATA OF
ALTEON WEBSYSTEMS, INC.
This section presents selected historical consolidated financial data of
Alteon. You should read carefully the consolidated financial statements included
in this proxy statement/prospectus, including the notes to the consolidated
financial statements. The selected data in this section are not intended to
replace the consolidated financial statements.
The consolidated statement of operations data for the years ended June 30,
1998, 1999 and 2000 and the consolidated balance sheet data as of June 30, 1999
and 2000 were derived from the audited consolidated financial statements
included in this proxy statement/prospectus. Deloitte & Touche LLP, Alteon's
independent auditors, audited these consolidated financial statements. The
consolidated statement of operations data for the period from inception on March
18, 1996 to June 30, 1996 and the year ended June 30, 1997 and the consolidated
balance sheet data as of June 30, 1996, 1997 and 1998 were derived from audited
consolidated financial statements that are not included in this proxy
statement/prospectus. 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.
<TABLE>
<CAPTION>
MARCH 18, 1996 YEAR ENDED JUNE 30,
(INCEPTION) TO ----------------------------------------
JUNE 30, 1996 1997 1998 1999 2000
-------------- ------- -------- -------- --------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales........................................ $ -- $ 178 $ 13,572 $ 26,254 $109,582
Cost of sales.................................... -- 637 7,893 13,385 40,083
------ ------- -------- -------- --------
Gross profit (loss).............................. -- (459) 5,679 12,869 69,499
Operating expenses:
Sales and marketing............................ 19 1,921 6,485 13,061 49,291
Research and development....................... 176 4,782 8,816 10,004 22,792
General and administrative..................... 98 744 1,505 2,538 7,010
Stock compensation to consultants.............. -- -- -- -- 7,687
------ ------- -------- -------- --------
Total operating expenses....................... 293 7,447 16,806 25,603 86,780
------ ------- -------- -------- --------
Loss from operations............................. (293) (7,906) (11,127) (12,734) (17,281)
Interest income (expense), net................... 20 122 322 264 8,041
------ ------- -------- -------- --------
Loss before income taxes......................... (273) (7,784) (10,805) (12,470) (9,240)
Income taxes..................................... 1 1 1 73 413
------ ------- -------- -------- --------
Net loss......................................... $ (274) $(7,785) $(10,806) $(12,543) $ (9,653)
====== ======= ======== ======== ========
Basic and diluted loss per common share.......... $(0.48) $ (5.15) $ (2.18) $ (1.65) $ (0.32)
====== ======= ======== ======== ========
Basic and diluted common shares used in
computation.................................... 569 1,511 4,951 7,610 30,565
====== ======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
-----------------------------------------------
1996 1997 1998 1999 2000
------ ------- ------- ------- --------
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, equivalents and short-term investments..... $3,830 $14,242 $ 9,047 $29,766 $232,988
Working capital.................................. 3,592 12,892 9,843 25,488 236,355
Total assets..................................... 3,996 16,443 19,542 40,621 307,025
Long-term obligations, net of current portion.... -- 700 1,371 1,919 1,427
Total stockholders' equity....................... 3,757 13,782 11,228 27,449 260,272
</TABLE>
10
<PAGE> 16
SUMMARY OF ALTEON QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table depicts statement of operations data for the most
recent eight quarters. In Alteon's opinion, this unaudited information has been
prepared on the same basis as its 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
----------------------------------------------------------------------------------
JUNE 30, MAR 31, DEC 31, SEPT 30, JUNE 30, MAR 31, DEC 31, SEPT 30,
2000 2000 1999 1999 1999 1999 1998 1998
-------- ------- ------- -------- -------- -------- ------- --------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales...................... $51,488 $28,229 $17,115 $ 12,750 $ 7,866 $ 6,702 $6,559 $ 5,127
Cost of sales.................. 17,697 10,366 6,573 5,447 4,004 3,157 3,675 2,549
------- ------- ------- -------- ------- -------- ------- -------
Gross profit................. 33,791 17,863 10,542 7,303 3,862 3,545 2,884 2,578
Operating expenses:
Sales and marketing.......... 20,597 13,311 8,563 6,820 4,127 3,346 3,072 2,516
Research and development..... 7,183 6,158 5,462 3,989 2,918 2,280 2,641 2,165
General and administrative... 2,137 1,946 1,644 1,283 725 690 631 492
Stock compensation to
consultants................ 49 -- -- 7,638 -- -- -- --
------- ------- ------- -------- ------- -------- ------- -------
Total operating expenses... 29,966 21,415 15,669 19,730 7,770 6,316 6,344 5,173
------- ------- ------- -------- ------- -------- ------- -------
Income (loss) from
operations................... 3,825 (3,552) (5,127) (12,427) (3,908) (2,771) (3,460) (2,595)
Interest income (expense),
net.......................... 3,806 2,508 1,396 331 75 33 91 65
------- ------- ------- -------- ------- -------- ------- -------
Income (loss) before income
taxes........................ 7,631 (1,044) (3,731) (12,096) (3,833) (2,738) (3,369) (2,530)
Income tax expense............. 184 -- 189 40 73 -- -- --
------- ------- ------- -------- ------- -------- ------- -------
Net income (loss).............. $ 7,447 $(1,044) $(3,920) $(12,136) $(3,906) $(2,738) $(3,369) $(2,530)
======= ======= ======= ======== ======= ======== ======= =======
Basic income (loss) per
share........................ $ 0.19 $(0.03) $ (0.11) $ (1.20) $ (0.45) $ (0.35) $(0.46) $ (0.39)
======= ======= ======= ======== ======= ======== ======= =======
Basic shares used in
computation.................. 39,082 37,575 35,509 10,095 8,697 7,892 7,312 6,540
======= ======= ======= ======== ======= ======== ======= =======
Diluted income (loss) per
share........................ $ 0.16 $(0.03) $ (0.11) $ (1.20) $ (0.45) $ (0.35) $(0.46) $ (0.39)
======= ======= ======= ======== ======= ======== ======= =======
Diluted shares used in
computation.................. 45,388 37,575 35,509 10,095 8,697 7,892 7,312 6,540
======= ======= ======= ======== ======= ======== ======= =======
Gross margin percentage........ 65.6% 63.3% 61.6% 57.3% 49.1% 52.9% 44.0% 50.3%
======= ======= ======= ======== ======= ======== ======= =======
</TABLE>
11
<PAGE> 17
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
Included in this proxy statement/prospectus are the unaudited pro forma
condensed combined financial statements of Nortel Networks, together with the
relevant notes, assumptions and adjustments thereto, which reflect the
completion of the merger and certain significant acquisitions as if they had
occurred on January 1, 1999 for the purposes of the unaudited pro forma
condensed combined statements of operations and as at June 30, 2000 for purposes
of the unaudited pro forma condensed combined balance sheet. The pro forma
statements have been prepared using the purchase method of accounting to account
for the merger and the significant acquisitions described in the notes to the
more complete financial information set forth below.
The following summary unaudited pro forma condensed combined financial
information for Nortel Networks is derived from, and should be read together
with, the detailed information contained in the audited consolidated financial
statements of Nortel Networks as of December 31, 1999 and the accompanying notes
to such statements, incorporated by reference, and the audited consolidated
financial statements of Alteon as of June 30, 2000 and the accompanying notes to
such statements and the unaudited pro forma statements of Nortel Networks as at
and for the six months ended June 30, 2000 and for the year ended December 31,
1999 and the accompanying notes to such statements; all of which are included in
this proxy statement/prospectus.
The unaudited pro forma statements should not be construed as
representative of such amounts for any future dates or periods. See "Unaudited
Pro Forma Condensed Combined Financial Information of Nortel Networks
Corporation."
<TABLE>
<CAPTION>
PRO FORMA AS AT AND PRO FORMA AS AT AND
FOR THE YEAR ENDED FOR THE SIX MONTHS
DECEMBER 31, 1999 ENDED JUNE 30, 2000
------------------- -------------------
(UNAUDITED)
(IN MILLIONS OF U.S. DOLLARS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
OPERATING RESULTS
Revenue.................................................. $21,566 $14,223
Net loss applicable to common shares..................... (5,983) (2,549)
Capital expenditures..................................... 800 712
FINANCIAL POSITION
Cash and short-term investments.......................... n/a 3,485
Working capital.......................................... n/a 7,549
Total assets............................................. n/a 39,861
Long-term debt........................................... n/a 1,538
Common shareholders' equity.............................. n/a 27,658
Total long-term debt to total capitalization............. n/a 5.6%
PER SHARE DATA
Net loss per common share, basic and diluted............. (2.01) (0.87)
Net loss per Alteon equivalent share, basic and
diluted................................................ (3.68) (1.59)
</TABLE>
12
<PAGE> 18
RISK FACTORS
You should consider the following matters together with the other
information included or incorporated by reference in this document in deciding
whether to vote in favor of adoption of the merger agreement.
BECAUSE YOU WILL RECEIVE A FIXED NUMBER OF NORTEL NETWORKS COMMON SHARES FOR
EACH SHARE OF YOUR ALTEON COMMON STOCK, AND BECAUSE THE MARKET VALUE OF NORTEL
NETWORKS COMMON SHARES WILL VARY, YOU CANNOT BE CERTAIN OF THE VALUE OF THE
CONSIDERATION YOU WILL RECEIVE IN THE MERGER.
In the merger, each share of Alteon common stock will be exchanged for
1.83148 Nortel Networks common shares. This exchange ratio will not be adjusted
to reflect any changes in the market price of either Alteon common stock or
Nortel Networks common shares. As a result, the value of the consideration you
receive in the merger for your shares of Alteon common stock will depend on the
market value of Nortel Networks common shares at the time the merger is
completed. This price may be lower or higher than the current price or the price
at the time you decide whether to vote in favor of adoption of the merger
agreement.
Neither Nortel Networks nor Alteon will have the right to terminate the
merger agreement or, in the case of Alteon, to resolicit the vote of its
stockholders, solely because of changes in the market price of Nortel Networks
common shares. You should obtain current market quotations for Nortel Networks
common shares.
In addition, the exchange of certificates representing your shares of
Alteon common stock for certificates representing Nortel Networks common shares
will not take place immediately after completion of the merger. As a
consequence, you will be unable to sell or otherwise transfer these Nortel
Networks common shares for a period following completion of the merger. The
market value of the Nortel Networks common shares you receive in the merger may
be either lower or higher at the time you receive your certificates representing
Nortel Networks common shares than at the time of the merger.
THE ANTICIPATED BENEFITS OF THE MERGER ARE DEPENDENT ON THE SUCCESSFUL
INTEGRATION OF THE BUSINESSES OF NORTEL NETWORKS AND ALTEON.
We will not achieve the anticipated benefits of the merger unless the
operations of Nortel Networks and Alteon are successfully combined in a
coordinated, timely and efficient manner. The combination of the two companies
will require the dedication of management resources, which might temporarily
detract attention from the day-to-day business of the combined company. It is
possible that the process of combining the two companies and their product
offerings will cause an interruption or a loss of momentum in the activities of
either or both of the companies' businesses, which could harm our combined
operations. We cannot assure you that the benefits we hope to achieve from the
merger will be realized.
DIRECTORS AND EXECUTIVE OFFICERS OF ALTEON HAVE INTERESTS IN THE MERGER THAT MAY
DIFFER FROM THEIR INTERESTS AS STOCKHOLDERS WHICH MAY HAVE INFLUENCED THEIR
DECISION TO APPROVE THE MERGER.
When considering the recommendation of the merger by Alteon's board of
directors, you should be aware that the directors and executive officers of
Alteon have interests in the merger that are in addition to, or different from,
their interests as Alteon stockholders which
13
<PAGE> 19
may have influenced their decision to approve the merger. See "The Merger
Proposal -- Interests of Certain Persons in the Merger." These interests
include:
- Options. Directors and executive officers of Alteon hold a significant
number of options to purchase Alteon common stock a portion of which,
under the terms of employment letters with Alteon and as a result of the
completion of the merger, will become vested and immediately
exercisable. To the extent these options are not exercised before the
merger is completed, they will be converted in the merger into options
to purchase Nortel Networks common shares.
- New Option Grants. Under the merger agreement, Alteon intends, prior to
the completion of the merger, to grant eight executive officers a
significant number of options to purchase shares of Alteon common stock
in order to provide incentives to such executive officers to remain with
Nortel Networks following the merger. On the date of the merger these
options will be converted into options to purchase Nortel Networks
common shares.
- Directors' and Officers' Insurance; Indemnification of Alteon's
Directors and Officers. Under the merger agreement, current and former
directors and officers of Alteon have significant rights to directors'
and officers' insurance coverage and to indemnification with respect to
acts and omissions in their capacities as directors and officers of
Alteon.
THE TERMINATION FEE AND THE INABILITY OF ALTEON TO TERMINATE THE MERGER
AGREEMENT IN FAVOR OF AN ALTERNATIVE PROPOSAL MAY DISCOURAGE OTHER COMPANIES
FROM TRYING TO ACQUIRE ALTEON.
In the merger agreement, Alteon agreed to pay a termination fee to Nortel
Networks in specified circumstances, including in the event that Alteon agrees
to be acquired by a company other than Nortel Networks. Also, Alteon is not
permitted to terminate the merger agreement in favor of an alternative
acquisition proposal, even if the proposal is a superior proposal as determined
by Alteon's board of directors. The termination fee and the inability of Alteon
to terminate the merger agreement in favor of an alternative proposal could
discourage other companies from trying to acquire Alteon, including companies
that might be willing to offer greater value to Alteon stockholders than Nortel
Networks has offered in the merger agreement. In addition, payment of the
termination fee would have a material adverse effect on Alteon's financial
condition.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE.
This document and the documents that are incorporated by reference contain
forward-looking statements about Alteon, Nortel Networks and the combined
company after the merger which Alteon and Nortel Networks believe are covered by
the Private Securities Litigation Reform Act of 1995. Statements in this
document that are not historical facts are "forward-looking statements" for the
purpose of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as
amended. Forward-looking statements include:
- financial projections and estimates;
- statements regarding plans, objectives and expectations of Alteon,
Nortel Networks or their boards of directors with respect to future
operations, products and services;
14
<PAGE> 20
- statements regarding future economic performance;
- statements relating to the assumptions underlying projections,
estimates, plans, objectives, expectations and performance; and
- statements relating to the estimated size and growth of relevant
markets.
When used in this document, the words "anticipates," "believes," "expects,"
"intends," "plans," and similar expressions, as they relate to Alteon, Nortel
Networks or the combined company after the merger or the management of any of
these companies, are intended to identify these forward-looking statements.
In making any of these statements, the expectations are believed to be
based on reasonable assumptions. However, there are numerous risks,
uncertainties and important factors that could cause actual results to differ
materially from those in forward-looking statements. These include:
- those discussed or identified from time to time in Alteon's or Nortel
Networks' public filings with the Securities and Exchange Commission;
- specific risks or uncertainties associated with Alteon's or Nortel
Networks' expectations with respect to:
-- timing, completion or tax status of the merger;
-- the value of the merger consideration;
-- growth prospects;
-- market positions;
-- distribution channels;
-- earnings per share;
-- cost savings;
-- revenue enhancements; and
-- general economic conditions such as:
- changes in interest rates and the performance of the markets;
- changes in domestic and foreign laws, regulations and taxes;
- changes in competition and pricing environments;
- regional or general changes in stock market valuations;
- the occurrence of significant natural disasters;
- general market conditions;
- competition; and
- pricing.
The actual results, performance or achievement by Alteon or Nortel Networks
could differ materially from those expressed in, or implied by, these
forward-looking statements. Accordingly, we cannot assure you that any of the
events anticipated by the forward-looking statements will occur, or if they do,
what impact they will have on the results of operations and financial condition
of Alteon or Nortel Networks.
15
<PAGE> 21
NORTEL NETWORKS RECENT DEVELOPMENTS
AGREEMENT TO ACQUIRE SONOMA SYSTEMS
On August 15 2000, Nortel Networks announced that it had entered into an
agreement to acquire Sonoma Systems for approximately $540 million in Nortel
Networks common shares. Sonoma Systems, a privately held company based in Marina
del Rey, California, is a maker of high-speed Internet access devices. Upon
completion of the transaction, Sonoma Systems will become a wholly-owned
subsidiary of Nortel Networks.
AGREEMENT TO ACQUIRE EPICON, INC.
On June 14, 2000, Nortel Networks announced that it had entered into an
agreement to acquire EPiCON, Inc., which is based in Chelmsford, Massachusetts,
for approximately $275 million in Nortel Networks common shares. EPiCON is a
developer of software for the application service provider market. Upon
completion of the transaction, EPiCON will become a wholly-owned subsidiary of
Nortel Networks.
REORGANIZATION OF NORTEL NETWORKS
Under a court-approved plan of arrangement under Canadian law that was
effective May 1, 2000, the entity currently known as Nortel Networks Limited,
which we refer to as Old Nortel, and its subsidiaries became direct and indirect
subsidiaries, respectively, of the entity currently known as Nortel Networks
Corporation, a Canadian corporation formed in connection with the plan of
arrangement and which we refer to as New Nortel.
In the arrangement, the outstanding common shares of Old Nortel were
exchanged for common shares of New Nortel. Prior to the arrangement,
approximately 37% of the outstanding common shares of Old Nortel were held by
BCE Inc., a Canadian corporation. A substantial portion of the New Nortel common
shares issuable in respect of BCE's interest in Old Nortel was, through the
arrangement, indirectly distributed to BCE shareholders. The aggregate number of
New Nortel common shares issued in the arrangement was substantially the same as
the aggregate number of Old Nortel common shares outstanding immediately prior
to the arrangement, excluding the effects of any exercise of dissenters' rights
and the reservation of certain shares for issuance pursuant to stock option
plans. The consolidated assets and liabilities of New Nortel and its
subsidiaries immediately after the arrangement were the same as those of Old
Nortel and its subsidiaries immediately prior to the arrangement, except for
differences attributable to the accounting treatment accorded to outstanding
preferred shares of Old Nortel. All of the business and operations conducted by
Old Nortel and its subsidiaries prior to the effectiveness of the arrangement
continue to be conducted by Old Nortel and its subsidiaries as subsidiaries of
New Nortel.
New Nortel has assumed the name "Nortel Networks Corporation," and New
Nortel common shares are traded publicly on the New York and Toronto stock
exchanges under the symbol "NT." Old Nortel has been renamed "Nortel Networks
Limited," and 100% of its common shares are now owned by New Nortel. The
preferred shares and debt securities of Old Nortel outstanding immediately prior
to the arrangement remain outstanding and continue to be obligations of Old
Nortel.
As part of the arrangement, New Nortel implemented a two-for-one stock
split with respect to its common shares, and adopted a shareholder rights plan.
Under the rights plan, New Nortel issued one right in respect of each New Nortel
common share outstanding on
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May 5, 2000, after giving effect to the stock split, and New Nortel will issue
one right in respect of each New Nortel common share issued thereafter,
including common shares to be issued in the merger, until the occurrence of
certain events associated with an unsolicited take-over bid as specified in the
rights plan. Please see "Description Of Nortel Networks Share Capital --
Shareholder Rights Plan."
You can find further information about the arrangement in Old Nortel's
Current Report on Form 8-K dated January 26, 2000, Old Nortel's Proxy Circular
and Proxy Statement (including the Notice of Application and Joint Arrangement
Circular which forms a part of and is incorporated by reference therein) dated
as of February 29, 2000 and New Nortel's Current Report on Form 8-K dated May 1,
2000. To learn how to obtain these reports, see "Where You Can Find More
Information."
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<PAGE> 23
COMPARATIVE UNAUDITED PER SHARE DATA
The following table sets forth certain historical, pro forma and pro forma
equivalent per share financial information for the six months ended June 30,
2000 and the year ended December 31, 1999 relating to outstanding Nortel
Networks common shares and outstanding shares of Alteon common stock. This
information should be read together with the unaudited pro forma condensed
combined financial information, including the accompanying notes, under
"Unaudited Pro Forma Condensed Combined Financial Information of Nortel Networks
Corporation" and the historical consolidated financial statements of Nortel
Networks, including the accompanying notes, incorporated in this proxy
statement/prospectus by reference and the historical consolidated financial
statements of Alteon, including the accompanying notes, included in this proxy
statement/prospectus. See "Selected Historical Financial Data of Nortel Networks
Corporation," "Selected Historical Financial Data of Alteon WebSystems, Inc.,"
"Summary Unaudited Pro Forma Condensed Combined Financial Information" and
"Unaudited Pro Forma Condensed Combined Financial Information of Nortel Networks
Corporation."
<TABLE>
<CAPTION>
AS AT AND FOR THE AS AT AND FOR THE
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1999 JUNE 30, 2000
----------------- -----------------
<S> <C> <C>
NORTEL NETWORKS COMMON SHARES(1):
Net loss per common share, basic and diluted:
Historical...................................... $(0.13) $(0.52)
Pro forma....................................... (2.01) (0.87)
Cash dividends per common share:
Historical...................................... 0.0750 0.0375
Book value per common share at period end:
Historical...................................... 4.75 7.38
Pro forma....................................... n/a 9.05
ALTEON COMMON STOCK(2):
Net income (loss) per common share, basic:
Historical...................................... (1.46) 0.17
Equivalent share................................ (3.68) (1.59)
Net income (loss) per common share, diluted:
Historical...................................... (1.46) 0.14
Equivalent Share................................ (3.68) (1.59)
Cash dividends per common share:
Historical...................................... n/a n/a
Book value per common share at period end:
Historical...................................... 2.54 6.25
Equivalent share................................ n/a 16.57
</TABLE>
---------------
(1) Pro forma net loss per common share has been calculated assuming completion
of the merger and the significant acquisitions as if they each had occurred
on January 1, 1999 and pro forma book value has been calculated as if the
completion of the merger occurred on June 30, 2000 based on the exchange
ratio. All Nortel Networks per common share numbers have been calculated to
reflect the stock dividend of one Nortel Networks common share on each
issued and outstanding Nortel Networks common share as of August 17, 1999
and the two-for-one stock split of Nortel Networks common shares on May 5,
2000.
(2) Equivalent share data in respect of the Alteon common stock has been
calculated by multiplying the Nortel Networks per common share pro forma
amounts by the exchange ratio.
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<PAGE> 24
THE 2000 ANNUAL MEETING OF ALTEON STOCKHOLDERS
DATE, TIME AND PLACE
The 2000 annual meeting of Alteon stockholders will be held on October 4,
2000, at the principal executive offices of Alteon located at 50 Great Oaks
Blvd., San Jose, California, commencing at 9:30 a.m. California time. We are
sending this proxy statement/prospectus to you in connection with the
solicitation of proxies by Alteon's board of directors for use at the Alteon
annual meeting and any adjournments or postponements of the annual meeting.
PURPOSES OF THE ANNUAL MEETING
The purposes of the annual meeting are:
- to elect two Class I directors to Alteon's board of directors;
- to ratify the appointment of Alteon's independent auditors;
- to vote upon a proposal to adopt the merger agreement; and
- to act upon any other matters properly brought before the annual meeting
and any adjournment or postponement of the annual meeting.
RECORD DATE AND VOTING POWER
Only holders of record of Alteon common stock on the record date, the close
of business on August 16, 2000, are entitled to notice of, and to vote at, the
annual meeting and any adjournment or postponement thereof. There were
approximately 805 holders of record of Alteon common stock at the close of
business on the record date, with 43,268,818 shares of Alteon common stock
outstanding. Each share of Alteon common stock entitles the holder to one vote
on each matter submitted for stockholder approval. See "Security Ownership of
Certain Beneficial Owners and Management of Alteon" for information regarding
Alteon management and persons known to the management of Alteon to be the
beneficial owners of more than 5% of the outstanding shares of Alteon common
stock.
QUORUM
The presence, in person or by proxy, at the annual meeting of the holders
of a majority of the shares of Alteon common stock outstanding as of the record
date is necessary to constitute a quorum at the annual meeting. For this
purpose, abstentions and broker "non-votes" will count toward establishment of a
quorum. Broker "non-votes" are shares held by brokers or nominees which are
represented at a meeting but with respect to which the broker or nominee is not
empowered to vote on a particular proposal.
REQUIRED VOTE
Election of Directors. A nominee for director must receive a plurality of
the votes cast to be elected. For this purpose, abstention and broker
"non-votes" will have no effect.
Appointment of Independent Auditors. The proposal to ratify the
appointment of independent auditors must receive the affirmative vote of a
majority of the votes cast at the annual meeting. For this purpose, abstention
and broker "non-votes" will have no effect.
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<PAGE> 25
Adoption of the Merger Agreement. The affirmative vote of the holders of a
majority of the shares of Alteon common stock outstanding as of the record date
is required to adopt the merger agreement. In determining whether the proposal
to adopt the merger agreement has received the requisite number of affirmative
votes, abstentions and broker "non-votes" will have the same effect as a vote
against the proposal to adopt the merger agreement.
Adjournment. The Alteon annual meeting may be adjourned from time to time,
by the chairman of the meeting, without a vote of the stockholders, or by the
vote of a majority of the shares casting votes.
STOCKHOLDER AGREEMENTS OF ALTEON'S DIRECTORS, EXECUTIVE OFFICERS AND
STOCKHOLDERS
The following executive officers, directors and stockholders of Alteon have
entered into stockholder agreements with Nortel Networks dated July 28, 2000:
Dominic Orr, Joe Booker, Selina Lo, James Burke, Barton Burstein, Anthony
Narducci, Shirish Sathaye, Tench Coxe, Adam Grosser, Andrew Verhalen, Matrix
Partners IV, L.P. and Matrix IV Entrepreneurs Fund, L.P. Under each of these
stockholder agreements, each person or entity referred to in the preceding
sentence has agreed to vote, and has granted Nortel Networks an irrevocable
proxy to vote, all shares of Alteon common stock beneficially owned by him, her
or it as of the record date in favor of the proposal to adopt the merger
agreement. Approximately 6,664,926 shares of Alteon common stock, which
represent approximately 15.40% of the outstanding shares of Alteon common stock
as of the record date, are subject to the stockholder agreements. See
"Stockholder Agreements."
HOW PROXIES ARE COUNTED
All properly executed proxies that are not revoked will be voted at the
Alteon annual meeting and at any adjournments or postponements of the annual
meeting in accordance with the instructions contained in the proxy. If you
execute and return a proxy and do not specify otherwise, the shares represented
by the proxy will be voted "FOR" the election of the Class I directors, "FOR"
the ratification of the appointment of Alteon's independent auditors, "FOR" the
adoption of the merger agreement and otherwise as recommended by Alteon's board
of directors.
VOTING AND REVOCATION OF PROXIES
If you are a record holder of Alteon common stock, you may vote your shares
by either of the following means:
- By proxy, by any of the three methods set forth below:
-- Mail. To grant your proxy by mail, please complete your proxy card
and sign, date and return it in the enclosed envelope. To be valid, a
returned proxy card must be signed and dated.
-- Telephone. You may use a touchtone telephone to grant your proxy. To
grant your proxy by phone, call the following toll-free number (800)
676-5925, which is also listed on your proxy, and follow the recorded
instructions. Proxies submitted via the telephone must be received by
12:00 midnight, California time, on October 3, 2000. If you grant your
proxy by phone, you do not need to complete and mail your proxy card.
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<PAGE> 26
-- Internet. You may use the Internet to grant your proxy. To grant your
proxy by means of the Internet, go to
HTTP://WWW.PROXYVOTING.COM/ALTEONWEBSYSTEMS. You will be required to
provide the Alteon control number contained on your proxy card. You
will then be asked to complete an electronic proxy card. The votes
represented by such proxy will be generated on the computer screen and
you will be prompted to submit or revise the proxy as desired.
Stockholders granting a proxy to vote via the Internet should
understand that there may be costs associated with electronic access,
such as usage charges from Internet access providers and telephone
companies, that must be borne by the stockholder. Proxies submitted
via the Internet must be received by 12:00 midnight, California time,
on October 3, 2000. If you grant your proxy on the Internet, you do
not need to complete and mail your proxy card.
- In person, by attending the annual meeting, and completing a ballot at
the meeting.
If you have questions or requests for assistance in completing and
submitting a proxy, please contact Corporate Investor Communications at the
following address and telephone number: 111 Commerce Road, Carlstadt, NJ 07072;
telephone: (877) 535-1140.
If your broker holds your shares for you in street name, you should
instruct your broker to vote your shares, following the directions your broker
provides. Most brokers have procedures for telephone and Internet voting. Check
the material your broker sends you, or call your account representative for more
information.
When you deliver a valid proxy or instruct your broker to vote your shares,
your shares will be voted according to your instructions.
Revoking Your Proxy. If you are a record holder of Alteon common stock,
you may revoke your proxy at any time before it is voted at the annual meeting
by:
- granting a proxy (by mail, phone or Internet) bearing a later date;
- filing or transmitting to Alteon's secretary another instrument or
transmission revoking the proxy; or
- attending the annual meeting and voting in person.
If your broker holds your shares for you in street name, to change your
vote you will need to give appropriate instructions to your broker, following
the directions your broker provides.
SOLICITATION OF PROXIES; COST OF SOLICITATION
In addition to solicitation by mail, the directors, officers, employees and
agents of Alteon may solicit proxies from Alteon stockholders by personal
interview, telephone, telegram or otherwise. Alteon will bear the costs of the
solicitation of proxies from its stockholders, except that Nortel Networks and
Alteon will each pay one-half of the cost of printing this proxy
statement/prospectus. Arrangements will also be made with brokerage firms and
other custodians, nominees and fiduciaries who are record holders of Alteon
common stock for the forwarding of solicitation materials to the beneficial
owners of Alteon common stock. Alteon will reimburse these brokers, custodians,
nominees and fiduciaries for the reasonable out-of-pocket expenses they incur in
connection with forwarding solicitation materials. Alteon has engaged the
services of Corporate Investor Communications to
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<PAGE> 27
distribute proxy solicitation materials to brokers, banks and other nominees and
to assist in the solicitation of proxies from Alteon stockholders for its
standard fee.
RECOMMENDATION OF ALTEON'S BOARD OF DIRECTORS
Alteon's board of directors has concluded that the proposal to adopt the
merger agreement is advisable and in the best interests of Alteon and its
stockholders and has unanimously approved the merger agreement. ACCORDINGLY,
ALTEON'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT ALL ALTEON STOCKHOLDERS
VOTE "FOR" THE ADOPTION OF THE MERGER AGREEMENT.
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<PAGE> 28
THE MERGER PROPOSAL
At the annual meeting you will be asked to vote to adopt the merger
agreement and approve any other matters required to be approved for consummation
of the merger. See "The Merger Agreement" for a description of the terms of the
merger.
ALTEON'S BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT
AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE ADOPTION OF THE MERGER
AGREEMENT.
BACKGROUND OF THE MERGER
In early May 2000, Nortel Networks' senior management determined to explore
the possible acquisition of companies engaged in the content-switching business.
Between May 12, 2000 and May 16, 2000, senior Nortel Networks executives,
including Clarence Chandran, currently Chief Operating Officer of Nortel
Networks, met on a number of occasions with Alteon's executives, including
Dominic Orr, President and Chief Executive Officer, Barton Burstein, Vice
President Business Development and Joe Booker, Chief Operating Officer. At these
meetings, the executives from Nortel Networks and Alteon discussed conditions in
the content-switching business, Alteon's prospects and performance and Nortel
Networks' strategy in the content-switching market.
On May 26, 2000, Nortel Networks and Alteon entered into a confidentiality
agreement containing customary terms and conditions regarding the confidential
treatment of any information exchanged by the parties. Technical personnel of
Nortel Networks and Alteon discussed technical and product-related matters
during the week of May 29, 2000.
On June 12, 2000, Messrs. Chandran and Orr again met to discuss Nortel
Networks' interest in a prospective merger with Alteon and the benefits to both
companies and their respective constituents of such a merger. At this meeting,
Messrs. Chandran and Orr discussed, among other matters, Alteon's technology and
investment and acquisition strategies. The topic of a price for Alteon was
mentioned in very general terms; however, no specific pricing or other
transaction terms were discussed. At the conclusion of the meeting, Messrs.
Chandran and Orr agreed to continue their discussions regarding a possible
transaction.
From June 21, 2000 to July 12, 2000, Nortel Networks and Alteon continued
their discussions with respect to technology, the content-switching market and
the Alteon product portfolio. Through these discussions, Nortel Networks
continued to evaluate the prospects, quality and readiness of the Alteon product
portfolio.
From July 12, 2000 to July 19, 2000, Credit Suisse First Boston, on behalf
of Nortel Networks, had several discussions with Alteon's financial advisor,
Lehman Brothers Inc., regarding the possible terms of a merger transaction
involving Alteon and Nortel Networks. On July 19, 2000, Credit Suisse First
Boston advised Lehman Brothers that, subject to the satisfactory completion of
Nortel Networks' due diligence investigation of Alteon, Nortel Networks would be
prepared to make a proposal to acquire Alteon.
On July 13, 2000 and July 14, 2000, certain senior executives of Alteon met
with another company about the possibility of an acquisition of Alteon by such
other company. These meetings resulted from very general discussions between
Alteon and such other company in May and June 2000. At the meetings on July 13,
2000 and July 14, 2000 Alteon's technology and business strategy and the
opportunities that might be available to the other company if it were to acquire
Alteon were discussed in general terms.
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<PAGE> 29
On July 20, 2000, Alteon's board of directors held a special meeting. At
that meeting, Mr. Orr briefed the board of directors on the status of
discussions between Alteon and Nortel Networks. The directors, together with
members of Alteon's management, representatives of Lehman Brothers and
representatives of Alteon's outside counsel, Cooley Godward LLP, then discussed
the possible transaction involving Alteon and Nortel Networks. Other strategic
alternatives available to Alteon, including a possible transaction involving
Alteon and the other company referred to above, were also discussed.
From July 21, 2000 to July 28, 2000, meetings were held at the offices of
Cooley Godward to complete the due diligence review and to negotiate definitive
agreements for a merger involving Alteon and Nortel Networks. Among those
present at these meetings were representatives of Alteon, Nortel Networks,
Lehman Brothers, Credit Suisse First Boston, Cooley Godward and Cleary,
Gottlieb, Steen & Hamilton, counsel to Nortel Networks.
Also from July 21, 2000 to July 26, 2000, senior executives of Alteon had
discussions with senior executives of the other company referred to above about
a possible transaction. Those discussions did not continue after July 26, 2000.
On July 26, 2000, a regularly scheduled meeting of Alteon's board of
directors was held. At that meeting, the directors, together with members of
Alteon's management, representatives of Lehman Brothers and representatives of
Cooley Godward, again discussed the possible transaction involving Alteon and
Nortel Networks and other possible strategic alternatives available to Alteon.
Representatives of Lehman Brothers presented a financial analysis of the
proposed transaction to Alteon's board of directors, and representatives of
Cooley Godward discussed the terms of the merger agreement and stockholder
agreements with Alteon's board of directors.
On July 27, 2000, another meeting of Alteon's board of directors was held.
At that meeting, further discussions took place about the possible transaction
involving Alteon and Nortel Networks. In addition, Lehman Brothers provided
Alteon's board of directors with its oral opinion (subsequently confirmed in
writing) that, based upon certain assumptions and qualifications, the proposed
exchange ratio pursuant to the merger agreement was fair to Alteon's
stockholders from a financial point of view. After this presentation, Alteon's
board of directors approved the merger agreement, the merger, the related
agreements and the transactions contemplated thereby, and authorized the
officers of Alteon to finalize and execute the merger agreement.
On July 27, 2000, Nortel Networks' board of directors met and, subject to
satisfactory completion of documentation and final terms within certain
parameters, authorized and approved the signing of the merger agreement.
On July 28, 2000, the companies signed the merger agreement and related
agreements and issued a press release announcing the transaction.
RECOMMENDATION OF ALTEON'S BOARD OF DIRECTORS; REASONS FOR THE MERGER
ALTEON'S BOARD OF DIRECTORS HAS APPROVED THE MERGER AND DETERMINED THAT THE
TERMS OF THE MERGER AGREEMENT ARE FAIR TO, AND IN THE BEST INTERESTS OF, ALTEON
AND ITS STOCKHOLDERS. ALTEON'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
ALTEON STOCKHOLDERS VOTE "FOR" THE ADOPTION OF THE MERGER AGREEMENT.
The decision by Alteon's board of directors to recommend that Alteon
stockholders vote "FOR" the adoption of the merger agreement was based on a
number of factors. Alteon's
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<PAGE> 30
board of directors considered the following positive factors, among others, to
support its determination that the terms of the merger agreement are fair to,
and in the best interests of, Alteon and its stockholders:
- the favorable view of Alteon's board of directors with respect to:
-- the potential compatibility between the products, technology, sales
force, critical skills and strategic direction of Alteon and Nortel
Networks;
-- the financial strength of Nortel Networks; and
-- the ability to use Nortel Networks' extensive sales network to
increase sales of Alteon's products;
- the belief of Alteon's board of directors that the long-term financial
condition, results of operations, prospects and competitive position of
the combined company would be better than the long-term financial
condition, results of operations, prospects and competitive position of
Alteon on a stand-alone basis;
- the favorable view of Alteon's board of directors of Nortel Networks'
stock market presence and positive reputation with investors as well as
the greater liquidity to Alteon stockholders of an investment in Nortel
Networks common shares as compared with Alteon common stock;
- the favorable view of Alteon's board of directors concerning current
market conditions and the comparative historical trading prices and
volatility of Alteon common stock and Nortel Networks common shares;
- the opinion of Lehman Brothers that, based upon certain analyses
performed by Lehman Brothers and discussed with Alteon's board of
directors over the course of a number of board meetings and based upon
and subject to the various conditions set forth in the opinion of Lehman
Brothers, the exchange ratio was fair to holders of Alteon common stock
from a financial point of view as of July 27, 2000 (see "-- Opinion of
Financial Advisor to Alteon");
- the expectation that for U.S. federal income tax purposes no gain or
loss would be recognized by a holder of Alteon common stock upon the
exchange of such holder's shares of Alteon common stock for Nortel
Networks common shares in the merger;
- the belief of Alteon's board of directors that the terms of the merger
agreement, including the conditions to each party's obligation to close
the merger, are reasonable;
- the belief of Alteon's board of directors that the merger will benefit
Alteon's customers for a number of reasons, including because the
combined company will be able to dedicate greater resources to enhancing
existing products and introducing new products; and
- the belief of Alteon's board of directors that the merger will benefit
Alteon's employees for a number of reasons including because the
combined company will provide employees the opportunity to participate
in the growth of a larger, more competitive company.
Alteon's board of directors also considered a number of potentially
negative factors in its deliberations concerning the merger and the merger
agreement, including:
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<PAGE> 31
- the risk that the benefits sought to be achieved in the merger would not
be achieved;
- the risk associated with the fact that the exchange ratio is fixed and
would not adjust for subsequent price fluctuations;
- the possibility that the public announcement of the merger would have a
negative impact on Alteon's sales, customer relations and operating
results as well as on Alteon's ability to attract and retain key
management, sales, marketing and technical personnel;
- the possibility that the merger would not be consummated;
- certain terms of the merger agreement and related agreements that
prohibit Alteon and its representatives from soliciting third party bids
and from accepting, approving or recommending third party bids except in
very limited circumstances, which terms would reduce the likelihood that
a third party would make a bid for Alteon; and
- the other risks described above under "Risk Factors."
Alteon's board of directors discussed with Alteon's management and advisors
the prospects for combinations with companies other than Nortel Networks and
whether and in what time frame the benefits described above could be achieved
through any such alternative combinations, as well as the risks and benefits of
a stand-alone strategy. Alteon's board of directors believed that some of the
above risks were unlikely to occur or unlikely to have a material impact on the
combined company, while others could be avoided or mitigated by Alteon or Nortel
Networks, and that, overall, the potential benefits of the merger outweighed the
risks associated with the merger agreement and the merger.
The foregoing discussion of information and factors considered by Alteon's
board of directors is not intended to be exhaustive but is believed to include
all material factors considered by Alteon's board of directors. In view of the
wide variety of factors considered, Alteon's board of directors did not find it
practicable to quantify or otherwise assign relative weight to the specific
factors considered. However, after taking into account all of the factors set
forth above, Alteon's board of directors unanimously agreed that the merger
agreement and the merger were fair to, and in the best interests of, Alteon and
its stockholders and that Alteon should proceed with the merger.
OPINION OF FINANCIAL ADVISOR TO ALTEON
Lehman Brothers has acted as financial advisor to Alteon in connection with
the merger. On July 27, 2000, Lehman Brothers rendered its opinion to the Alteon
board of directors that as of such date, from a financial point of view, the
exchange ratio of 1.83148 common shares of Nortel Networks for every one share
of Alteon common stock to be offered to Alteon's stockholders in the merger was
fair to such stockholders.
The full text of the Lehman Brothers opinion dated July 27, 2000 is
included as Annex D to this proxy statement/prospectus. Holders of Alteon common
stock may read the Lehman Brothers opinion for a discussion of the procedures
followed, factors considered, assumptions made and qualifications and
limitations of the review undertaken by Lehman Brothers in connection with its
opinion.
Lehman Brothers' advisory services and opinion were provided for the
information and assistance of Alteon's board of directors in connection with its
consideration of the merger. Lehman Brothers' opinion is not intended to be and
does not constitute a recommendation to
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<PAGE> 32
any stockholder of Alteon as to how such stockholder should vote with respect to
the merger agreement. Lehman Brothers was not requested to opine as to, and its
opinion does not address, Alteon's underlying business decision to proceed with
or effect the merger.
In arriving at its opinion, Lehman Brothers reviewed and analyzed:
- the merger agreement and the specific terms of the merger;
- publicly available information concerning Alteon and Nortel Networks
that it believed to be relevant to its analysis;
- financial and operating information with respect to the business,
operations and prospects of Alteon furnished to it by Alteon;
- publicly available estimates of the future financial performances of
Alteon and Nortel Networks prepared by third party research analysts;
- a trading history of Alteon's common stock from September 24, 1999 to
the present and a comparison of that trading history with those of other
companies that it deemed relevant;
- a trading history of Nortel Networks' common shares from January 1, 1995
to the present and a comparison of that trading history with those of
other companies that it deemed relevant;
- a comparison of the historical financial results and present financial
condition of Alteon with those of other companies that it deemed
relevant;
- a comparison of the historical financial results and present financial
condition of Nortel Networks with those of other companies that it
deemed relevant;
- a comparison of the financial terms of the merger agreement with the
financial terms of other transactions that it deemed relevant; and
- the potential pro forma financial effects of the merger on Nortel
Networks and a comparison of the relative contributions of Alteon and
Nortel Networks to the combined company following consummation of the
merger.
In addition, Lehman Brothers had discussions with the management of Alteon
concerning its business, operations, assets, financial condition and prospects
and undertook other studies, analyses and investigations as Lehman Brothers
deemed appropriate, as summarized below.
In arriving at its opinion, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information used by it
without assuming any responsibility for independent verification of such
information. Lehman Brothers also relied upon the assurances of the management
of Alteon that they were not aware of any facts or circumstances that would make
the information relied upon by Lehman Brothers inaccurate or misleading. Upon
advice of Alteon, Lehman Brothers assumed that the financial projections of
Alteon were reasonably prepared on a basis reflecting the best currently
available estimates and judgments of the management of Alteon as to the future
financial performance of Alteon. Lehman Brothers also considered publicly
available estimates of the future financial performance of Alteon prepared by
third party research analysts. For purposes of its analysis, upon the advice of
Alteon, Lehman Brothers assumed that Alteon will perform in a range between the
projections prepared by management and the estimates of
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<PAGE> 33
third party research analysts. In arriving at its opinion, with the consent of
Alteon, Lehman Brothers was not provided with and did not have any access to any
financial forecasts or projections prepared by the management of Nortel Networks
as to the future financial performance of Nortel Networks, and accordingly,
Lehman Brothers assumed that the publicly available estimates of research
analysts were a reasonable basis upon which to evaluate and analyze the future
financial performance of Nortel Networks, and Lehman Brothers relied upon such
estimates in performing its analysis. Lehman Brothers did not conduct a physical
inspection of the properties and facilities of Alteon or Nortel Networks. Lehman
Brothers also did not make or obtain any evaluations or appraisals of the assets
or liabilities of Alteon or Nortel Networks. In addition, Alteon did not
authorize Lehman Brothers to solicit, and Lehman Brothers did not solicit, any
indications of interest from any third party with respect to the purchase of all
of Alteon's business except for one third party identified by Alteon and Lehman
Brothers. Upon advice of Alteon and its legal and accounting advisors, Lehman
Brothers assumed that the merger will qualify as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code, and therefore as a
tax-free transaction to the stockholders of Alteon. Lehman Brothers' opinion was
necessarily based upon market, economic and other conditions as they existed on,
and could be evaluated as of, July 27, 2000.
In arriving at its opinion, Lehman Brothers did not ascribe a specific
range of value to Alteon or Nortel Networks, but rather made its determination
as to the fairness, from a financial point of view, of the exchange ratio to be
offered to Alteon's stockholders in the merger on the basis of financial and
comparative analyses described below. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant methods
of financial and comparative analysis and the application of those methods to
the particular circumstances, and therefore, such an opinion is not readily
susceptible to summary description. Furthermore, Lehman Brothers did not
attribute any particular weight to any analysis or factor considered by it, but
rather made qualitative judgments as to the significance and relevance of each
analysis and factor. Accordingly, Lehman Brothers believes that its analyses
must be considered as a whole and that considering any portion of such analyses
and factors, without considering all analyses and factors as a whole, could
create a misleading or incomplete view of the process underlying its opinion. In
its analyses, Lehman Brothers made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond the control of Alteon and Nortel Networks. None of Alteon,
Nortel Networks, Lehman Brothers or any other person assumes responsibility if
future results are materially different from those discussed. Any estimates
contained in these analyses were not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than as set forth in the analyses. In addition, analyses relating to
the value of businesses do not purport to be appraisals or to reflect the prices
at which businesses actually may be sold.
The following is a summary of the material financial analyses used by
Lehman Brothers in connection with rendering its opinion to Alteon's board of
directors. Some of the summaries of the financial and comparative analyses
include information presented in tabular format. In order to fully understand
the methodologies used by Lehman Brothers and the results of its financial and
comparative analyses, the tables must be read together with the text of each
summary. The tables alone do not constitute a complete description of the
financial and comparative analyses. Accordingly, the information presented in
the tables and described below must be considered as a whole. Considering any
portion of such analyses
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<PAGE> 34
and of the factors considered, without considering all analyses and factors as a
whole, could create a misleading or incomplete view of the process underlying
Lehman Brothers' opinion.
Comparable Company Analysis. Using publicly available information, Lehman
Brothers compared selected financial data of Alteon with similar data of
selected companies engaged in businesses considered by Lehman Brothers to be
comparable to that of Alteon. Specifically, Lehman Brothers included in its
review the following communications equipment companies:
- Extreme Networks, Inc.;
- F5 Networks, Inc.;
- Foundry Networks, Inc.;
- Packeteer, Inc.; and
- Radware Ltd.
For each of Alteon and the selected communications equipment companies,
Lehman Brothers calculated:
- the ratio of the market price per share to the mean earnings per share
estimates for the calendar year 2001 reported by First Call Corporation,
which is a service widely used by the investment community which gathers
earnings estimates from various research analysts; and
- the ratio of enterprise value to revenue estimates for the calendar
years 2000 and 2001 as provided by Institutional Brokers Estimates
Systems (IBES) or third party research reports. IBES is a data service
that monitors and publishes compilations of earnings estimates by
selected research analysts regarding companies. Enterprise value means
the diluted equity market capitalization plus net debt (cash).
Lehman Brothers then compared those ratios for the selected companies to
similar ratios calculated for Alteon based on the transaction price and
estimates for Alteon's earnings per share and revenue as estimated by third
party research analysts. Lehman Brothers arrived at the transaction price by
multiplying Nortel Networks' closing price on the New York Stock Exchange on
July 27, 2000 by the exchange ratio of 1.83148. The following table presents the
earnings and revenue multiples:
<TABLE>
<CAPTION>
PRICE / ENTERPRISE VALUE /
EARNINGS MULTIPLES REVENUE MULTIPLES
------------------ -----------------------------
CALENDAR YEAR CALENDAR YEAR CALENDAR YEAR
2001 2000 2001
------------------ ------------- -------------
<S> <C> <C> <C>
COMPARABLE COMPANY MULTIPLES (AS
OF 7/27/00):
Alteon........................... 120.0x 32.6x 13.8x
Mean of selected communications
equipment Companies............ 91.1x 20.3x 12.0x
Median of selected communications
equipment companies............ 78.9x 21.5x 11.7x
</TABLE>
Lehman Brothers also compared selected financial data of Nortel Networks
with similar data of selected companies engaged in businesses considered by
Lehman Brothers to be
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<PAGE> 35
comparable to that of Nortel Networks. Specifically, Lehman Brothers included in
its review the following communications equipment companies:
- Alcatel SA;
- Cisco Systems, Inc.; and
- Lucent Technologies, Inc.
For each of the selected companies, Lehman Brothers calculated:
- the ratio of the market price per share to the mean earnings per share
estimates for the calendar year 2001 reported by First Call Corporation;
and
- the ratio of enterprise value to revenue estimates for the calendar year
2000 and 2001 as provided by IBES or third party research reports.
For Nortel Networks, Lehman Brothers made the same calculations with
estimates provided in a Credit Suisse First Boston research report. The
following table presents the earnings and revenue multiples:
<TABLE>
<CAPTION>
PRICE / ENTERPRISE VALUE /
EARNINGS MULTIPLES REVENUE MULTIPLES
------------------ -----------------------------
CALENDAR YEAR CALENDAR YEAR CALENDAR YEAR
2001 2000 2001
------------------ ------------- -------------
<S> <C> <C> <C>
COMPARABLE COMPANY MULTIPLES (AS OF
7/27/00):
Nortel Networks..................... 78.8x 7.2x 5.5x
Mean of selected communications
equipment companies............... 53.3x 9.8x 7.3x
Median of selected communications
equipment companies............... 40.5x 4.3x 3.7x
</TABLE>
Because of the inherent differences between the businesses, operations,
financial conditions and prospects of Alteon and Nortel Networks and the
businesses, operations, financial conditions and prospects of the companies
included in their comparable company groups, Lehman Brothers believed that it
was inappropriate to rely solely on the quantitative results of the analysis,
and accordingly, also made qualitative judgments concerning differences between
the financial and operating characteristics of Alteon, Nortel Networks and the
companies in their respective comparable company groups that would affect the
public trading values of Alteon, Nortel Networks and the comparable companies.
In particular, Lehman Brothers considered markets served, rates of growth and
profitability of Alteon and each of the companies in the comparable company
groups. Lehman Brothers concluded that such analysis was supportive of its
opinion as to the fairness of the exchange ratio to be offered to Alteon's
stockholders in the merger.
Premium Paid Analysis. Using publicly available information, Lehman
Brothers reviewed the premiums paid, or proposed to be paid in the case of
transactions pending as of the date of the Lehman Brothers opinion, in 22
acquisitions of public communications equipment companies having transaction
values over $1 billion announced since January 1, 1997.
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<PAGE> 36
Lehman Brothers calculated:
- the premium per share paid by the acquiror compared to the share price
of the target company prevailing (1) three months, (2) one month and (3)
one day prior to the announcement of the transaction.
- the premium per share paid by the acquiror compared to the highest and
lowest share price of the target company prevailing during the 52-week
period prior to the announcement of the transaction.
Lehman Brothers compared the premiums paid in the communications equipment
company sector generated in the analysis above to the premium to be paid by
Nortel Networks for Alteon in the merger. Lehman Brothers concluded that such
analysis was supportive of its opinion as to the fairness of the exchange ratio
to be offered to Alteon's stockholders in the merger. The following table shows
the median 3-month, 1-month and 1-day premiums as well as the premiums to the
high and low closing prices over the previous 52 weeks:
<TABLE>
<CAPTION>
52-WEEK
---------------
3-MONTHS 1-MONTH 1-DAY HIGH LOW
-------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
PREMIUM PAID ANALYSIS:
Nortel Networks/Alteon merger (based
on Nortel Networks 7/27/00 closing
price)............................. 72.6% 19.6% 0.7% (9.1%) 229.1%
Median of selected communications
equipment transactions............. 48.5% 36.9% 31.5% 1.1% 235.1%
</TABLE>
Comparable Transaction Analysis. The comparable transaction analysis
provides a market benchmark based on the consideration paid in selected
comparable transactions. For this analysis, Lehman Brothers reviewed publicly
available information to determine the purchase prices and multiples paid in 22
transactions of public communications equipment companies having transaction
values over $1 billion announced since January 1, 1997.
Lehman Brothers divided:
- the enterprise value of the relevant transactions by each of the
following revenue measurements from the acquired business:
(1) the latest twelve months', or LTM,
(2) the total revenue for the following four consecutive quarters, or
Forward 4Q, and
(3) the revenue for the next calendar year; and
- the offer price per share by the estimates of earnings per share for the
following four consecutive quarters as provided by IBES or third party
research reports.
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<PAGE> 37
The following table shows the revenue and earnings multiples for the
selected transactions:
<TABLE>
<CAPTION>
PRICE/
ENTERPRISE VALUE/ EARNINGS
REVENUE MULTIPLES MULTIPLES
------------------------------- ---------
FORWARD NEXT CALENDAR FORWARD
LTM 4Q YEAR 4Q
----- ------- ------------- ---------
<S> <C> <C> <C> <C>
COMPARABLE TRANSACTION MULTIPLES:
Nortel Networks/Alteon merger (based on
Nortel Networks 7/27/00 closing
price)................................. 51.1x 19.3x 13.8x 169.4x
Median of selected comparable
transactions........................... 9.5x 5.8x 6.0x 50.0x
Mean of selected comparable
transactions........................... 35.7x 14.7x 12.8x 111.0x
</TABLE>
Because the reasons for and the circumstances surrounding each of the
transactions analyzed were so diverse and because of the inherent differences in
the businesses, operations, financial conditions and prospects of Alteon and the
businesses, operations, and financial conditions of the companies included in
the comparable transactions group, Lehman Brothers believed that a purely
quantitative comparable transaction analysis would not be particularly
meaningful in the context of the merger. Lehman Brothers believed that the
appropriate use of a comparable transaction analysis in this instance would
involve qualitative judgments concerning the differences between the
characteristics of these transactions and the merger which would affect the
acquisition values of the acquired companies and Alteon. In particular, Lehman
Brothers considered markets served, rates of growth and profitability of Alteon
and each of the acquired companies as well as business and market conditions
existing at the time of the merger as compared to those existing when these
transactions were executed. Lehman Brothers concluded that such analysis was
supportive of its opinion as to the fairness of the exchange ratio to be offered
to Alteon's stockholders in the merger.
Stock Trading History. Lehman Brothers considered various historical data
concerning the history of the trading prices for Alteon common stock, Nortel
Networks common shares, an index of the stock prices of the communications
equipment companies comparable to Alteon, and an index of the stock prices of
the communications equipment companies comparable to Nortel Networks for the
period from September 24, 1999 to July 26, 2000. Lehman Brothers concluded that
such analysis was supportive of its opinion as to the fairness of the exchange
ratio to be offered to Alteon's stockholders in the merger. The following table
shows the historical trading data:
<TABLE>
<CAPTION>
PERCENT CHANGE
9/24/99 -- 7/26/00
------------------
<S> <C>
STOCK PRICE PERFORMANCE:
Alteon...................................................... +202%
Nortel Networks............................................. +358%
Communications equipment companies comparable to Alteon..... +139%
Communications equipment companies comparable to Nortel
Networks.................................................. +148%
</TABLE>
Pro Forma Merger Analysis. Lehman Brothers analyzed the pro forma impact
of the merger on Nortel Networks' pre-goodwill earnings per share based on third
party research analyst estimates and Alteon management estimates for the future
financial performance of Alteon and based on third-party analyst research
estimates for the future financial performance of Nortel Networks. Using third
party research analyst estimates for Alteon's
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<PAGE> 38
projections, Lehman Brothers concluded that the merger would be dilutive to
Nortel Networks' pre-goodwill earnings per share in 2001. Using Alteon's
management estimates for the future financial performance of Alteon, Lehman
Brothers concluded that the merger would be accretive to Nortel Networks'
pre-goodwill earnings per share in 2001. Lehman Brothers concluded that such
analysis was supportive of its opinion as to the fairness of the exchange ratio
to be offered to Alteon's stockholders in the merger.
Contribution Analysis. Lehman Brothers utilized publicly available
historical financial data regarding Alteon and Nortel Networks and estimates for
the future financial performance of Alteon and Nortel Networks to calculate the
relative contributions of Alteon and Nortel Networks to the pro forma combined
company with respect to revenues and pre-goodwill net income for the calendar
years 1999, 2000 and 2001. Lehman Brothers calculated the contributions based on
third party research analyst estimates and Alteon management estimates for the
future financial performance of Alteon and based on third party analyst
estimates for the future financial performance of Nortel Networks. Lehman
Brothers also reviewed the pro forma ownership of the combined company on a
diluted basis. Lehman Brothers concluded that such analysis was supportive of
its opinion as to the fairness of the exchange ratio to be offered to Alteon's
stockholders in the merger. The following table shows the revenue and net income
contribution by Alteon in 2000 and 2001 as well as the pro forma diluted
ownership percentages of Nortel Networks and Alteon as calculated by Lehman
Brothers:
<TABLE>
<CAPTION>
CALENDAR YEAR 2000 CALENDAR YEAR 2001
CALENDAR --------------------- ---------------------
YEAR MGMT. RESEARCH MGMT. RESEARCH
1999 ESTIMATES ESTIMATES ESTIMATES ESTIMATES
-------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
ALTEON CONTRIBUTION:
Revenue.......................... 0.2% 0.8% 0.7% 1.9% 1.3%
Net income (pre-goodwill)........ * 1.2% 0.6% 5.2% 1.9%
PRO FORMA DILUTED OWNERSHIP
(TREASURY-STOCK METHOD):
Nortel Networks.................. 96.7%
Alteon........................... 3.3%
</TABLE>
---------------
* Not material
Lehman Brothers is an internationally recognized investment banking firm
and, as part of its investment banking activities, is regularly engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. Alteon's board of directors
selected Lehman Brothers because of its expertise, reputation and familiarity
with Alteon and the communications equipment industry generally and because its
investment banking professionals have substantial experience in transactions
comparable to the merger.
As compensation for its services in connection with the merger, Alteon has
agreed to pay Lehman Brothers a fee of 0.40% of the transaction value, which,
based upon the closing price of Nortel Networks common shares on July 27, 2000
is approximately $30.2 million. This includes a fee of $2 million which was
payable upon the delivery of the fairness opinion and creditable against the
total transaction fee. In addition, Alteon has agreed to reimburse Lehman
Brothers for reasonable out-of-pocket expenses incurred in connection with the
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<PAGE> 39
merger and to indemnify Lehman Brothers for certain liabilities that may arise
out of its engagement by Alteon and the rendering of Lehman Brothers' opinion.
Lehman Brothers has previously rendered investment banking services to Alteon
and received customary fees for such services. These services included being
lead manager on Alteon's initial public offering in September 1999 and its
follow-on offering in January 2000.
In the ordinary course of its business, Lehman Brothers may actively trade
in the debt or equity securities of Alteon and Nortel Networks for its own
account and for the accounts of its customers and, accordingly, may at any time
hold a long or short position in such securities.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Some directors and officers of Alteon have interests in the merger that are
in addition to, or different from, their interests as stockholders in Alteon.
The members of Alteon's board of directors knew about these interests, and
considered them when they approved the merger agreement and the merger. These
interests are summarized below.
Options. Just prior to completion of the merger, assuming the merger is
completed on October 4, 2000, or shortly thereafter, up to a maximum of
approximately 1,413,136 shares of Alteon common stock subject to stock awards,
including stock options and restricted stock subject to a right of repurchase,
held by Alteon's directors and executive officers which would not otherwise have
become vested as of such date will vest under the terms of Alteon's equity
incentives plan, applicable stock award agreements, applicable offer letters
and, with respect to the non-employee directors of Alteon, pursuant to the
merger agreement. Nortel Networks will assume all of Alteon's stock options to
the extent they are not exercised before the merger and will treat them as
options to purchase Nortel Networks common shares, as described under "The
Merger Agreement -- Treatment of Alteon Stock Options and the Employee Stock
Purchase Plan."
New Option Grants. Under the merger agreement, Alteon intends to grant to
Dominic Orr, Selina Lo, Shirish Sathaye, Atul Bhatnagar, Barton Burstein,
Prabhat Mishra, Anthony Narducci and Steve Wood options to purchase an aggregate
of 480,000 shares of Alteon common stock prior to the completion of the merger.
The exercise price per share of these options will be equal to the fair market
value of shares of Alteon common stock on the date of grant, determined in
accordance with the Alteon 1999 Equity Incentive Plan. These options will vest
in two equal installments on the second and third anniversaries of the date of
the merger, provided the relevant executive has been continuously employed with
Alteon (or a successor company) through that anniversary. Upon completion of the
merger, these options will be converted into options to purchase Nortel Networks
common shares.
Modification of Previously Granted Options. Dominic Orr, Selina Lo,
Anthony Narducci and Shirish Sathaye each had previously entered into employment
letters with Alteon which provided that between 50% to 80% of their outstanding
unvested stock options would vest upon a change in control. These executive
officers, as well as the other executive officers listed under "-- New Option
Grants" above, have agreed to modify the vesting of their current outstanding
stock options so that only 25% of the unvested options will vest immediately
prior to the completion of the merger, and 1/20th of the remaining unvested
options, excluding the new option grants described under "-- New Option Grants"
above, will vest on each one-month anniversary of the date of the merger.
However, all of the unvested options (other than the new option grants described
under "-- New Option Grants" above) will vest if and when the executive's
employment is terminated by Alteon without
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<PAGE> 40
cause or by the executive for good reason. "Without cause" and "good reason" are
defined in each executive's respective employment letter.
Directors' and Officers' Insurance; Indemnification of Alteon Directors and
Officers. The merger agreement provides that Nortel Networks will maintain
directors' and officers' liability insurance to cover the present and former
directors and officers of Alteon and its subsidiaries with respect to claims
against these directors and officers arising from facts or events which occurred
at or before the merger.
The merger agreement also requires the surviving corporation in the merger
to indemnify each present and former director and officer of Alteon and its
subsidiaries in connection with any claim or investigation arising out of
actions or omissions occurring at or before the merger. See "The Merger
Agreement -- Indemnification."
ACCOUNTING TREATMENT
The merger will be accounted for under the purchase method of accounting.
REGULATORY APPROVALS
Set forth below is a summary of the regulatory approvals being sought in
connection with the merger. While Nortel Networks and Alteon believe that they
will receive these regulatory approvals, we cannot assure you that we will
obtain these approvals on satisfactory terms or otherwise.
United States. The merger is subject to the requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules
and regulations under the act, which provide that particular transactions may
not be completed until required information and materials are furnished to the
Antitrust Division of the Department of Justice and the Federal Trade Commission
and the requisite waiting period has expired or is terminated. The required
information was filed with the Department of Justice and the Federal Trade
Commission on August 15, 2000, and early termination was requested on August 15,
2000.
Canada. Each of:
- the distribution by Nortel Networks of its common shares in the merger;
- the assumption by Nortel Networks of the Alteon stock options
outstanding at the time of the merger; and
- the issuance of Nortel Networks common shares upon exercise of those
options;
must either comply with the registration and prospectus requirements of
applicable Canadian provincial securities laws, or be carried out under an
applicable exemption to such requirements. A prospectus in respect of such
distribution, assumption and issuance has not been filed with any securities
commission or similar regulatory authority in any province or territory in
Canada. Where appropriate exemptions are not available, Nortel Networks plans to
apply to the relevant securities regulatory authority of each such province for
an appropriate order or ruling exempting such distribution, assumption, and
issuance from the prospectus and registration requirements of the securities
laws of such province and providing for resale rights in respect of the Nortel
Networks common shares so received.
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<PAGE> 41
Germany. In connection with the merger, Nortel Networks will file a
notification with, and submit specified information to, the German Federal
Cartel Office (Bundeskartellamt) under the German Act Against Restraints on
Competition (Gesetz gegen Wettbewerbsbeschrankungen). It would be a violation of
such act to complete the merger prior to clearance by the Federal Cartel Office
or the expiration of the requisite review period.
Austria. In connection with the merger, Nortel Networks will file a
notification with, and submit specified information to, the Austrian Cartel
Court (Kartellgericht) under the Austrian Cartel Act (Kartellgesetz 1988). It
would be a violation of such act to complete the merger prior to clearance by
the Austrian Cartel Court or the expiration of the requisite review period.
Should any other approval or action be required, Alteon and Nortel Networks
currently contemplate that the approval would be sought or action taken.
The merger agreement provides that each of Nortel Networks and Alteon is
obligated to complete the merger only if:
- all material regulatory approvals are received;
- all statutory or regulatory waiting periods in respect of all material
regulatory approvals have terminated or expired; and
- with respect to Nortel Networks' obligation to complete the merger, no
approvals have been received that contain conditions or restrictions
that would reasonably be expected to (1) have a material adverse effect,
following the merger, on Nortel Networks and its subsidiaries taken as a
whole or on the surviving corporation or (2) require Nortel Networks, in
the case of a required approval of a United States or Canadian
governmental authority, to dispose of any assets of Nortel Networks,
Alteon or their respective subsidiaries, or to refrain from exercising
full authority over Alteon and its subsidiaries following the merger.
RESALE OF NORTEL NETWORKS COMMON SHARES
United States. Nortel Networks common shares issuable to Alteon
stockholders upon completion of the merger, and upon exercise of the Alteon
stock options and employee stock purchase plan purchase rights to be assumed by
Nortel Networks by reason of the merger, have been or will be registered under
the Securities Act. These securities may be traded freely in the United States
without restriction by those stockholders who are not deemed to be "affiliates"
of Nortel Networks or Alteon as that term is defined in rules adopted under the
Securities Act.
If you are an affiliate of Alteon or Nortel Networks as that term is used
in the Securities Act, you may not use this proxy statement/prospectus in
connection with any resale by you of Nortel Networks common shares that you
receive in the merger or that you receive when you exercise a stock option or
employee stock purchase plan purchase right that is converted in the merger into
an option to buy Nortel Networks common shares.
Alteon has agreed in the merger agreement to use its reasonable efforts to
cause each person who may be deemed to be an affiliate of Alteon to execute and
deliver to Nortel Networks an affiliate agreement. Each person who executes an
affiliate agreement will agree not to offer to sell, transfer, or otherwise
dispose of any Nortel Networks common shares received as a result of the merger,
except:
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<PAGE> 42
- in compliance with Rule 145 under the Securities Act;
- in a transaction that, in the opinion of counsel reasonably satisfactory
to Nortel Networks, is otherwise exempt from the registration
requirements of the Securities Act; or
- in an offering which is registered under the Securities Act.
Canada. If you wish to sell your Nortel Networks common shares in Canada,
you should consider the information below.
The Nortel Networks common shares issuable to holders of Alteon common
stock in the merger and upon the exercise of Alteon stock options and employee
stock purchase plan purchase rights assumed by Nortel Networks in the merger
will be freely resalable in or into Canada through an appropriately registered
dealer, but only if a number of conditions are met at the time of resale,
including the following:
- the selling shareholder does not hold, alone or in combination with
others, more than 20% of the outstanding voting securities of Nortel
Networks and does not otherwise hold a sufficient number of any
securities of Nortel Networks to affect materially the control of Nortel
Networks;
- if the selling shareholder is in a special relationship with Nortel
Networks, the selling shareholder has reasonable grounds to believe that
Nortel Networks is not in default of any requirement under applicable
Canadian securities laws;
- required disclosures are made by Nortel Networks to the applicable
Canadian securities regulatory authorities;
- no unusual effort is made to prepare the market or to create a demand
for the shares; and
- no extraordinary commission or consideration is paid in respect of the
transaction in the shares.
A selling shareholder is in a special relationship with Nortel Networks if,
among other things, the selling shareholder is:
- a director, officer or employee of Nortel Networks;
- a director or senior officer of a subsidiary of Nortel Networks,
including the surviving corporation in the merger; or
- a person or company, or a director or senior officer of a company, that
beneficially owns, directly or indirectly, or exercises control or
direction over, voting securities with more than 10% of the voting
rights attached to all voting securities of Nortel Networks.
NO APPRAISAL RIGHTS
Under the Delaware General Corporation Law, you will have no appraisal
rights in connection with the merger. You will find additional information under
"Comparative Rights of Holders of Alteon Common Stock and Nortel Networks Common
Shares -- Dissent and Appraisal Rights."
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U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
It is the opinion of Cooley Godward, counsel to Alteon, and of Cleary,
Gottlieb, Steen & Hamilton, counsel to Nortel Networks, that, subject to the
accuracy of certain customary representations made by Alteon and Nortel Networks
and subject to certain customary assumptions, including the completion of the
merger solely in accordance with the terms of the merger agreement:
- the merger will qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code;
- Nortel Networks will be treated as a corporation under Section 367(a)(1)
of the Internal Revenue Code with respect to each transfer of property
thereto pursuant to the merger; and
- accordingly, the following material U.S. federal income tax consequences
will result from the merger:
-- no gain or loss will be recognized by Alteon, the merger subsidiary or
Nortel Networks as a result of the merger;
-- no gain or loss will be recognized by Alteon stockholders who receive
Nortel Networks common shares in the merger, except with respect to
cash received for any fractional share; and
-- the tax basis of the Nortel Networks common shares received by Alteon
stockholders in the merger will be the same as the tax basis of the
Alteon common stock surrendered in exchange for those shares reduced
by the tax basis allocable to fractional shares for which cash is
received.
The opinions are based on the Internal Revenue Code, U.S. Treasury
regulations, current administrative rulings and practice and judicial authority,
all of which are subject to change, possibly with retroactive effect. Neither
opinion applies to Alteon stockholders who will own 5% or more of Nortel
Networks' common shares, measured by vote or value, either directly or
indirectly through attribution rules, immediately after the merger since those
shareholders are subject to special tax rules and may be required to recognize
gain or loss in respect of the transaction in certain circumstances. The IRS
will not be asked to rule on the tax consequences of the merger. Instead, Alteon
will rely on the opinion of Cooley Godward and Nortel Networks will rely on the
opinion of Cleary, Gottlieb, Steen & Hamilton. These opinions have been filed
with the SEC, and you can obtain copies of them as described under "Where You
Can Find More Information." An opinion of counsel is not binding on the IRS and
the IRS could take a position different from what is reflected in the opinions.
We cannot assure you that the opinions will be upheld by the courts if
challenged by the IRS. We urge you to consult your own tax and financial
advisors regarding the U.S. federal income tax consequences of the merger for
you based on your own particular facts and circumstances as well as any state,
local, foreign or other tax consequences of the merger.
A successful challenge by the IRS to the reorganization status of the
merger would generally result in an Alteon stockholder recognizing a gain or
loss with respect to their Alteon common stock surrendered in the merger. Such
gain or loss would be equal to the difference between the stockholder's basis in
such shares and the fair market value, at the time of the merger, of the Nortel
Networks common shares received in exchange therefor. In such event, an Alteon
stockholder's aggregate basis in the Nortel Networks common shares so received
would equal the fair market value of such shares at the time of the merger, and
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the holding period for such shares would begin the day after the merger. Such
gain or loss would be capital in nature if the exchanged Alteon common stock was
a capital asset in the hands of the Alteon stockholder at the time of the
merger. However, even in the event of a successful IRS challenge to the
reorganization status of the merger, neither Alteon nor Nortel Networks would
recognize gain or loss solely as a result of the merger.
If you receive cash for any fractional share interest in a Nortel Networks
common share in the merger, you will be treated as though Nortel Networks
distributed an actual fractional share interest to you and then redeemed the
fractional share interest for cash. The difference between the cash amount you
will receive for the fractional share interest and the amount of your tax basis
in the Alteon common stock allocable to that fractional share interest will
generally be capital gain or loss if you hold your Alteon common stock as a
capital asset at the time of the merger. Long-term capital gains recognized by
an individual holder on capital assets held for more than one year generally are
subject to a maximum tax rate of 20%. The holding period for Nortel Networks
common shares that you receive in the merger will include the holding period of
your shares of Alteon common stock if you held those shares as capital assets at
the time of the merger.
Alteon stockholders will be required to retain records and file a statement
setting forth facts relating to the merger with their U.S. federal income tax
returns.
Each Alteon stockholder should complete and sign the substitute Form W-9
included as part of the letter of transmittal to be sent to each Alteon
stockholder, so as to provide the information, including such stockholder's
taxpayer identification number, and certification necessary to avoid back-up
withholding, unless an applicable exemption exists and is proved in a manner
satisfactory to Nortel Networks and the exchange agent. In general, if an Alteon
stockholder does not sign the substitute Form W-9, the exchange agent will
withhold 31% of any cash payment to such stockholder in the merger.
The discussion above summarizes the material U.S. federal income tax
consequences of the merger, but may not address the particular facts and
circumstances of your situation. It does not discuss all of the consequences
that may be important to you if:
- you are entitled to special treatment under the Internal Revenue Code
(as are insurance companies, dealers in securities or currencies,
traders in securities electing to mark to market, exempt organizations
or foreign persons);
- your Alteon common stock is qualified small business stock for purposes
of Section 1202 of the Internal Revenue Code; or
- you acquired your Alteon common stock pursuant to the exercise of Alteon
stock options or otherwise as compensation.
The summary set forth above is not a complete analysis of all potential tax
effects of the transactions contemplated by the merger agreement or the merger
itself. No information is provided in this document regarding the tax
consequences, if any, of the merger or the exchange of shares in the merger
under state, local, foreign or other tax laws or under proposed changes in
applicable tax laws.
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CERTAIN U.S. AND CANADIAN TAX CONSIDERATIONS RELATING TO HOLDING NORTEL NETWORKS
COMMON SHARES
Certain U.S. Federal Income Tax Considerations. The following summary
describes the material U.S. federal income tax consequences of the ownership and
disposition of Nortel Networks common shares by a U.S. holder. A U.S. holder is
a person or entity that:
- is a citizen or resident of the U.S.;
- is a U.S. domestic corporation; or
- will otherwise be subject to U.S. federal income tax on a net income
basis in respect of Nortel Networks common shares.
Even if you are a U.S. holder, this summary is not a complete description
of all the tax considerations that may be important to your decision to hold or
dispose of Nortel Networks common shares. In particular, this summary does not
discuss certain rules of general application that are assumed to be known by
investors and does not address the tax treatment of beneficial owners that:
- will not hold Nortel Networks common shares as a capital asset;
- own 10% or more of the outstanding voting securities of Nortel Networks;
or
- may be subject to special tax rules, such as:
-- banks;
-- dealers in securities or currencies;
-- traders in securities electing to mark to market;
-- tax-exempt entities;
-- insurance companies;
-- persons that will hold Nortel Networks common shares as a position in
a straddle or a conversion transaction; or
-- persons that have a functional currency other than the U.S. dollar.
This summary is based upon tax laws and practice of the United States as in
effect on the date of this document, which are subject to change. You should
consult your own tax advisor about the U.S. tax consequences of your beneficial
ownership and disposition of Nortel Networks common shares and the effect of any
foreign, state or local tax laws.
The gross amount of any cash dividends paid by Nortel Networks with respect
to Nortel Networks common shares, including the amount of any Canadian taxes
withheld from these dividends, generally will be includible in the gross income
of a U.S. holder to the extent paid out of Nortel Networks' current or
accumulated earnings and profits, as determined under U.S. federal income tax
principles. This income will be foreign source dividend income and will not be
eligible for the dividends-received deduction allowed to U.S. corporations with
respect to stock of other U.S. corporations. Canadian withholding tax at the
legally applicable rate will be treated as foreign income tax which U.S. holders
may elect to deduct in computing their taxable income or, subject to the
limitations on foreign tax credits generally, credit against their U.S. federal
income tax liability. Dividends on Nortel Networks common
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shares generally will constitute passive income or, in some cases, financial
services income for U.S. foreign tax credit purposes. Foreign tax credits will
not be allowed for withholding taxes imposed in respect of certain short-term or
hedged positions in Nortel Networks common shares or in respect of arrangements
in which a U.S. holder's expected economic profit, after non-U.S. taxes, is
insubstantial. You should consult your own advisers concerning the implications
of these rules in light of your particular circumstances.
Distributions of Nortel Networks common shares to U.S. holders that are
made by Nortel Networks as part of a pro rata distribution to all holders of
Nortel Networks common shares generally will not be subject to U.S. federal
income tax.
Assuming that the Nortel Networks common shares are held as a capital
asset, any gain or loss realized by a U.S. holder on the sale or other
disposition of Nortel Networks common shares will be subject to U.S. federal
income taxation as capital gain or loss in an amount equal to the difference
between the U.S. holder's tax basis in the Nortel Networks common shares and the
amount realized on the disposition. This gain or loss will be long-term capital
gain or loss only if the Nortel Networks common shares were held for more than
one year. Dividends paid on, and proceeds from the sale or other disposition of
Nortel Networks common shares, including gains attributable to cash received for
any fractional Nortel Networks common shares may be subject to the information
reporting requirements of the Internal Revenue Code and may be subject to backup
withholding at the rate of 31% unless the holder:
- establishes that it is a corporation or other exempt holder; or
- provides an accurate taxpayer identification number on a properly
completed IRS Form W-9 and certifies that no loss of exemption from
backup withholding has occurred.
The amount of any backup withholding from a payment to a holder will be
allowed as a credit against the U.S. holder's U.S. federal income tax liability
and may entitle the holder to a refund, provided that certain required
information is furnished to the IRS.
Certain Canadian Federal Income Tax Considerations. Osler, Hoskin &
Harcourt LLP, Canadian tax counsel to Nortel Networks, has advised that the
following is a general summary of the principal Canadian federal income tax
considerations generally applicable to holders of Alteon common stock who
acquire Nortel Networks common shares in the merger in exchange for Alteon
common stock and who, for purposes of the Income Tax Act (Canada), at all
relevant times:
- deal at arm's length with Nortel Networks;
- alone or together with others not at arm's length with them, did not own
25% or more of any class or series of Nortel Networks shares, including
interests in or rights to shares, within the five-year period before
disposing of those shares;
- hold their Alteon common stock and Nortel Networks common shares for
their own account as capital property and do not use or hold their
Alteon common stock or Nortel Networks common shares in, or in the
course of, carrying on business in Canada;
- are not financial institutions as defined in the Income Tax Act (Canada)
for purposes of certain special provisions of the Income Tax Act
(Canada) (the mark-to-market rules) relating to securities held by
financial institutions; and
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- whose Alteon common stock and Nortel Networks common shares are not
designated insurance property as defined in the Income Tax Act (Canada)
and are not effectively connected with an insurance business carried on
in Canada.
This summary is based on the current provisions of the Income Tax Act
(Canada) and the regulations under the Income Tax Act (Canada), all specific
proposals to amend the Income Tax Act (Canada) and those regulations publicly
announced by or on behalf of the Minister of Finance (Canada) prior to the date
of this document and counsel's understanding of the current administrative
practices of the Canada Customs and Revenue Agency. This summary does not take
into account or anticipate any other changes in law or practice, whether by
judicial, governmental or legislative decision or action, nor does it take into
account the tax legislation or considerations of any province or territory, or
any jurisdiction other than Canada. This summary is of a general nature only, is
not intended nor should it be construed to be legal or tax advice to any
particular holder of Nortel Networks common shares or shares of Alteon common
stock and, in particular, does not take into account or anticipate the specific
circumstances of any particular holder or address tax considerations peculiar to
any holder subject to special provisions of the Income Tax Act (Canada).
Accordingly, you should consult your own tax advisor with respect to your
particular circumstances.
If you are not resident in Canada for purposes of the Income Tax Act
(Canada):
- you will not be subject to Canadian tax on the exchange of your shares
of Alteon common stock for Nortel Networks common shares in the merger;
- dividends on Nortel Networks common shares you receive in the merger
will generally be subject to Canadian withholding tax. If you are a
resident of the United States for purposes of the Canada-United States
Income Tax Convention (1980), the rate of this withholding tax will
generally be 15% of the gross amount of the dividends, under the terms
of the Canada-United States Income Tax Convention (1980). If you are
resident elsewhere, the rate of withholding will generally be 25%, or a
lesser rate provided under any applicable income tax treaty or
convention; and
- gains realized on the disposition of Nortel Networks common shares you
receive in the merger will not generally be subject to Canadian tax if
such shares are listed on a stock exchange prescribed by the Income Tax
Act (Canada), which includes the New York and Toronto stock exchanges.
If you are a resident of the United States for purposes of the
Canada-United States Income Tax Convention (1980), your gains generally
will not in any event be subject to Canadian tax as long as the value of
your Nortel Networks common shares is not derived principally from
Canadian real estate, as contemplated in the Canada-United States Income
Tax Convention (1980).
If you are resident in Canada for purposes of the Income Tax Act (Canada)
and Alteon is not your foreign affiliate, as defined in the Income Tax Act
(Canada):
- you will realize a capital gain (or sustain a capital loss) on the
exchange of your shares of Alteon common stock for Nortel Networks
common shares in the merger:
-- the amount of this gain (or loss) will be the amount by which the fair
market value of the Nortel Networks common shares you receive plus the
amount of cash you receive for any fractional share, net of any
reasonable costs you incur, exceeds (or is exceeded by) your adjusted
cost base in the shares of Alteon common stock you exchange; and
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- the adjusted cost base of your Nortel Networks common shares immediately
after the merger generally will be the average of:
-- the fair market value of the Alteon common stock you exchanged less
the amount of cash you received for any fractional Nortel Networks
common share; and
-- the adjusted cost base of any other Nortel Networks common shares you
then own as capital property.
STOCK EXCHANGE LISTINGS OF NORTEL NETWORKS COMMON SHARES
Nortel Networks will apply to list the Nortel Networks common shares to be
issued in the merger, and upon exercise of the stock options assumed by Nortel
Networks by reason of the merger, on the New York and Toronto stock exchanges.
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THE MERGER AGREEMENT
The following is a summary of the material provisions of the merger
agreement. A copy of the merger agreement is attached as Annex A and is
incorporated by reference. We encourage you to read the merger agreement in its
entirety.
THE MERGER
When the merger occurs, a newly formed subsidiary of Nortel Networks will
merge with and into Alteon, the separate corporate existence of this subsidiary
will cease and Alteon will survive and continue to exist as a Delaware
corporation and as a wholly-owned subsidiary of Nortel Networks. In this
document, the company that survives the merger is sometimes referred to as the
surviving corporation.
EFFECTIVE TIME OF THE MERGER
The merger will be completed on the second business day after the last of
the conditions to the merger has been satisfied or waived, or another date if so
agreed to by Nortel Networks and Alteon. Under Delaware law, the merger will
become effective at the time a certificate of merger is filed, or at a later
time as specified in the certificate of merger with the consent of Nortel
Networks and Alteon, in accordance with Delaware law.
CONVERSION OF ALTEON COMMON STOCK
Each share of Alteon common stock outstanding immediately prior to the
merger will be converted in the merger into 1.83148 common shares of Nortel
Networks. However, each share of Alteon common stock held in Alteon's treasury
or held by Nortel Networks or its subsidiaries at the time of the merger will
instead be canceled and retired without any payment.
NO FRACTIONAL NORTEL NETWORKS COMMON SHARES
Nortel Networks will not issue fractional shares in the merger. If, upon
conversion of your Alteon common stock, you are entitled to receive a number of
Nortel Networks common shares that includes a fraction of a Nortel Networks
common share, you will instead be entitled to receive cash for that fractional
share. The amount of cash payable will equal the fraction multiplied by the
volume weighted average of the last sales prices of a Nortel Networks common
share on the New York Stock Exchange (as reported in the three-star New York
City edition of The Wall Street Journal) for the five consecutive trading days
ending on the trading day prior to completion of the merger.
EXCHANGE OF ALTEON COMMON STOCK FOR NORTEL NETWORKS COMMON SHARES
At or prior to the completion of the merger, Nortel Networks will create an
exchange fund by depositing with an exchange agent certificates representing the
number of Nortel Networks common shares, and an estimated amount of cash for
fractional shares, to be issued or paid in exchange for outstanding shares of
Alteon common stock.
Promptly after the merger is completed, Nortel Networks will cause to be
mailed to each record holder of Alteon common stock a letter of transmittal and
instructions for surrendering Alteon common stock for exchange for Nortel
Networks common shares.
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On surrender to the exchange agent of your Alteon common stock for
cancellation together with a properly executed and completed letter of
transmittal, you will be entitled to receive the full number of Nortel Networks
common shares into which your Alteon common stock is converted as determined by
the exchange ratio, and cash for any fractional Nortel Networks common share.
Nortel Networks will not pay you any dividends or other distributions
declared after the merger is completed until you have surrendered your Alteon
common stock. Once you have properly surrendered your Alteon common stock,
Nortel Networks will pay to you the amount of any dividends or other
distributions that were declared after the merger is completed and before you
surrendered your Alteon common stock, without interest.
On completion of the merger, Alteon will close its stock transfer books and
no longer transfer Alteon common stock. After the merger is completed, you will
cease to have any rights with respect to Alteon common stock, except for the
right to convert your common stock into Nortel Networks common shares as
described above.
Any portion of the exchange fund that remains unclaimed by Alteon
stockholders one year after the merger will be paid or delivered to Nortel
Networks. Any Alteon stockholders who have not previously surrendered their
Alteon common stock as described above must then look only to Nortel Networks
for payment of Nortel Networks common shares, cash instead of any fractional
shares and unpaid dividends and distributions on the Nortel Networks common
shares deliverable in respect of the Alteon common stock. No interest will be
paid on any of these amounts.
TREATMENT OF ALTEON STOCK OPTIONS AND THE EMPLOYEE STOCK PURCHASE PLAN
In the event that the merger agreement is adopted by the Alteon
stockholders and the merger is completed, Nortel Networks will assume all Alteon
stock options outstanding at the time of the merger. After the merger, Nortel
Networks will treat these assumed stock options as options to acquire Nortel
Networks common shares on the terms and conditions of the Alteon equity
incentive plan or stock award agreement under which they initially were granted,
as amended at the time of the merger in accordance with the merger agreement.
After the merger, the assumed stock options will entitle the option holder
to purchase a number of Nortel Networks common shares equal to 1.83148 times the
number of shares of Alteon common stock covered by those options prior to the
merger, rounded down to the next lowest whole number. The exercise price for
each Nortel Networks common share covered by an assumed stock option will equal
the aggregate exercise price for the shares of Alteon common stock covered by
the option prior to the merger divided by the exchange ratio.
In the event that the merger agreement is approved by the Alteon
stockholders and the merger is completed, pursuant to the Alteon equity
incentive plans, up to a maximum of 25% of the outstanding unvested shares
subject to stock awards held by Alteon participants will accelerate and become
immediately vested and exercisable, provided that, 100% of the outstanding
unvested shares subject to stock awards held by Alteon's non-employee directors
pursuant to the merger agreement, and at least 50% of certain executive
officer's outstanding unvested shares subject to stock awards will accelerate
and become immediately vested and exercisable pursuant to offer letters with
Alteon. See "The Merger Proposal -- Interests of Certain Persons."
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Nortel Networks will assume the Alteon employee stock purchase plan and
continue the purchase rights under the outstanding offering periods as of the
date of the merger agreement and for one additional six-month offering period to
commence August 16, 2000. After the merger, the assumed stock purchase rights
will entitle the participants under the plan to purchase a number of Nortel
Networks common shares (rounded down to the nearest whole share) equal to each
participant's payroll deductions as of the relevant purchase date divided by the
lesser of (i) 85% of the fair market value of Nortel Networks' common shares on
such purchase date (rounded up to the nearest whole cent) or (ii) 85% of the
fair market value of shares of Alteon common stock on the first day of the
relevant offering period divided by 1.83148 (rounded up to the nearest whole
cent).
Nortel Networks' board of directors or an appropriate committee of its
board of directors will succeed to the authorities and responsibilities of
Alteon's board of directors or any board committee under each Alteon stock
option plan and employee stock purchase plan, and, except as described above,
those plans will continue to be administered in accordance with their current
terms. The conversion of Alteon stock options that are incentive stock options
as defined in Section 422 of the Internal Revenue Code will be done in a manner
consistent with Section 424(a) of the Internal Revenue Code.
EMPLOYEE BENEFITS
During the one-year period following the merger, Nortel Networks has agreed
that Alteon employees who continue in their employment:
- will receive annual salaries or hourly wage rates that are no less than
those that were in effect prior to the merger; and
- will be provided employee benefits, other than equity-based benefits,
that are substantially similar in the aggregate to either those in
effect prior to the merger or those offered to similarly-situated
employees of Nortel Networks.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains representations and warranties of Alteon with
respect to the following:
- its corporate organization and existence;
- its capitalization;
- disclosure of its subsidiaries and their corporate organization and
existence;
- its corporate power and authority to execute, deliver and perform its
obligations under the merger agreement;
- the merger agreement and related transactions not violating its
certificate and bylaws, applicable law and specified agreements;
- its financial statements and filings with the SEC;
- the absence of undisclosed litigation, claims or other proceedings;
- its compliance with applicable law;
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- the absence of undisclosed material contracts and the absence of
defaults under its material contracts;
- brokers' and finders' fees with respect to the merger;
- its employee benefit plans and related matters;
- the inapplicability of state anti-takeover laws to the transactions
contemplated by the merger agreement;
- its major customers;
- the absence of environmental liabilities;
- intellectual property;
- the filing and accuracy of its tax returns;
- its belief that no conditions exist that would adversely affect the
status of the merger as a reorganization for U.S. federal income tax
purposes;
- required governmental and regulatory approvals;
- its receipt of an opinion of Lehman Brothers that the exchange ratio is
fair, from a financial point of view, to Alteon's stockholders;
- the absence of year 2000 liabilities; and
- the absence of materially adverse changes in its business between March
31, 2000 and the date of the merger agreement.
The merger agreement contains material representations and warranties of
each of Nortel Networks and the merger subsidiary with respect to the following:
- its corporate organization and existence;
- its capitalization;
- its corporate power and authority to execute, deliver and perform its
obligations under the merger agreement;
- the merger agreement and related transactions not violating its charter
and bylaws, applicable law and material agreements;
- its financial statements and filings with the SEC;
- the absence of undisclosed litigation, claims or other proceedings;
- brokers' and finders' fees relating to the merger;
- required governmental and regulatory approvals; and
- the absence of materially adverse changes in its business since March
31, 2000 and until the date of the merger agreement.
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CONDUCT OF BUSINESS OF ALTEON
The merger agreement provides that Alteon and its subsidiaries will conduct
their businesses in the ordinary and usual course in all material respects and
will use their reasonable efforts to keep their business organizations and
assets intact and to preserve their current business relationships. With certain
exceptions, the merger agreement also contains limitations, prohibitions and
other provisions relating to Alteon's conduct of business from the date of the
merger agreement to the completion of the merger with respect to:
- changes affecting its capital stock;
- actions relating to dividends and other distributions;
- employment arrangements;
- changes affecting employee benefit plans;
- acquisitions and disposals of assets, businesses or properties;
- amendments to its certificate or bylaws;
- changes in its accounting principles or practices;
- entering into, modifying or terminating contracts or leases potentially
involving payments or delivery of value in excess of certain thresholds
or involving non-competition obligations;
- settlement of claims;
- actions that would be reasonably likely to adversely affect the status
of the merger as a reorganization for U.S. federal income tax purposes;
- actions that would be reasonably likely to result in a breach of any of
its representations and warranties or cause any condition to the merger
not to be satisfied;
- incurring debt;
- entering into derivative contracts;
- making capital expenditures;
- changing its material tax elections;
- waivers of confidentiality or standstill provisions with other
companies; and
- agreements or commitments to do any of the foregoing.
CONDUCT OF BUSINESS OF NORTEL NETWORKS
Subject to specified exceptions, the merger agreement contains limitations,
prohibitions and other provisions relating to Nortel Networks' actions during
the period from the date of the merger agreement to the completion of the merger
with respect to:
- the declaration or payment of any extraordinary cash dividend or any
other extraordinary distribution on or in respect of the Nortel Networks
common shares, other than a pro-rata stock dividend or stock split;
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- actions that would be reasonably likely to adversely affect the status
of the merger as a reorganization for U.S. federal income tax purposes;
- actions that would be reasonably likely to result in a breach of any of
its representations and warranties or cause any condition to the merger
not to be satisfied; and
- agreements or commitments to do any of the foregoing.
COVENANTS OF ALTEON
The merger agreement contains covenants requiring Alteon to:
- take all action necessary to convene an appropriate meeting of its
stockholders to consider and vote on the adoption of the merger
agreement and for Alteon's board of directors to recommend that Alteon's
stockholders adopt the merger agreement, except as described below under
"-- Acquisition Proposals;"
- use its reasonable efforts to cause each person who may be deemed an
"affiliate" of Alteon under the Securities Act to execute and deliver an
agreement limiting such person's ability to sell, transfer or dispose of
his or her Nortel Networks common shares;
- provide Nortel Networks with reasonable access to information under the
condition that non-public information be covered by the terms of the
confidentiality agreement between Nortel Networks and Alteon; and
- call the 2000 annual meeting of Alteon stockholders prior to the time
the stockholder vote is taken with respect to the adoption of the merger
agreement.
COVENANTS OF NORTEL NETWORKS
In the merger agreement, Nortel Networks has agreed to use its reasonable
efforts to list on the New York and Toronto stock exchanges, prior to the
merger, the Nortel Networks common shares to be issued in the merger and upon
exercise of Alteon's stock options and employee stock purchase plan rights
assumed by Nortel Networks in the merger. Nortel Networks has also agreed to use
its reasonable efforts to obtain all necessary approvals of Canadian securities
regulatory authorities to permit the distribution of Nortel Networks common
shares in the merger.
COVENANTS OF NORTEL NETWORKS, ALTEON AND THE MERGER SUBSIDIARY
The merger agreement also contains various covenants requiring Alteon,
Nortel Networks and the merger subsidiary:
- to use their reasonable efforts in good faith to take all necessary
actions to effect the merger;
- to cooperate in the preparation of this proxy statement/prospectus and a
joint communications plan with respect to the transactions contemplated
by the merger agreement;
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- to take all steps within their control to exempt the transactions
contemplated by the merger agreement from any state anti-takeover law
that purports to apply to those transactions;
- to cooperate and use their respective reasonable best efforts to:
-- prepare all documentation, effect all filings and obtain all permits,
consents, approvals and authorizations of all third parties and
regulatory authorities necessary to complete the transactions
contemplated by the merger agreement, subject to specified limitations
described under "The Merger Proposal -- Regulatory Approvals;" and
-- cause the merger to be completed as expeditiously as reasonably
practicable; and
- to use their reasonable efforts to cause their respective independent
public accountants to deliver to the other party customary accountants'
comfort letters.
ACQUISITION PROPOSALS
Alteon has agreed in the merger agreement that it will not, and will cause
its subsidiaries and its officers, directors, agents and advisors and those of
its subsidiaries not to, initiate, solicit or knowingly encourage inquiries or
proposals with respect to, or engage in any negotiations concerning, or provide
any confidential information to, or have any discussions with, any person other
than Nortel Networks relating to any acquisition proposal. Under the merger
agreement, an acquisition proposal is:
- a merger or consolidation, or any similar transaction, involving Alteon,
other than such transactions in which holders of Alteon common stock
prior to the transaction continue to hold at least 80% of the Alteon
common stock after the transaction;
- a purchase or other acquisition of more than 20% of the fair market
value of the consolidated assets of Alteon and its subsidiaries;
- a purchase or other acquisition of beneficial ownership of securities
representing more than 20% of the voting power of Alteon;
- any substantially similar transaction; or
- any offer, proposal or publicly announced bona fide intention to make an
offer with respect to any of the foregoing.
Notwithstanding the foregoing, the merger agreement permits Alteon to
discuss or negotiate with, or provide any information to, any person in response
to a bona fide written acquisition proposal by that person, but only if:
- the proposal was not solicited or encouraged in violation of the merger
agreement;
- the meeting of Alteon's stockholders has not occurred;
- Alteon's board of directors determines in good faith that the
acquisition proposal would, if completed, be a superior proposal, as
defined in the merger agreement, and is reasonably likely to be
completed;
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- Alteon's board of directors determines, in good faith after consultation
with outside counsel, that such action is legally required as a matter
of the fiduciary duties of the directors under applicable law; and
- before providing any information or data to any person or entering into
discussions or negotiations with any person, Alteon receives from that
person a signed confidentiality agreement with terms no less restrictive
with respect to that person than the terms of the confidentiality
agreement which Nortel Networks has entered into with Alteon.
The merger agreement defines a superior proposal as any bona fide written
acquisition proposal made by a third party that was not solicited or encouraged
in violation of the merger agreement and which Alteon's board of directors
determines in its good faith judgment, based on a written opinion to that effect
by a financial advisor of nationally recognized reputation, to be more favorable
to the stockholders of Alteon than the transactions contemplated by the merger
agreement.
Alteon has agreed to notify Nortel Networks within 24 hours after any of
its officers or directors become aware of any inquiries, proposals or offers
described above and to advise Nortel Networks promptly of any material
developments.
Alteon has also agreed to cease any activities, discussions or negotiations
with any parties other than Nortel Networks with respect to any acquisition
proposal.
CONDITIONS TO THE MERGER
The obligation of each of the parties to complete the merger is conditioned
upon the satisfaction or waiver of the following conditions:
- the merger agreement has been adopted by the requisite vote of the
holders of Alteon common stock;
- all required material regulatory approvals have been obtained and are in
full force and effect and all statutory waiting periods in respect
thereof have expired or been terminated and, in the case of Nortel
Networks, no regulatory approval contains any conditions, restrictions
or requirements that would reasonably be expected to:
-- have a material adverse effect on Nortel Networks and its subsidiaries
taken as a whole, or on the surviving corporation, after completion of
the merger; or
-- with respect to a required approval of a United States or Canadian
governmental authority, require Nortel Networks to dispose of any
assets of Nortel Networks, Alteon or their respective subsidiaries, or
prohibit Nortel Networks from exercising full authority over Alteon
and its subsidiaries after completion of the merger;
- no action by a United States or Canadian governmental authority is in
effect that enjoins or prohibits completion of the merger and, in the
case of Nortel Networks, no action by a United States or Canadian
governmental authority is pending that is reasonably likely to succeed
and that seeks to enjoin or prohibit completion of the merger or impose
substantial penalties as a result of the merger;
- the representations and warranties of the other party contained in the
merger agreement are true and correct as of the date of the merger
agreement and as of
51
<PAGE> 57
completion of the merger, except for any representations and warranties
that by their terms speak as of the date of the merger agreement or some
other date, which are true and correct as of that date, subject to the
applicable materiality standard set forth in the merger agreement;
- each of the agreements and covenants to be performed by the other party
in accordance with the merger agreement has been performed in all
material respects at or prior to the time of the merger;
- no events have occurred which have had or would reasonably be expected
to have a material adverse effect on the other party;
- this proxy statement/prospectus has been declared effective and no stop
order suspending its effectiveness has been issued, and no proceedings
for that purpose have been initiated or threatened by the SEC and not
concluded or withdrawn;
- Nortel Networks has received an opinion of Cleary, Gottlieb, Steen &
Hamilton as to tax matters;
- Alteon has received an opinion of Cooley Godward as to tax matters; and
- the Nortel Networks common shares issuable under the merger agreement
have received approval for listing on the New York and Toronto stock
exchanges, subject to official notice of issuance.
Other than the conditions relating to shareholder approvals and the
legality of the transaction, Alteon could elect to waive conditions to Nortel
Networks' performance and complete the merger. If Alteon waives any material
condition, it will consider whether to resolicit proxies or seek a new
stockholder approval, and will do so if, in the opinion of its counsel, this is
required under applicable law. Nortel Networks could waive conditions to
Alteon's performance and complete the merger.
INDEMNIFICATION
The surviving corporation will indemnify the present and former officers
and directors of Alteon and its subsidiaries to the fullest extent permitted by
Delaware law and Alteon's certificate and bylaws with respect to any claim
arising out of actions or omissions occurring at or prior to completion of the
merger. The surviving corporation will also fulfill Alteon's obligations under
Alteon's certificate and bylaws and any indemnification agreements between
Alteon and its present and former officers and directors currently in effect.
For six years following completion of the merger, Nortel Networks will provide
an insurance policy with respect to that portion of directors' and officers'
liability insurance that serves to cover the present and former directors and
officers of Alteon or its subsidiaries with respect to claims arising from facts
or events which occurred at or prior to completion of the merger. Except for
specified limitations, this insurance policy will contain at least the same
maximum coverage and amounts as Alteon currently provides to its directors and
officers.
WAIVER AND AMENDMENT
Nortel Networks and Alteon may amend any provision of the merger agreement
by an agreement in writing approved by their respective boards of directors.
However, after adoption of the merger agreement by Alteon's stockholders, the
merger agreement may not be amended without further stockholder approval if by
law the amendment would require the
52
<PAGE> 58
approval of Alteon's stockholders. Prior to the time the merger is completed,
Nortel Networks or Alteon may, with the approval of their respective boards of
directors:
- extend the time for the performance of any of the obligations or other
acts of the other parties;
- waive any inaccuracies in the representations and warranties contained
in the merger agreement; and
- waive compliance with any of the agreements or conditions contained in
the merger agreement.
TERMINATION OF THE MERGER AGREEMENT
Termination by mutual consent. The merger agreement may be terminated, and
the merger may be abandoned by the mutual consent of Nortel Networks and Alteon.
Termination by either party. Either party may terminate the merger
agreement if:
- the other party breaches any of its representations or warranties under
the merger agreement, subject to the applicable materiality standard,
and the breach cannot be cured or has not been cured within 30 calendar
days after written notice of the breach is given to the breaching party;
- the other party materially breaches any of its covenants or agreements
contained in the merger agreement, and the breach cannot be cured or has
not been cured within 30 calendar days after written notice of the
breach is given to the breaching party;
- the merger is not completed by February 28, 2001, if all required
approvals of governmental authorities have then been obtained, or
otherwise if the merger has not been completed by April 30, 2001, except
in either case if failure of the merger to be completed is due to the
knowing action or inaction of the party seeking to terminate the merger
agreement;
- any required approval of a United States or Canadian governmental
authority has been denied by final nonappealable action; or
- the required stockholder approval is not obtained at the Alteon meeting
at which a vote was taken.
Termination by Nortel Networks. Nortel Networks may also terminate the
merger agreement if any required approval of a governmental authority contains
any final, nonappealable conditions, restrictions or requirements that would
reasonably be expected to:
- have a material adverse effect, following the merger, on Nortel Networks
and its subsidiaries taken as a whole or on the surviving corporation;
- require Nortel Networks, in the case of a required approval of United
States or Canadian governmental authority, to dispose of any assets of
Nortel Networks, Alteon or their respective subsidiaries, or prohibit
Nortel Networks from exercising full authority over Alteon and its
subsidiaries following the merger; or
- Alteon's board of directors at any time prior to the Alteon
stockholders' meeting withdraws its recommendation of the merger, or
resolves to do so.
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<PAGE> 59
Termination by Alteon. Alteon may also terminate the merger agreement if
any required approval of a governmental authority contains any final,
nonappealable conditions, restrictions or requirements that would reasonably be
expected to:
- have a material adverse effect, following the merger, on Nortel Networks
and its subsidiaries taken as a whole; or
- require Nortel Networks, in the case of a required approval of United
States or Canadian governmental authority, to dispose of any assets of
Nortel Networks, Alteon or their respective subsidiaries, or prohibit
Nortel Networks from exercising full authority over Alteon and its
subsidiaries following the merger;
unless, in either case, within 30 days following receipt by Nortel Networks of
written notice of Alteon's intent to terminate the merger agreement under these
circumstances, Nortel Networks notifies Alteon that it waives its analogous
right to terminate the merger agreement.
TERMINATION FEES AND EXPENSES
Alteon may be required to pay Nortel Networks a termination fee of $225
million in any one of the following four circumstances:
1. Failure to complete the merger.
- Alteon terminates the merger agreement because the merger is not
completed by February 28, 2001, if all required approvals of
governmental authorities have then been obtained, or otherwise if the
merger has not been completed by April 30, 2001, unless in either case
the failure of the merger to be completed results primarily from Nortel
Networks' action or inaction or from Nortel Networks' or the merger
subsidiary's inability to obtain consent or approval of, or make any
filing or registration with, any governmental authority;
- at any time after the date of the merger agreement and at or before the
time of such termination an acquisition proposal has been made; and
- within 12 months of the termination of the merger agreement, Alteon
enters into a definitive agreement with any third party providing for
the completion of an acquisition proposal or an acquisition proposal is
completed.
2. Failure of Alteon's stockholders to approve the merger.
- Alteon or Nortel Networks terminates the merger agreement due to the
failure of Alteon's stockholders to approve the merger agreement at a
meeting at which a vote was taken;
- at any time after the date of the merger agreement and at or before the
Alteon stockholders meeting an acquisition proposal has been made and
publicly announced or the existence of which is a matter of public
knowledge; and
- within 12 months of the termination of the merger agreement, Alteon
enters into a definitive agreement with any third party providing for
the completion of an acquisition proposal or an acquisition proposal is
completed.
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<PAGE> 60
For purposes of determining whether a termination fee is due under the
circumstances described in "1" or "2" above, all references to "20%" in the
definition of acquisition proposal described above shall be replaced with "40%."
3. Willful breach of certain covenants.
Nortel Networks terminates the merger agreement after:
- Alteon willfully breaches any of its covenants or agreements with
respect to acquisition proposals; or
- at any time after Alteon or its stockholders receives an acquisition
proposal, Alteon willfully breaches any of its covenants or agreements
with respect to:
-- preparing a registration statement and obtaining shareholder approval;
-- exempting the transactions contemplated by the merger agreement from
any state anti-takeover law; or
-- obtaining regulatory approval.
4. Withdrawal of recommendation by Alteon's board of directors.
Nortel Networks terminates the merger agreement after Alteon's board of
directors withdraws its recommendation of the merger or resolves to do so.
Expenses. Subject to certain exceptions, each party to the merger
agreement will pay all merger-related expenses, except that printing and mailing
expenses and SEC registration and filing fees will be shared equally between the
parties.
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<PAGE> 61
STOCKHOLDER AGREEMENTS
The following is a summary of the material provisions of the stockholder
agreements. A form of the stockholder agreement executed by each of the
applicable officers and directors is attached as Annex B and a form of the
stockholder agreement executed by Matrix Partners IV, L.P. and Matrix IV
Entrepreneurs Fund, L.P. is attached as Annex C. We encourage you to read each
of Annex B and Annex C in its entirety.
Dominic Orr, Joe Booker, Selina Lo, James Burke, Barton Burstein, Anthony
Narducci, Shirish Sathaye, Tench Coxe, Adam Grosser and Andrew Verhalen, all of
whom are officers or directors of Alteon and holders of Alteon common stock,
trusts related to such individuals and Matrix Partners IV, L.P. and Matrix IV
Entrepreneurs Fund, L.P., major stockholders of Alteon, each entered into a
stockholder agreement as an inducement and condition to Nortel Networks entering
into the merger agreement. The following is a summary of the stockholder
agreements entered into by each of these parties, except that the stockholder
agreements entered into by Matrix Partners IV, L.P. and Matrix IV Entrepreneurs
Fund, L.P. contain certain negotiated differences, as described below.
Voting of Shares; Proxy. Each of the stockholders who entered into a
stockholder agreement agreed to vote his, her or its Alteon common stock at
Alteon's annual meeting:
- in favor of the merger agreement; and
- against any competing acquisition proposal, as defined earlier in this
proxy statement/prospectus, see "The Merger Agreement -- Acquisition
Proposals."
Termination. The obligations of each stockholder under the stockholder
agreement will terminate at the earliest of:
- the completion of the merger;
- the termination of the merger agreement, unless Nortel Networks is or
may be entitled to receive a termination fee under the merger agreement
following such termination; and
- 30 days following the termination of the merger agreement in the event
that Nortel Networks is or may be entitled to receive a termination fee
under the merger agreement following such termination, provided that
during this 30 day period, sales of the stockholder's shares of Alteon
common stock are permitted if in broker transactions effected through
the Nasdaq National Market.
Covenants of Each Stockholder. Each stockholder has agreed in the
stockholder agreement that he, she or it will not:
- transfer or encumber the Alteon common stock he, she or it owns or
controls, except to a family member or as a result of his or her death,
and only if the transferee agrees to honor the terms of the stockholder
agreement; or
- solicit, initiate or knowingly encourage or otherwise facilitate any
acquisition proposal.
Matrix Partners Stockholder Agreements. The stockholder agreements entered
into by Matrix Partners IV, L.P. and Matrix IV Entrepreneurs Fund, L.P. are
identical to the stockholder agreements signed by each of the other
stockholders, except that:
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<PAGE> 62
- a transfer to any partner of Matrix Partners IV, L.P. or Matrix IV
Entrepreneurs Fund, L.P., as the case may be, is excluded from the
transfer restrictions, provided that such partner agrees to honor the
terms of the stockholder agreement; and
- any partner of Matrix Partners IV, L.P. or Matrix IV Entrepreneurs Fund,
L.P., as the case may be, who is not a director of Alteon is excluded
from the definition of affiliate for the purpose of determining such
stockholder's beneficial ownership of Alteon common stock under the
stockholder agreement.
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<PAGE> 63
MARKET PRICES AND DIVIDENDS
NORTEL NETWORKS
The Nortel Networks common shares are traded on the New York and Toronto
stock exchanges under the symbol "NT." The following table sets forth the range
of high and low sales prices as reported on the New York Stock Exchange
Composite Tape, together with the dividends per common share declared by Nortel
Networks, during the periods indicated. We have adjusted the information in the
table to reflect the two-for-one stock split of Nortel Networks common shares on
January 7, 1998, the stock dividend of one Nortel Networks common share on each
issued and outstanding Nortel Networks common share as of August 17, 1999 and
the two-for-one stock split of Nortel Networks common shares on May 5, 2000.
<TABLE>
<CAPTION>
PRICE RANGE
------------------ PER SHARE
PERIOD HIGH LOW DIVIDENDS
------ ------- ------- ---------
<S> <C> <C> <C>
1998
Quarter ended March 31, 1998.................. $16.360 $ 9.922 $0.01875
Quarter ended June 30, 1998................... 17.313 12.844 0.01875
Quarter ended September 30, 1998.............. 15.922 7.610 0.01875
Quarter ended December 31, 1998............... 12.922 6.703 0.01875
1999
Quarter ended March 31, 1999.................. $15.938 $12.531 $0.01875
Quarter ended June 30, 1999................... 22.000 15.360 0.01875
Quarter ended September 30, 1999.............. 28.938 19.906 0.01875
Quarter ended December 31, 1999............... 55.000 24.781 0.01875
2000
Quarter ended March 31, 2000.................. $72.094 $37.750 $0.01875
Quarter ended June 30, 2000................... 71.250 44.375 0.01875
July 1, 2000 through August 24, 2000.......... 89.000 67.938 --
</TABLE>
On July 27, 2000, the last full trading day before Alteon and Nortel
Networks announced the merger, the closing price per Nortel Networks common
share on the New York Stock Exchange Composite Tape was $78.625. On August 24,
2000, the most recent date for which prices were practicably available before
printing of this proxy statement/prospectus, this price was $81.563. Past price
performance is not necessarily indicative of future price performance. You
should obtain current market quotations for Nortel Networks common shares.
Holders of Nortel Networks common shares are entitled to receive dividends
from legally available funds when, as and if declared by Nortel Networks' board
of directors. Although Nortel Networks currently intends to continue paying
quarterly cash dividends on Nortel Networks common shares, Nortel Networks
cannot assure you that its dividend policy will remain unchanged after
completion of the merger. The declaration and payment of dividends after the
merger will depend upon business conditions, operating results, capital and
reserve requirements and other factors considered relevant by Nortel Networks'
board of directors.
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<PAGE> 64
ALTEON
Alteon common stock has traded on the Nasdaq National Market under the
symbol "ATON" since September 24, 1999. The following table sets forth the high
and low sales price as reported by the Nasdaq National Market for the periods
indicated.
<TABLE>
<CAPTION>
PRICE RANGE
-------------------
PERIOD HIGH LOW
------ -------- -------
<S> <C> <C>
FISCAL YEAR ENDING JUNE 30, 2000
Quarter ended September 30, 1999........................ $122.500 $44.500
Quarter ended December 31, 1999......................... 138.000 64.000
Quarter ended March 31, 2000............................ 129.000 66.875
Quarter ended June 30, 2000............................. 100.125 41.000
FISCAL YEAR ENDING JUNE 30, 2001
July 1, 2000 through August 24, 2000.................... $160.563 $91.000
</TABLE>
On July 27, 2000, the last full trading day before Alteon and Nortel
Networks announced the merger, the closing price per share of Alteon common
stock as reported by the Nasdaq National Market was $143.000. Alteon has never
declared or paid any dividends. On August 24, 2000, the most recent date for
which prices were practicably available before the printing of this proxy
statement/prospectus, this price was $147.375. Past price performance is not
necessarily indicative of future price performance. You should obtain current
market quotations for shares of Alteon common stock.
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<PAGE> 65
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION OF NORTEL NETWORKS CORPORATION
The following unaudited pro forma condensed combined financial statements
give effect to the merger as well as to Nortel Networks' acquisition of Qtera
Corporation, Clarify Inc. Promatory Communications, Inc., Xros, Inc. and
CoreTek, Inc. (such acquisitions other than the merger collectively referred to
as the significant acquisitions) which have been aggregated in the pro forma
statements as Other. Each of these transactions has been or will be accounted
for under the purchase method of accounting. These unaudited pro forma condensed
combined financial statements have been prepared in accordance with accounting
principles generally accepted in the United States.
The unaudited pro forma condensed combined statements of operations for the
six months ended June 30, 2000 and the year ended December 31, 1999 give effect
to the merger and the significant acquisitions as if each had occurred on
January 1, 1999. The unaudited pro forma condensed combined statement of
operations for the six months ended June 30, 2000 is based on the historical
results of operations of Nortel Networks for the six months ended June 30, 2000
(which included the results of the significant acquisitions from the respective
dates of acquisition to June 30, 2000), the results of Alteon for the six months
ended June 30, 2000 and material results of operations of the significant
acquisitions for the period January 1 to the respective dates of acquisition.
The unaudited pro forma condensed combined statement of operations for the year
ended December 31, 1999 is based on the historical results of operations of
Nortel Networks, Alteon and the companies acquired in the significant
acquisitions for the year ended December 31, 1999. The unaudited pro forma
condensed combined balance sheet as of June 30, 2000 gives effect to the merger
as if it had occurred as at June 30, 2000. The unaudited pro forma condensed
combined balance sheet is based on the historical unaudited condensed balance
sheet of Nortel Networks (which includes the significant acquisitions from the
respective dates of acquisition) and Alteon as at that date. The following
unaudited pro forma condensed combined financial information, consisting of the
unaudited pro forma condensed combined statements of operations, unaudited pro
forma condensed combined balance sheet and the accompanying notes, should be
read in conjunction with the historical consolidated financial statements and
notes of Nortel Networks, which are incorporated by reference in this proxy
statement/prospectus, and the historical consolidated financial statements and
notes of Alteon set forth in this proxy statement/prospectus.
The unaudited pro forma condensed combined financial information is
presented for illustrative purposes only and is not necessarily indicative of
the future financial position or future results of operations of Nortel Networks
after the merger and the significant acquisitions or of the financial position
or results of operations of Nortel Networks that would have actually occurred
had the merger and the significant acquisitions been effected as of the dates
described above.
The allocation of the aggregate purchase price of Alteon reflected in the
unaudited pro forma condensed combined financial information of Nortel Networks
is preliminary. The actual purchase price allocation to reflect the fair values
of assets acquired and liabilities assumed will be based upon management's
evaluation of such assets and liabilities following the effective time and,
accordingly, the adjustments that have been included will change based upon the
final allocation of the total purchase price (including any purchase price
adjustment). Such allocation may differ significantly from the preliminary
allocation included in this proxy statement/prospectus.
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<PAGE> 66
NORTEL NETWORKS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS AT JUNE 30, 2000
(IN MILLIONS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
NORTEL PRO FORMA PRO FORMA
NOTES NETWORKS ALTEON SUBTOTAL ADJUSTMENTS COMBINED
----- -------- ------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents....... $ 3,331 $154 $ 3,485 $ -- $ 3,485
Accounts receivable
Related parties............... 11 11 11
Trade - net................... 6,928 29 6,957 6,957
Inventories....................... 3,364 16 3,380 3,380
Prepaid expenses and other
assets.......................... 1,057 83 1,140 1,140
Deferred income taxes - net....... 868 868 868
------- ---- ------- ------ -------
15,559 282 15,841 15,841
Long-term receivables - net....... 1,021 1,021 1,021
Investments at cost and associated
companies at equity............. 695 8 703 703
Plant and equipment - net......... 2,630 17 2,647 2,647
Long-term deferred income taxes... 113 113 113
Intangible assets
Acquired technology - net....... 2.6 1,226 1,226 10 1,236
Goodwill - net.................. 2.6 12,334 12,334 5,509 17,843
Other assets...................... 457 457 457
------- ---- ------- ------ -------
Total assets...................... $34,035 $307 $34,342 $5,519 $39,861
======= ==== ======= ====== =======
</TABLE>
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NORTEL NETWORKS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS AT JUNE 30, 2000
(IN MILLIONS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
NORTEL PRO FORMA PRO FORMA
NOTES NETWORKS ALTEON SUBTOTAL ADJUSTMENTS COMBINED
----- -------- ------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities
Notes payable................... $ 195 $ -- $ 195 $ -- $ 195
Accounts payable and accrued
liabilities
Trade and other payables...... 2.6 2,598 17 2,615 90 2,705
Payroll and benefit-related
liabilities................ 903 8 911 911
Other accrued liabilities..... 3,824 19 3,843 3,843
Income taxes payable............ 321 321 321
Long-term debt due within one
year.......................... 316 1 317 317
------- ---- ------- ------ -------
8,157 45 8,202 90 8,292
Long-term liabilities
Deferred income................. 73 73 73
Long-term debt.................. 1,222 1 1,223 1,223
Deferred income taxes - net..... 805 805 805
Other liabilities............... 1,021 1 1,022 1,022
------- ---- ------- ------ -------
11,278 47 11,325 90 11,415
------- ---- ------- ------ -------
Minority interest in subsidiary
companies....................... 788 -- 788 -- 788
------- ---- ------- ------ -------
Shareholders' equity
Common shares................... 2.7 21,183 312 21,495 (312) 27,162
2.6 5,979
Additional paid-in capital...... 2.6 1,919 1,919 1,278 3,197
Notes receivables from
stockholders.................. 2.7 (5) (5) 5 --
Deferred compensation........... 2.7 (6) (6) 6 (1,386)
2.6 (1,386)
Retained earnings (deficit)..... 2.7 (617) (41) (658) 41 (799)
2.6 (182)
Accumulated other comprehensive
loss.......................... (516) (516) (516)
------- ---- ------- ------ -------
21,969 260 22,229 5,429 27,658
------- ---- ------- ------ -------
Total liabilities and
shareholders' equity............ $34,035 $307 $34,342 $5,519 $39,861
======= ==== ======= ====== =======
</TABLE>
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NORTEL NETWORKS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NORTEL PRO FORMA PRO FORMA
NOTES NETWORKS OTHER SUBTOTAL ALTEON SUBTOTAL ADJUSTMENTS COMBINED
----- -------- ------ -------- ------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........................... $21,287 $ 235 $21,522 $ 44 $21,566 $ -- $21,566
Cost of revenues................... 12,063 61 12,124 19 12,143 12,143
------- ------ ------- ------ ------- ------- -------
Gross profit....................... 9,224 174 9,398 25 9,423 -- 9,423
Selling, general and administrative
expense (excluding stock-based
compensation)..................... 3,979 159 4,138 27 4,165 4,165
Stock-based compensation........... 2.8 8 8 664 672
Research and development
expenses.......................... 2,992 48 3,040 15 3,055 3,055
In-process research and development
expense........................... 252 2 254 254 254
Amortization of intangibles
Acquired technology............... 2.8 686 1 687 687 176 863
Goodwill.......................... 2.8 1,207 1,207 1,207 4,723 5,930
Special charges.................... 160 2 162 162 162
Gain on sale of businesses......... (131) (131) (131) (131)
------- ------ ------- ------ ------- ------- -------
Operating earnings/(loss).......... 79 (38) 41 (25) 16 (5,563) (5,547)
Equity in net earnings of
associated companies.............. 41 41 41 41
Other income -- net................ 219 4 223 2 225 225
Interest expense
Long-term debt.................... (93) (93) (93) (93)
Other............................. (71) (71) (71) (71)
------- ------ ------- ------ ------- ------- -------
Earnings (loss) before income
taxes............................. 175 (34) 141 (23) 118 (5,563) (5,445)
Income tax provision............... 526 12 538 -- 538 538
------- ------ ------- ------ ------- ------- -------
Net loss applicable to common
shares............................ $ (351) $ (46) $ (397) $ (23) $ (420) $(5,563) $(5,983)
======= ====== ======= ====== ======= ======= =======
Loss per common share
basic............................. $ (0.13) $ (0.14) $ (2.01)
diluted........................... $ (0.13) $ (0.14) $ (2.01)
Dividends declared per common
share............................. $ 0.075 $ 0.075
Weighted average number of common
shares outstanding (millions)
basic............................. 2,705 2,973 2,973
diluted........................... 2,765 3,086 3,086
</TABLE>
-------------------------
(1) Pro forma loss per common share has been calculated assuming completion of
the merger and the significant acquisitions as if they each had occurred on
January 1, 1999.
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<PAGE> 69
NORTEL NETWORKS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NORTEL PRO FORMA PRO FORMA
NOTES NETWORKS OTHER SUBTOTAL ALTEON SUBTOTAL ADJUSTMENTS COMBINED
----- -------- ----- -------- ------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $14,143 $ -- $14,143 $ 80 $14,223 $ -- $14,223
Cost of revenues..................... 8,203 5 8,208 28 8,236 8,236
------- ---- ------- ------ ------- ------- -------
Gross profit......................... 5,940 (5) 5,935 52 5,987 -- 5,987
Selling, general and administrative
expense (excluding stock-based
compensation)...................... 2,673 7 2,680 38 2,718 2,718
Stock-based compensation............. 2.8 321 321
Research and development expenses.... 1,862 12 1,874 13 1,887 1,887
In-process research and development
expense............................ 2.9 1,040 1,040 1,040 (1,040) --
Amortization of intangibles
Acquired technology................ 2.8 390 390 390 51 441
Goodwill........................... 2.8 1,289 1,289 1,289 1,726 3,015
Special charges...................... 262 262 262 262
Gain on sale of businesses........... (174) (174) (174) (174)
------- ---- ------- ------ ------- ------- -------
Operating earnings / (loss).......... (1,402) (24) (1,426) 1 (1,425) (1,058) (2,483)
Equity in net loss of associated
companies.......................... (6) (6) (6) (6)
Other income -- net.................. 594 2 596 5 601 601
Interest expense
Long-term debt..................... (47) (47) (47) (47)
Other.............................. (32) (32) (32) (32)
------- ---- ------- ------ ------- ------- -------
Earnings (loss) before income
taxes.............................. (893) (22) (915) 6 (909) (1,058) (1,967)
Income tax provision................. 582 582 582 582
------- ---- ------- ------ ------- ------- -------
Net earnings (loss) applicable to
common shares...................... $(1,475) $(22) $(1,497) $ 6 $(1,491) $(1,058) $(2,549)
======= ==== ======= ====== ======= ======= =======
Loss per common share
basic.............................. $ (0.52) $ (0.51) $ (0.87)
diluted............................ $ (0.52) $ (0.51) $ (0.87)
Dividends declared per common
share.............................. $0.0375 $0.0375
Weighted average number of common
shares outstanding (millions)
basic.............................. 2,865 2,944 2,944
diluted............................ 3,027 3,126 3,126
</TABLE>
-------------------------
(1) Pro forma loss per common share has been calculated assuming completion of
the merger and the significant acquisitions as if they each had occurred on
January 1, 1999.
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<PAGE> 70
NOTES TO THE PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The pro forma statements give effect to the merger as well as to the
significant acquisitions which have been aggregated in the pro forma statements
as Other. Each of these transactions has been or will be accounted for under the
purchase method of accounting. These pro forma statements have been prepared in
accordance with accounting principles generally accepted in the United States.
The total purchase price of Alteon will be allocated to the assets acquired
and liabilities assumed, based on their respective fair values. The allocation
of the aggregate purchase price reflected in the pro forma statements is
preliminary. The actual purchase allocation to reflect the fair values of the
assets acquired and liabilities assumed will be based upon management's
evaluation of such assets and liabilities and, accordingly, the adjustments that
have been included in the pro forma statements will change based upon the final
allocation of the total purchase price (including any purchase price
adjustment). Such allocation may differ significantly from the preliminary
allocation included herein.
The pro forma statements of operations for the six months ended June 30,
2000 and the year ended December 31, 1999 give effect to the merger and the
significant acquisitions as if each had occurred on January 1, 1999. The pro
forma statements have been prepared by management of Nortel Networks based on
the unaudited and audited consolidated financial statements of Nortel Networks
as at and for the six months ended June 30, 2000 and for the year ended December
31, 1999, respectively, the unaudited consolidated financial statements of
Alteon as at and for the six months ended June 30, 2000 and the year ended
December 31, 1999, and the unaudited consolidated financial statements of the
companies acquired in the significant acquisitions as at and for the six months
ended June 30, 2000 and for the year ended December 31, 1999, adjusted to
reflect classifications consistent with the presentation adopted by Nortel
Networks. The accounting policies used in the preparation of the pro forma
statements are those disclosed in Nortel Networks' audited and unaudited
consolidated financial statements.
The pro forma statements also are not necessarily indicative of the results
that actually would have been achieved if the transactions reflected therein had
been completed on the dates indicated or the results which may be obtained in
the future. In preparing these pro forma statements, no adjustments have been
made to reflect transactions which have occurred since the dates indicated or to
reflect the operating benefits and general and administrative cost savings
expected to result from combining the operations of Nortel Networks, Alteon and
the significant acquisitions.
The following pro forma financial information, consisting of the pro forma
statements of operations, pro forma balance sheet and the accompanying notes,
should be read in conjunction with the historical consolidated financial
statements and notes of Nortel Networks, which are incorporated by reference in
this proxy statement/prospectus, and the historical consolidated financial
statements and notes of Alteon set forth in this proxy statement/prospectus. The
pro forma statements should also be read in conjunction with the description of
the merger in this proxy statement/prospectus.
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<PAGE> 71
As more fully described in "Nortel Networks Recent Developments --
Reorganization of Nortel Networks," all acquisitions completed prior to May 1,
2000 were consummated by Old Nortel. The number of common shares issued as
consideration and the number of stock options assumed in those acquisitions have
been restated to reflect the plan of arrangement, including the exchange of Old
Nortel common shares for New Nortel common shares and the two-for-one stock
split of Nortel Networks common shares on May 5, 2000. Since May 1, 2000,
acquisitions involving any share consideration have been consummated by New
Nortel, while acquisitions not involving share consideration have continued to
be consummated by Old Nortel or its subsidiaries.
2. PRO FORMA ADJUSTMENTS AND ASSUMPTIONS
The pro forma statements incorporate the following assumptions:
These pro forma statements give effect to the acquisition of Alteon as if
it had occurred on June 30, 2000 in respect of the pro forma balance sheet and
on January 1, 1999 in respect of the pro forma statements of operations. The pro
forma statements give effect to the significant acquisitions (noted below) as if
they had occurred on the respective dates of acquisition in respect of the pro
forma balance sheet and on January 1, 1999 in respect of the pro forma
statements of operations. The significant acquisitions have been aggregated in
Other in the pro forma statements of operations.
<TABLE>
<CAPTION>
PURCHASE ACQUIRED DEFERRED
ACQUISITION NOTE DATE PRICE TECHNOLOGY IPR&D GOODWILL COMPENSATION
----------- ----- --------- -------- ---------- ------ -------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Qtera (2.1) January $ 3,004 $ -- $ 559 $ 2,424 $ --
28
Clarify (2.2) March 16 2,114 210 64 1,814 --
Promatory (2.3) March 23 729 60 50 629 --
Xros (2.4) June 2 3,227 29 191 3,004 --
CoreTek (2.5) June 23 1,047 115 176 790 --
------- ---------- ------ -------- ------------
Total other $10,121 $ 414 $1,040 $ 8,661 $ --
======= ========== ====== ======== ============
Announced
Alteon (2.6) July 28 $ 7,347 $ 10 $ 182 $ 5,509 $ 1,386
======= ========== ====== ======== ============
</TABLE>
2.1 QTERA
Qtera Corporation was a producer of ultra-long-reach optical networking
systems. In connection with the acquisition, approximately 56.4 million common
shares of Nortel Networks were issued, of which approximately 10.4 million
common shares of Nortel Networks were issued into escrow related to contingent
consideration payable by Nortel Networks upon the achievement by Qtera of
certain business performance objectives in 2000. The equivalent of approximately
7.4 million stock options to purchase common shares of Nortel Networks and 1.9
million warrants convertible into common shares of Nortel Networks were assumed.
The fair values of the assumed Qtera stock options and warrants, using the
Black-Scholes valuation model, were $385 million and $78 million, respectively.
These shares, stock options and warrants exclude the stock options and warrants
that are to be assumed on the achievement of certain business performance
objectives. The maximum contingent consideration is approximately $500 million,
payable by the issuance of common shares of Nortel Networks, and the assumption
of Qtera stock options and warrants, upon Qtera achieving certain business
performance objectives. As at June 30, 2000, approximately $300 million of the
contingent consideration had been paid upon achievement of business performance
objectives, and was recorded as an increase to the goodwill noted above. The
allocation of the purchase price included net tangible assets of $21 million.
The in-process
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<PAGE> 72
research and development assets were charged to earnings in the period and
goodwill is being amortized on a straight-line basis over three years.
2.2 CLARIFY
Clarify Inc. was a global provider of e-business front office solutions. In
connection with the acquisition, approximately 63.4 million common shares of
Nortel Networks were issued and the equivalent of approximately 17.6 million
stock options to purchase common shares of Nortel Networks were assumed. The
fair value of the assumed Clarify stock options, using the Black-Scholes
valuation model, was $363 million. The allocation of the purchase price included
net tangible assets of $26 million. The acquired technology assets are being
charged to earnings on a straight-line basis over two years and the in-process
research and development assets were charged to earnings in the period. Goodwill
is being amortized on a straight-line basis over three years.
2.3 PROMATORY
Promatory Communications, Inc. was a developer of digital subscriber line
platforms for high-speed Internet access. In connection with the acquisition,
approximately 13.9 million common shares of Nortel Networks were issued, of
which approximately 1.3 million common shares of Nortel Networks were issued
into escrow related to contingent consideration payable by Nortel Networks upon
the achievement by Promatory of certain business performance objectives in 2000.
The equivalent of approximately 0.3 million stock options to purchase common
shares of Nortel Networks were also assumed. The fair value of the assumed
Promatory stock options, using the Black-Scholes valuation model, was $14
million. The maximum contingent consideration is approximately $75 million,
payable in common shares of Nortel Networks, upon Promatory achieving certain
business performance objectives. The allocation of the purchase price included
assumed net tangible liabilities of $10 million. The acquired technology assets
are being charged to earnings on a straight-line basis over three years and the
in-process research and development assets were charged to earnings in the
period. Goodwill is being amortized on a straight-line basis over three years.
2.4 XROS
Xros, Inc. was a developer of second-generation, large-scale, fully
photonic switching. In connection with the acquisition, Nortel Networks issued
approximately 52.9 million common shares and assumed the equivalent of
approximately 2.1 million stock options to purchase common shares of Nortel
Networks. The fair value of the assumed Xros stock options, using the
Black-Scholes valuation model, was $76 million. The allocation of the purchase
price included assumed net tangible assets of $3 million. The acquired
technology assets are being charged to earnings on a straight-line basis over
three years and the in-process research and development assets were charged to
earnings in the period. Goodwill is being amortized on a straight-line basis
over three years.
2.5 CORETEK
CoreTek, Inc. was a developer of strategic optical components. In
connection with the acquisition, Nortel Networks issued approximately 14.5
million common shares and assumed the equivalent of approximately 3.4 million
stock options to purchase common shares of Nortel Networks. The fair value of
the assumed CoreTek stock options, using the Black-Scholes valuation model, was
$175 million. The maximum contingent consideration is
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<PAGE> 73
approximately $364 million, payable in common shares of Nortel Networks, upon
CoreTek achieving certain business performance objectives in 2000. The
allocation of the purchase price included assumed net tangible liabilities of
$34 million. The acquired technology assets are being charged to earnings on a
straight-line basis over three years and the in-process research and development
assets were charged to earnings in the period. Goodwill is being amortized on a
straight-line basis over three years.
2.6 THE MERGER
The pro forma financial information also reflects the merger consideration
valued at approximately $7,347 million. As the merger has not yet been
completed, the actual consideration for the merger cannot yet be determined.
For the purposes of the pro forma financial information, the number of
Nortel Networks common shares assumed to be issued in the merger is
approximately 79.1 million shares. This amount is based on the number of shares
of Alteon common stock outstanding as of July 28, 2000, the date the parties
entered into the merger agreement. For the purposes of the pro forma financial
information, the estimated equivalent of approximately 20.4 million stock
options to purchase Nortel Networks common shares are assumed. Similarly, the
estimated value of the options to purchase Nortel Networks common shares to be
issued in the acquisition of Alteon is based on the outstanding options to
purchase Alteon common stock as of July 28, 2000. The estimated fair value of
the estimated assumed Alteon stock options using the Black-Scholes valuation
model is $1,278 million. The actual number of Nortel Networks common shares and
stock options to be issued will be based on the actual outstanding Alteon common
shares and options, as of the completion of the merger. The maximum contingent
consideration is approximately $375 million payable by the issuance of common
shares of Nortel Networks upon the occurrence of certain business events.
The following represents the estimated allocation for the estimated
purchase price to be paid in the merger over the estimated historical net book
values of the acquired assets and assumed liabilities of Alteon as of the date
of the pro forma balance sheet and is for illustrative purposes only. The actual
purchase price allocations will be based on fair values of the acquired assets
and assumed liabilities as of the actual acquisition date.
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Common shareholders' equity of Alteon acquired............. $ 260
Fair value of common shares to be issued................... 5,979
Fair value of assumed Alteon stock options................. 1,278
Estimated acquisition costs................................ 90
------
Total purchase price....................................... 7,347
------
Excess purchase price over fair values of net tangible
assets acquired.......................................... $7,087
======
</TABLE>
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<PAGE> 74
Allocation of purchase price in excess of fair value of net tangible assets
acquired:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
In-process research and development......................... $ 182
Acquired technology......................................... 10
Goodwill.................................................... 5,509
Deferred compensation....................................... 1,386
------
$7,087
======
</TABLE>
2.7 This adjustment is to eliminate the shareholders' equity of Alteon in the
amount of $260 million.
2.8 The pro forma adjustments represent the goodwill and acquired technology
amortization that would have been recorded during the periods covered by the pro
forma statements of operations related to the significant acquisitions. The
in-process research and development expense for the merger and the significant
acquisitions has been reflected in the pro forma balance sheet but has not been
included in the pro forma statement of operations as these statements do not
give effect to nonrecurring merger costs related to the transactions.
<TABLE>
<CAPTION>
AMORTIZATION AMORTIZATION
DECEMBER 31, SIX MONTHS ENDED
1999 JUNE 30, 2000(1) AMORTIZATION PERIOD
------------ ---------------- ----------------------------
ACQUIRED TECHNOLOGY (IN MILLIONS)
<S> <C> <C> <C>
Qtera................. $ -- $ -- --
Clarify............... 105 22 2 years, straight-line basis
Promatory............. 20 5 3 years, straight-line basis
Xros.................. 10 4 3 years, straight-line basis
CoreTek............... 38 18 3 years, straight-line basis
Alteon................ 3 2 3 years, straight-line basis
------ ------
TOTAL............... $ 176 $ 51
====== ======
</TABLE>
<TABLE>
<CAPTION>
AMORTIZATION AMORTIZATION
DECEMBER 31, SIX MONTHS ENDED
1999 JUNE 30, 2000(1) AMORTIZATION PERIOD
------------ ---------------- ----------------------------
GOODWILL (IN MILLIONS)
<S> <C> <C> <C>
Qtera................. $ 808 $ 91 3 years, straight-line basis
Clarify............... 605 126 3 years, straight-line basis
Promatory............. 210 48 3 years, straight-line basis
Xros.................. 1,001 417 3 years, straight-line basis
CoreTek............... 263 126 3 years, straight-line basis
Alteon................ 1,836 918 3 years, straight-line basis
------ ------
TOTAL............... $4,723 $1,726
====== ======
</TABLE>
-------------------------
(1) The pro forma adjustments excludes the amortization for acquired technology
and goodwill already accounted for by Nortel Networks (and already included
in Nortel Networks' results for the six months ended June 30, 2000).
The pro forma adjustments are based on the assumption that the goodwill and
other intangibles relating to the merger and the significant acquisitions are
amortized on a straight-line basis over two to three years. These adjustments
are preliminary and could vary significantly based upon the final allocation of
the total purchase price (including any
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<PAGE> 75
purchase price adjustment). The valuation of the actual intangible assets of
Alteon will not be completed until the merger is complete. When completed,
certain amounts identified as intangible assets may be amortized over periods
other than the three-year period represented in the pro forma statement of
operations. Additionally, the estimate of in-process research and development
may change.
The impact on the pro forma net loss of these amortizations was a charge of
$1,777 million for the six months ended June 30, 2000 and $4,899 million for the
year ended December 31, 1999. The actual amortization of intangibles arising
from the transaction will take place subsequent to the completion of the merger.
The pro forma adjustments also represent amortization of deferred
compensation that would have been recorded during the periods covered by the pro
forma statements of operations related to the merger (December 31, 1999 -- $664
million, six months ended June 30, 2000 -- $321 million).
2.9 This adjustment is to remove the effect of the in-process research and
development expense included in the historical results of operations of Nortel
Networks related to the significant acquisitions which are effected as of
January 1, 1999 for the purposes of these pro forma statement of operations.
3. ITEMS NOT ADJUSTED
The pro forma statements do not reflect any operating efficiencies, cost
savings and other benefits, or merger related expenses anticipated by Nortel
Networks' management as a result of the merger.
4. COMMON SHARES OUTSTANDING
The number of pro forma common shares outstanding after giving effect to
the transaction are:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Nortel Networks common shares outstanding at June 30,
2000...................................................... 2,977
Average shares of Alteon common stock outstanding converted
to equivalent Nortel Networks common shares (1.83148
exchange ratio)........................................... 79
-------------
Pro forma common shares outstanding......................... 3,056
=============
</TABLE>
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<PAGE> 76
5. PER SHARE INFORMATION
The pro forma net loss per common share, basic and diluted was based on the
weighted average number of common shares outstanding during the period as
calculated below:
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1999 2000
------------ ----------------
(IN MILLIONS)
<S> <C> <C>
Nortel Networks average common shares
outstanding.................................... 2,705 2,865
Average shares of Alteon common stock outstanding
converted to equivalent Nortel Networks common
shares (1.83148 exchange ratio)................ 79 79
Average common shares outstanding issued in
significant acquisitions....................... 189 n/a
----- -----
Pro forma average common shares outstanding...... 2,973 2,944
===== =====
</TABLE>
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<PAGE> 77
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF ALTEON
The following table summarizes information regarding the beneficial
ownership of Alteon outstanding common stock as of August 16, 2000 for:
- each group known to Alteon who beneficially owns more than 5% of
Alteon's common stock;
- Alteon's chief executive officer;
- each of Alteon's four other most highly compensated executive officers
whose compensation exceeded $100,000 during Alteon's fiscal year ended
June 30, 2000;
- each of Alteon's directors and nominees; and
- all of Alteon's executive officers, directors and nominees as a group.
Beneficial ownership of shares is determined under the rules of the SEC 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 Alteon
common stock held by them. Shares of Alteon common stock subject to options
currently exercisable or exercisable within 60 days of August 16, 2000 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 43,268,818 shares of Alteon common
stock outstanding as of August 16, 2000. Unless otherwise indicated, the address
of each of the named individuals is c/o Alteon WebSystems, Inc., 50 Great Oaks
Blvd., San Jose, California 95119.
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<PAGE> 78
AMOUNT AND NATURE OF SHARES OF ALTEON COMMON STOCK
BENEFICIALLY OWNED AS OF AUGUST 16, 2000
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED
SHARES ISSUABLE (INCLUDES
PURSUANT TO THE NUMBER
OPTIONS SHARES SUBJECT TO OF SHARES
EXERCISABLE A RIGHT OF SHOWN IN PERCENT OF
WITHIN 60 DAYS OF REPURCHASE AS OF COLUMNS ONE OUTSTANDING
NAME AUGUST 16, 2000 AUGUST 16, 2000(1) AND TWO) SHARES
---- ----------------- ------------------ ------------ -----------
<S> <C> <C> <C> <C>
FIVE PERCENT
STOCKHOLDERS:
Munder Capital
Management(2).......... -- -- 2,300,000 5.32%
DIRECTORS AND EXECUTIVE
OFFICERS:
Dominic P. Orr(3)........ 747,500 214,031 2,152,344 4.83%
Barton M. Burstein(4).... 80,000 67,189 354,777 *
Joe T. Booker(5)......... 195,000 78,750 739,594 1.66%
Shirish S. Sathaye(6).... 138,125 59,375 579,790 1.27%
Selina Y. Lo(7).......... 273,750 162,344 1,200,038 2.67%
Tench Coxe(8)............ 165,000 -- 701,329 1.61%
Adam Grosser............. 123,750 -- 201,352 *
Andrew W. Verhalen(9).... 165,000 -- 2,080,901 4.77%
All executive officers,
directors and nominees
as a group (12
people)(10)............ 2,519,901 935,415 9,184,827 20.06%
</TABLE>
-------------------------
* Less than 1%
(1) These shares of Alteon common stock are 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 repurchase price ranges from $0.05 to $89.25.
(2) Represents shares held by Munder Capital Management as of June 30, 2000.
(3) Includes 148,688 shares held by the Dominic P. Orr 1999 Annuity Trust.
(4) Includes 75,000 shares held by Steven Gary Blank, trustee of the Burstein
Family Trust.
(5) Includes 100,000 shares held by the Booker Annuity Trust.
(6) Includes 122,000 shares held by the Sathaye Family Trust.
(7) Includes 89,000 shares held by the Selina Lo 1999 Annuity Trust and 797,515
shares held by the Selina Y. Lo Trust.
(8) Includes 197,827 shares held by Sutter Hill Ventures, 330,454 shares held by
Mr. Coxe, trustee of the Coxe/Otus Revocable Trust and 8,048 shares held by
Wells Fargo Bank, trustee of a Keogh account 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.
(9) Includes 1,704,775 shares held by Matrix Partners IV, L.P., 97,619 shares
held by Matrix IV Entrepreneurs Fund, L.P., and 113,507 shares held by the
Andrew W. Verhalen & Janet L. Brownstone 1989 Trust. 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 the Matrix shares except to the extent of his proportionate
partnership interest in these shares.
(10) Includes shares described in the notes above, as applicable.
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<PAGE> 79
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
Alteon's directors and executive officers, and persons who own more than 10% of
a registered class of Alteon equity securities, to file with the SEC initial
reports of ownership and reports of changes in ownership of common stock and
other equity securities of Alteon. Officers, directors and greater than 10%
stockholders are required by SEC regulation to furnish Alteon with copies of all
Section 16(a) forms they file.
To Alteon's knowledge, based solely on a review of the copies of such
reports furnished to Alteon and written representations that no other reports
were required, during the fiscal year ended June 30, 2000, all Section 16(a)
filing requirements applicable to Alteon executive officers, directors and
greater than 10% beneficial owners were complied with.
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<PAGE> 80
BUSINESS OF NORTEL NETWORKS
The following is a brief description of the business of Nortel Networks.
Additional information regarding Nortel Networks is contained in its filings
with the SEC.
Nortel Networks is a leading global supplier of networking solutions and
services that support voice, data and video transmission over wireless and
wireline technologies. Nortel Networks is focused on building the infrastructure
service enabling solutions and applications for the new, high-performance
Internet. Nortel Networks' business consists of the design, development,
assembly, manufacture, marketing, sale, financing, installation, servicing and
support of networking solutions and services for service provider and carrier
customers and enterprise customers. Nortel Networks' solutions and services are
used by customers to support the Internet and other public and private voice,
data and video networks.
Nortel Networks is a corporation organized under the Canada Business
Corporations Act. The principal executive offices of Nortel Networks are located
at 8200 Dixie Road, Suite 100, Brampton, Ontario, Canada, L6T 5P6. Nortel
Networks' telephone number is (905) 863-0000.
DESCRIPTION OF NORTEL NETWORKS SHARE CAPITAL
GENERAL
The authorized capital of Nortel Networks includes an unlimited number of
Nortel Networks common shares and an unlimited number of Class A Preferred
Shares and Class B Preferred Shares, without nominal or par value, issuable in
series.
COMMON SHARES
The Nortel Networks common shares are listed on the New York and Toronto
stock exchanges. Nortel Networks will apply to list the Nortel Networks common
shares issued in the merger and upon exercise of the Alteon stock options to be
assumed by Nortel Networks by reason of the merger on these stock exchanges.
At the close of business on July 31, 2000, there were 2,993,109,817 Nortel
Networks common shares issued and outstanding.
Holders of Nortel Networks common shares are entitled to one vote per share
on all matters voted on at all meetings of shareholders, except meetings at
which only holders of other classes or series of shares of Nortel Networks are
entitled to vote.
Subject to the rights, privileges, restrictions and conditions attaching to
any other class or series of shares of Nortel Networks, holders of Nortel
Networks common shares have the right to receive any dividends declared and
payable by Nortel Networks on Nortel Networks common shares and the right to
receive the remaining assets of Nortel Networks upon liquidation, dissolution or
winding-up, if any, after payment of all debts and liabilities.
Holders of Nortel Networks common shares have no pre-emptive, redemption or
conversion rights. Outstanding Nortel Networks common shares are, and Nortel
Networks common shares to be issued in the merger will be, validly issued, fully
paid and non-assessable.
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<PAGE> 81
Repurchases of Nortel Networks Common Shares. The following table sets
forth information with respect to programs under which Nortel Networks' board of
directors has authorized the repurchase for cancellation of Nortel Networks
common shares through open market purchases. We have adjusted this information
to reflect the two-for-one stock split of Nortel Networks common shares on
January 7, 1998, the stock dividend of one Nortel Networks common share on each
issued and outstanding Nortel Networks common share as of August 17, 1999 and
the two-for-one stock split of Nortel Networks common shares on May 5, 2000.
<TABLE>
<CAPTION>
NUMBER OF
NORTEL NETWORKS NUMBER OF
COMMON SHARES NORTEL NETWORKS
AUTHORIZED FOR COMMON SHARES
PROGRAM PERIOD REPURCHASE REPURCHASED
------------------------ --------------- ---------------
<S> <C> <C> <C>
1997 stock repurchase
program............ January 30, 1997 through 64,000,000 40,729,600
January 29, 1998
1998 stock repurchase
program............ February 4, 1998 through 25,600,000 17,389,600
February 3, 1999
1999 stock repurchase
program............ February 26, 1999 40,000,000 0
through February 25,
2000
</TABLE>
SHAREHOLDER RIGHTS PLAN
Nortel Networks has adopted a shareholder rights plan, the objectives of
which are to provide adequate time for its board of directors and shareholders
to assess an unsolicited take-over bid for Nortel Networks, to provide Nortel
Networks' board of directors with sufficient time to explore and develop
alternatives for maximizing shareholder value if such a bid is made and to
provide Nortel Networks shareholders with an equal opportunity to participate in
such a bid. The rights plan encourages a potential acquiror to proceed either by
way of a "permitted bid" that satisfies certain minimum standards designed to
promote fairness, or with the concurrence of Nortel Networks' board of
directors. A permitted bid under the rights plan is a take-over bid made by way
of a take-over bid circular that satisfies all of the following conditions:
- the bid is made to all holders of Nortel Networks shares that are
entitled to vote generally on the election of directors;
- the bid must remain open for at least 60 days and more than 50% of the
outstanding voting shares (other than shares beneficially owned on the
date of the bid by the offeror and certain related parties) must be
deposited under the bid and not withdrawn before any shares may be taken
up and paid for. In addition, if 50% of the voting shares are so
deposited and not withdrawn, the offeror must make an announcement to
that effect, and must leave the bid open for an additional ten business
days; and
- under the terms of the bid, voting shares may be deposited at any time
between the date of the bid and the date voting shares are taken up and
paid for, and any voting shares so deposited may be withdrawn until
taken up and paid for.
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<PAGE> 82
If the take-over bid fails to satisfy such minimum standards and the rights
plan is not waived by Nortel Networks' board of directors, the rights plan
provides that common shareholders of Nortel Networks, other than the offeror,
will be able to purchase additional Nortel Networks common shares at a 50%
discount to market price. A detailed description of the rights plan may be found
in Nortel Networks' registration statement on Form 8-A, as amended, which you
may obtain as described under "Where You Can Find More Information."
PREFERRED SHARES OF NORTEL NETWORKS
Nortel Networks' board of directors may from time to time issue Class A
Preferred Shares and Class B Preferred Shares in one or more series and
determine for any such series, by resolution passed before issuance, its
designation, number of shares and respective rights, privileges, restrictions
and conditions. The holders of Nortel Networks' preferred shares do not have the
right to receive notice of, attend, or vote at, any meeting of shareholders
except to the extent otherwise determined by Nortel Networks' board of directors
and set forth in the articles of amendment designating any series of preferred
shares or as provided in the Canada Business Corporations Act. Nortel Networks
has not issued any preferred shares as of the date of this proxy
statement/prospectus.
PREFERRED SHARES OF OLD NORTEL
As of the date of this proxy statement/prospectus, Old Nortel has
outstanding the following preferred shares:
- 200 cumulative redeemable Class A Preferred Shares series 4;
- 16,000,000 cumulative redeemable Class A Preferred Shares series 5; and
- 14,000,000 non-cumulative redeemable Class A Preferred Shares series 7.
The series 5 preferred shares are convertible, in specific circumstances,
into an equal number of cumulative redeemable Class A Preferred Shares series 6,
none of which are currently outstanding. Once issued, the series 6 preferred
shares are convertible, in specific circumstances, into series 5 preferred
shares. The series 7 preferred shares are convertible, in specific
circumstances, into an equal number of non-cumulative redeemable Class A
Preferred Shares series 8, none of which are currently outstanding. Once issued,
the series 8 preferred shares are convertible, in specific circumstances, into
series 7 preferred shares. In the event of the dissolution, liquidation or
winding up of Old Nortel, the holders of Old Nortel preferred shares would have
a prior claim on the assets of Old Nortel ahead of Nortel Networks, as the sole
holder of Old Nortel common shares. A detailed description of Old Nortel's
outstanding preferred shares may be found in its registration statement on Form
8-A, as amended, which you may obtain as described under "Where You Can Find
More Information."
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BUSINESS OF ALTEON
Alteon is 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. Alteon's 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. Alteon refers to
this combination of capabilities as Web-working. Alteon's solutions are designed
to increase the performance, availability, scalability, manageability and
control of Web servers and Web data center infrastructure. Alteon provides
Web-working solutions to e-commerce companies, Web portals, content publishers,
Web hosting companies, Internet service providers, server vendors and
enterprises.
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, 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 modems and wireless
access devices, 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 vital for generating revenue and communicating with
customers
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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. 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. Alteon refers 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.
In response to the rapid growth and greater 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 disappointed customers and
lost revenues.
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 effectively. 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
Alteon refers 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:
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- 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 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. This lack of integration adds
to the complexity and management challenges of Web data centers.
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 networks. Next
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generation Web data center infrastructure solutions must be able to manage data
packets and Web sessions at these high data transmission speeds.
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 SOLUTION
Alteon provides next generation Internet infrastructure solutions that are
designed to increase the performance, availability, scalability, manageability
and control of Web servers and Web data centers. Alteon's Web data center
products include Gigabit Ethernet switches, server adapters and software that
combine intelligent Web session management with the high performance and
availability of leading networking infrastructure solutions. Alteon refers to
this combination of capabilities as Web-working.
Alteon provides Web-working solutions to e-commerce companies, Web portals,
content publishers, Web hosting companies, Internet service providers, server
vendors and enterprises. Alteon's Web data center switches, which it calls 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
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management appliances. Greater integration can improve Alteon's 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. Alteon's server adapters provide Gigabit Ethernet
connectivity to servers and can increase their access speed while off-loading
server processing tasks. Alteon's switch and adapter architectures are scalable
to accommodate a customer's growth. Alteon believes these features are crucial
to e-businesses operating Web data centers today and will become increasingly
important in the future.
Alteon's Web-working solutions are based on its core software and hardware
technologies:
Web OS. All of Alteon's Web switches can support Alteon's 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. Alteon's Web switches
implement a distributed processing architecture that is optimized for
processing-intensive Web session management. Alteon has developed application
specific integrated circuits, or ASICs, which have been designed specifically to
address the requirements of the Web data center. Alteon's ASICs, which it calls
WebICs, are deployed in Alteon's Web switches in a distributed architecture with
a WebIC at each port or port group, providing dedicated processing capacity.
Alteon's current Web switches can support a session switching rate of
approximately 74,000 sessions per second on a Fast Ethernet port, which it
believes is the maximum session rate possible, or "wire speed", for Fast
Ethernet. Alteon's WebICs are also programmable, providing the flexibility to
integrate new Web traffic management capabilities through software upgrades.
The key benefits of Alteon's solutions are:
High-Speed, Web-Intelligent Switching. Alteon's 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 integrating multiple Web traffic
management functions into a single platform, Alteon's solutions are designed to
reduce the delay created by multiple, single-function appliances located in the
data path. The Alteon 700 Series of Web switches, like Alteon's other 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.
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Rapid and Efficient Scalability. Alteon's 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, Alteon's Web switches
are scalable in performance, port density and feature support. Its distributed
architecture, which includes a WebIC on every port or port group, is designed to
allow the capacity of Alteon's 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 Alteon's 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 Alteon's Web switches feature automatic failover to redundant
switches upon failure. Unlike two port Internet traffic management appliances,
Alteon's switches support multiple input and output connections, referred to as
"full-meshed topology," with redundant network links.
Increased Flexibility and Control. Alteon's 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, Alteon's bandwidth management software product is designed to allow
Web data center administrators to allocate and prioritize bandwidth to control
resource usage.
Cost Effectiveness. Alteon believes that its Web data center solutions
provide significant cost savings for its customers. Alteon's solutions integrate
multiple functions in a single Web switch, reducing capital, management and
training costs. In addition, because Alteon's Web OS software can be implemented
incrementally, Web data center administrators can typically deploy additional
services without costly hardware upgrades. Alteon's 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 STRATEGY
Alteon's objective is to be the leading supplier of Web-working
infrastructure solutions. The key elements of Alteon's strategy are:
Extend Early Market Leadership in the Web-working Market. Alteon pioneered
Web-working by shipping the first Web switch in February 1998. Alteon's focus on
providing purpose-built infrastructure solutions optimized for managing traffic
in the Web data center has enabled it to gain a large share of the early Web
switching market. According to the Dell'Oro Group, a market research company,
Alteon achieved a leading position in the Web switching market, with 49.6% of
the worldwide Web switching revenue and 80% of the Gigabit Ethernet Web
switching market in 1999. Alteon intends to leverage its early market leadership
to continue defining the Web-working market via rapid product expansion and new
product introductions. Alteon began customer shipments of its newest family of
Web switches, the Alteon 700 Series, in March 2000. The Alteon 700 Series is
designed to extend Alteon's Web switching performance leadership. Based on
product simulations, Alteon believes it will have the ability to process up to
12,000,000 sessions per second per switch, which it believes would be the
highest session switching rate in the industry among products shipping today.
Alteon believes this capacity, when combined with port density of up to 128 Fast
Ethernet or 32 Gigabit Ethernet ports, will allow Alteon to provide its
customers with a
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cost-effective and easily-manageable upgrade path as their Web data centers
grow. Additionally, Alteon introduced a companion platform to its industry
leading Web switches, the Alteon Integrated Service Director (iSD), that will
allow it to extend its Web product offerings into the market for Web
infrastructure application software. The first two products based on the iSD
platform, the iSD-SSL Accelerator and the iSD-Akamaizer, are planned for
customer release before the end of calendar year 2000.
Leverage Web-working Technology Leadership. Alteon offers customers a rich
set of value-added Web traffic control functions based on its ability to manage
traffic at the Web session layers in parallel on every port. By integrating
these functions on a single platform, Alteon believes that its 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. Alteon intends to leverage Web OS and its distributed WebIC
architecture to integrate many new traffic control features in its products.
Alteon believes that its ability to provide enhanced features using a common
platform offers a significant competitive advantage. As an example of Alteon's
technical leadership, it 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. Alteon
co-authored a proposal for this capability with UUNET, Juniper Networks Inc. and
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. Alteon
intends to complement its direct sales force with a broader set of
Internet-focused resellers, system integrators and Web service outsourcing
leaders. In June 1999, Alteon entered into an agreement with Lucent Technologies
Inc. 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 Alteon Web switches as part of the "Integrated IP
Solutions for Service Providers" program. In May 2000, Alteon expanded the
Lucent relationship by announcing that Lucent will sell Alteon Web switching
products through an original equipment manufacturer (OEM) relationship using the
Lucent label on Alteon products. Alteon's 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 Alteon's 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., Digital
Island, Inc. and Akamai Technologies, Inc. In June 2000, Alteon announced a
joint technology and marketing agreement with Akamai, which provides the basis
for Alteon's iSD-Akamaizer. Alteon believes that these relationships provide an
important competitive advantage by helping Alteon anticipate Alteon's and these
companies' industry trends and supply compatible solutions to joint customers.
Increase Penetration of Leading E-businesses. Alteon is focusing its
near-term sales and marketing initiatives on leading e-commerce companies, Web
portals, content publishers, Web hosting companies, application service
providers, Internet service providers, content distribution network providers
and enterprises. Similar to the way universities led the adoption of router
backbones, Alteon believes that these early adopters of Internet technologies
will lead the way to widespread adoption of Web-working infrastructure
solutions.
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Expand Supplier Relationships with Leading Server Manufacturers. Alteon
believes its ACEnic Gigabit Ethernet server adapter products have helped it
establish close relationships with a majority of the leading server vendors.
These OEM customers provide Alteon with valuable insights into Web server and
Web data center application trends and technologies. Because Alteon's Web
switches and server vendors' hardware and software offerings target a common
environment, the Web data center, Alteon and server vendors should mutually
benefit from increased cooperation in marketing, distribution, service and joint
technology development. Alteon plans to broaden its distribution and service
relationships with leading server vendors to include not only its ACEnic server
adapters but also its Web switch and Web OS products.
Enhance Customer Service and Support. Alteon believes that its ability to
provide high-quality customer service and support is a key factor in attracting
and retaining customers. Prior to the installation of its Internet traffic
management solutions, its systems engineering team works with customers to
analyze and understand their specific network needs. Alteon's worldwide
technical support team provides remote support through a full time, or "24x7,"
help desk and assists its customers with online queries and software upgrades.
In addition, Alteon providea consulting services to its customers. Alteon intend
to enhance its existing sales and customer service efforts by expanding its
system engineering and customer support service organizations on a worldwide
basis. Given the increasingly mission-critical nature of its customers' Web data
centers, Alteon believes its ability to provide differentiated service and
support is a competitive advantage.
TECHNOLOGIES
All of Alteon's Web switches are built on a technology core that consists
of Alteon Web OS traffic management software, its distributed processing
architecture and its family of WebICs. This technology core forms the basis of
Alteon's advanced Web switch and Gigabit Ethernet server adapter products, which
are designed to optimize Web data center performance, scalability, availability
and manageability.
Web OS Software
Alteon's Web switches run Web OS, a suite of Web traffic management
software. Web OS features are designed to offload processing from Web servers,
scale Web servers and applications, monitor and control bandwidth resources and
increase the availability, manageability and control of Web data center
infrastructures. In addition to offering a variety of Web traffic management
features, Web OS allows Alteon 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.
Existing customers may acquire the key for these new software upgrades directly
through software licenses.
Distributed Processing Architecture
Alteon's distributed processing architecture is the key to its scalable,
high-performance and cost-effective solutions for Web data center traffic
management. The distributed network processor architecture used in Alteon's Web
switch products is specifically designed for processing-intensive Web traffic
management. With two reduced instruction set computing, or
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RISC, processors located on every port or port group on the switch, the
processing tasks for Web sessions are distributed across multiple RISC
processors for parallel operations. This not only increases Web session
throughput, but also reduces delay as the processing queues are shortened with
parallel processing. In May 2000, Alteon began shipping Virtual Matrix
Architecture (VMA) software in connection with its Web switches. VMA further
enables Web OS to use all the embedded processors within Alteon's Web switches,
regardless of switch configuration, maximizing processing performance and memory
utilization efficiency. With VMA, Alteon's Web switches support wire speed
session switching rates on the Fast Ethernet ports while taking advantage of the
significant processing capacity provided by its distributed architecture. This
allows future Web traffic management features to be added with minimal
performance impact.
Proprietary WebICs
Each port on Alteon's ACEdirector and ACEswitch 180 Series Web switches has
a dedicated WebIC, Alteon's purpose-built ASIC, 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 Alteon's 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. Alteon
believes that this could enable its current generation of Web switches to
process up to 296,000 sessions per second and that the performance and
scalability enabled by the integration of RISC processors into Alteon's WebICs
significantly differentiates its Web traffic management products.
The Alteon 700 Series is designed to improve on Alteon's 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. This
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
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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, Alteon believes that high-speed Web content parsing will become
increasingly important. Alteon's 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. The Alteon 714 allows up to 34 of Alteon's new WebICs to be
interconnected, which is designed to enable data throughput rates of up to
12,000,000 Web sessions per second.
Alteon's current-generation WebIC is also used across its ACEnic Gigabit
Ethernet server adapter line. The two embedded RISC processors are used to
implement many intelligent server offload functions. Alteon's WebIC allows its
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 Dell, IBM, Compaq, Hewlett-Packard, 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 server load balancing,
policy-based traffic redirection, high availability configurations, 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 the
Alteon ACEdirector Series, Alteon 180 Series and 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 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.
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
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addresses. When traffic is redirected to a server farm, a Web switch running its
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 cacheable objects from cacheable 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. Alteon has 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, the healthy switches automatically assume 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.
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.
Bandwidth Management Software
This Alteon software product provides users with the capability to meter,
control and account for bandwidth use for traffic entering and leaving Web
servers. Because Alteon's Web switches are designed to connect servers, they are
positioned to meter server input and output and to control bandwidth usage. This
feature also allows e-businesses to record a variety of traffic statistics for
accounting, service level agreement reporting and capacity planning.
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Global Server Load Balancing (GSLB) Software
The Alteon global server load balancing software product 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.
Web Switches
ACEdirector Series. Alteon's ACEdirector product line represents Alteon's
first series of stackable, fixed configuration Web switches. Based on Alteon's
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, ACEdirector 3 and
ACEdirector 4 products. The ACEdirector 4 and ACEdirector 3 each support
increasingly more memory than the ACEdirector 2, enabling expanded network
configurations. All three products offer eight Fast Ethernet ports, with the
ACEdirector 3 and ACEdirector 4 supporting one additional Gigabit Ethernet port.
Alteon began shipping its ACEdirector product line in April 1998.
Cache Director. Alteon's 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 Alteon's ACEdirector Series and is based on the same distributed
processing architecture as all of Alteon's Web switches. Alteon has shipped this
product since December 1998.
Alteon 180 Series. Like Alteon's ACEdirector series, the Alteon 180 Series
is stackable, fixed-configuration Web switches. The Alteon 180 Series consists
of the Alteon 180, Alteon 180e and Alteon 184, which support Ethernet and Layer
3 switching, and are configured with Web OS functions to enable advanced Web
traffic management features. As with the ACE Director Series, the Alteon 180e
and Alteon 184 support increasingly more memory. 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. Alteon has
shipped Alteon 180 Series products since February 1998.
Alteon 700 Series. The Alteon 700 Series represents Alteon's most advanced
offering of Web switches and was developed using its next-generation WebIC
technology. In July 1999, Alteon began customer testing of the Alteon 700 Series
and began customer shipments of these switches in March 2000. Like the existing
families of Web switches, the Alteon 700 Series offers robust Web session
switching capabilities using the Alteon suite of Web OS software products. In
addition, with the advanced processing capabilities of Alteon's 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
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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 Alteon 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.
Integrated Service Director Series. The Integrated Service Director (iSD)
is a new line of Web optimization tools designed to work in conjunction with
Alteon's entire line of Fast and Gigabit Ethernet Web switches. The iSD is a
service delivery platform that supports a variety of value-added applications.
These products intelligently speed application and content delivery by
offloading compute-intensive functions from servers. The iSD product line is
expected to begin general shipment before the end of calendar year 2000.
Alteon has announced two products in the iSD line: the iSD-SSL Accelerator
and the iSD-Akamaizer. The iSD-SSL Accelerator, which is currently being tested
by its customers, increases the speed of secure e-Commerce transactions by
offloading Secure Sockets Layer (SSL) processing, such as the
encryption/decryption of traffic as well as secure key exchange processing, from
local servers. The iSD-Akamaizer automates the process of manipulating Web
content for use on Akamai's global content delivery network -- a process known
as "Akamaizing." Currently this process is performed manually or through the use
of software scripts that consume valuable host processing power on Web servers
or caches.
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The following table summarizes the features and performance capabilities of
Alteon's Web switches:
<TABLE>
<CAPTION>
ACESWITCH 180
CACHE DIRECTOR ACEDIRECTOR 2/3/4 180E/184 ALTEON 708 ALTEON 714
------------------ ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Maximum 8 Fast Ethernet 8 Fast Ethernet; 8 selectable Up to 128 Fast Up to 64 Fast
Configurations ACEdirector 3/4 10/100/1000 Ethernet or 16 Ethernet or 32
also supports 1 Ethernet plus 1 Gigabit Ethernet Gigabit Ethernet
Gig Ethernet Gig Ethernet
uplink uplink
Web Session Switching Yes Yes Yes Yes Yes
Sessions per Second 74,000 74,000 74,000 74,000 (Fast 74,000 (Fast
per Port Ethernet) 372,000 Ethernet) 372,000
(approximate) (Gigabit Ethernet) (Gigabit Ethernet)
Sessions per Second 296,000 296,000 296,000 6,000,000 12,000,000
per Switch
(approximate)
Modularity Stackable Fixed Stackable Fixed Stackable Fixed Modular 4 input/ Modular 8 input/
configuration configuration configuration output slots for output slots for
mixed connectivity mixed connectivity
Physical Redundancy None None None Physical Physical
redundancy, Redundancy,
including power including power
supplies and supplies and
management modules Management Modules
and Redundant core
Semiconductor
Interconnectivity
Fabric Capacity 8 Gbps 8 Gbps 8 Gbps 90 Gbps 180 Gbps
Per Port List Price Fast Ethernet: Fast Ethernet: Fast and Gigabit Fast Ethernet: Fast Ethernet:
Range of Fully- $687 $1,375 -- $2,375 Ethernet:# $387 -- $583 $350 -- $545
Configured System Gig Ethernet: $1,667 -- $3,333 Gig Ethernet: Gig Ethernet:
(U.S.) $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
Alteon 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. Alteon's 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.
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Alteon believes its 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 Alteon ACEnic server adapters. For example,
Microsoft stated that it has demonstrated 920 Mbps throughput on a single-CPU
Pentium II Xeon server (400MHz) and IBM announced 989 Mbps throughput for an
RS/6000 platform using an Alteon ACEnic server adapter.
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 Alteon's 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.
Alteon believes that the breadth of operating systems that it supports and
the software drivers written by its 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.
Alteon's ACEnic server adapters support Ethernet frame sizes above the
standard 1,500 bytes, known as Jumbo Frames. Jumbo Frames is an optional
performance extension to Ethernet that Alteon proposes 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 Alteon's ACEnic OEM partners have implemented Jumbo Frame support
in their drivers.
CUSTOMERS
Alteon's customers consist of e-commerce companies, Web portals, content
publishers, Web hosting companies, Internet service providers, server vendors
and enterprises. Alteon sells its Gigabit Ethernet server adapters primarily to
OEMs.
In fiscal 2000, no individual customer accounted for 10% or more of
Alteon's 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%, sales to Fuji Xerox accounted for 14% and sales to 3Com
accounted for 10% of net sales. Alteon expects that revenues from a relatively
small number of customers will continue to account for a significant portion of
revenues. Unless and until Alteon diversifies and expands its customer base, its
future success will significantly depend upon the timing and size of future
purchase orders from its largest customers.
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Sales to customers outside of the United States accounted for approximately
41% in fiscal 2000, 25% in fiscal 1999, and 29% in fiscal 1998.
RESEARCH AND DEVELOPMENT
To be successful, Alteon must continue to enhance and build on its WebIC
and Web OS technologies and develop competitive new products. Alteon has
assembled a team of highly experienced hardware, software and test engineers and
system architects. Its engineering team possesses expertise in the areas of high
performance server connectivity, high performance, highly-integrated ASIC and
system design and Internetworking.
Alteon takes 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 it
believes is critical to maintaining a leadership position in the Web-working
market. Alteon's 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 June 30, 2000, Alteon had 90 full-time employees engaged in research
and development. Expenditures for research and development in 2000, 1999 and
1998 were approximately $22.8 million, $10.0 million and $8.8 million
respectively. In addition, Pharsalia Technologies, Inc., a software development
company acquired by Alteon on July 17, 2000, employs approximately 30 engineers
in Roswell, Georgia.
Alteon's industry is characterized by very rapid technological change,
frequent new product introductions and enhancements, changes in customer demands
and evolving industry standards. Alteon's existing products will be rendered
less competitive or obsolete if Alteon fails to introduce new products or
product enhancements that anticipate the features and functionality that
customers demand or insure that its products interoperate with current and
emerging networking technologies. In the past, Alteon has lost customers to
competitors because it was not able to respond to their requests for additional
features in a timely fashion. As exemplified by its acquisition of Pharsalia,
Alteon's strategy is to continue to make strategic investments and acquisitions
for technology.
MARKETING, SALES AND CUSTOMER SUPPORT
Alteon sells its products through its own direct sales force, OEMs and
resellers. In the United States Alteon sells its products both directly, as well
as through resellers and OEMs, and internationally it sells its products
primarily through resellers. Alteon is actively establishing new sales channels
and increasing its direct sales force, both domestically and internationally.
Alteon's direct sales teams typically consist of a sales representative covering
specific geographic regions and a systems engineer. Alteon's systems engineers
provide technical support and implementation expertise during the evaluation
process. Alteon expects to continue to increase the number of direct sales
personnel in order to support and develop
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leads for its indirect distribution channels and increase the direct sale of its
products. This expansion will significantly increase personnel costs and related
expenditures. Sales personnel will not be productive immediately and Alteon
cannot 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 its
products, Alteon expects to increase its reliance on OEMs and resellers. For
example, in June 1999, it 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. In May 2000, Alteon extended its agreement with Lucent into an OEM
arrangement whereby Lucent will private-label Alteon's stackable Web switches.
Lucent is not obligated to resell Alteon's products under this agreement. Alteon
cannot assure you that its existing OEM and reseller customers will market its
products effectively or continue to devote the resources necessary to provide
Alteon 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 Alteon's current or
potential competitors which may reduce their efforts in selling Alteon's
products. Alteon may also be unable to retain current or future OEM customers.
Generally, OEM relationships can be terminated with little or no notice. If
Alteon's relationship with any current or future OEM customers is terminated by
either party, Alteon may not be successful in replacing the customer on a timely
basis, or at all, with another suitable OEM.
Alteon sells its Web switches and its Web OS primarily through its own
direct sales force and resellers to e-businesses, including e-commerce
companies, Web portals, content publishers, Web hosting companies, Internet
service providers, server vendors and enterprises. Alteon sells its server
adapters primarily to OEMs. Alteon believes that its customers evaluate its
products primarily on the basis of performance, features, manageability and
speed of delivery.
Alteon believes that alliances with vendors of complementary technologies
are important in its rapidly evolving market. As a result, Alteon has
established its W.E.B.S. program, which has three components: product
interoperation/integration, joint marketing and joint sales. Through this
program, Alteon attempts to offer its 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, Digital Island and Akamai Technologies.
Alliances such as W.E.B.S. and its relationship with Lucent help Alteon expand
its sales effort, penetrate new accounts, and ensure interoperability with
industry leading products and compliance with industry standards.
Once Alteon's products are sold to end users, Alteon's system engineering
team continues to work to address the evolving needs of the end user networks.
Alteon assists its OEMs and resellers in providing support for products it
sells. The sales price for all Alteon products includes a one-year full
warranty, and an additional five-year service plan can be purchased separately.
Alteon's technical support team provides worldwide support through a help desk
and assists Alteon customers with online service updates and software upgrades.
Alteon also provides on-site support for critical problem resolution. In
addition, it provides a full range of training and consulting services to its
customers, including comprehensive network management and performance and
capacity analysis to assist in predicting future network requirements. Alteon
believes that it has leading customer service and support capabilities and it
plans to continue to invest in this area in the future.
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MANUFACTURING
Alteon's manufacturing operations consist primarily of prototype
development and quality control. It outsources substantially all of the
manufacturing and testing of its hardware platforms to a contract manufacturer,
Celestica Thailand Limited, on a turn-key basis. Alteon purchasees custom
components and certain other high-value or scarce components from third party
suppliers and delivers those components to Celestica on a consignment basis for
assembly in its hardware platforms. Alteon designs and directs Celestica's
manufacturing processes with the goal of ensuring compliance with Alteon's
quality standards and cost improvement initiatives. Alteon's reliance on a
single independent manufacturer involves a number of risks, including the
potential absence of adequate manufacturing capacity and reduced control over
delivery schedules, manufacturing yields and costs. As Alteon's relationship
with Celestica continues to develop, manufacturing yields or product performance
could be adversely affected due to difficulties associated with adapting
Alteon's technology and product design to Celestica's process technology and
design rules. In addition, Celestica is not obligated to supply products to
Alteon 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 Alteon components in required volumes,
Alteon will have to identify acceptable alternative manufacturers, which could
take in excess of six months.
Alteon purchases several key product components that are contained in its
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 its business. For example, the
only manufacturer for Alteon's WebICs is LSI Logic (LSI). The process used to
manufacture its WebICs is proprietary to LSI. Alteon does not have a supply
agreement with LSI. If LSI terminated this relationship, Alteon would be
required to redesign its WebICs to make them compatible with the manufacturing
process of a new supplier. Alteon estimates that this process could take as long
as 12 months and cost $4.0 million or more.
In order to maintain its competitive edge, Alteon plans to focus its
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.
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COMPETITION
Alteon competes in the highly competitive, next generation Internet
infrastructure market. Alteon expects competition to intensify in the future.
Alteon believes its ability to compete successfully in this market will be
driven primarily by the reliability, performance and distinctive features of its
products and by the quality of its customer service. Alteon competes with large
telecommunications and networking companies including Cisco Systems Inc. Alteon
expects that, over time, Cisco, 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 Local Area Network (LAN) switches. Cisco has also acquired a
competitor of Alteon, ArrowPoint Communications, to broaden their Web switching
offerings. These product offerings compete directly with Alteon's 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 Alteon's products,
they would be significant competitors and their activities could cause Alteon to
reduce its prices. In addition, a number of other private and public companies
offer products designed to address the same problems which Alteon's 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 Alteon's products.
In order to compete successfully in this emerging market, Alteon needs to:
- continuously improve its 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 its next
generation WebIC; and
- build relationships with networking equipment providers that lack
Internet traffic management solutions.
INTELLECTUAL PROPERTY AND LICENSES
Alteon's success is dependent upon its ability to develop and protect its
proprietary technology and intellectual proprietary rights. Alteon relies
primarily on a combination of contractual provisions, confidentiality
procedures, trade secrets, and patent, copyright and trademark laws to
accomplish these goals.
Alteon has seven U.S. patent applications pending. It is possible that the
patents Alteon has applied for, if issued, or its potential future patents may
be successfully challenged or that no patents will be issued from its patent
applications. It is also possible that Alteon may not develop proprietary
products or technologies that are patentable, that any patent issued to it may
not provide it with any competitive advantages, or that the patents of others
will harm itsility to do business.
Alteon seeks to avoid disclosure of its trade secrets, including but not
limited to, requiring employees, customers and others with access to its
proprietary information to execute confidentiality agreements with Alteon and
restricting access to its source code.
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Alteon also seeks to protect its software, documentation and other written
materials under trade secret and copyright laws. Despite its efforts to protect
ITS proprietary rights, existing laws and contractual arrangements provide only
limited protection. Unauthorized parties may attempt to copy or otherwise obtain
and use Alteon's products or technology. Monitoring unauthorized use of its
products is difficult and Alteon cannot be certain that the steps it has taken
will prevent unauthorized use of its technology, particularly in foreign
countries where the laws may not protect proprietary rights as fully as in the
United States. Expensive litigation may be necessary in the future to enforce
intellectual property rights. Alteon's failure to enforce and protect its
intellectual property rights could harm Alteon's business.
Alteon incorporates technology that is licensed from several third parties
into its products. These licenses are either perpetual or are for technologies
for which alternative sources are generally available. In addition, Alteon's
WebICs are manufactured using technology owned by LSI. If Alteon lost access to
this LSI technology, it would be required to re-design its products and develop
or license additional technology.
Alteon expects that it will be subject to infringement claims as the number
of products and competitors in its markets grows and the functionality of
products overlaps. In August 1999, Alteon received a letter from Resonate, Inc.
alleging that some of its products infringe one of its patents. Alteon does not
believe that any of its current products infringe Resonate's patent. In July
2000, Alteon received a letter from IBM claiming that certain products may
require a license under certain IBM patents. If these claims, or any similar
claims Alteon may receive in the future, cannot be resolved through a license or
similar arrangement, Alteon 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,
Alteon could be required to pay substantial damages, including treble damages if
it is 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 Alteon's business
by causing it to do one or more of the following:
- stop selling, incorporating or using Alteon 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.
EMPLOYEES
As of June 30, 2000, Alteon employed 420 employees. Of the total number of
full-time employees, 90 were in research and development, 270 were in sales and
marketing and business development and 60 were in operations and administration.
Alteon's employees do not have any collective bargaining agreement, and Alteon
has never experienced a work stoppage. Alteon believes its employee relations
are good.
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ACQUISITION OF PHARSALIA BY ALTEON
On July 17, 2000, Alteon acquired Pharsalia for approximately $221 million
in a stock-for-stock transaction. Alteon issued an aggregate of approximately
1.4 million shares of Alteon common stock for all outstanding shares of
Pharsalia common stock, and assumed all outstanding Pharsalia options. Pharsalia
develops Internet infrastructure software products that allow companies to
expand their Web presence through enhanced content delivery. Pharsalia's
products are expected to run on Alteon's iSD series.
PROPERTIES
Alteon's 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. Alteon occupies approximately 48,000 square feet in this facility and
sublease approximately 30,000 square feet under a sublease that expires in 2002.
Alteon recently signed a lease for a new 360,000 square foot corporate campus in
San Jose, California. The new campus is expected to be ready for occupancy by
July 2001. The lease expires in 2010. Alteon leases two other facilities with
approximately 30,000 square feet which expire in 2001. Alteon also leases office
space in Georgia, Virginia, Florida, and in Australia, China, Hong Kong, Japan,
Korea, Singapore, Taiwan, and the United Kingdom for its sales and service
personnel. Alteon believes that it will need to obtain additional space in the
near future and that this additional space can be obtained on commercially
reasonable terms.
LEGAL PROCEEDINGS
From time to time Alteon is a party to certain litigation or legal claims.
Alteon management has reviewed all pending legal matters and believes that the
resolution of such matters will not have a significant adverse effect on its
financial position or results of operations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS OF ALTEON
Alteon provides next-generation Internet infrastructure solutions that are
designed to increase the performance, availability, scalability, manageability
and control of Web servers and Web data centers. Alteon's products include Web
switches, server adapters and software that combine intelligent Web session
management with the high performance and availability of leading networking
infrastructure solutions.
Alteon derives revenues primarily from direct product sales and sales to
original equipment manufacturers, or OEMs, and resellers. Revenues are
recognized when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the price is fixed and determinable and
collectibility is reasonable assured. Revenues are generally recognized upon
product shipment. Revenues are recorded net of sales returns and allowances
which are calculated based on actual historical and expected results. Alteon
also records a provision at the time it recognizes revenue primarily for
warranty costs. No revenue is recognized on products shipped on a trial basis.
Alteon recognizes service contract revenue ratably over the respective service
period, which is generally one year. Service revenue has not been significant to
date.
Alteon markets its products through its direct sales force, OEMs and
resellers. Alteon sells its products both directly and through resellers and
OEMs in the United States, and it sell its products internationally primarily
through resellers. A majority of its sales to date have been to customers
located in the United States. In the fiscal year ended June 30, 2000, 1999 and
1998, sales in the United States accounted for approximately 59%, 75% and 71% of
net sales, respectively. Alteon expects sales in the United States to continue
to account for the majority of its revenues.
A small number of Alteon's OEM and reseller customers account for a
significant portion of its revenues. OEM and reseller customers represent an
increasing source of revenues. In 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%, sales to Fuji Xerox accounted for 14%, and sales
to 3Com accounted for 10% of net sales.
Alteon has a limited operating history, which makes it difficult to predict
future operating results. Alteon believes its success requires expanding its
customer base and successfully introducing next generation products, including
the Alteon 700 Series of Web switches and the Alteon iSD product line. Alteon
intends to continue to invest significantly in sales, marketing and research and
development for the foreseeable future. Alteon's 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 Alteon's
market is intense and may result in price reductions and loss of market share.
Delays in anticipated sales past the end of a quarter may harm its results of
operations for that quarter. Alteon's operating results will be affected by many
factors, including the following:
- changes in the mix of products it sell;
- the timing of the on-going release of the Alteon 700 Series of Web
switches, as well as other product enhancements or new products, and its
ability to manage product transitions;
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- deferrals of customer orders in anticipation of product enhancements or
new products;
- announcement or market acceptance of product enhancements or new
products offered by its competitors;
- the length and variability of its sales cycle;
- the mix of channels through which it sell its products;
- the timing and amount of orders from its OEM and reseller customers; and
- general economic conditions and economic conditions specific to the
Internet traffic management industry.
As a result, Alteon believes that period-to-period comparisons of its
results of operations are not meaningful and should not be relied upon as an
indicator of its future performance. Alteon's 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 its common stock is likely to
decline.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
net revenues for the years ended June 30, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
-------------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Net sales.......................................... 100.0% 100.0% 100.0%
Cost of sales...................................... 36.6 51.0 58.2
----- ----- -----
Gross margin..................................... 63.4 49.0 41.8
Operating expenses
Sales and marketing.............................. 45.0 49.7 47.7
Research and development......................... 20.8 38.1 65.0
General and administrative....................... 6.4 9.7 11.1
Stock compensation to consultants................ 7.0 0.0 0.0
----- ----- -----
Total operating expenses...................... 79.2 97.5 123.8
----- ----- -----
Loss from operations............................... (15.8) (48.5) (82.0)
Interest income (expense), net..................... 7.3 1.0 2.4
----- ----- -----
Loss before income taxes........................... (8.5) (47.5) (79.6)
Income tax expense................................. 0.4 0.3 0.0
----- ----- -----
Net loss........................................... (8.9)% (47.8)% (79.6)%
===== ===== =====
</TABLE>
Years Ended June 30, 2000 and 1999
Net Sales. Net sales increased 317% to $109.6 million in fiscal 2000
compared to $26.3 million in fiscal 1999. Sales of Alteon Web switch products
represented $80.8 million in fiscal 2000, an increase of $69.2 million from
fiscal 1999. Sales of Alteon second generation ACEnic server adapter products in
fiscal 2000 were $25.9 million, an increase of $15.2 million from fiscal 1999.
International sales accounted for 41% and 25% of net sales in fiscal 2000 and
1999, respectively.
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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. Gross
profit as a percentage of net sales, or gross margin, increased to 63.4% in
fiscal 2000 from 49% in fiscal 1999. This increase in gross margin was due
primarily to volume of high margin Web switching products.
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 $49.3 million in
fiscal 2000 from $13.1 million in fiscal 1999. Of the $36.2 million increase,
$18.3 million was due to increased personnel costs, including commissions
associated with establishing a significant sales force and supporting increased
marketing efforts, $8.4 million was due to increased product marketing costs
related primarily to its Web switches, $3.9 million was due to travel related
expenses, and $2.3 million was due to consulting and other services fees. Alteon
expects that sales and marketing expenses will increase as it adds 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. Alteon has not capitalized any software development
costs. These costs are expensed as incurred because Alteon believes its current
development process is completed at essentially the same time as it establishes
technological feasibility. Research and development expenses increased to $22.8
million in fiscal 2000 from $10.0 million in fiscal 1999. Of the $12.8 million
increase, $4.9 million was due to increased personnel costs associated with the
design and development of products based on Alteon's next generation of WebICs,
including its Alteon 700 Series of Web switches, $2.8 million was due to
increased outside service costs primarily associated with product testing, $2.4
million was due to non-recurring engineering and prototype assembly expenses
related to the design and development of these products, and $0.6 million was
due to depreciation of equipment. Alteon expects that research and development
expenses will increase as it continues to develop new products and product
enhancements.
General and Administrative. General and administrative expenses consist
primarily of personnel costs for its administrative and financial groups, as
well as legal, accounting and other professional fees. General and
administrative expenses increased to $7.0 million in fiscal 2000 from $2.5
million in fiscal 1999. This increase was due to increased personnel costs and
professional fees required to support Alteon's growth. Alteon expects that
general and administrative expenses will increase as it establishes the
infrastructure to support growing operations.
Stock Compensation to Consultants. Since inception, Alteon has granted
stock options to consultants to provide services over the vesting periods of the
options. Alteon incurred a noncash, nonrecurring charge of $7.7 million in
fiscal 2000 in connection with changes to the vesting periods of these options.
At June 30, 2000, all of these options were vested, and therefore, Alteon will
not incur additional charges in connection with these options.
Interest Income (Expense), Net. Interest income (expense), net consists of
interest income from cash and equivalent and short-term investment balances
offset by interest expense associated with debt obligations. Interest income
(expense), net increased to $8.0 million in fiscal 2000 from $0.3 million in
fiscal 1999. This increase was due primarily to higher interest income
associated with higher average cash and equivalents and short-term investment
balances.
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Income Taxes. The $0.4 million provision for income taxes in fiscal 2000
represents foreign income taxes and state franchise taxes. Alteon has not
provided for or paid federal income taxes due to its net losses. As of June 30,
2000, Alteon had available net operating loss carryforwards for federal and
state income tax purposes of approximately $52.0 million and $9.6 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. Alteon has recorded a full valuation allowance against its
deferred tax asset due to uncertainties surrounding the realization of this
asset.
Years Ended June 30, 1999 and 1998
Net Sales. Net sales grew to $26.3 million in fiscal 1999 from $13.6
million in fiscal 1998. All of Alteon's $26.3 million in net sales in fiscal
1999 were due to sales of its Web data center products. Sales of its second
generation ACEnic products in this period represented $10.7 million, an increase
of $9.5 million from fiscal 1998. Sales of its ACEdirector product line
represented $6.5 million in fiscal 1999, an increase of $6.2 million from fiscal
1998. Sales of the Alteon 180 Series of Web switches represented $5.1 million in
fiscal 1999, an increase of $3.5 million from fiscal 1998. Sales of Alteon's
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 margin increased to 49% in fiscal 1999 from 42%
in fiscal 1998. This increase in gross margin was due primarily to a change in
Alteon's 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,
Alteon increased its 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 Alteon's 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.
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 its next generation of WebICs,
including the 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.
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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
its growth.
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
Alteon established in March 1998.
Income Taxes. The $73,000 provision for income taxes represents foreign
income taxes and state maximum franchise taxes. As of June 30, 1999, it 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.
Liquidity and Capital Resources. In September 1999, Alteon sold 4.6
million shares of Alteon common stock in an initial public offering. The net
offering proceeds to Alteon were approximately $79.6 million. In January 2000,
Alteon sold 1,535,506 shares of Alteon common stock as part of a follow-on
offering of 5.5 million shares at a price of $103.50 per share. Alteon raised
approximately $150.2 million, net of offering costs, in the follow-on offering.
Working capital increased to $236.4 million at June 30, 2000 from $25.5 million
at June 30, 1999. As of June 30, 2000, Alteon had cash and equivalents and
short-term investments of $233.0 million.
Alteon's operating activities used cash of $5.2 million in fiscal 2000
primarily to fund operating losses, partially offset by changes in working
capital. Receivable days outstanding increased to 51 days at June 30, 2000 from
44 days at June 30, 1999 based on receivables as of June 30, 2000 and June 30,
1999 and fourth quarter net sales for the quarters ended at June 30, 2000 and
June 30, 1999, respectively. Alteon had approximately $7.9 million of
noncancellable purchase commitments associated with inventory purchases as of
June 30, 2000.
During fiscal 2000, investing activities, exclusive of the maturities and
purchases of short-term investments of $42.3 million and $120.8 million,
respectively, used cash of $24.7 million. Alteon used $16.5 million for the
acquisition of property and equipment. Alteon made $8.0 million of strategic
investments in the equity securities of privately held companies in fiscal 2000.
Alteon expects to continue its investment strategy in the future. As of June 30,
2000, Alteon did not have any material commitment for capital expenditures.
Alteon has a loan and security agreement with a committed line of $12.0
million which bears interest at the rate of prime plus 0.75% (10.25% at June 30,
2000). This agreement includes a revolving bank line of credit, which expires in
December 2000, and a borrowing arrangement for the purchase of equipment, which
requires that all advances and accrued interest be paid by March 2003. At June
30, 2000, Alteon had approximately $2.2 million outstanding from advances for
equipment purchases, payable in monthly installments, through May 2002.
In future periods, Alteon anticipates significant increases in working
capital on a period-to-period basis primarily as a result of increased product
sales and higher levels of inventory. Alteon also anticipates that it will
continue to invest significant amounts in property and equipment related to
expansion of its facilities and to support increased sales and marketing as well
as ongoing research and development activities. Alteon believes that its June
30, 2000 balances of cash and equivalents and short-term investments, and
amounts available under its credit facilities, will satisfy its expected
operating losses and working
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capital and capital expenditure requirements for at least the next 12 months.
However, Alteon cannot assure you that its predictions with respect to its
operating expenses and capital expenditure requirements are accurate. Therefore,
Alteon may require additional funds to support its working capital and operating
expenses or for other purposes sooner than expected. Alteon may seek to raise
additional funds through public or private offerings or debt financings. Alteon
cannot assure you that financings will be available, or if available, will be on
reasonable terms, nor can Alteon assure you that these financings will not be
dilutive to its stockholders.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosure. The following discussion about Alteon's market
risk disclosures involves forward-looking statements. Actual results could
differ materially from those projected in the forward-looking statements. Alteon
is exposed to market risk related to changes in interest rates risk. Alteon does
not use derivative financial instruments for speculative or trading purposes.
Interest Rate Sensitivity. Alteon maintains a short-term investment
portfolio consisting mainly of income securities with an average maturity of
less than one year. These available-for-sale securities are subject to interest
rate risk and will fall in value if market interest rates increase. If market
interest rates were to increase immediately and uniformly by 10 percent from
levels at June 30, 2000, the fair value of the portfolio would decline by an
immaterial amount. Alteon did not have any short-term investments at June 30,
1999. Alteon has the ability to hold its fixed income investments until
maturity, and therefore it would not expect its operating results or cash flows
to be affected to any significant degree by the effect of a sudden change in
market interest rates on its securities portfolio.
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COMPARATIVE RIGHTS OF HOLDERS OF ALTEON COMMON STOCK
AND NORTEL NETWORKS COMMON SHARES
Alteon's internal affairs are currently governed by the laws of the State
of Delaware, particularly the Delaware General Corporation Law, and Alteon's
certificate of incorporation and bylaws. When the merger is completed, Alteon
stockholders will become shareholders of Nortel Networks, a Canadian corporation
governed by the Canada Business Corporations Act. At that time, your rights will
be governed by the Canada Business Corporations Act, other applicable Canadian
law and Nortel Networks' articles and bylaws.
The following is a summary comparison of some of the differences between
the rights of holders of Nortel Networks common shares under the Canada Business
Corporations Act and Nortel Networks' articles and bylaws and the rights of
Alteon's stockholders under the Delaware General Corporation Law and Alteon's
certificate of incorporation and bylaws. This summary is not a complete
discussion of, and is qualified in its entirety by reference to, the Delaware
General Corporation Law, the Canada Business Corporations Act, the respective
common laws of Delaware and Canada and the full texts of the governing corporate
instruments of Alteon and Nortel Networks.
VOTE ON EXTRAORDINARY CORPORATE TRANSACTIONS
Alteon. Under the Delaware General Corporation Law, mergers or
consolidations, or sales or exchanges of all or substantially all of a
corporation's assets, require the affirmative vote of the board of directors,
except in limited circumstances. In addition, these transactions require, with
specified exceptions, the affirmative vote of a majority of the outstanding
shares of the corporation entitled to vote on the transaction. Stockholder
consent is not required:
- from the stockholders of a corporation that survives the merger if:
-- the merger does not require the issuance of common shares in excess of
20% of the corporation's shares outstanding immediately prior to the
merger;
-- the merger agreement does not amend in any respect the surviving
company's certificate; and
-- stockholder approval is not specifically mandated in the surviving
company's certificate; or
- from either corporation where one corporation owns 90% of each class of
outstanding shares of the other corporation.
Alteon's certificate of incorporation does not require a greater percentage
vote for extraordinary corporate transactions than required under Delaware law.
Nortel Networks. Under the Canada Business Corporations Act, extraordinary
corporate actions must be approved by a resolution passed by at least two-thirds
of the votes cast by the shareholders voting on the resolution in person or by
proxy at the annual or special meeting called for this purpose, and in some
cases whether or not the shares are designated as voting shares in the
corporation's articles of incorporation. In some cases, extraordinary corporate
actions must also be approved by separate resolutions of each affected class or
series of shares, including classes or series that do not otherwise carry the
right to vote. Extraordinary corporate actions include certain types of
amalgamations, continuances, a sale, lease or exchange of all or substantially
all the property of a corporation other than in the
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ordinary course of business, liquidations and dissolutions and arrangements, if
ordered by a court.
DIVIDENDS AND DISTRIBUTIONS
Alteon. Subject to restrictions contained in a corporation's certificate,
the Delaware General Corporation Law generally provides that a corporation may
declare and pay dividends out of:
- the excess, if any, of net assets over capital, as that term is defined
in the Delaware General Corporation Law; or
- when no surplus exists, out of net profits for the fiscal year in which
the dividend is declared and net profits for the preceding fiscal year.
Dividends may not be paid out of net profits if the capital of the
corporation is less than the amount of capital represented by the issued and
outstanding stock of all classes having a preference upon the distribution of
assets.
Alteon's certificate of incorporation does not have any additional
restrictions with respect to the payment of dividends.
Nortel Networks. Under the Canada Business Corporations Act, a corporation
may not declare or pay a dividend if there are reasonable grounds to believe
that:
- the corporation is, or would be after payment of the dividend, unable to
pay its liabilities as they become due; or
- the realizable value of the corporation's assets after payment of the
dividend would be less than the aggregate of its liabilities and its
stated capital of all classes.
Other than the preferential rights of the holders of Nortel Networks
preferred shares with respect to dividends and liquidations, Nortel Networks'
articles have no additional restrictions on the declaration or payment of
dividends.
AMENDMENTS TO CHARTER
Alteon. The Delaware General Corporation Law requires stockholder approval
for any amendment to a corporation's certificate of incorporation. In addition,
if the amendment to the certificate adversely affects the rights of a particular
class of stock, that class is entitled to vote separately on the amendment,
whether or not it is designated as voting stock. Under Alteon's certificate, the
affirmative vote of the holders of not less than 66 2/3% of the outstanding
Alteon shares entitled to vote is required in order to alter, amend or repeal
any provision of the Alteon certificate relating to:
- the right of the board of directors to set the number of directors which
shall constitute the board;
- the removal and election of directors and the filling of vacancies on
the board of directors;
- classification of directors;
- action taken by stockholders at annual or special meetings;
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- the calling of any meeting of stockholders and the prohibition of
written consents;
- the requirements to amend the bylaws and the certificate; and
- liability of directors and indemnification of agents as defined in
Section 317 of the California General Corporation Law (if then
applicable).
Nortel Networks. Under the Canada Business Corporations Act, amendments to
the articles of incorporation of a corporation generally require approval by a
resolution passed by at least two-thirds of the votes cast by shareholders
voting on the resolution. If the amendment affects a particular class or series
of shares in a manner requiring a separate class or series vote, that class or
series is entitled to vote on the amendment whether or not it otherwise carries
the right to vote. Approval of a proposed amendment in these circumstances
requires an affirmative two-thirds vote of the holders of the shares of each
class or series entitled to vote separately.
AMENDMENT TO BYLAWS
Alteon. The Delaware General Corporation Law states that stockholders
entitled to vote have the power to adopt, amend, or repeal the bylaws of a
corporation. The corporation in its certificate may also confer this power on
the board of directors in addition to the stockholders.
Alteon's certificate of incorporation provides that Alteon's board of
directors may adopt, amend or repeal, and holders of at least 66 2/3% of the
outstanding voting stock of the corporation may adopt, amend or alter by
affirmative vote any or all of the bylaws of the corporation.
Nortel Networks. The Canada Business Corporations Act provides that,
unless the articles of incorporation or bylaws of a corporation provide
otherwise, the directors may, by resolution, make, amend or repeal any bylaws
that regulate the business or affairs of a corporation. Where the directors
make, amend or repeal a by-law, they are required to submit the by-law or
amendment or repeal of a by-law to the shareholders for confirmation at the next
annual or special meeting of shareholders. The shareholders entitled to vote at
shareholder meetings may confirm, reject or amend any by-law or amendment or
repeal of a by-law by a resolution passed by a majority of the votes cast by
shareholders entitled to vote at the annual or special meeting of shareholders
represented in person or by proxy.
INTERESTED SHAREHOLDER TRANSACTIONS
Alteon. The Delaware General Corporation Law prohibits, in certain
circumstances, a business combination between a corporation and an interested
stockholder within three years of the stockholder becoming an interested
stockholder. An interested stockholder is a stockholder who, directly or
indirectly, controls 15% or more of the outstanding voting stock or was an
affiliate of the corporation and was the owner of 15% or more of the outstanding
voting stock at any time within the prior year period. A business combination
includes a merger or consolidation, a sale or other disposition of assets having
an aggregate market value equal to 10% or more of the consolidated assets of the
corporation or of the aggregate market value of the outstanding stock of the
corporation and certain transactions that would increase the interested
stockholder's proportionate ownership in the corporation. This provision does
not apply where:
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- a business combination is approved by a majority of the board of
directors and the affirmative vote of two-thirds of the votes entitled
to be cast by disinterested stockholders at an annual or special
meeting;
- a business combination is approved by the corporation's board of
directors prior to the date the interested stockholder acquired his or
her shares;
- the corporation's board of directors approved the transaction which
resulted in the stockholder becoming an interested stockholder prior to
the date the interested stockholder acquired its shares; or
- the interested stockholder acquired at least 85% of the voting stock of
the corporation in the transaction in which the stockholder became an
interested stockholder.
Alteon's certificate of incorporation does not require a greater percentage
vote to approve an interested stockholder transaction than required under
Delaware law.
Nortel Networks. The Canada Business Corporations Act does not contain a
comparable provision with respect to business combinations. However, Rule 61-501
under the Securities Act (Ontario) contains requirements in connection with
related party transactions. A related party transaction includes a transaction
by itself or together with other related transactions, by which an issuer,
directly or indirectly, acquires or transfers an asset or acquires or issues
treasury securities or assumes a liability from or to, as the case may be, a
related party by any means. The term "related party" is defined in Rule 61-501
and includes directors, senior officers, holders of voting securities carrying
more than 10% of the voting rights attached to all voting securities of the
issuer and persons or companies, whether alone or jointly or in concert with
others, that hold securities of the issuer sufficient to affect materially
control of the issuer.
Rule 61-501 requires more detailed disclosure in any proxy material
required to be sent to security holders in connection with a related party
transaction. Subject to specified exceptions, Rule 61-501 also requires the
preparation of a formal valuation of the subject matter of the related party
transaction and any non-cash consideration offered in the transaction and the
inclusion of the valuation or a summary of the valuation in the proxy material.
In some circumstances, Rule 61-501 also requires that the minority shareholders
of the issuer separately approve the transaction, by a simple majority of the
votes cast.
DISSENT AND APPRAISAL RIGHTS
Alteon. Stockholders of a Delaware corporation who dissent from a merger
or consolidation of the corporation for which a stockholder's vote is required
are, in specific instances, entitled to appraisal rights, and the surviving
corporation is required to purchase the dissenting shares at fair value. There
are, however, no statutory rights of appraisal with respect to stockholders of a
Delaware corporation whose shares of stock, at the record date for the
determination of stockholders entitled to notice of and to vote at the meeting
of stockholders to act upon the merger or consolidation, are either:
- listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc.; or
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- held of record by more than 2,000 stockholders unless the agreement of
merger or consolidation converts such shares into anything other than:
-- stock of the surviving corporation;
-- stock of another corporation which is either listed on a national
securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of
Securities Dealers, Inc., or held of record by more than 2,000
stockholders;
-- cash for fractional shares; or
-- some combination of the above.
Appraisal rights are not available for any shares of the surviving
corporation if the merger did not require the vote of stockholders of the
surviving corporation.
Nortel Networks. Shareholders of a Canada Business Corporations Act
corporation are entitled to exercise dissent rights and to be paid the fair
value of their shares in connection with:
- an amendment to a corporation's articles of incorporation to add, change
or remove any provisions restricting or constraining the issue, transfer
or ownership of shares of the class held by those holders;
- an amendment to a corporation's articles of incorporation to add, change
or remove any restriction on the business or businesses of the
corporation;
- other amendments to a corporation's articles of incorporation that
require a separate class or series vote;
- an amalgamation, other than an amalgamation between a parent corporation
and one or more of its wholly-owned subsidiaries or between two or more
wholly-owned subsidiaries;
- a continuance under the laws of another jurisdiction;
- a sale, lease or exchange of all or substantially all the property of
the corporation other than in the ordinary course of business; or
- a court order permitting a shareholder to dissent in connection with an
application to the court for an order approving an arrangement proposed
by the corporation, although a shareholder is not entitled to dissent if
an amendment to the articles of incorporation is effected by a court
order approving a reorganization or rectifying a matter that is
oppressive or unfairly prejudicial to or that unfairly disregards the
interests of any security holder, creditor, director or officer.
DIRECTORS' QUALIFICATIONS
Alteon. The Delaware General Corporation Law does not have any residency
or other director qualification requirements.
Nortel Networks. Generally, a majority of the directors of a Canada
Business Corporations Act corporation must be Canadian citizens who ordinarily
reside in Canada. The Canada Business Corporations Act also requires that a
corporation whose securities are
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publicly traded have no fewer than three directors, at least two of whom are not
officers or employees of the corporation or any of its affiliates.
COMPOSITION OF THE BOARD OF DIRECTORS
Alteon. Delaware law permits a classified board of directors, with
staggered terms under which the directors are elected for terms of two or three
years.
Alteon's certificate of incorporation provides that the directors be
divided into a three-class staggered board of directors. However, Alteon's
certificate of incorporation also provides that during such time or times that
Alteon is subject to Section 2115(b) of the California General Corporation Law,
the board of directors will not be staggered and all directors will be elected
at each annual meeting.
Nortel Networks. Nortel Networks' articles and bylaws do not provide for a
classified board of directors.
ELECTION OF DIRECTORS
Alteon. Delaware law permits cumulative voting in the election of
directors.
Generally, Alteon's certificate of incorporation does not provide for
cumulative voting in the election of directors. However, Alteon's certificate of
incorporation does provide for cumulative voting in the event that such time or
times that Alteon is subject to Section 2115(b) of the California General
Corporation Law and is not a "listed" corporation or ceases to be a "listed"
corporation under Section 301.5 of the California General Corporation Law.
Nortel Networks. Nortel Networks' articles and bylaws do not provide for
cumulative voting in the election of directors. The Nortel Networks articles
provide that the election of each director of Nortel Networks requires a
resolution passed by not less than two-thirds of the number of votes attaching
to the shares represented in person or by valid proxy at a meeting called to
elect directors and carrying the right to vote on the resolution. This
requirement contrasts with the usual method of electing directors by majority
approval under the Canada Business Corporations Act, which is by a majority of
the votes cast by shareholders who voted in person or by proxy.
REMOVAL OF DIRECTORS
Alteon. Delaware law permits the removal of any director or the entire
board of directors, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors, except as set forth in
the corporation's certificate of incorporation.
Alteon's certificate of incorporation does not require a greater percentage
vote to remove a director than required under Delaware law.
Nortel Networks. The shareholders of a Canada Business Corporations Act
corporation may, by resolution passed by a majority of the votes cast on the
resolution at a meeting of shareholders called for that purpose, remove any
director before the expiration of his term of office and may elect any qualified
person to serve for the remainder of the director's term.
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VACANCY ON BOARDS OF DIRECTORS
Alteon. The Delaware General Corporation Law provides that a vacancy on
the board of directors shall be filled as the bylaws of the corporation provide.
In the absence of such provision, a vacancy is to be filled by the board of
directors or other governing body.
Alteon's bylaws provide that, subject to the rights of the holders of any
series of preferred stock, any vacancies on the board of directors may be filled
by the affirmative vote of a majority of the directors then in office, even if
constituting less than a quorum of the board of directors, unless the board of
directors determines by resolution that any such vacancies shall be filled by
the stockholders. Any director who fills the vacancy is to hold office for the
remainder of the full term of the director for which the vacancy was created or
occurred and until that director's successor has been elected and qualified.
Pursuant to Alteon's certificate of incorporation, if the directors voting to
fill the vacancy constitute less than a majority of the whole board of
directors, the Delaware Court of Chancery may, at the request of a
stockholder(s) holding at least 10% of the shares, order an election to fill the
vacancies or replace the directors chosen by the directors then in office.
However, Alteon's certificate of incorporation provides that during such
time or times that Alteon is subject to Section 2115(b) of the California
General Corporation Law, if the directors voting to fill a vacancy constitute
less than a majority of the directors then in office, any holder or holders of
an aggregate of 5% or more of total shares may call a special stockholder
meeting or may apply to the Superior Court of the proper county to order a
special meeting of stockholders to elect the entire board of directors, in
accordance with California General Corporation Law Section 305(c). The term of
any director will terminate upon election of a successor.
Nortel Networks. Generally, under the Canada Business Corporations Act, if
there is a vacancy on the board of directors, the remaining directors, if they
constitute a quorum, may appoint a qualified person to fill the vacancy for the
remainder of the vacating director's term. In the absence of a quorum, the
remaining directors must call a meeting of shareholders to fill the vacancy. In
addition, if the articles of a corporation so provide, the directors may
increase the number of directors within the range provided in the articles and
may fill the vacancies created for a term expiring not later than the next
annual meeting of shareholders if the total number of directors so appointed
does not exceed one-third of the number of directors elected at the previous
annual meeting of shareholders. Nortel Networks' articles provide for the
filling of vacancies caused by an increase in the number of directors as
described.
DIRECTORS' AND OFFICERS' INDEMNIFICATION
Alteon. The Delaware General Corporation Law authorizes a corporation to
indemnify its current and former directors and officers against all reasonable
expenses, including attorneys' fees, and, except in actions initiated by or in
the right of the corporation, against all judgments, fines and amounts paid in
settlement, in actions brought against them, if the individual is determined to
have acted in good faith, for a purpose which he reasonably believed to be in,
or not opposed to, the best interests of the corporation and, in the case of a
criminal proceeding, had no reason to believe his conduct was unlawful. A
corporation may grant its directors, officers, employees or other agents
additional rights to indemnification, subject to public policy restrictions
included in the Delaware General Corporation Law.
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Alteon's certificate of incorporation authorizes indemnification of agents
(as defined in Section 317 of the California General Corporation Law) for breach
of duty to the corporation and its shareholders, in excess of the
indemnification otherwise permitted by Section 317 of the California General
Corporation Law, except, however, that during such time or times that Alteon is
subject to Section 2115(b) of the California General Corporation Law, Alteon may
not indemnify its agents beyond the limitations set forth in Section 204 of the
California General Corporation Law.
The Delaware General Corporation Law provides a right of mandatory
indemnification to the extent that an indemnitee is successful on the merits or
otherwise in the defense of any claim, issue or matter associated with an
action. The Delaware General Corporation Law also allows the advance payment of
an indemnitee's expenses prior to the final disposition of an action, if the
indemnitee undertakes to repay any amount advanced if it is later determined
that the indemnitee is not entitled to indemnification for the action for which
the expenses were advanced. Alteon's bylaws provide for the advance payment of
expenses incurred by indemnified parties.
Nortel Networks. The Canada Business Corporations Act also generally
provides that a corporation may indemnify its present and former directors or
officers or a person who acts or acted at the corporation's request as a
director or officer of a corporation of which the corporation is or was a
shareholder or creditor, and his or her heirs and legal representatives against
all costs, charges and expenses, including an amount paid to settle an action or
satisfy a judgment reasonably incurred by him or her in respect of any civil,
criminal or administrative action or proceeding to which he or she is made a
party by reason of being or having been a director or officer of the
corporation. However, this indemnity is limited to circumstances in which the
director or officer acted honestly and in good faith with a view to the best
interests of the corporation. In the case of a criminal or administrative action
or proceeding that is enforced by a monetary penalty, the director or officer
must have had reasonable grounds for believing that his or her conduct was
lawful. Subject to the above mentioned limitations, a corporation may, with the
approval of a court, also indemnify in respect of an action by or on behalf of
the corporation to which the person is made a party by reason of being or having
been a director or an officer of the corporation. The Nortel Networks bylaws
require indemnification to the full extent authorized by the Canada Business
Corporations Act. Where an officer or director is substantially successful on
the merits in his or her defense of an action or proceeding, the officer or
director is entitled to indemnification from the corporation for reasonable
costs, charges and expenses, subject to the limitations discussed above.
The Canada Business Corporations Act does not expressly contemplate the
advance payment of an indemnitee's expenses prior to the final disposition of an
action.
LIMITATION OF DIRECTORS' PERSONAL LIABILITY FOR MONETARY DAMAGES
Alteon. Under the Delaware General Corporation Law, a corporation is
permitted to include a provision in its certificate which limits or eliminates
the personal liability of directors to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, as long as this
liability does not arise from proscribed conduct, including intentional
misconduct and breach of the duty of loyalty.
Alteon's certificate of incorporation limits the personal liability of the
corporation's directors for monetary damages for breach of fiduciary duty to the
full extent permitted by applicable law.
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Nortel Networks. The Canada Business Corporations Act has no comparable
provision.
SPECIAL MEETING OF STOCKHOLDERS
Alteon. Under the Delaware General Corporation Law, a special meeting of
stockholders may be called by the board of directors or any other person
authorized to do so in the corporation's certificate of incorporation or bylaws.
Alteon's bylaws provide that a special meeting of stockholders may only be
called by the chairman of the board of directors, the chief executive officer,
holders of 50% of the company's voting stock, or pursuant to a resolution
adopted by a majority of the board of directors.
Nortel Networks. Under the Canada Business Corporations Act, the directors
of a corporation may call a special meeting of shareholders. Under the Nortel
Networks bylaws, in addition to Nortel Networks' board of directors, the
Chairman of the Board of Nortel Networks or the Chief Executive Officer of
Nortel Networks has the power to call a special meeting of shareholders.
QUORUM REQUIREMENTS
Alteon. Under the Delaware General Corporation Law, holders of a majority
of the shares entitled to vote, whether present in person or represented by
proxy, of a corporation constitute a quorum of stockholders, unless otherwise
specified in the corporation's certificate of incorporation or bylaws. In no
event, however, can holders of less than one-third of the outstanding shares
constitute a quorum.
Alteon's bylaws state that a majority of the issued and outstanding shares
of stock entitled to vote at a meeting of the stockholders, present in person or
by proxy, constitutes a quorum of the stockholders for the transaction of
business, except as otherwise provided by statute, its certificate or its
bylaws.
Nortel Networks. Under the Canada Business Corporations Act, holders of a
majority of the outstanding shares entitled to vote at a meeting of shareholders
constitute a quorum, unless otherwise specified in a corporation's bylaws.
Nortel Networks' bylaws generally state that a quorum shall be three persons
present in person and representing in their own right, or by proxy, or as the
duly authorized representative of any shareholder that is a body corporate or
association, not less than 25% of the outstanding shares of the corporation
carrying voting rights at the meeting of shareholders.
RIGHTS AGREEMENT
Alteon. Alteon has not adopted a rights agreement.
Nortel Networks. Nortel Networks has adopted the shareholders rights plan
described under "Description of Nortel Networks Share Capital -- Shareholder
Rights Plan."
INSPECTION OF BOOKS AND RECORDS
Alteon. Under the Delaware General Corporation Law, any stockholder has
the right, upon written demand, to examine the books and records of the
corporation for any proper purpose.
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Nortel Networks. The Canada Business Corporations Act provides that
shareholders, creditors, their agents and legal representatives may examine
specified records of a corporation during usual business hours and take extracts
of the records free of charge.
APPLICABILITY OF CALIFORNIA LAW TO ALTEON
During such time or times that Alteon is subject to Section 2115(b) of the
California General Corporations Law, substantial portions of the California
General Corporations Law purport to apply to Alteon, despite the fact that
Alteon is incorporated in Delaware. The provisions of the California General
Corporations Law to which Alteon would be subject include:
- provisions governing the election of directors, removal of directors and
filling of director vacancies;
- provisions governing a director's standard of care in performing the
duties of a director;
- a stockholder's right to vote cumulatively in certain elections of
directors;
- a director's or stockholder's right to inspect corporate records;
- indemnification provisions concerning directors, officers and others;
- the corporate requirements to approve mergers or other corporate
reorganizations; and
- dissenters' rights.
Under Section 2115(b), the provisions of the California General
Corporations Law that would be applicable to Alteon purportedly apply to the
exclusion of similar provisions of the Delaware General Corporation Law.
From and after the Alteon annual meeting, Alteon will not be subject to
Section 2115(b) by the terms of that provision so long as it continues to be
listed on the Nasdaq National Market.
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ELECTION OF CLASS I DIRECTORS
Alteon's certificate and bylaws provide that Alteon's board of directors
shall be divided into three classes, each class consisting, as nearly as
possible, of one-third of the total number of directors constituting Alteon's
entire board of directors. Each class is elected for a three year term. The
terms of office of the current Class I, II and III directors are scheduled to
expire at the 2000, 2001 and 2002 annual meeting, respectively. At each annual
meeting, directors are elected to succeed those in the class whose term expires
at that annual meeting, the newly elected directors to hold office until the
third succeeding annual meeting and the election and qualification of their
respective successors.
Alteon's board of directors is presently composed of five members. There
are two Class I directors whose term of office expires at the 2000 annual
meeting. Each of Alteon's nominees for election to this class is currently a
Class I director. If elected at the annual meeting, each of the nominees would
serve until the merger is completed or, if the merger is not completed, the 2003
annual meeting and until his successor is elected and has qualified, or until
such director's earlier death, resignation or removal. Directors are elected by
a plurality of the votes present in person or represented by proxy and entitled
to vote at the meeting.
Each of the nominees for election has advised Alteon he is willing to serve
as director. If either director nominee becomes unavailable before the meeting,
your proxy authorizes Alteon to vote for a replacement nominee who may be
nominated by Alteon's board of directors.
EFFECTS OF THE MERGER ON ALTEON'S BOARD OF DIRECTORS
Upon completion of the merger, the entire Alteon board of directors will
cease to serve as directors. The directors of the merger subsidiary will serve
as directors of the surviving corporation following the merger.
ALTEON NOMINEES FOR CLASS I DIRECTORS
Set forth below is biographical information with respect to each Alteon
nominee for election as a Class I director.
Joe T. Booker, age 59, has served as Alteon's Chief Operating Officer since
December 1999, as Alteon's Vice President of Operations since February 1997 and
as a member of Alteon's board of directors since September 1997. From August
1994 to February 1997, Mr. Booker served as Vice President and General Manager
of the Commercial Business Unit at Bay Networks, Inc., a networking company.
Andrew W. Verhalen, age 44, has served as a member of Alteon's 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.
ALTEON'S BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH NAMED NOMINEE.
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CLASS II DIRECTORS
Set forth below is biographical information with respect to the Alteon
Class II directors, who will serve until the merger is completed, or, if the
merger is not completed, the 2001 annual meeting.
Tench Coxe, age 42, has served as a member of Alteon's 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., and nVidia
Corporation and a number of private companies. He holds a B.A. in Economics from
Dartmouth College and an M.B.A. from Harvard University Graduate School of
Business Administration.
Dominic P. Orr, age 49, has served as Alteon's Chairman of the Board since
August 1999, as Alteon's Chief Executive Officer and President and as a member
of Alteon's board of directors since November 1996. From April 1994 to October
1996, Mr. Orr served as Senior Vice President at Bay Networks. 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.
CLASS III DIRECTOR
Set forth below is biographical information with respect to the Alteon
Class III director, who will serve until the merger is completed, or, if the
merger is not completed, the 2002 annual meeting.
Adam Grosser, age 39, has served as a member of Alteon's board of directors
since June 1999. Since February 1997, Mr. Grosser has held various positions
with At Home Corporation, including President, Subscriber Networks. In April
1994, Mr. Grosser co-founded Catapult Entertainment Inc., a networking services
provider for personal computers and console video games, where he served as
President and Chief Executive Officer until it was sold in November 1996.
Catapult filed a voluntary petition for bankruptcy under Chapter 11 of the U.S.
bankruptcy code in October 1996 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, Mr. Grosser 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.
ALTEON'S BOARD OF DIRECTORS COMMITTEES AND MEETINGS
During the fiscal year ended June 30, 2000 Alteon's board of directors held
seven meetings and acted by written consent once. Alteon's board of directors
has an audit committee and a compensation committee.
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- Audit Committee. The Alteon audit committee, consisting of Messrs. Coxe,
Verhalen and Grosser, reviews Alteon's internal accounting procedures and
consults with and reviews the services provided by Alteon's independent
auditors. It met seven times during the fiscal year ended June 30, 2000.
- Compensation Committee. Alteon's compensation committee, consisting of
Messrs. Coxe, Verhalen and Grosser, reviews and recommends to Alteon's board
of directors the compensation and benefits of all Alteon officers and
establishes and reviews general policies relating to compensation and
benefits of Alteon employees. It met seven times and acted by written consent
nine times during the fiscal year ended June 30, 2000.
During the fiscal year ended June 30, 2000, each Alteon board member
attended 100% of the aggregate of the meetings of the board of directors and of
the committees on which he served, held during the period for which he was a
director or committee member, respectively.
COMPENSATION OF DIRECTORS
Alteon does not provide cash compensation to members of its board of
directors for their services as members of the board of directors or for
attendance at committee meetings. Members of Alteon's board of directors are
reimbursed for some expenses in connection with attendance at board of directors
and committee meetings. In August 1999, Alteon's non-employee directors each
received options to purchase an aggregate of 123,750 shares of Alteon common
stock at an exercise price per share of $14.00. The exercise price was equal to
the fair market value of the Alteon common stock on the date of grant as
determined by Alteon's 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. Upon the completion of the merger, pursuant to the
merger agreement, 100% of the outstanding unvested shares subject to stock
awards held by Alteon's non-employee directors will accelerate and become
immediately vested and exercisable.
INFORMATION REGARDING EXECUTIVE OFFICERS
The following table lists the names, ages and positions held by Alteon's
executive officers, other than those who serve as directors, as of July 31,
2000. There are no family relationships between any director or executive
officer and any other director or executive officer of Alteon. Executive
officers serve at the discretion of Alteon's board of directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Selina Y. Lo......................... 40 Vice President of Marketing and Product
Management
James G. Burke....................... 57 Chief Financial Officer and Secretary
Barton M. Burstein................... 47 Vice President of Business Development
Anthony Narducci..................... 55 Vice President of Worldwide Sales
Shirish S. Sathaye................... 39 Vice President of Technology
Prabhat Mishra....................... 44 Vice President of Engineering
Atul Bhatnagar....................... 43 Vice President of Advanced Products
</TABLE>
Selina Y. Lo has served as Alteon's 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 in May 1995, and
served at Bay
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Networks 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 Alteon's 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 Alteon's 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.
Anthony Narducci has served as Alteon's 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 Alteon's Vice President of Technology
since March 2000. From May 1997 to March 2000, Mr. Sathaye served as Alteon's
Vice President of Engineering. 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.
Prabhat Mishra has served as Alteon's Vice President of Engineering since
March 2000. From September 1999 to March 2000 Mr. Mishra served as Vice
President of Engineering at Resilience Corporation where he directed development
of Internet and e-commerce server products. From November 1998 to September
1999, Mr. Mishra was the Director of Engineering at Tri-Path Technology where he
worked on advanced chips for audio systems, wireless communications and
high-speed networking devices. From March 1987 to November 1998, Mr. Mishra
worked at Sun Microsystems in a variety of positions, including Senior Director
of Engineering. Mr. Mishra holds a M.S.E.E. from Virginia Polytechnic Institute
and a B.S.E.E. from Indian Institute of Technology at Kanpur.
Atul Bhatnagar has served as Alteon's Vice President of Advanced Products
since May 2000. From May 1985 to May 2000, Mr. Bhatnagar worked at
Hewlett-Packard in a variety
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of management positions. Mr. Bhatnagar holds a M.S.E.E. from the University of
New Mexico and a B.S.E.E. from the Birla Institute of Technology and Sciences,
Pilani, India.
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
Alteon's board of directors has selected Deloitte & Touche LLP as its
independent auditors until the merger is completed, or if the merger is not
completed, for the fiscal year ending June 30, 2001, and has further directed
that management submit the selection of independent auditors for ratification by
the stockholders at the annual meeting. Deloitte & Touche LLP has audited the
Alteon financial statements from Alteon's inception on March 18, 1996.
Representatives of Deloitte & Touche LLP are expected to be present at the
annual meeting, will have an opportunity to make a statement if they so desire
and will be available to respond to appropriate questions.
Alteon stockholder ratification of the selection of Deloitte & Touche LLP
as Alteon's independent auditors is not required by Alteon's bylaws or
otherwise. However, Alteon's board of directors is submitting the selection of
Deloitte & Touche LLP to the Alteon stockholders for ratification as a matter of
good corporate practice. If the Alteon stockholders fail to ratify the
selection, the Alteon audit committee and board of directors will reconsider
whether or not to retain Deloitte & Touche LLP. Even if the selection is
ratified, the Alteon audit committee and board of directors in their discretion
may direct the appointment of different independent auditors at any time during
the year if they determine that such a change would be in the best interests of
Alteon and the Alteon stockholders.
The affirmative vote of the holders of a majority of the shares present in
person or represented by proxy at the annual meeting will be required to ratify
the selection of Deloitte & Touche LLP.
ALTEON'S BOARD OF DIRECTORS RECOMMENDS VOTING "FOR" THE SELECTION OF
DELOITTE & TOUCHE LLP AS ALTEON'S INDEPENDENT AUDITORS.
Following the merger, the surviving corporation will be a wholly-owned
subsidiary of Nortel Networks and accordingly will not be expected to continue
to retain its own independent auditors.
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EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation that
Alteon paid during the fiscal years ended June 30, 2000 and June 30, 1999 to its
Chief Executive Officer and each of Alteon's four other most highly compensated
executive officers who earned more than $100,000 during these fiscal years. All
option grants were made under Alteon's 1999 Equity Incentive Plan.
SUMMARY ANNUAL COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM ANNUAL
COMPENSATION
----------------
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS
--------------------------- ---- ---------- --------- ----------------
<S> <C> <C> <C> <C>
Dominic P. Orr..................... 2000 $175,000 -- 560,000
Chief Executive Officer, 1999 $175,000 -- 375,000
President and
Chairman
Barton M. Burstein................. 2000 $160,000 $40,000 80,000
Vice President of Business 1999 $160,000 -- 37,500
Development
Joe T. Booker...................... 2000 $175,000 -- 120,000
Chief Operating Officer, Vice 1999 $175,000 -- --
President of Operations and
Director
Shirish S. Sathaye................. 2000 $160,000 -- 60,000
Vice President of Technology 1999 $160,000 -- --
Selina Y. Lo....................... 2000 $155,000 -- 180,000
Vice President of Marketing and 1999 $155,000 -- 187,500
Product Management
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth summary information regarding the option
grants made to Alteon's Chief Executive Officer and each of Alteon's four other
most highly compensated executive officers during the fiscal year ended June 30,
2000. The exercise price per share was equal to the fair market value of
Alteon's common stock on the date of grant as determined by Alteon's board of
directors. Percentage of total options as set forth below was calculated based
on options to purchase an aggregate of 7,872,650 shares of Alteon common stock
granted under the 1999 Equity Incentive Plan in fiscal 2000. 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 Alteon common stock on the date of grant. The
options listed in the table below vest in a series of equal monthly installments
beginning from the vesting start date and extending through the next four years
of service.
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<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES
PERCENT OF OF STOCK PRICE
NUMBER OF TOTAL OPTIONS APPRECIATION FOR
SECURITIES GRANTED TO OPTION TERM
UNDERLYING EMPLOYEES IN EXERCISE PRICE EXPIRATION ------------------------
NAME OPTIONS GRANTED FISCAL YEAR (PER SHARE) DATE 5% 10%
---- --------------- ------------- -------------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Dominic P. Orr......... 240,000 3.05% $43.75 5/26/10 $6,603,394 $16,734,296
320,000 4.06% $43.75 5/26/10 $8,804,525 $22,312,394
Barton M. Burstein..... 5,000 0.06% $19.00 9/23/09 $ 59,745 $ 151,406
35,000 0.44% $19.00 9/23/09 $ 418,214 $ 1,059,839
40,000 0.51% $54.31 4/17/10 $1,366,274 $ 3,462,406
Joe T. Booker.......... 5,000 0.06% $19.00 9/23/09 $ 59,745 $ 151,406
75,000 0.95% $19.00 9/23/09 $ 896,175 $ 2,271,083
40,000 0.51% $54.31 4/17/10 $1,366,274 $ 3,462,405
Shirish S. Sathaye..... 60,000 0.76% $43.75 5/26/10 $1,650,848 $ 4,183,574
Selina Y. Lo........... 180,000 2.29% $68.44 1/7/10 $7,747,196 $19,632,915
</TABLE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END VALUES
The following table sets forth for Alteon's Chief Executive Officer and
each of its four most highly compensated executive officers information
regarding shares of Alteon common stock acquired upon exercise of options in
fiscal 2000 and the number and value of options held as of June 30, 2000, the
last day of fiscal 2000. Options granted to purchase shares of Alteon common
stock under its 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, Alteon has the right to repurchase any of
that person's unvested shares of Alteon common stock at the original option
exercise price. In addition, upon a change of control of Alteon, Alteon has the
same right to repurchase any unvested shares of Alteon 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 Alteon 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 Alteon common stock underlying the option. Exercise prices ranged from $0.05
to $89.25. Mr. Orr did not realize any value on the date of exercise as the
exercise price equaled the fair market value on the date of exercise. Amounts
shown in the value of unexercised in-the-money options at June 30, 2000 column
are based on a price of $100.0625, the last reported price of Alteon common
stock as reported on the Nasdaq National Market on June 30, 2000, without taking
into account any taxes that may be payable in connection with the transaction,
multiplied by the number of shares of Alteon common stock underlying the option,
less the aggregate exercise price payable for these Alteon shares.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
ALTEON SHARES JUNE 30, 2000 JUNE 30, 2000
ACQUIRED ON ----------------- ---------------------------
NAME EXERCISE VALUE REALIZED VESTED UNVESTED VESTED UNVESTED
---- ------------- -------------- ------ -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dominic P. Orr.............. 187,500 -- -- 747,500 -- $48,486,712
Barton M. Burstein.......... 37,500 $ 375,000 -- 80,000 -- $ 4,992,500
Joe T. Booker............... -- -- 50,000 145,000 $4,936,460 $10,663,230
Shirish S. Sathaye.......... 221,875 $15,193,300 -- 138,125 -- $ 4,627,931
Selina Y. Lo................ -- -- -- 273,750 -- $14,268,356
</TABLE>
121
<PAGE> 127
EMPLOYMENT, SEVERANCE AND CHANGE OF CONTROL AGREEMENTS
On October 11, 1996, Alteon entered into an employment offer letter with
Dominic P. Orr, Chief Executive Officer, President and Chairman of Alteon which
set his initial annual compensation at $175,000. In addition, Alteon granted Mr.
Orr an option to purchase 1,761,702 shares of Alteon common stock at an exercise
price of $0.05 per share. This stock award vested 25% on the first anniversary
of the date of hire with the remainder vesting monthly over the following three
years. Under 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.
In addition, if Alteon is acquired or sold, 80% of the unvested portion of Mr.
Orr's stock awards vest immediately.
Alteon has also entered into employment offer letters with three of its
four other most highly compensated executive officers. Ms. Lo's, Mr. Booker's,
and Mr. Sathaye's letters provide that if Alteon is acquired or sold, 50% of the
unvested portion of his or her shares subject to stock awards will vest
immediately. If Mr. Orr, Ms. Lo, Mr. Booker or Mr. Sathaye accept full time
employment with the acquiring company, the remaining unvested portion of their
shares subject to stock awards will continue 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 shares subject to stock awards will
immediately vest in full. In addition, upon Mr. Booker's death or disability,
50% of his unvested shares will vest immediately. In the event that the merger
agreement is adopted by the Alteon stockholders and the merger is completed, Mr.
Orr's, Ms. Lo's and Mr. Sathaye's letters will be amended and certain provisions
will be superseded pursuant to employment letters between these Alteon executive
officers and Nortel Networks, as described more fully in "The Merger Proposal --
Interests of Certain Persons in the Merger."
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. In the event that the merger agreement is adopted by the Alteon
stockholders and the merger is completed, up to a maximum of 25% of the
outstanding unvested shares subject to stock awards held by participants will
accelerate and become immediately vested and exercisable, provided that,
pursuant to the merger agreement 100% of the outstanding unvested shares subject
to stock awards held by Alteon's non-employee directors and at least 50% of
certain executive officer's outstanding unvested shares subject to stock awards
will accelerate and become immediately vested and exercisable pursuant to offer
letters with Alteon. Nortel Networks intends to assume Alteon's outstanding
stock awards.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee is currently comprised of Messrs. Coxe, Verhalen
and Grosser. None of them has at any time been an officer or employee of Alteon.
No interlocking relationship exists between Alteon's 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.
122
<PAGE> 128
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION(1)
The compensation committee of Alteon's board of directors is composed of
Messrs. Coxe, Grosser and Verhalen, none of whom is currently an officer or
employee of Alteon. The Committee is responsible for establishing Alteon's
compensation programs for all employees, including executives. For executive
officers, the compensation committee evaluates performance and determines
compensation policies and levels.
Compensation Philosophy. The goals of the compensation program are to
align compensation with business objectives and performance and to enable Alteon
to attract, retain and reward executive officers and other key employees who
contribute to the long-term success of Alteon and to motivate them to enhance
long-term stockholder value. Key elements of this philosophy are:
- Alteon pays competitively with leading companies with which Alteon
competes for talent. To ensure that pay is competitive, Alteon compares
its pay practices with these companies and sets it pay parameters based
on this review.
- Alteon seeks to maintain annual incentive opportunities sufficient to
provide motivation to achieve specific operating goals and to generate
rewards that bring total compensation to competitive levels.
- Alteon provides significant equity-based incentives for executives and
other key employees to ensure that they are motivated over the long-term
to respond to Alteon's business challenges and opportunities as owners
and not just as employees.
Base Salary. The compensation committee annually reviews each executive
officer's base salary. When reviewing base salaries, the Committee considers
individual and corporate performance, levels of responsibility, prior
experience, breadth of knowledge and competitive pay practices. The compensation
committee uses both the Radford and the Advanced HR salary surveys to gather
market compensation data and targets salaries at or above the 75(th) percentile.
Long-Term Incentives. Alteon's long-term incentive program consists of the
1999 Equity Incentive Plan and 1999 Employee Stock Purchase Plan. The 1999
Equity Incentive Plan utilizes vesting periods (generally four years) to
encourage key employees to continue in the employ of Alteon. Through option
grants, executives receive significant equity incentives to build long-term
stockholder value. Grants are made at 100% of fair market value on the date of
grant. Executives receive value from these grants only if Alteon's common stock
appreciates over the long-term. The size of option grants is determined based on
competitive practices at leading companies in Alteon's industry and Alteon's
philosophy of significantly linking executive compensation with stockholder
interests. The compensation committee uses both the Radford and the Advanced HR
salary surveys to gather market compensation data and targets option grants at
or above the 75(th) percentile. In fiscal 2000, the compensation committee
granted to each executive stock options that will vest over a four-year period.
Such grants were intended to provide incentive to maximize stockholder value
over the next several years. The committee believes this approach creates an
appropriate focus on longer term objectives and promotes executive retention.
Chief Executive Officer Compensation. Mr. Orr's base salary at the
beginning of fiscal 2000 as Chief Executive Officer, President and Chairman of
the Board, was $175,000. Following a review of compensation paid by leading
companies in Alteon's industry, the
---------------
(1) Notwithstanding anything to the contrary set forth in any of Alteon's
previous filings under the Securities Act, or the Exchange Act that might
incorporate future filings, including this proxy statement/prospectus, in
whole or in part, the following report and Performance Graph shall not be
incorporated by reference into any such filings.
123
<PAGE> 129
compensation committee maintained Mr. Orr's base annual salary through fiscal
2000 at $175,000. This amount was estimated to provide an annual cash
compensation level at the average of chief executive officer compensation levels
at a selected group of leading companies in Alteon's industry. In setting this
amount, the compensation committee took into account (1) its belief that Mr. Orr
is the CEO of a leading company in Alteon's industry who has significant and
broad-based experience in this industry, (2) the scope of Mr. Orr's
responsibilities, and (3) Alteon's board of directors' confidence in Mr. Orr to
lead Alteon's continued development. Considering these factors, Mr. Orr was
granted an option to purchase 560,000 shares of Alteon common stock
(representing less than 1% of Alteon's fully diluted equity) as an incentive for
future performance, an amount the compensation committee determined was
consistent with competitive practices.
Conclusion. Through the plans described above, a significant portion of
Alteon's compensation program and Mr. Orr's compensation are contingent on
Alteon's performance, and the realization of benefits is closely linked to
increases in long-term stockholder value. Alteon remains committed to this
philosophy of pay for performance, recognizing that the competitive market for
talented executives and the volatility of Alteon's business may result in highly
variable compensation for a particular time period.
COMPENSATION COMMITTEE
Tench Coxe
Adam Grosser
Andrew Verhalen
124
<PAGE> 130
PERFORMANCE MEASUREMENT COMPARISON
The following graph shows the total stockholder return of an investment of
$100 in cash on September 24, 1999 for:
- Alteon common stock;
- the Nasdaq Stock Market Index; and
- the Nasdaq Computer Manufacturer Stocks Index.
All values assume reinvestment of the full amount of all dividends.
LOGO
COMPARISON OF CUMULATIVE TOTAL RETURN
<TABLE>
<CAPTION>
NASDAQ
NASDAQ COMPUTER
STOCK MANUFACTURER
PERIOD ENDING ALTEON MARKET STOCKS
------------- ------ ------ ------------
<S> <C> <C> <C>
9/24/99......................................... 100 100 100
9/30/99......................................... 494.74 100.13 99.49
12/31/99........................................ 461.84 147.99 148.25
3/31/00......................................... 431.84 166.15 185.68
6/30/00......................................... 526.65 144.41 161.08
</TABLE>
CERTAIN TRANSACTIONS
Alteon has entered into indemnity agreements with certain executive
officers and directors which provide, among other things, that Alteon will
indemnify the executive officer or director, under the circumstances and to the
extent provided for in the agreement, for expenses, damages, judgments, fines
and settlements he or she may be required to pay in actions or proceedings which
he or she is or may be made a party be reason of his or her position as a
director, officer or other agent of Alteon, and otherwise to the full extent
permitted under Delaware law and Alteon's bylaws. See "-- Employment, Severance
and Change of Control Agreements" for a description of agreements that Alteon
has entered into with its executive officers.
125
<PAGE> 131
OTHER MATTERS
No other matters may be brought before the annual meeting by anyone other
than Alteon's board of directors. At the date of this proxy
statement/prospectus, Alteon's board of directors does not know of any business
that it will present at the annual meeting other than as set forth in the notice
accompanying this proxy statement/prospectus. If any other matter should
properly be brought before the annual meeting by Alteon's board of directors, it
is intended that a supplement or amendment to this proxy statement/prospectus
describing the matter will be sent to all Alteon stockholders entitled to vote.
STOCKHOLDER PROPOSALS FOR THE ALTEON 2001 ANNUAL MEETING
If the merger is not completed, proposals of stockholders of Alteon that
are intended to be presented by such stockholders at Alteon's 2001 annual
meeting and that the stockholders desire to have included in Alteon's proxy
statement must be received by the Secretary of Alteon no later than May 2, 2001
in order that they may be considered for possible inclusion in Alteon's proxy
statement and form of proxy relating to that meeting. In order to avoid
controversy, shareholders should submit their proposals by means, including
electronic means, that permit them to prove the date of delivery.
With respect to stockholder proposals and director nominations that are not
sought to be included in Alteon's proxy statement and form of proxy relating to
Alteon's 2001 annual meeting, Alteon's bylaws require that advance notice of
such proposals be delivered to or mailed and received by, Alteon no later than
close of business on August 5, 2001 and no earlier than close of business on
July 6, 2001. Stockholders are also advised to review Alteon's bylaws, which
contain additional requirements with respect to advance notice of stockholder
proposals and director nominations.
Alteon's Annual Report to the SEC on Form 10-K for the fiscal year ended
June 30, 2000 is available without charge upon written request to: Investor
Relations, Alteon WebSystems, Inc., 50 Great Oaks Blvd., San Jose, California
95119.
126
<PAGE> 132
LEGAL OPINIONS
The validity of the Nortel Networks common shares offered by this proxy
statement/prospectus will be passed upon for Nortel Networks by Nicholas J.
DeRoma, Esq., Chief Legal Officer of Nortel Networks.
EXPERTS
The consolidated financial statements as of December 31, 1999 and 1998 and
for each of the three years in the period ended December 31, 1999 and the
related financial statement schedules incorporated in this proxy
statement/prospectus by reference from Nortel Networks Corporation's Current
Report on Form 8-K dated August 7, 2000, as amended by Form 8-K/A dated August
18, 2000, have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report, which is incorporated herein by reference, and have been
so incorporated in reliance upon the report of the firm given upon their
authority as experts in accounting and auditing.
The consolidated financial statements of Alteon as of June 30, 1999 and
2000 and for each of the three years in the period ended June 30, 2000 included
in this proxy statement/prospectus, the related consolidated financial statement
schedule included elsewhere in the registration statement, and the consolidated
financial statements from which the selected historical consolidated financial
data of Alteon included in this prospectus have been derived, have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing herein and elsewhere in the registration statement. Such consolidated
financial statements, consolidated financial statement schedule, and selected
historical consolidated financial data have been included herein and elsewhere
in the Registration Statement in reliance upon the reports of such firm given
upon their authority as experts in accounting and auditing.
The consolidated financial statements of Bay Networks, Inc., which Nortel
Networks acquired on August 31, 1998, as of June 30, 1997 and 1996, and for each
of the three years in the period ended June 30, 1997, appearing in the Bay
Networks, Inc. Annual Report on Form 10-K for the year ended June 30, 1997 have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon included therein and incorporated herein by reference. Such
consolidated financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
127
<PAGE> 133
SERVICE OF PROCESS AND ENFORCEMENT OF LIABILITIES
Nortel Networks is a Canadian corporation. A substantial portion of Nortel
Networks' assets is located in Canada and a majority of its directors and
officers, and its experts named in this proxy statement/prospectus, are
residents of Canada. As a result, it may be difficult for investors to effect
service within the United States upon Nortel Networks or upon Nortel Networks'
directors, officers and experts. Execution by United States courts of any
judgment obtained against Nortel Networks or any of its directors, officers and
experts in United States courts would be limited to the assets of Nortel
Networks or that person in the United States. Nicholas J. DeRoma, Esq., Chief
Legal Officer of Nortel Networks, has advised Nortel Networks that there is
doubt as to the enforceability in Canada of United States judgments or
liabilities in original actions in Canadian courts predicated solely upon the
civil liability provisions of the federal securities laws of the United States.
The agent for service of process in the United States for Nortel Networks in
connection with the merger is CT Corporation System, 111 8th Avenue, New York,
New York 10011.
128
<PAGE> 134
WHERE YOU CAN FIND MORE INFORMATION
Alteon and Nortel Networks file annual, quarterly and special reports,
proxy statements and other information with the SEC. You may read and copy any
of the information on file with the SEC at the SEC's following locations:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, NY 10048 Chicago, IL 60661-2511
</TABLE>
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. Alteon's and Nortel Networks' SEC filings are also available to
the public from commercial document retrieval services. Alteon's SEC filings are
available at the SEC's World Wide Web site located at http://www.sec.gov and
some of Nortel Networks' filings are available at http://www.nortelnetworks.com.
Nortel Networks common shares are listed on the New York and Toronto stock
exchanges. Reports and other information concerning Nortel Networks may be
inspected at the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005.
Nortel Networks filed a registration statement on Form S-4 to register with
the SEC the Nortel Networks common shares offered by this proxy
statement/prospectus. This proxy statement/prospectus is a part of that
registration statement and constitutes a prospectus of Nortel Networks in
addition to being a proxy statement of Alteon for the Alteon annual meeting. As
permitted by SEC rules, this proxy statement/prospectus does not contain all the
information you can find in the registration statement or exhibits to the
registration statement.
The SEC allows Nortel Networks to incorporate by reference information into
this proxy statement/prospectus, which means that Nortel Networks can disclose
important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is deemed to
be part of this proxy statement/prospectus, except for any information
superseded by information in this proxy statement/prospectus. This proxy
statement/prospectus incorporates by reference the documents set forth below
that Nortel Networks has previously filed with the SEC. These documents contain
important information about Nortel Networks and its financial performance.
129
<PAGE> 135
<TABLE>
<CAPTION>
NORTEL NETWORKS' SEC FILINGS PERIOD/DATE OF FILING
---------------------------- ---------------------
<S> <C>
Annual Report on Form 10-K............ Year ended December 31, 1999 dated
March 7, 2000 as amended by Form
10-K/A dated March 27, 2000
Quarterly Report on Form 10-Q......... Quarter ended March 31, 2000 dated May
15, 2000, Quarter ended June 30, 2000
dated August 7, 2000
Current Reports on Form 8-K........... Dated January 6, 2000, January 26,
2000, January 26, 2000, February 14,
2000, February 25, 2000 (Form 8-K/A),
March 15, 2000, March 21, 2000, April
20, 2000, April 26, 2000, May 1, 2000,
June 14, 2000, July 26, 2000, August
7, 2000, August 15, 2000, August 18,
2000 (Form 8-K/A), and August 18, 2000
respectively
Description of the Nortel Networks
common shares, rights to purchase
common shares and preferred shares
contained in Nortel Networks' Form
8-A................................... Dated April 28, 2000, as amended by a
filing on Form 8-A/A dated May 1, 2000
Description of the Old Nortel
preferred shares contained in Nortel
Networks' Form 8-A.................... Dated October 8, 1975, as amended by
filings on Form 8 dated February 24,
1983, June 12, 1984, September 13,
1984, June 25, 1985 and July 15, 1987,
and as amended by filings on Form
8-A/A, dated May 8, 1998 and November
19, 1999
Proxy Circular and Proxy Statement
(including the Notice of Application
and Joint Arrangement Circular which
forms a part of and is incorporated by
reference therein).................... Dated as of February 29, 2000, filed
as Exhibit 99 to Nortel Networks'
Annual Report on Form 10-K/A for the
year ended December 31, 1999
</TABLE>
Nortel Networks is also incorporating by reference any future filings made
by Nortel Networks with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, between the date of this document
and the date of the Alteon annual meeting.
Nortel Networks has supplied all information contained or incorporated by
reference in this document relating to Nortel Networks, and Alteon has supplied
all information contained in this document relating to Alteon.
You may already have been sent some of the documents incorporated by
reference, but you can obtain any of them from Nortel Networks or the SEC.
Documents incorporated by reference are available from Nortel Networks, without
charge, excluding all exhibits unless an
130
<PAGE> 136
exhibit has been specifically incorporated by reference in this proxy
statement/prospectus. Stockholders may obtain documents incorporated by
reference in this document by Nortel Networks by requesting them in writing or
by telephone at:
Nortel Networks Corporation
8200 Dixie Road, Suite 100
Brampton, Ontario
Canada, L6T 5P6
Attn: Corporate Secretary
Telephone: (905) 863-0000
IF YOU WOULD LIKE TO REQUEST DOCUMENTS FROM NORTEL NETWORKS, PLEASE DO SO
BY SEPTEMBER 20, 2000 TO RECEIVE THEM BEFORE THE ALTEON ANNUAL MEETING. NORTEL
NETWORKS WILL SEND REQUESTED DOCUMENTS BY FIRST-CLASS MAIL WITHIN ONE BUSINESS
DAY OF RECEIVING THE REQUEST.
You should rely only on the information contained or incorporated by
reference in this document to vote on the merger agreement proposal. No one has
been authorized to provide you with information that is different from what is
contained in this document. This document is dated August 28, 2000. You should
not assume the information contained in this document is accurate as of any date
other than this date, and neither the mailing of this document to stockholders
nor the issuance of Nortel Networks common shares in the merger shall imply
information is accurate as of any other date.
131
<PAGE> 137
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets at June 30, 2000 and 1999....... F-3
Consolidated Statements of Operations for the years ended
June 30, 2000, 1999 and 1998.............................. F-4
Consolidated Statements of Stockholders' Equity for the
years ended June 30, 2000, 1999 and 1998.................. F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 2000, 1999 and 1998.............................. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 138
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 subsidiaries (collectively, the "Company") as of June 30,
2000 and 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 2000. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at June 30, 2000
and 1999, and the results of its operations and its cash flows for each of the
three years in the period ended June 30, 2000 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
San Jose, California
July 19, 2000
(July 28, 2000 as to Note 15)
F-2
<PAGE> 139
ALTEON WEBSYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents.................................... $154,125 $29,766
Short-term investments.................................. 78,863 --
Accounts receivable (net of allowances of $3,323 in 2000
and $1,369 in 1999).................................. 28,733 3,853
Inventories............................................. 15,515 2,632
Prepaid expenses and other current assets............... 4,352 397
-------- -------
Total current assets................................. 281,588 36,648
Property and equipment -- net............................. 17,133 3,931
Investments and other assets.............................. 8,304 42
-------- -------
Total................................................ $307,025 $40,621
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 16,948 $ 3,561
Accrued compensation and benefits....................... 8,059 2,052
Other accrued expenses.................................. 13,592 3,607
Current portion of note payable to bank................. 815 1,363
Current portion of capital lease obligations............ 72 348
Deferred sales, net..................................... 5,277 176
Income taxes payable.................................... 470 53
-------- -------
Total current liabilities............................ 45,233 11,160
Note payable to bank...................................... 1,427 1,798
Capital lease obligations................................. -- 121
Sublease deposits......................................... 93 93
-------- -------
Total liabilities.................................... 46,753 13,172
-------- -------
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, 0 shares in 2000, 13,785,326
shares in 1999 (liquidation preference $0 in 2000,
and $58,272 in 1999)................................. -- 58,294
Common stock, $0.001 par value, authorized, 300,000,000
shares; outstanding, 41,622,464 shares in 2000, and
12,987,109 in 1999................................... 311,785 3,224
Notes receivable from stockholders...................... (4,643) (2,465)
Deferred stock compensation............................. (5,745) (196)
Accumulated deficit..................................... (41,061) (31,408)
Accumulated other comprehensive loss.................... (64) --
-------- -------
Total stockholders' equity........................... 260,272 27,449
-------- -------
Total................................................ $307,025 $40,621
======== =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 140
ALTEON WEBSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net sales...................................... $109,582 $ 26,254 $ 13,572
Cost of sales.................................. 40,083 13,385 7,893
-------- -------- --------
Gross profit................................. 69,499 12,869 5,679
Operating expenses:
Sales and marketing.......................... 49,291 13,061 6,485
Research and development..................... 22,792 10,004 8,816
General and administrative................... 7,010 2,538 1,505
Stock compensation to consultants............ 7,687 -- --
-------- -------- --------
Total operating expenses.................. 86,780 25,603 16,806
-------- -------- --------
Loss from operations........................... (17,281) (12,734) (11,127)
Other income (expense):
Interest income.............................. 8,396 541 493
Interest expense............................. (355) (277) (171)
-------- -------- --------
Loss before income taxes....................... (9,240) (12,470) (10,805)
Income tax expense............................. 413 73 1
-------- -------- --------
Net loss....................................... $ (9,653) $(12,543) $(10,806)
======== ======== ========
Basic and diluted loss per common share........ $ (0.32) $ (1.65) $ (2.18)
======== ======== ========
Basic and diluted common shares used in 30,565 7,610 4,951
computation..................................
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 141
ALTEON WEBSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK RECEIVABLE DEFERRED ACCUMULATED
--------------------- --------------------- FROM STOCK COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT STOCKHOLDERS COMPENSATION LOSS
----------- ------- ---------- -------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JUNE 30, 1997............ 9,070,804 $21,721 11,329,059 $ 345 $ (225) $ -- $ --
Sale of Series B preferred stock
(net of issuance cost of $2)...... 84,000 503
Sale of Series C preferred stock
(net of issuance cost of $20)..... 1,093,960 7,638
Exercise of stock options.......... 336,092 59
Issuance of common stock for
services.......................... 185,064 83
Exercise of stock options for notes
receivable........................ 1,649,500 701 (701)
Issuance of stock options to
consultants....................... 17
Repurchase of common stock in
exchange for notes receivable..... (776,223) (84) 67
Repurchase of founder's stock...... (1,132,689) (42)
Repayment of notes receivable...... 11
Net loss...........................
----------- ------- ---------- -------- ------- ------- ----
BALANCES, JUNE 30, 1998............ 10,248,764 29,862 11,590,803 1,079 (848) -- --
Sale of Series C preferred stock
(net of issuance cost of $20)..... 1,041,730 7,271
Sale of Series D preferred stock
(net of issuance cost of $45)..... 2,494,832 21,161
Exercise of stock options.......... 159,417 74
Issuance of common stock for
services.......................... 60,889 171
Exercise of stock options for notes
receivable........................ 1,298,187 1,714 (1,714)
Issuance of stock options to
consultants....................... 22
Repurchase of common stock in
exchange for notes receivable..... (122,187) (45) 30
Repayment of notes receivable...... 67
Deferred compensation.............. 209 (209)
Amortization of deferred
compensation...................... 13
Net loss...........................
----------- ------- ---------- -------- ------- ------- ----
BALANCES, JUNE 30, 1999............ 13,785,326 58,294 12,987,109 3,224 (2,465) (196) --
Sale of Series D preferred stock
(net of issuance cost of $45)..... 5,168 44
Conversion of preferred stock to
common stock in conjection with
initial public offering........... (13,790,494) (58,338) 20,685,724 58,338
Issuance of common stock in
connection with initial public
offering (net of issuance costs of
$7,821)........................... 4,600,000 79,579
Issuance of common stock in
connection with follow-on offering
(net of issuance costs of
$8,740)........................... 1,535,506 150,185
Common stock issued under employee
stock purchase plans.............. 76,988 1,243
Exercise of stock options.......... 1,047,414 1,775
Issuance of common stock for
services.......................... 26,272 410
Exercise of stock options for notes
receivable........................ 772,956 3,764 (3,764)
Issuance of stock options to
consultants....................... 7,687
Repurchase of common stock in
exchange for notes receivable..... (109,505) (247) 247
Repayment of notes receivable...... 1,339
Deferred compensation.............. 5,827 (5,827)
Amortization of deferred
compensation...................... 278
Unrealized loss on investments..... (64)
Net loss...........................
----------- ------- ---------- -------- ------- ------- ----
BALANCES, JUNE 30, 2000............ -- $ -- 41,622,464 $311,785 $(4,643) $(5,745) $(64)
=========== ======= ========== ======== ======= ======= ====
<CAPTION>
ACCUMULATED STOCKHOLDERS
DEFICIT '92 EQUITY
----------- ------------
<S> <C> <C>
BALANCES, JUNE 30, 1997............ $ (8,059) $ 13,782
Sale of Series B preferred stock
(net of issuance cost of $2)...... 503
Sale of Series C preferred stock
(net of issuance cost of $20)..... 7,638
Exercise of stock options.......... 59
Issuance of common stock for
services.......................... 83
Exercise of stock options for notes
receivable........................ --
Issuance of stock options to
consultants....................... 17
Repurchase of common stock in
exchange for notes receivable..... (17)
Repurchase of founder's stock...... (42)
Repayment of notes receivable...... 11
Net loss........................... (10,806) (10,806)
-------- --------
BALANCES, JUNE 30, 1998............ (18,865) 11,228
Sale of Series C preferred stock
(net of issuance cost of $20)..... 7,271
Sale of Series D preferred stock
(net of issuance cost of $45)..... 21,161
Exercise of stock options.......... 74
Issuance of common stock for
services.......................... 171
Exercise of stock options for notes
receivable........................ --
Issuance of stock options to
consultants....................... 22
Repurchase of common stock in
exchange for notes receivable..... (15)
Repayment of notes receivable...... 67
Deferred compensation.............. --
Amortization of deferred
compensation...................... 13
Net loss........................... (12,543) (12,543)
-------- --------
BALANCES, JUNE 30, 1999............ (31,408) 27,449
Sale of Series D preferred stock
(net of issuance cost of $45)..... 44
Conversion of preferred stock to
common stock in conjection with
initial public offering........... --
Issuance of common stock in
connection with initial public
offering (net of issuance costs of
$7,821)........................... 79,579
Issuance of common stock in
connection with follow-on offering
(net of issuance costs of
$8,740)........................... 150,185
Common stock issued under employee
stock purchase plans.............. 1,243
Exercise of stock options.......... 1,775
Issuance of common stock for
services.......................... 410
Exercise of stock options for notes
receivable........................ --
Issuance of stock options to
consultants....................... 7,687
Repurchase of common stock in
exchange for notes receivable..... --
Repayment of notes receivable...... 1,339
Deferred compensation.............. --
Amortization of deferred
compensation...................... 278
Unrealized loss on investments..... (64)
Net loss........................... (9,653) (9,653)
-------- --------
BALANCES, JUNE 30, 2000............ $(41,061) $260,272
======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 142
ALTEON WEBSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
2000 1999 1998
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $ (9,653) $(12,543) $(10,806)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 2,865 1,688 907
Amortization of deferred compensation........ 278 13 --
Deferred rent................................ (28) 240 93
Issuance of common stock for services........ 410 171 83
Issuance of stock options to consultants..... 7,687 22 17
Changes in assets and liabilities:
Accounts receivables....................... (24,880) (1,286) (2,477)
Inventories................................ (12,883) 2,274 (4,474)
Prepaid expenses and other current
assets.................................. (3,955) (131) (177)
Accounts payable........................... 13,387 1,120 1,606
Accrued compensation and related
liabilities............................. 6,007 749 665
Other accrued expenses..................... 15,531 2,066 1,239
--------- -------- --------
Net cash used in operating activities... (5,234) (5,617) (13,324)
--------- -------- --------
Cash flows from investing activities:
Maturities of short-term investments............ 42,275 -- --
Purchases of short-term investments............. (120,794) -- --
Purchases of property and equipment............. (16,472) (2,926) (2,049)
Investments and other assets.................... (8,265) 21 (24)
--------- -------- --------
Net cash used in investing activities... (103,256) (2,905) (2,073)
--------- -------- --------
Cash flows from financing activities:
Net proceeds from sale of preferred stock....... 44 28,432 8,141
Borrowings under note payable................... -- 2,465 1,535
Repayments of note payable...................... (919) (749) (90)
Proceeds from issuance of common stock in public
offerings.................................... 229,764 -- --
Proceeds from stock issued under employee
benefit plans, net of repurchases............ 3,018 59 42
Repurchase of founder's stock................... -- -- (42)
Repayments of note receivable for common
stock........................................ 1,339 67 11
Repayments of capital lease obligations......... (397) (231) (197)
Borrowings under line of credit................. -- (802) 802
--------- -------- --------
Net cash provided by financing
activities........................... 232,849 29,241 10,202
--------- -------- --------
Net increase (decrease) in cash and equivalents... 124,359 20,719 (5,195)
Cash and equivalents, beginning of period......... 29,766 9,047 14,242
--------- -------- --------
Cash and equivalents, end of period............... $ 154,125 $ 29,766 $ 9,047
========= ======== ========
Noncash investing and financing activities:
Exercise of stock options for notes receivable,
net of repurchases........................... $ 3,517 $ 1,714 $ 634
Additional cash flow information:
Interest paid................................... $ 363 $ 276 $ 167
Taxes paid...................................... 10 20 1
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 143
ALTEON WEBSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
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.
Basis of Consolidation. The consolidated financial statements include the
Company and its wholly-owned subsidiaries. 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, short-term investments, and accounts receivable. Banking with
creditworthy institutions mitigates risks associated with cash equivalents. The
Company generally invests in instruments with an investment credit rating of
A1/P1 or better. 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, short-term investments, notes receivable from stockholders and
long-term obligations. At June 30, 2000 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, bonds, commercial paper, municipal bonds, and
government securities, with rates from 5.5% to 7.2%, totaling $148.3 million and
$22.5 million at June 30, 2000 and 1999, respectively.
Short-term Investments. Short-term investments consist of investments
acquired with maturities exceeding three months but less than two years. While
the Company's intent is to hold debt securities to maturity, consistent with
Statement of Financial Accounting Standards
F-7
<PAGE> 144
ALTEON WEBSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
No. 115, Accounting for Certain Investments in Debt and Equity Securities, we
have classified all debt securities and all investments in equity securities
that have readily determinable fair values as available-for-sale, as the sale of
such securities may be required prior to maturity to implement management
strategies. Such securities are reported at fair value, with unrealized gains or
losses excluded from earnings and included in other comprehensive income, net of
applicable taxes. The cost of securities sold is based on the specific
identification method. Realized gains or losses and declines in value, if any,
judged to be other than temporary are reported in interest and income, net in
the consolidated statements of operations.
Inventory. Inventory is stated at the lower of standard cost (first-in,
first-out) or market.
Property and Equipment. Property and equipment is stated at cost.
Depreciation and amortization is 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.
Revenue Recognition. Revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
price is fixed and determinable, and collectibility is reasonably assured.
Revenue is recognized upon shipment to both resellers and end users. 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 $2.4 million, $209,000 and $54,000 in fiscal 2000,
1999 and 1998, 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
F-8
<PAGE> 145
ALTEON WEBSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 December 1999, the staff of the
Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No.
101, Revenue Recognition in Financial Statements (SAB 101). SAB 101 summarized
certain of the SEC's views in applying generally accepted accounting principles
(GAAP) to revenue recognition in financial statements. The SEC is also
developing additional guidance for SAB 101. The Company is required to adopt SAB
101 in the fourth quarter of fiscal 2001 and the effects, if any, are required
to be recorded through a retroactive cumulative effect adjustment as of the
beginning of that fiscal year, with a restatement of all prior interim quarters
in that year. The Company has not yet determined the impact, if any, of SAB 101
on the Company's financial statements.
In June 1998, the FASB issued SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. In June 1999, the FASB issued SFAS 137,
Accounting for Derivative Instruments and Hedging Activities -- Deferral of
Effective Date of SFAS 133. These statements require companies to record
derivatives in the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the fair market values of those
derivatives instruments would be accounted for depending on the use of the
instrument and whether it qualifies for hedge accounting. SFAS No. 133 will be
effective for the Company's fiscal year ending June 30, 2001. Management is in
the process of evaluating any impact on the Company's financial condition or
results of operations resulting from these statements.
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.
Reclassifications. Certain prior year amounts have been reclassified to
conform to the current year presentation. These reclassifications had no effect
on net loss or stockholders' equity.
F-9
<PAGE> 146
ALTEON WEBSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SHORT-TERM INVESTMENTS
Available-for-sale securities consist of the following at June 30, 2000 (in
thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
INVESTMENT COST GAINS LOSSES FAIR VALUE
---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Commercial paper....................... $24,649 $ -- $ (21) $24,628
Certificates of deposit................ 7,002 3 -- 7,005
Corporate debt securities.............. 8,016 -- (14) 8,002
Government securities.................. 39,260 -- (32) 39,228
------- ------- ------- -------
$78,927 $ 3 $ (67) $78,863
======= ======= ======= =======
</TABLE>
All short-term investments mature within one year and the contractual value
of available for-sale debt securities at June 30, 2000 is as follows (in
thousands):
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
<S> <C> <C>
Short-term investments................................. $78,927 $78,863
</TABLE>
There were no short-term investments at June 30, 1999.
3. INVENTORY
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-----------------
2000 1999
------- -------
<S> <C> <C>
Raw materials............................................... $ 7,647 $ 973
Work-in-process............................................. 1,051 394
Finished goods.............................................. 1,181 496
Inventory at manufacturer in Thailand....................... 5,636 769
------- -------
Total..................................................... $15,515 $ 2,632
======= =======
</TABLE>
F-10
<PAGE> 147
ALTEON WEBSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-----------------
2000 1999
------- ------
<S> <C> <C>
Computers, equipment and software......................... $19,954 $4,653
Furniture and fixtures.................................... 1,371 778
Leasehold improvements.................................... 1,922 1,347
------- ------
23,247 6,778
Accumulated depreciation and amortization................. (6,114) (2,847)
------- ------
$17,133 $3,931
======= ======
</TABLE>
5. INVESTMENTS AND OTHER ASSETS
Included in investments and other assets are the Company's privately held
corporate equity securities in certain technology companies totaling $8.0
million as of June 30, 2000. Investments in equity securities are carried at the
lower of cost or market. The Company's policy is to regularly review the
assumptions underlying the financial performance of these privately held
companies and, if and when the Company determines that a decline in fair value
below the cost basis is other than temporary, the related investment is written
down to its fair value.
6. OTHER ACCRUED EXPENSES
Other accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-----------------
2000 1999
------- ------
(IN THOUSANDS)
<S> <C> <C>
Accrued warranty.......................................... $ 2,026 $ 893
Marketing and related accruals............................ 1,149 275
Professional fees and related accruals.................... 4,785 907
Accrued channel commission................................ 1,240 --
Deferred rent............................................. 371 399
Customer prepaids......................................... 369 535
Sales tax payable......................................... 879 94
Other..................................................... 2,773 504
------- ------
Total........................................... $13,592 $3,607
======= ======
</TABLE>
7. LINE OF CREDIT AND NOTE PAYABLE TO BANK
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
F-11
<PAGE> 148
ALTEON WEBSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
credit issuances. In December 1998, the line was increased to $3,000,000. In
September 1999, the line was increased to $12 million, subject to a $1.5 million
sublimit on letter of credit issuances. The line of credit will mature in
December 2000. At June 30, 2000 and 1999, there were no borrowings outstanding
under the revolving bank line of credit. There is an outstanding irrevocable
standby letter of credit in the amount of approximately $207,000. Borrowings
under the line of credit agreement bear interest at a rate equal to three
quarters percentage point (0.75%) above the bank's prime rate (10.25% at June
30, 2000) and are collateralized by substantially all of the Company's assets.
The Company entered into a borrowing arrangement in March 1998 which was
modified in December 1998 to borrow up to $4,000,000 for the purchase of
equipment. At June 30, 2000, the borrowings bear interest at a rate equal to
three-quarters of one percentage point (0.75%) above the bank's prime rate
(10.25% at June 30, 2000) 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 equal monthly installments of principal and
interest. At June 30, 2000, the Company had approximately $2.2 million
outstanding, payable through June 2002.
The line of credit also contains restrictive covenants, including a minimum
quick ratio of 1.5:1 and tangible net worth of at least $10 million. The loan
agreement has negative convenants prohibiting us from paying dividends without
prior written consent from the bank. At June 30, 2000, the Company was in
compliance with all covenants.
8. LEASE COMMITMENTS
Equipment with a net book value of approximately $0 and $136,000 at June
30, 2000 and 1999, respectively (net of accumulated amortization of
approximately $1,026,000 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 expiring through May 2003. Rent expense was approximately $1.3 million,
$1.1 million, and $414,000 in the years ended June 30, 2000, 1999 and 1998,
respectively. One of the Company's facility leases is secured by a $207,000
letter of credit.
Effective September 1998, the Company subleased one of its facilities. The
cash received from this lease was $209,000 and $169,000 for the years ended June
30, 2000 and 1999, respectively. The cash to be received over the remaining
lease term is $195,000. Effective July 1999, the Company subleased a portion of
another facility for 34 months. Cash received from this lease was $414,000 for
the year ended June 30, 2000. The cash to be received over the remaining lease
term is $807,000. In connection with these subleases, the Company has deposits
of $93,000 at June 30, 2000 and 1999 from the lessees.
F-12
<PAGE> 149
ALTEON WEBSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At June 30, 2000 minimum future lease payments are as follows, excluding
sublease income discussed above (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING JUNE 30, LEASES LEASES
-------------------- ------- ---------
<S> <C> <C>
2001..................................................... $75 $2,260
2002..................................................... -- 1,419
2003..................................................... -- 2,734
2004..................................................... -- 146
2005..................................................... -- 110
Thereafter............................................... -- --
--- ------
Total minimum lease payments............................. 75 $6,669
======
Amount representing interest............................. (3)
---
Present value of minimum lease payments.................. 72
Current portion.......................................... 72
---
Long-term portion........................................ $ 0
===
</TABLE>
9. STOCKHOLDERS' EQUITY
STOCK SPLIT
During June 1999, the Company's stockholders approved a stock split of
three shares of common stock for every two shares of outstanding common stock.
All share and per share amounts have been adjusted to give effect to these
changes.
INITIAL AND FOLLOW-UP PUBLIC OFFERINGS 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 20,685,724 shares of common stock at a conversion rate of
1.5-to-1.
On January 31, 2000, the Company completed the sale of 5 million shares of
its common stock at a price of $103.50 per share. Of the shares that were
offered, the Company sold 1,250,000 shares and its stockholders sold 3,750,000
shares. The underwriters exercised the related overall allotment option on
February 25, 2000 at which time the Company sold an additional 285,506 shares
and its stockholders sold an additional 214,494 shares. Offering proceeds to the
Company, net of underwriting discounts and aggregate expenses of approximately
$8.7 million, were approximately $150.2 million.
F-13
<PAGE> 150
ALTEON WEBSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2000, 2,007,596 outstanding shares of such stock were subject to repurchase.
STOCK OPTIONS
Under the 1999 Equity Incentive Plan (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 21,385,069 in June 2000.
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 21,385,069. 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.
Under the 2000 Nonstatutory Equity Incentive Plan, nonstatutory stock
options may be granted to employees and non-employees. The number of common
shares reserved under the Plan was increased to 4,000,000 in May 2000. The
number of shares available as nonstatutory stock options may not exceed
4,000,000. Nonstatutory stock options are granted at fair market value (as
determined by the Board of Directors) at the date of grant, and 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.
F-14
<PAGE> 151
ALTEON WEBSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Option activity under the plans is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Outstanding, July 1, 1997.......................... 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......................... 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......................... 4,338,664 2.42
Granted (weighted average fair value of $41.10 per
share)........................................... 7,872,650 40.75
Exercised.......................................... (1,820,370) 3.04
Canceled........................................... (440,378) 15.56
---------- ------
Outstanding, June 30, 2000......................... 9,950,566 $32.01
========== ------
</TABLE>
At June 30, 2000, the Company had reserved shares of common stock for
issuance under its stock option plans of 25,385,069 shares, and 5,278,050 shares
were available for future grants under the plans.
Additional information regarding options outstanding as of June 30, 2000 is
as follows:
<TABLE>
<CAPTION>
NUMBER OUTSTANDING
WEIGHTED AVERAGE
REMAINING
OPTIONS CONTRACTUAL LIFE WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE
------------------------ ----------- ------------------ ----------------
<S> <C> <C> <C>
$0.05 - 2.00.................... 1,619,270 8.12 $ 1.31
2.83 - 11.00.................... 1,065,343 8.65 5.59
14.00 - 14.00................... 1,459,776 9.18 14.00
19.00 - 43.75................... 1,640,571 9.61 34.01
45.19 - 54.00................... 1,154,000 9.92 47.83
54.31 - 54.31................... 2,053,147 9.63 54.31
64.00 - 85.50................... 882,459 9.54 68.61
87.00 - 87.00................... 1,500 9.51 87.00
91.69 - 91.69................... 7,000 9.99 91.69
91.88 - 91.88................... 67,500 9.99 91.88
--------- ---- ------
$0.05 - 91.88................... 9,950,566 9.24 $32.01
========= ---- ------
</TABLE>
STOCK AND STOCK OPTIONS GRANTED TO NON-EMPLOYEES
The Company has granted equity instruments to non-employees for consulting
and other services. During fiscal 2000 and 1999 the Company issued 26,272 and
60,889 shares of
F-15
<PAGE> 152
ALTEON WEBSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
$410,000 and $171,000 in 2000 and 1999, respectively, and was expensed at the
time of issuance.
The Company has also granted stock options to non-employees with vesting
periods historically 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 fiscal 2000, in connection with the changes to the vesting period
of these options, the Company expensed $7.7 million. In fiscal 1999, the Company
expensed $22,000 related to the vesting of these options.
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 have 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
is 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.
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, no compensation expense has been recognized in the financial
statements for employee stock arrangements, because the fair value of common
stock at the grant date is not greater than the option exercise price.
SFAS No. 123, Accounting for Stock-Based Compensation, 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 Black Scholes
pricing method with the following weighted average assumptions: expected life,
two years average risk-free interest rates, approximately 6.3% in 2000 and 4.8%
in 1999 and 5.6% in 1998 for the stock option plans, and approximately 6.1% in
2000 for the ESPP; and no dividends during the expected term; and
F-16
<PAGE> 153
ALTEON WEBSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
volatility of 85% for 2000. The Company's calculations are based on a multiple
option valuation approach, and forfeitures are recognized as they occur.
If the computed fair values of the 2000, 1999 and 1998 awards had been
amortized to expense over the vesting period of the awards, pro forma net loss
for June 30, 2000, 1999 and 1998 would have been as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net loss:
As reported................................... $ (9,653) $(12,543) $(10,806)
Pro forma..................................... $(27,956) $(12,817) $(10,933)
Loss per share -- basic and diluted........... $ (0.32) $ (1.65) $ (2.18)
Pro forma -- basic and diluted................ $ (0.91) $ (1.68) $ (2.21)
</TABLE>
10. INCOME TAXES
No federal income taxes were provided in 2000, 1999, and 1998 due to the
Company's net operating losses. The provision for income taxes for these periods
represents state minimum franchise taxes and foreign income taxes of $413,000,
$73,000 and $1,000 for 2000, 1999 and 1998, respectively. 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,
---------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Taxes computed at federal statutory rate................. (35.0)% (35.0)% (35.0)%
State income taxes, net of federal benefit............... (19.8) (8.2) (8.4)
Federal research and development credit.................. (15.8) (3.9) (4.1)
Foreign losses benefited at rates lower than the U.S..... 23.7 0.0 0.0
Other.................................................... 5.1 6.7 (4.1)
Change in valuation allowance............................ 46.3 41.0 51.6
----- ----- -----
Total provision........................................ 4.5% 0.6% 0.0%
===== ===== =====
</TABLE>
Deferred tax assets at are comprised of the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
Accruals and reserves..................................... $ 6,099 $ 2,171
Net operating loss and tax credits carried forwards....... 24,522 9,435
Depreciation.............................................. 613 443
Capitalized expenses...................................... 3,346 2,128
-------- --------
Total gross deferred tax asset before valuation
allowance............................................ 34,580 14,177
Valuation allowance....................................... (34,580) (14,177)
-------- --------
Net deferred tax assets................................. $ 0 $ 0
======== ========
</TABLE>
F-17
<PAGE> 154
ALTEON WEBSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in the deferred assets are approximately $16,124,000 of tax
benefit related to equity transactions which will be credited to stockholders'
equity if and when realized after the other tax deductions in the carryforwards
have been realized.
At June 30, 2000, the Company had federal and state net operating loss
carryforwards of approximately $51,992,000 and $9,641,000 available to reduce
future federal and state taxable income, respectively. The federal and state
carryforwards begin to expire in 2012 and 2005, respectively. The Company also
has research and development credit carryforwards of approximately $3,814,000
and $2,136,000 available to offset future federal and state income taxes,
respectively, as of June 30, 2000. These federal carryforwards begin to expire
in 2012. The Company also has a state investment tax credit of approximately
$981,000 as of June 30, 2000 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 the Internal Revenue Code and applicable
California state tax law.
11. CONTINGENCIES
The Company is involved in litigation in the normal course of business.
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 one reportable segment.
In fiscal 2000, no individual customer accounted for 10% or more of net
sales. The Company had sales, net of sales returns, to individual customers in
excess of 10% of net sales as follows:
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30
------------
CUSTOMER 1999 1998
-------- ---- ----
<S> <C> <C>
A (Stockholder)............................................. 14% 10%
B........................................................... * 42
C (Stockholder)............................................. * 14
D........................................................... 10 *
E........................................................... 10 *
</TABLE>
-------------------------
* less than 10%
On June 30, 2000, the Company had no accounts receivable from individual
customer in excess of 10% of gross accounts receivable. On June 30, 1999, one
customer represented 16% of gross accounts receivable. On June 30, 1998, two
customers represented 12% and 10% of gross accounts receivable, respectively.
F-18
<PAGE> 155
ALTEON WEBSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Sales to customers by geographic area are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------
2000 1999 1998
-------- ------- -------
<S> <C> <C> <C>
United States................................. $ 64,797 $19,716 $ 9,652
United Kingdom................................ 7,237 1,221 289
Korea......................................... 7,603 721 94
Japan......................................... 10,417 1,611 2,981
Other......................................... 19,528 2,985 556
-------- ------- -------
Total....................................... $109,582 $26,254 $13,572
======== ======= =======
</TABLE>
Substantially all the Company's long-lived assets are in the United States.
13. NET LOSS PER SHARE
The following is a reconciliation of the denominators used in computing
basic and diluted net loss per share (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Shares (denominator):
Weighted average common shares outstanding.......... 32,861 12,004 10,775
Less weighted average common shares outstanding
subject to Repurchase............................. 2,296 4,394 5,824
------ ------ ------
Shares used in computation, basic and diluted..... 30,565 7,610 4,951
====== ====== ======
</TABLE>
For fiscal 2000, 1999 and 1998, the Company had securities outstanding
which 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 20, 2000:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------
2000 1999 1998
--------- ---------- ----------
<S> <C> <C> <C>
Preferred stock............................ -- 20,677,972 15,373,134
Stock options.............................. 4,771,776 4,338,664 2,367,375
--------- ---------- ----------
Total.................................... 4,771,776 25,016,636 17,740,509
========= ========== ==========
</TABLE>
14. RELATED PARTY TRANSACTIONS
During the years ended June 30, 2000, 1999 and 1998, the Company had net
sales to a related party shareholder of $6.0 million, $3.7 million and $1.2
million, respectively. The related amounts receivable are $1.1 million, $0.8
million, and $0.2 million, respectively.
F-19
<PAGE> 156
ALTEON WEBSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the same periods, the Company had net sales to another related party
shareholder of $7.6 million, $1.0 million, and $1.9 million, respectively. The
related amounts receivable are $2.4 million at June 30, 2000. Net prepaid
amounts from this customer were $0.4 million and $0.6 million at June 30, 1999
and 1998, respectively.
A related party has provided manufacturing services during the years ended
June 30, 2000, 1999 and 1998. The total value of inventory purchased from the
related party is $15.8 million, $8.7 million and $2.0 million, respectively. The
related amounts payable are $1.7 million, $0.8 million and $0.9 million,
respectively.
15. SUBSEQUENT EVENTS
On July 17, 2000, the Company completed the acquisition of Pharsalia
Technologies, Inc. ("Pharsalia") for approximately $221 million in a
stock-for-stock transaction. The Company issued an aggregate of approximately
1.4 million shares of common stock for all outstanding shares of Pharsalia
common stock, and assumed all outstanding options of Pharsalia. Pharsalia
develops Internet infrastructure software products that allow companies to
expand their Web presence through enhanced content delivery.
On July 28, 2000, Nortel Networks Corporation and the Company announced the
signing of a definitive agreement for Nortel Networks Corporation to acquire the
Company in an all-stock purchase transaction. Under the agreement, Nortel
Networks Corporation will issue 1.83148 shares of Nortel Networks Corporation
common stock for each share of the Company's common stock. The boards of
directors of both companies have approved the transaction. The acquisition,
which is subject to customary regulatory and the Company's stockholders'
approval, is expected to close in second quarter of the Company's fiscal 2001.
The acquisition triggers the accelerated vesting of certain employee stock
options (see Note 9).
F-20
<PAGE> 157
ANNEX A
EXECUTION VERSION
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
NORTEL NETWORKS CORPORATION,
DARIUS CORP.
AND
ALTEON WEBSYSTEMS, INC.
DATED AS OF JULY 28, 2000
A-1
<PAGE> 158
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I CERTAIN DEFINITIONS............................... A-4
1.01. Certain Definitions................................ A-4
ARTICLE II THE MERGER; EFFECTS OF THE MERGER................ A-9
2.01. The Merger......................................... A-9
2.02. Effective Date and Effective Time.................. A-10
2.03. Tax Consequences................................... A-10
ARTICLE III CONVERSION OF SHARES; EXCHANGE PROCEDURES....... A-10
3.01. Conversion of Shares............................... A-10
3.02. Issuance of Shares of the Surviving Corporation.... A-10
3.03. Rights as Stockholders; Stock Transfers............ A-11
3.04. Fractional Shares.................................. A-11
3.05. Exchange Procedures................................ A-11
3.06. Anti-Dilution Provisions........................... A-12
3.07. Stock Options and Other Stock Plans................ A-12
ARTICLE IV ACTIONS PENDING MERGER........................... A-16
4.01. Forbearances of the Company........................ A-16
4.02. Forbearances of Nortel Networks.................... A-19
ARTICLE V REPRESENTATIONS AND WARRANTIES.................... A-19
5.01. Representations and Warranties of the Company...... A-19
5.02. Representations and Warranties of Nortel Networks
and Sub................................................ A-31
ARTICLE VI COVENANTS........................................ A-34
6.01. Reasonable Efforts................................. A-34
6.02. Stockholder Approvals.............................. A-35
6.03. Registration Statement............................. A-35
6.04. Press Releases..................................... A-36
6.05. Access; Information................................ A-36
6.06. Acquisition Proposals.............................. A-37
6.07. Affiliate Agreements............................... A-38
6.08. Takeover Laws...................................... A-38
6.09. Shares Listed...................................... A-38
6.10. Regulatory Applications............................ A-38
6.11. Indemnification.................................... A-39
6.12. Certain Employee Benefit Matters................... A-40
6.13. Accountants' Letters............................... A-41
6.14. Notification of Certain Matters.................... A-41
6.15. Certain Tax Matters................................ A-42
6.16. Company Annual Meeting............................. A-42
ARTICLE VII CONDITIONS TO CONSUMMATION OF THE MERGER........ A-42
7.01. Conditions to Each Party's Obligation to Effect the
Merger................................................. A-42
7.02. Conditions to Obligation of the Company............ A-43
7.03. Conditions to Obligation of Nortel Networks and
Sub.................................................... A-44
ARTICLE VIII TERMINATION.................................... A-45
8.01. Termination........................................ A-45
8.02. Effect of Termination and Abandonment.............. A-46
ARTICLE IX MISCELLANEOUS.................................... A-47
9.01. Survival........................................... A-47
9.02. Amendment; Extension; Waiver....................... A-47
</TABLE>
A-2
<PAGE> 159
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
9.03. Counterparts....................................... A-48
9.04. Governing Law...................................... A-48
9.05. Expenses........................................... A-48
9.06. Notices............................................ A-48
9.07. Entire Understanding............................... A-49
9.08. Assignment; No Third Party Beneficiaries........... A-49
9.09. Interpretation..................................... A-49
9.10. Severability....................................... A-50
9.11. Specific Performance; Attorney's Fees; Waiver of
Jury Trial............................................. A-50
</TABLE>
Exhibit A Form of Affiliate Letter........................................ A-52
A-3
<PAGE> 160
AGREEMENT AND PLAN OF MERGER, dated as of July 28, 2000 (this "AGREEMENT"),
by and among NORTEL NETWORKS CORPORATION, a corporation organized under the laws
of Canada ("NORTEL NETWORKS"), DARIUS CORP., a corporation organized under the
laws of Delaware ("SUB"), and ALTEON WEBSYSTEMS, INC., a corporation organized
under the laws of Delaware (the "COMPANY").
WITNESSETH:
WHEREAS, the Boards of Directors of each of Nortel Networks, Sub and the
Company have determined that it is advisable and in the best interests of their
respective companies and their stockholders to consummate the strategic business
combination transaction provided for herein in which, subject to the terms and
conditions set forth herein, Sub will merge (the "MERGER") with and into the
Company, so that the Company is the surviving corporation in the Merger;
WHEREAS, the parties intend that for U.S. federal income tax purposes, the
Merger qualify as a "reorganization" within the meaning of Section 368(a) of the
Code;
WHEREAS, as a condition and as an inducement to Nortel Networks'
willingness to enter into this Agreement, Nortel Networks is entering into
agreements (the "STOCKHOLDER AGREEMENTS") with certain Company stockholders; and
WHEREAS, the parties desire to make certain representations, warranties and
agreements in connection with the Merger and also to prescribe certain
conditions to the Merger.
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants and agreements contained herein, and intending to be legally bound
hereby, the parties agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
1.01. Certain Definitions. As used in this Agreement, the following terms
shall have the meanings set forth below:
"1999 Plan" shall have the meaning set forth in Section 3.07(c)(i).
"2000 Plan" shall have the meaning set forth in Section 3.07(c)(ii).
"Acquisition Proposal" shall mean any of the following (other than with
Nortel Networks or any Subsidiary or other affiliate of Nortel Networks) (a) a
merger or consolidation, or any similar transaction, involving the Company
(other than mergers, consolidations or similar transactions involving solely the
Company and/or one or more wholly owned Subsidiaries of the Company or mergers,
consolidations or similar transactions in connection with which holders of
Company Common Stock prior to such transactions continue to hold at least 80% of
the outstanding shares of Company Common Stock after such transaction), (b) a
direct or indirect purchase or other acquisition (including by way of merger,
consolidation, share exchange, tender or exchange offer involving any Subsidiary
of the Company or securities issued by any Subsidiary of the Company, as the
case may be) of assets having a fair market value of greater than 20% of the
fair market value of the consolidated assets of the Company and its
Subsidiaries, (c) a purchase or other acquisition (including by way of merger,
consolidation, share exchange, tender or exchange offer or otherwise) of
beneficial ownership of securities representing more than 20% of the voting
power of the Company, (d) any transaction substantially similar to the
transactions described in clauses '(a)" through "(c)" of this paragraph, or (e)
any offer, proposal or publicly
A-4
<PAGE> 161
announced bona fide intention to make an offer with respect to any of the
foregoing; in each case other than the transactions contemplated by this
Agreement.
"Agreement" shall have the meaning set forth in the first paragraph of this
Agreement.
"August 16 Offering" shall have the meaning set forth in Section 3.07(d).
"Business Day" shall mean each day on which banking institutions in both of
Toronto, Canada and New York, New York are not authorized or required to close.
"Canadian GAAP" shall mean Canadian generally accepted accounting
principles.
"Capitalization Date" shall have the meaning set forth in Section 5.01(b).
"Code" shall mean the U.S. Internal Revenue Code of 1986, as amended.
"Company" shall have the meaning set forth in the first paragraph of this
Agreement.
"Company Affiliate" shall have the meaning set forth in Section 6.07(a).
"Company Board" shall mean the Board of Directors of the Company.
"Company Certificate" shall mean the Amended and Restated Certificate of
Incorporation of the Company, as amended.
"Company Common Stock" shall have the meaning set forth in Section 3.01(b).
"Company Disclosure Schedule" shall have the meaning set forth in the
opening paragraph of Section 5.01.
"Company Employees" shall have the meaning set forth in Section 6.12(b).
"Company Equity Interests" shall have the meaning set forth in Section
5.01(c).
"Company Filed SEC Documents" shall have the meaning set forth in Section
5.01(g).
"Company Financial Advisor" shall mean Lehman Brothers Inc.
"Company Intellectual Property Rights" shall have the meaning set forth in
Section 5.01(p).
"Company Meeting" shall have the meaning set forth in Section 6.02.
"Company Plan" shall mean any Plan entered into or currently maintained,
sponsored, or contributed to by the Company or any of its Subsidiaries or to
which the Company or any such Subsidiary has any obligation to contribute or
with respect to which the Company or any of its Subsidiaries may have any
material liability.
"Company Preferred Stock" shall have the meaning set forth in Section
5.01(b).
"Company Proxy Statement" shall have the meaning set forth in Section
6.03(a).
"Company Purchase Right" shall have the meaning set forth in Section
3.07(d).
"Company SEC Documents" shall have the meaning set forth in Section
5.01(g).
"Company Stock Option Arrangements" shall have the meaning set forth in
Section 3.07(a).
"Company Stock Option Plans" shall have the meaning set forth in Section
3.07(a).
"Company Stock Options" shall have the meaning set forth in Section
3.07(a).
"Company Stock Purchase Plan" shall have the meaning set forth in Section
3.07(d).
"Confidentiality Agreement" shall mean that certain confidentiality
agreement, dated May 26, 2000, by and between the Company and Nortel Networks.
"Continuation Period" shall have the meaning set forth in Section 6.12(a).
A-5
<PAGE> 162
"Copyrights" shall have the meaning set forth in the definition of
Intellectual Property Rights.
"Costs" shall have the meaning set forth in Section 6.11(a).
"Deloitte" shall have the meaning set forth in Section 6.13.
"Deloitte San Jose" shall have the meaning set forth in Section 6.13.
"DGCL" shall mean the General Corporation Law of the State of Delaware.
"Effective Date" shall have the meaning set forth in Section 2.02.
"Effective Time" shall have the meaning set forth in Section 2.02.
"Employee Option Pool" shall have the meaning set forth in Section 3.07(c).
"Environmental Laws" shall have the meaning set forth in Section 5.01(o).
"ERISA" shall mean the U.S. Employee Retirement Income Security Act of
1974, as amended, and the regulations promulgated thereunder and published
interpretations of any Governmental Authority with respect thereto.
"Exchange Act" shall mean the U.S. Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"Exchange Agent" shall have the meaning set forth in Section 3.05(a).
"Exchange Fund" shall have the meaning set forth in Section 3.05(a).
"Exchange Ratio" shall mean 1.83148, subject to adjustment as set forth in
Section 3.06.
"Executive Option Pool" shall have the meaning set forth in Section
3.07(c).
"Exon-Florio" shall have the meaning set forth in Section 5.01(r).
"February 16 Offering" shall have the meaning set forth in Section 3.07(d).
"Governmental Authority" means any court, administrative agency or
commission or other foreign or domestic federal, state, provincial or local
governmental authority or instrumentality.
"HSR Act" shall have the meaning set forth in Section 5.01(r).
"Indemnified Party" shall have the meaning set forth in Section 6.11(a).
"Insurance Amount" shall have the meaning set forth in Section 6.11(b).
"Intellectual Property Rights" shall mean all proprietary and intellectual
property rights, in any jurisdiction, whether owned or held for use under
license, including such rights in and to: (A) trademarks, service marks, brand
names, trade dress, trade names, words, symbols, color schemes, Internet domain
names and other indications of origin ("TRADEMARKS"); (B) patents and pending
and filed patent applications (including all provisional, divisional,
continuation in part and reissue patents) (together, "PATENTS"), inventors'
certificates and invention disclosures; (C) trade secrets and other confidential
or non-public business information, including ideas, formulas, compositions,
discoveries and improvements, know-how, manufacturing and production processes
and techniques, and research and development information; drawings,
specifications, plans, proposals and technical data; analytical models,
investment and lending strategies and records, financial and other products;
financial, marketing and business data, pricing and cost information; business
and marketing plans and customer and supplier lists and information; in each
case whether patentable, copyrightable or not ("TRADE SECRETS"); (D) computer
programs and databases, including all object code, source code, algorithms,
subroutines, specifications, and documentation in each case whether patentable,
copyrightable or not (collectively, "SOFTWARE"), and all documenta-
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tion therefor; (E) writings and other works of authorship, including marketing
materials, brochures, training materials, including all copyrights and moral
rights related to each of the foregoing ("COPYRIGHTS"); (F) mask works; (G)
rights to limit the use or disclosure of confidential information by any Person;
in each case including all registrations of, and applications to register, any
of the foregoing with any Governmental Authority and any renewals or extensions
thereof; the goodwill associated with each of the foregoing; and any claims or
causes of action or defenses arising out of or related to any of the foregoing.
"Knowledge" with respect to a party shall mean to the actual knowledge of
its senior executive officers after reasonable inquiry.
"Liens" shall mean any charge, mortgage, pledge, security interest,
restriction, claim, lien, or encumbrance.
"Material Adverse Effect" shall mean with respect to any party, any change,
circumstance or effect that (i) is or is reasonably likely to be materially
adverse to the business, condition (financial or otherwise) or results of
operations of such party and its Subsidiaries taken as a whole, other than any
change, circumstance or effect that results from or arises out of (a) changes in
the economy in general or (b) changes or circumstances affecting the industries
in which such party operates, which change, circumstance or effect (in the case
of clause (b)) does not affect the Company or Nortel Networks, as the case may
be, disproportionately relative to other entities operating in such industry;
provided, that any change, circumstance or effect that arises directly out of or
results directly from (x) the announcement or pendency of this Agreement
(including delays or cancellations in customer orders, a reduction in sales, a
disruption in supplier, distribution or similar relationships or a loss of
employees) or (y) any action or inaction taken by the Company at the written
request of Nortel Networks shall not by itself be deemed to constitute a
Material Adverse Effect; and provided further, that a reduction in sales by the
Company or its Subsidiaries to Lucent Technologies, Inc. shall not be taken into
account in determining the existence of a Material Adverse Effect; or (ii) would
materially impair the ability of Nortel Networks or the Company, as the case may
be, to perform its obligations under this Agreement.
"Material Systems" shall mean, with respect to any person, all internal
computer systems, communications systems, embedded manufacturing systems and
facilities infrastructure systems that are material to the business, finances
and operations of such person.
"Merger" shall have the meaning set forth in the recitals to this
Agreement.
"NASD" shall mean the National Association of Securities Dealers, Inc. or,
if the context so requires, The Nasdaq Stock Market, Inc.
"New Certificates" shall have the meaning set forth in Section 3.05(a).
"Nortel Networks" shall have the meaning set forth in the first paragraph
of this Agreement.
"Nortel Networks Board" shall mean the Board of Directors of Nortel
Networks.
"Nortel Networks Common Shares" shall have the meaning set forth in Section
3.01(b).
"Nortel Networks Plans" shall have the meaning set forth in Section
6.12(b).
"Nortel Networks SEC Documents" shall have the meaning set forth in Section
5.02(f).
"NYSE" shall mean the New York Stock Exchange, Inc.
"Old Certificates" shall have the meaning set forth in Section 3.05(a).
"Other Company Option Agreements" shall have the meaning set forth in
Section 3.07(a).
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"Outstanding Offerings" shall have the meaning set forth in Section
3.07(d).
"Patents" shall have the meaning set forth in the definition of
Intellectual Property Rights.
"Person" or "person" shall mean any individual, bank, corporation, limited
liability company, partnership, association, joint-stock company, business trust
or unincorporated organization.
"Plan" shall mean any "employee benefit plan", within the meaning of
Section 3(3) of ERISA, whether or not subject to ERISA, and any employment,
consulting, termination, severance, retention, change in control, deferred or
incentive compensation, bonus, stock option or other equity based, vacation or
other fringe benefit plan, program, policy, arrangement, agreement or
commitment.
"Registration Statement" shall have the meaning set forth in Section
6.03(a).
"Regulatory Law" shall mean the Sherman Act, as amended, the Clayton Act,
as amended, the HSR Act, the Federal Trade Commission Act, as amended, and all
other federal, state and foreign, if any, statutes, rules, regulations, orders,
decrees, administrative and judicial doctrines and other laws that are designed
or intended to prohibit, restrict or regulate actions having the purpose or
effect of monopolization or restraint of trade or lessening of competition
through merger or acquisition.
"Rights" shall mean, with respect to any person, securities or obligations
convertible into or exercisable or exchangeable for, or giving any person any
right to subscribe for or acquire, or any options, calls or commitments relating
to, or any stock appreciation right or other instrument the value of which is
determined in whole or in part by reference to the market price or value of,
shares of capital stock of such person.
"SEC" shall mean the United States Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Software" shall have the meaning set forth in the definition of
Intellectual Property Rights.
"Stockholder Agreements" shall mean the agreements defined as such in the
recitals hereto, as such agreements may from time to time be amended.
"Sub" shall have the meaning set forth in the first paragraph of this
Agreement.
"Sub Common Stock" shall have the meaning set forth in Section 3.01(a).
"Subsidiary" and "Significant Subsidiary" shall have the meanings ascribed
to them in Rule 1-02 of Regulation S-X of the SEC.
"Superior Proposal" shall have the meaning set forth in Section 6.06(a).
"Surviving Corporation" shall mean the Company, as the surviving
corporation in the Merger.
"Takeover Laws" shall have the meaning set forth in Section 5.01(m).
"Tax Returns" shall have the meaning set forth in Section 5.01(q).
"Taxes" shall mean all taxes, charges, fees, levies or other assessments,
however denominated, including, without limitation, all net income, gross
income, gross receipts, sales, use, ad valorem, goods and services, capital,
transfer, franchise, profits, license, withholding, payroll, employment,
employer health, excise, estimated, severance, stamp, occupation, property or
other taxes, custom duties, fees, assessments or charges of any kind whatsoever,
together with any interest and any penalties, additions to tax or additional
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amounts imposed by any taxing authority whether arising before, on or after the
Effective Date.
"Termination Fee" shall have the meaning set forth in Section 8.02(b).
"Trade Secrets" shall have the meaning set forth in the definition of
Intellectual Property Rights.
"Trademarks" shall have the meaning set forth in the definition of
Intellectual Property Rights.
"Trading Day" shall mean any day on which the NYSE is open for trading.
"Treasury Shares" shall mean shares of the Company Common Stock held by the
Company or any of its Subsidiaries.
"TSE" shall mean The Toronto Stock Exchange.
"U.S. GAAP" shall mean United States generally accepted accounting
principles.
"Year 2000 Compliant" shall have the meaning set forth in Section 5.01(t).
"$" shall mean United States Dollar.
ARTICLE II
THE MERGER; EFFECTS OF THE MERGER
2.01. The Merger. (a) Surviving Corporation. Upon the terms and subject
to the conditions set forth in this Agreement, and in accordance with the DGCL,
at the Effective Time, Sub will merge with and into the Company pursuant to the
Merger. Following the Effective Time, the separate corporate existence of Sub
shall cease and the Company shall survive and continue to exist as a Delaware
corporation.
(b) Effectiveness and Effects of the Merger. Subject to the satisfaction
or waiver of the conditions set forth in Article VII in accordance with this
Agreement, the Merger shall become effective upon the occurrence of the filing
in the office of the Secretary of State of the State of Delaware of a
certificate of merger in accordance with Section 251 of the DGCL, or such later
date and time as may be set forth in such certificate with the consent of Nortel
Networks and the Company. The Merger shall have the effects prescribed in the
DGCL. Without limiting the generality of the foregoing, and subject thereto, at
the Effective Time all the property, rights, privileges, powers and franchises
of the Company and Sub shall be vested in the Surviving Corporation, and all
debts, liabilities and duties of the Company and Sub shall become the debts,
liabilities and duties of the Surviving Corporation.
(c) Certificate of Incorporation and By-Laws. The certificate of
incorporation and bylaws of Sub, as in effect immediately prior to the Effective
Time, but with Article 1 of the certificate of incorporation amended to read:
"The name of the Corporation is Alteon WebSystems, Inc.," shall be those of the
Surviving Corporation until thereafter changed or amended as provided therein or
by applicable law.
(d) Name. The name of the Surviving Corporation shall remain "Alteon
WebSystems, Inc."
(e) Officers and Directors of Surviving Corporation. The officers of the
Company as of the Effective Time shall be the officers of the Surviving
Corporation, until the earlier of their resignation or removal or otherwise
ceasing to be an officer or until their respective successors are duly elected
and qualified, as the case may be. The directors of Sub as of the Effective Time
shall be the directors of the Surviving Corporation until the earlier of their
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resignation or removal or otherwise ceasing to be a director or until their
respective successors are duly elected and qualified, as the case may be.
2.02. Effective Date and Effective Time. Subject to the satisfaction or
waiver (subject to applicable law) of the conditions set forth in Article VII in
accordance with this Agreement, the parties shall cause the effective date of
the Merger (the "EFFECTIVE DATE") to occur on (i) the second Business Day to
occur after the last of the conditions set forth in Section 7.01 shall have been
satisfied or waived in accordance with the terms of this Agreement or (ii) such
other date to which the parties may agree in writing. The time on the Effective
Date when the Merger shall become effective is referred to as the "EFFECTIVE
TIME."
2.03. Tax Consequences. It is intended that the Merger shall qualify as a
reorganization under Section 368(a) of the Code.
ARTICLE III
CONVERSION OF SHARES; EXCHANGE PROCEDURES
3.01. Conversion of Shares. Subject to the provisions of this Agreement,
at the Effective Time, automatically by virtue of the Merger and without any
action on the part of any party or stockholder:
(a) Conversion of Sub Common Stock. Each share of common stock of
Sub, par value $0.001 per share (the "SUB COMMON STOCK"), issued and
outstanding immediately prior to the Effective Time, shall be converted
into one newly issued, fully-paid and non-assessable share of preferred
stock, $0.001 par value, of the Surviving Corporation, pursuant to a
Certificate of Designations proposed by Nortel Networks and approved by the
Company, such approval not to be unreasonably withheld or delayed.
(b) Conversion of Company Common Stock. Subject to Section 3.04,
each share of common stock, par value $0.001 per share, of the Company (the
"COMPANY COMMON STOCK") issued and outstanding immediately prior to the
Effective Time (other than shares of Company Common Stock to be canceled
pursuant to Section 3.01(c)) shall become and be converted into a number of
common shares, without par value, of Nortel Networks ("NORTEL NETWORKS
COMMON SHARES"), equal to the Exchange Ratio. All of the shares of Company
Common Stock converted into Nortel Networks Common Shares (or cash pursuant
to Section 3.04) pursuant to this Article III shall no longer be
outstanding and shall automatically be canceled and shall cease to exist as
of the Effective Time.
(c) Treasury Shares. Each share of Company Common Stock held by the
Company or any wholly owned Subsidiary of the Company as Treasury Shares
immediately prior to the Effective Time or owned by Nortel Networks or any
Subsidiary thereof shall no longer be outstanding and shall automatically
be canceled and retired at the Effective Time and no consideration shall be
issued in exchange therefor.
3.02. Issuance of Shares of the Surviving Corporation. At the Effective
Time, in consideration of the issuance by Nortel Networks of Nortel Networks
Common Shares to the holders of Company Common Stock in accordance with Section
3.01(b), the Surviving Corporation shall issue to Nortel Networks a number of
shares of newly issued, fully-paid and non-assessable common stock, $0.001 par
value, of the Surviving Corporation, which number shall be equal to the number
of shares of Company Common Stock outstanding as of immediately prior to the
Effective Time.
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3.03. Rights as Stockholders; Stock Transfers. At the Effective Time,
holders of Company Common Stock shall cease to be, and shall have no rights as,
stockholders of the Company, other than the right to receive any dividend or
other distribution with respect to such Company Common Stock with a record date
occurring prior to the Effective Time and the consideration provided under this
Article III. After the Effective Time, there shall be no transfers on the stock
transfer books of the Company or the Surviving Corporation of shares of Company
Common Stock.
3.04. Fractional Shares. Notwithstanding any other provision hereof, no
fractional Nortel Networks Common Shares and no certificates or scrip therefor,
or other evidence of ownership thereof, will be issued in the Merger; instead,
Nortel Networks shall pay to each holder of Company Common Stock who would
otherwise be entitled to a fractional share of Nortel Networks Common Shares
(after taking into account all Old Certificates delivered by such holder) an
amount (in U.S. dollars) in cash (without interest) determined by multiplying
such fraction by the volume weighted average of the last sale price of Nortel
Networks Common Shares on the NYSE (as reported in the three star New York City
edition of the Wall Street Journal (for trading during regular trading hours,
not extended trading)) for the five Trading Days immediately preceding the
Effective Date. As promptly as practicable after the determination of the amount
of cash, if any, to be paid to holders of fractional interests, Nortel Networks
shall so notify the Exchange Agent, and Nortel Networks shall cause the
Surviving Corporation to deposit such amount with the Exchange Agent and shall
cause the Exchange Agent to forward payments to such holders of fractional
interests subject to and in accordance with the terms hereof.
3.05. Exchange Procedures. (a) At or prior to the Effective Time, Nortel
Networks shall deposit, or shall cause to be deposited, with a bank or trust
company having (or whose parent has) net capital of not less than $100,000,000
(the "EXCHANGE AGENT"), for the benefit of the holders of certificates formerly
representing shares of Company Common Stock ("OLD CERTIFICATES"), for exchange
in accordance with this Article III, certificates representing the Nortel
Networks Common Shares ("NEW CERTIFICATES") and an estimated amount of cash
pursuant to Section 3.04 (such cash and New Certificates (without any interest
on any such cash), being hereinafter referred to as the "EXCHANGE FUND") to be
paid pursuant to this Article III in exchange for outstanding shares of Company
Common Stock.
(b) As promptly as practicable after the Effective Date, Nortel Networks
shall send or cause the Exchange Agent to send or cause to be sent to each
former holder of record of shares (other than Treasury Shares) of Company Common
Stock immediately prior to the Effective Time transmittal materials for use in
exchanging such stockholder's Old Certificates for the consideration set forth
in this Article III. Nortel Networks shall cause the New Certificates
representing Nortel Networks Common Shares into which shares of a stockholder's
Company Common Stock are converted at the Effective Time and/or any check in
respect of any fractional share interests or dividends or distributions which
such person shall be entitled to receive pursuant to this Article III, to be
delivered to such stockholder upon delivery to the Exchange Agent of Old
Certificates representing such shares of Company Common Stock (or, pursuant to
Section 3.05(f), a surety bond reasonably satisfactory to Nortel Networks and
the Exchange Agent, if any of such certificates are lost, stolen or destroyed)
owned by such stockholder. No interest will be paid on any such cash to be paid
in lieu of fractional share interests or in respect of dividends or
distributions which any such person shall be entitled to receive pursuant to
this Article III upon such delivery.
(c) Notwithstanding the foregoing, neither the Exchange Agent nor any
party hereto shall be liable to any former holder of Company Common Stock for
any amount properly
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delivered to a public official pursuant to applicable abandoned property,
escheat or similar laws.
(d) No dividends or other distributions with respect to Nortel Networks
Common Shares with a record date occurring after the Effective Time shall be
paid to the holder of any unsurrendered Old Certificate representing shares of
Company Common Stock converted in the Merger into Nortel Networks Common Shares
and cash in lieu of fractional Nortel Networks Common Shares pursuant to Section
3.04, until the holder thereof shall be entitled to receive New Certificates and
such amount of cash in exchange therefor in accordance with this Article III.
After becoming so entitled in accordance with this Article III, the record
holder thereof also shall be entitled to receive any such dividends or other
distributions, without any interest thereon, which theretofore had become
payable with respect to Nortel Networks Common Shares such holder had the right
to receive upon surrender of the Old Certificate, and payment thereof shall be
made promptly following the later of (i) the date on which such holder shall
become entitled to receive New Certificates and (ii) the payment date with
respect to such dividend or other distribution.
(e) Any portion of the Exchange Fund that remains unclaimed by the
stockholders of the Company for one year after the Effective Time shall, upon
demand by Nortel Networks, be paid or delivered to Nortel Networks. Any
stockholders of the Company who have not theretofore complied with this Article
III shall thereafter look only to Nortel Networks for payment of the Nortel
Networks Common Shares, cash in lieu of any fractional shares and unpaid
dividends and distributions on the Nortel Networks Common Shares deliverable in
respect of each share of Company Common Stock such stockholder holds, as
determined pursuant to this Agreement, in each case, without any interest
thereon.
(f) If any Old Certificate shall have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming such Old
Certificate to be lost, stolen or destroyed and the posting by such person of a
bond in such reasonable amount as Nortel Networks may direct as indemnity
against any claim that may be made against it or the Surviving Corporation with
respect to such Old Certificate, Nortel Networks shall, in exchange for such
lost, stolen or destroyed Old Certificate, deliver or cause the Exchange Agent
to deliver a New Certificate in respect thereof pursuant to this Article III.
3.06. Anti-Dilution Provisions. In the event Nortel Networks or the
Company (with Nortel Networks' consent) changes (or establishes a record date
for changing) the number or classes of Nortel Networks Common Shares or the
number or classes of shares of Company Common Stock issued and outstanding prior
to the Effective Time as a result of a stock split, stock dividend,
recapitalization, subdivision, reclassification, combination, exchange of shares
or similar transaction with respect to the outstanding Nortel Networks Common
Shares or the outstanding Company Common Stock then (a) if the record and
payment dates therefor shall be prior to the Effective Time, the Exchange Ratio
shall be proportionately adjusted to reflect such stock split, stock dividend,
recapitalization, subdivision, reclassification, combination, exchange of shares
or similar transaction; and (b) if the record date therefor shall be prior to
the Effective Time but the payment date therefor shall be subsequent to the
Effective Time, Nortel Networks shall take such action as shall be required so
that on such payment date any former holder of Old Certificates who shall have
received or become entitled to receive New Certificates pursuant to this Article
III shall be entitled to receive such additional Nortel Networks Common Shares
as such holder would have received as a result of such event if the record date
therefor had been immediately after the Effective Time.
3.07. Stock Options and Other Stock Plans. (a) Effective at the
Effective Time, each option to purchase shares of Company Common Stock
(collectively, the "COMPANY STOCK
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OPTIONS") granted to employees or directors of, or consultants or advisors to,
the Company or any Subsidiary thereof pursuant to the terms of the 1999 Equity
Incentive Plan, the 2000 Nonstatutory Equity Incentive Plan and the 2000 Equity
Incentive Plan of Pharsalia Technologies, Inc. (collectively, the "COMPANY STOCK
OPTION PLANS") or granted to employees pursuant to a separate stock option
agreement listed on Section 3.07 of the Company Disclosure Schedule
(collectively, the "OTHER COMPANY OPTION AGREEMENTS" and, together with the
Company Stock Option Plans, the "COMPANY STOCK OPTION ARRANGEMENTS") that is
outstanding immediately prior to the Effective Time shall be assumed by Nortel
Networks and deemed to constitute an option to acquire, on the same terms and
conditions (including such terms relating to the vesting and exercisability of
the Company Stock Options and terms relating to adjustments for any stock
dividend, subdivision, reclassification, recapitalization, split, combination,
exchange of shares or similar transaction following such assumption) as were
applicable under such Company Stock Option immediately prior to the Effective
Time, the number of Nortel Networks Common Shares (rounded down to the greatest
number of whole Nortel Networks Common Shares) that is equal to the product of
(i) the number of shares of Company Common Stock covered by such Company Stock
Option immediately prior to the Effective Time multiplied by (ii) the Exchange
Ratio, at an option exercise price per share of Nortel Networks Common Shares
(rounded up to the nearest whole cent) equal to the quotient of (iii) the option
exercise price per share of Company Common Stock covered by such Company Stock
Option immediately prior to the Effective Time divided by (iv) the Exchange
Ratio. The date of grant of each such Company Stock Option shall be the date on
which such Company Stock Option was originally granted. As soon as reasonably
practicable following the Effective Date, Nortel Networks shall cause to be
delivered to each holder of a Company Stock Option that has been assumed by
Nortel Networks pursuant to this Section 3.07 a notice (x) stating that such
Company Stock Option has been converted into an option to purchase Nortel
Networks Common Shares, (y) stating that such Company Stock Option has been
assumed by Nortel Networks and shall continue in effect subject to all of the
terms and conditions applicable thereto immediately prior to the Effective Time
and (z) setting forth the number of Nortel Networks Common Shares covered by
such Company Stock Option and the per share option exercise price for such
Nortel Networks Common Shares. From and after the Effective Time, Nortel
Networks and the Surviving Corporation shall comply with the terms of each
Company Stock Option Arrangement pursuant to which the Company Stock Options
were granted; provided, that (i) the board of directors of Nortel Networks or an
authorized committee thereof shall succeed to the authorities and
responsibilities of the Company Board or any committee thereof under the Company
Stock Option Arrangements and (ii) the terms of the Company Stock Option
Arrangements shall be amended as necessary to reflect the assumption of the
Company Stock Options contemplated hereunder. Notwithstanding the foregoing, the
adjustments provided herein with respect to any Company Stock Options that are
"incentive stock options" (as defined in Section 422 of the Code) shall be
effected in a manner consistent with Section 424(a) of the Code.
(b) Prior to the Effective Date, the Company shall take all necessary or
appropriate action (including amending any of the Company Stock Option
Arrangements or making adjustments as permitted thereby) to (i) effectuate the
assumption and conversion of the Company Stock Options by Nortel Networks and
the assignment to Nortel Networks of the authorities and responsibilities of the
Company Board or any committee thereof under the Company Stock Option
Arrangements, (ii) except as specifically provided in Section 3.07(c) herein,
preclude the grant of any additional Company Stock Options under any of the
Company Stock Option Arrangements or otherwise, (iii) accelerate the vesting of
the Company Stock Options granted to the Non-Employee Directors under the 1999
Equity
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Incentive Plan (it being understood that the Company shall not amend or change
in any way the acceleration of vesting of the Common Stock Options of any other
option holder under any of the Company Stock Option Arrangements without the
express consent of Nortel Networks) and (iv) make such other amendments as
Nortel Networks shall reasonably determine are necessary to comply with Canadian
securities laws or TSE rules or policies that will become applicable to such
Company Stock Option Arrangements at the Effective Time or otherwise by reason
of the Merger.
(c) As soon as practicable after the execution hereof, the Company shall
establish two option pools (the "EXECUTIVE OPTION POOL" and the "EMPLOYEE OPTION
POOL") in order to grant Company Stock Options to certain executives, key
employees and new hires during the period from the date hereof to the Effective
Time under the terms and conditions set forth in this Section 3.07(c). The
Executive Option Pool shall consist of an aggregate of 480,000 shares of Company
Common Stock and the Employee Option Pool shall consist of an aggregate of
500,000 shares of Company Common Stock. In no event shall the Company grant any
Company Stock Options that are reload options or which include the ability to
exercise through the use of promissory notes or any stock appreciation rights,
restricted stock, stock bonus or any type of synthetic stock option features nor
shall the Company grant any Company Stock Options in excess of the amounts
reserved in the two option pools described above without the express consent of
Nortel Networks. The Company shall promptly notify Nortel Networks of the grant
of Company Common Options hereunder and provide Nortel Networks with reasonable
details of each grant, including without limitation, name of employee, number of
shares granted, exercise price and confirmation of the appropriate vesting
schedule.
(i) Executive Option Pool. After the date hereof, but prior to the
Effective Time, the Company shall take all necessary actions to grant
Company Stock Options from the Executive Option Pool to the key executives
listed on Section 3.07(c)(i) of the Company Disclosure Schedule for the
number of shares of Company Common Stock listed opposite each such
executive's name on such disclosure schedule. All Company Stock Options
granted in respect of the Executive Option Pool shall (A) be granted under
and, except as provided herein, be subject to the terms and conditions of,
the Company 1999 Equity Incentive Plan (the "1999 PLAN"), (B) have an
exercise price equal to the Fair Market Value (as defined in the 1999 Plan)
of the shares of Company Common Stock on the date of grant, (C) vest in two
equal installments on the second and third anniversaries of the Effective
Time, provided such executive is employed with the Company or its successor
on each such anniversary and (D) not be subject to any acceleration of
vesting upon the consummation of the transactions contemplated hereunder.
(ii) Employee Option Pool. From the date hereof to the Effective
Time, the Company may grant Company Stock Options from the Employee Option
Pool to persons identified as key employees of the Company and to
newly-hired employees of the Company, in each case, who are not officers of
the Company. All Company Stock Options granted in respect of the Employee
Option Pool shall (A) be granted under, and except as provided herein, be
subject to the terms and conditions of, the Company 2000 Nonstatutory
Equity Incentive Plan (the "2000 PLAN"), (B) have an exercise price equal
to the Fair Market Value (as defined in the 2000 Plan) of the shares of
Company Common Stock on the date of grant and (C) vest as follows:
twenty-five percent on the first anniversary of the grant date and 1/48 on
each one-month anniversary thereafter, provided such employee is employed
with the Company or its successor on each such anniversary.
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(d) Effective at the Effective Time, each right to purchase shares of
Company Common Stock ("COMPANY PURCHASE RIGHT") granted to employees of the
Company or any Subsidiary thereof pursuant to the Company's 1999 Employee Stock
Purchase Plan and the Company Employee Stock Purchase Plan Offering, as amended
effective February 16, 2000 (the "COMPANY STOCK PURCHASE PLAN"), and the Initial
Offering (as defined in the Company Stock Purchase Plan) and the offering that
commenced on February 16, 2000, (the "FEBRUARY 16 OFFERING"), and one additional
six-month offering commencing on August 16, 2000 (the "AUGUST 16 OFFERING"
together with the Initial Offering and the February 16 Offering referred to
herein as the "OUTSTANDING OFFERINGS") shall be assumed by Nortel Networks. By
virtue of the Merger, each Company Purchase Right under the Outstanding
Offerings shall be automatically converted into and deemed to constitute a right
to acquire, on the same terms and conditions as were applicable under the
Company Stock Purchase Plan immediately prior to the Effective Time (except as
modified as specifically provided herein), the number of Nortel Networks Common
Shares (rounded down to the nearest whole share) equal to the amount of the
Participant's payroll deductions as of the relevant Purchase Date (as defined in
the Company Stock Purchase Plan) under the Company Stock Purchase Plan divided
by the lesser of (i) eighty-five percent of the fair market value of the Nortel
Networks Common Shares on the relevant Purchase Date under the Outstanding
Offerings (rounded up to the nearest whole cent), or (ii) eighty-five percent of
the fair market value of the Company Common Shares on the Offering Date of the
relevant Outstanding Offering divided by the Exchange Ratio (rounded up to the
nearest whole cent). The Company shall take all necessary actions, including
without limitation amending the Company Stock Purchase Plan, to limit the August
16 Offering to six months, to cancel all offerings other than the August 16
Offering scheduled, contemplated or otherwise required to commence after the
date hereof and to prohibit any employees to begin participation in the
Outstanding Offerings other than the August 16 Offering after the date hereof.
From and after the Effective Time, Nortel Networks and the Surviving Corporation
shall comply with the terms of each Company Purchase Right granted pursuant to
the Company Stock Purchase Plan in respect of the Outstanding Offerings;
provided, that (i) the Board of Directors of Nortel Networks or an authorized
committee thereof shall succeed to the authorities and responsibilities of the
Company Board or any committee thereof under the Company Stock Purchase Plan,
(ii) the terms of the Company Stock Purchase Plan shall be amended to reflect
the assumption of rights and other provisions contemplated hereunder and (iii)
immediately after the final Purchase Date of the Outstanding Offerings, the
Company Stock Purchase Plan shall be terminated. Notwithstanding the foregoing,
the adjustments provided herein with respect to the Company Purchase Rights
granted pursuant to Section 423 of the Code shall be effected in a manner
consistent with Section 424(a) of the Code.
(e) Nortel Networks shall cause to be taken all corporate action necessary
to reserve for issuance a sufficient number of Nortel Networks Common Shares for
delivery upon exercise of Company Stock Options in accordance with this Section
3.07. Within 10 days following the Effective Date, Nortel Networks shall file
with the SEC a registration statement on Form S-8 (or any successor or other
appropriate forms) with respect to the Nortel Networks Common Shares subject to
Company Stock Options and Company Purchase Rights to be registered under the
Securities Act and shall use its reasonable efforts to cause the effectiveness
of such registration statement (and current status of the prospectus or
prospectuses contained therein) to be maintained for so long as Company Stock
Options and Company Purchase Rights remain outstanding.
(f) In consideration of Nortel Networks' agreement set forth in this
Section 3.07 to assume the Company's liabilities pursuant to Company Stock
Options outstanding at the
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Effective Time, the Company hereby agrees to pay Nortel Networks, upon exercise
of the Company's outstanding Company Stock Options after the Effective Time,
amounts sufficient to ensure that Nortel Networks Common Shares are issued to
the optionees on a fully-paid basis (i.e., for total consideration equal to the
fair market value of the Nortel Networks Common Shares issued to optionees on
the date such shares are issued).
(g) Immediately prior to the Effective Time, the Company shall assign to
Nortel Networks any rights to repurchase (or similar rights) with respect to
those shares of Company Common Stock issued to former stockholders of Pharsalia
Technologies, Inc., pursuant to that Exchange Agreement, dated as of March 31,
2000, by and between the Company, Pharsalia Technologies, Inc., and the Key
Stockholder (as defined therein).
ARTICLE IV
ACTIONS PENDING MERGER
4.01. Forbearances of the Company. From the date hereof until the
Effective Time, except as expressly contemplated by this Agreement, or as set
forth in Section 4.01 of the Company's Disclosure Schedule, or except as
expressly consented to in writing by Nortel Networks, the Company will not, and
will cause each of its Subsidiaries not to:
(a) Ordinary Course. Conduct its business and the business of its
Subsidiaries other than in the ordinary and usual course in all material
respects and in material compliance with applicable laws and regulations
or, to the extent consistent therewith, fail to use reasonable efforts to
preserve intact their business organizations and assets and maintain their
rights, franchises and existing relations with customers, suppliers,
employees and business associates, or take any action that would adversely
affect its ability to perform any of its material obligations under this
Agreement in any material respect; provided, however, that no action by the
Company or its Subsidiaries with respect to matters specifically addressed
by any other provision of this Section 4.01 shall be deemed a breach of
this Section 4.01(a) unless such action would constitute a breach of one or
more of such other provisions.
(b) Capital Stock. (i) Issue, sell, pledge, dispose of or encumber,
or authorize or propose the issuance, sale, pledge, disposition or
encumbrance of, any shares of its capital stock or any Rights, (ii) enter
into any agreement with respect to the foregoing or (iii) permit any
additional shares of capital stock to become subject to new grants of
employee or director stock options, other Rights or similar stock-based
employee rights, other than (x) the issuance of Company Common Stock upon
the exercise of stock options outstanding as of the date hereof or granted
in accordance with Section 3.07(c) in accordance with the terms of the
Company Stock Option Arrangements as in effect on the date of this
Agreement, (y) issuances by a wholly owned Subsidiary of the Company of
capital stock to such Subsidiary's parent and (z) issuances to comply with
the Company's obligation under the Company Stock Purchase Plan.
(c) Dividends, Etc. (i) Make, declare, pay or set aside for payment
any dividend (other than dividends from the Company's Subsidiaries to the
Company or another Subsidiary of the Company) on or in respect of, or
declare or make any distribution on any shares of its capital stock or (ii)
except for any such transaction by a wholly owned Subsidiary of the Company
which remains a wholly owned Subsidiary after consummation of such
transaction and except for repurchases from employees pursuant to
restricted stock purchase or similar agreements in effect as of the date of
this Agreement, directly or indirectly adjust, split, combine, redeem,
reclassify, purchase,
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repurchase or otherwise acquire, any shares of the capital stock of the
Company or any of its Subsidiaries.
(d) Compensation; Employment Agreements; Etc. Enter into or amend
any employment, consulting, severance, retention, change in control or
similar agreements or arrangements with any of its or its Subsidiaries'
directors, officers, employees or consultants or former directors,
officers, employees or consultants, or grant any salary, wage or other
compensation increase, make any award or grant under any Plan or increase
or modify any employee benefit (including any incentive or bonus payments
or perquisite), except for (i) increases in annual salary or hourly wage
rates granted to current employees (other than officers) in the ordinary
course of business, consistent with past practice, (ii) the payment of
bonuses to employees in an aggregate amount not to exceed $50,000 per
month, (iii) the retention of consultants whose fees and expenses do not
exceed $3,000,000 in the aggregate per quarter (provided, that such
consultants shall not be issued any equity securities or the right to
acquire equity securities of the Company), (iv) the payment of signing
bonuses to new employees not in excess of $15,000 per employee and (v)
changes required to be implemented in accordance with the current terms of
any Company Plan set forth in Section 4.01 of the Company's Disclosure
Schedule.
(e) Benefit Plans. Enter into, adopt, implement or amend in any
material respect (except to the extent required to comply with applicable
law) any Plan (other than routine Company policies that do not involve the
incurrence by the Company of any liability in excess of $500,000 in the
aggregate).
(f) Acquisitions and Dispositions. Acquire all or any portion of the
assets, business or properties of any other entity (other than the
acquisition of inventory, equipment, raw materials or other supplies in the
ordinary course of business, consistent with past practices) or, other than
the sale of products or equipment or the disposition of financial
instruments for purposes of cash management in the ordinary course of
business, consistent with past practices, sell, transfer, mortgage,
encumber or otherwise dispose of or discontinue any portion of its assets,
business or properties or agree to enter into any merger, reorganization,
share exchange, business combination or similar transaction pursuant to
which shareholders of the Company would receive any consideration in
exchange for or in addition to their existing shares of Company Common
Stock, it being understood, in each case, that Nortel Networks shall have a
reasonable opportunity to consult with the Company in connection with the
structuring, negotiation and documentation of any such transaction.
(g) Amendments. Amend the Company Certificate or the Company's
bylaws.
(h) Accounting Methods. Implement or adopt any material change in
its accounting principles, practices or methods, other than as may be
required by U.S. GAAP or SEC regulation.
(i) Contracts. Except in the ordinary course of business or in
accordance with clause "(iii)" of Section 4.01(d), (A) enter into or
terminate any contract, agreement or lease potentially involving payments
or delivery of value thereunder by or to the Company or any of its
Subsidiaries in excess of $1,000,000, (B) amend or modify in a material
respect any of its existing contracts, agreements or leases (including any
licensing agreement) involving payments or delivery of value in excess of
$1,000,000 or (C) enter into or amend or modify in a material respect any
non-competition or similar obligation by the Company or Company Affiliates.
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(j) Claims. Except in the ordinary course of business, settle any
claim, action or proceeding to the extent the settlement involves the
payment of money damages in excess of $250,000 in the aggregate or
involving any restrictions or limitations on the Company or the Company's
business.
(k) Adverse Actions. (i) Take any action, or permit any action to be
taken while knowing that such action would, or is reasonably likely to,
prevent or impede the Merger from qualifying as a reorganization within the
meaning of Section 368(a) of the Code; or (ii) knowingly take any action or
permit any action to be taken that is intended or is reasonably likely to
result in (A) any of its representations and warranties set forth in this
Agreement being or becoming untrue in a material respect at any time at or
prior to the Effective Time such that the conditions set forth in Section
7.03(a) would not be satisfied, (B) except as otherwise permitted by
Section 6.06, any of the conditions to the Merger set forth in Article VII
not being satisfied or satisfaction of any such condition being materially
delayed or (C) a violation of any provision of this Agreement except, in
each case, as may be required by applicable federal, state, local and
foreign statutes, laws, regulations, ordinances, rules, judgments, orders
or decrees.
(l) Incurrence of Indebtedness. Other than (i) short-term
indebtedness incurred in the ordinary course of business consistent with
past practice but in no event to exceed an aggregate of $3,000,000 of
short-term indebtedness and (ii) indebtedness of the Company or any of its
Subsidiaries to the Company or any of its Subsidiaries, incur any
indebtedness for borrowed money, assume, guarantee, endorse or otherwise as
an accommodation become responsible for the obligations of any other
individual, corporation or other entity, or make any loan or advance other
than loans or advances (except for loans or advances to purchase Company
Common Stock) to employees, customers or other persons in the ordinary
course of business, consistent with past practices.
(m) Derivatives. Enter into (i) leveraged derivative contracts
(defined as contracts that use a factor to multiply the underlying index
exposure), or (ii) other derivative contracts except for the purpose of
hedging known interest rate and foreign exchange exposures or otherwise
reducing the Company's cost of financing.
(n) Capital Expenditures. Make any capital expenditures in excess of
$1,000,000 in the aggregate in any quarter of the year.
(o) Tax Elections. Make any new or different material Tax election,
or revoke any material Tax election, file any material amended Tax Returns,
settle any material Tax audits or other proceedings, other than in
connection with currently pending proceedings or subsequent related
proceedings, or change in any material respect its method of tax accounting
or tax practice.
(p) Confidentiality Agreements. Waive any confidentiality or
"standstill" provisions entered into with any third party in connection
with its consideration of an Acquisition Proposal.
(q) Agreements. Agree or commit to do anything prohibited by the
above paragraphs (a) through (p).
Within two business days after the execution of this Agreement, Nortel
Networks shall (i) designate a Person who will be solely responsible for
receiving any requests for consent with respect to the matters referred to in
this Section 4.01, and (ii) provide the name of such Person to the Chief
Financial Officer and General Counsel of the Company. Notwithstanding anything
to the contrary in this Section 4.01, if the Company makes a request in writing
to the Person referred to in the preceding sentence seeking Nortel Networks'
consent to any
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action or transaction that is otherwise prohibited by this Section 4.01, and
describing the material terms of such proposed action or transaction, Nortel
Networks shall respond to such request in a reasonably timely fashion after such
request is made.
4.02. Forbearances of Nortel Networks. From the date hereof until the
Effective Time, except as expressly contemplated by this Agreement, without the
prior written consent of the Company, Nortel Networks will not, and will cause
each of its Subsidiaries not to:
(a) Dividends, Etc. (i) Make, declare, pay or set aside for payment
any extraordinary cash dividend or make any other extraordinary
distribution (other than pro rata stock dividends, stock splits or similar
distributions) on or in respect of the Nortel Networks Common Shares.
(b) Adverse Actions. (i) Take any action or permit any action to be
taken while knowing that such action would, or is reasonably likely to,
prevent or impede the Merger from qualifying as a reorganization within the
meaning of Section 368(a) of the Code; or (ii) knowingly take any action or
permit any action to be taken that is intended or is reasonably likely to
result in (A) any of its representations and warranties set forth in this
Agreement being or becoming untrue in a material respect at any time at or
prior to the Effective Time, (B) subject to Section 6.10(d), any of the
conditions to the Merger set forth in Article VII not being satisfied or
satisfaction of any such condition being materially delayed or (C) a
violation of any provision of this Agreement except, in each case, as may
be required by applicable law.
(c) Agreements. Agree or commit to do anything prohibited by the
above paragraphs (a) and (b).
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.01. Representations and Warranties of the Company. Except as set forth
in the Company Filed SEC Documents or in the disclosure schedule delivered by
the Company to Nortel Networks prior to the execution of this Agreement (the
"COMPANY DISCLOSURE SCHEDULE") (each section of which qualifies the
correspondingly numbered representation and warranty or covenant to the extent
specified therein), the Company hereby represents and warrants to each of Nortel
Networks and Sub as follows:
(a) Organization, Standing and Authority. The Company is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware. It is duly qualified to do business and is
in good standing (in jurisdictions which recognize such concept) in the
states of the United States and foreign jurisdictions where its ownership
or leasing of property or assets or the conduct of its business requires it
to be so qualified and it has in effect all federal, state, local and
foreign governmental authorizations necessary for it to own or lease its
properties and assets and to carry on its business as it is now conducted,
except where the failure to be so duly qualified and in good standing or to
have in effect all federal, state, local, and foreign governmental
authorizations does not have, and would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on the Company.
The Company has made available to Nortel Networks a complete and correct
copy of its certificate of incorporation and bylaws, each as amended and in
full force and effect as of the date of this Agreement, and the Company is
not in violation of any provision thereof.
(b) Shares.
(i) The authorized capital stock of the Company consists of (A)
300,000,000 shares of Company Common Stock of which 43,169,417 shares
were outstanding as
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of July 25, 2000 (the "CAPITALIZATION DATE") and (B) 5,000,000 shares of
preferred stock, par value $.001 per share ("COMPANY PREFERRED STOCK"),
of which no shares were issued or outstanding as of the Capitalization
Date. Between the Capitalization Date and the date of this Agreement,
there have been no issuances of shares of the capital stock of the
Company or any other securities of the Company other than issuances of
shares pursuant to Company Stock Options and other Rights outstanding on
the Capitalization Date as set forth in clause (iii) below.
(ii) All issued and outstanding shares of Company Common Stock
have been duly authorized and validly issued, and are fully paid and
nonassessable, and no class of capital stock of the Company is entitled
to preemptive rights.
(iii) There were outstanding at the Capitalization Date except as
set forth in Section 5.01(b)(iii) of the Company Disclosure Schedule no
Rights to acquire capital stock from the Company other than (i) Company
Stock Options representing in the aggregate the right to purchase
10,592,707 shares of Company Common Stock and (ii) Rights granted in
connection with the Company Stock Purchase Plan. Section 5.01(b)(iii) of
the Company Disclosure Schedule also sets forth for all Company Stock
Options outstanding at the Capitalization Date a true and complete list
of the following: their holders, their date of grant, the number of
shares of Company Common Stock for which they are exercisable, their
exercise price as currently in effect, their date of vesting and the
conditions, if any, under which such vesting may accelerate. No Rights
to acquire capital stock from the Company have been issued or granted
since the Capitalization Date.
(c) Subsidiaries.
(i) Section 5.01(c)(i) of the Company Disclosure Schedule sets
forth a list as of the date hereof of all of the Company's Subsidiaries,
together with their jurisdiction of organization. Unless otherwise
described therein, the Company owns, directly or indirectly,
beneficially and of record 100% of the issued and outstanding voting
securities of each such Subsidiary (other than directors' qualifying
shares, if any). No equity securities of any of the Company's
Subsidiaries are or may become required to be issued (other than to the
Company or its wholly owned Subsidiaries) by reason of any Rights and
there are no contracts, commitments, understandings or arrangements by
which any of such Subsidiaries is bound to sell or otherwise transfer
any shares of capital stock of any such Subsidiaries (other than to the
Company or its wholly owned Subsidiaries). There is no corporation,
partnership, limited liability company or similar entity with respect to
which, as of the date of this Agreement, the Company or any Subsidiary
of the Company owns more than 5% but less than a majority of the voting
equity or similar voting interest or any interest convertible into, or
exchangeable or exercisable for, more than 5% but less than a majority
of the voting equity or similar voting interest and which interest is
carried on the Company's most recent financial statements (or if not
held as of the date thereof, would be carried on the Company's financial
statements if prepared as of the date hereof) at a value in excess of
$500,000 (collectively, the "COMPANY EQUITY INTERESTS"). All of the
shares of capital stock of each of the Significant Subsidiaries of the
Company and all the Company Equity Interests held by the Company and
each Subsidiary of the Company are fully paid and nonassessable and are
owned by the Company or such Subsidiary free and clear of any Liens
(other than Taxes not yet due and payable). As of the date of this
Agreement, except as set forth in Section 5.01(c)(i) of the Company
Disclosure Schedule there are no material outstanding contractual
obligations of the Company or any of its
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Subsidiaries to provide funds to, or make any investment (in the form of
a loan, capital contribution or otherwise) in, any entity in which the
Company or any Subsidiary of the Company owns a Company Equity Interest.
(ii) Each of the Company's Subsidiaries has been duly organized and is
validly existing in good standing (in jurisdictions which recognize such
concept) under the laws of the jurisdiction of its organization. Each of
such Subsidiaries is duly qualified to do business and in good standing (in
jurisdictions which recognize such concept) in the jurisdictions where its
ownership or leasing of property or the conduct of its business requires it
to be so qualified and each has in effect all federal, state, local and
foreign governmental authorizations necessary for it to own or lease its
properties and assets and to carry on its business as it is now conducted,
except where the failure to be so duly qualified and in good standing or to
have in effect all federal, state, local, and foreign governmental
authorizations does not have, and would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on the Company.
(d) Corporate Power. The Company and each of its Subsidiaries has the
corporate power and authority to carry on its business as it is now being
conducted and to own all its properties and assets; and it has the corporate
power and authority to execute, deliver and perform its obligations under this
Agreement and to consummate the transactions contemplated hereby.
(e) Corporate Authority.
(i) Subject, in the case of the consummation of the Merger, to receipt
of the requisite approval and adoption of the "agreement of merger" (as
such term is used in Section 251 of the DGCL) contained in this Agreement
and the Merger by the holders of a majority of the outstanding shares of
Company Common Stock entitled to vote thereon, the Company Board having
unanimously adopted a resolution approving such "agreement of merger" and
declaring its advisability, this Agreement and the transactions
contemplated hereby have been authorized by all necessary corporate action
of the Company and the Company Board (assuming that neither Nortel Networks
nor Sub is an "interested stockholder" of the Company under Section 203 of
the DGCL immediately before the execution and delivery of this Agreement
and the Stockholder Agreements).
(ii) This Agreement is a legal, valid and binding agreement of the
Company, enforceable in accordance with its terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and similar laws of
general applicability relating to or affecting creditors' rights or by
general equity principles, whether considered at law or in equity).
(f) No Defaults. Subject to receipt of the regulatory approvals, and
expiration of the waiting periods, referred to in Section 5.01(r), required
filings under federal or state securities or other laws, the execution,
delivery and performance of this Agreement by the Company and the
consummation of the transactions contemplated hereby by the Company do not
and will not (i) constitute a breach or violation of, or a default under,
any law, rule or regulation or any judgment, decree, order, governmental
permit or license, or agreement, indenture or instrument of the Company or
of any of its Subsidiaries or to which the Company or any of its
Subsidiaries or any of their respective properties or assets are subject or
bound, (ii) constitute a breach or violation of, or a default under, the
articles or certificate of incorporation or bylaws of the Company or any of
its Subsidiaries or (iii) require any consent or approval under any such
law, rule, regulation, judgment, decree, order, governmental permit or
license,
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agreement, indenture or instrument, except in the case of (i) and (iii),
where such breach, violation or default or the failure to obtain such
consents or approvals would not in the aggregate have a Material Adverse
Effect on the Company, the Surviving Corporation or Nortel Networks and
would not prevent or materially impair the Company's ability to consummate
the transactions contemplated by this Agreement. Section 5.01(f) of the
Company Disclosure Schedule contains a list of all consents of third
parties required under any material agreement to be obtained by the Company
or its Subsidiaries prior to, or as a result of, the consummation of the
Merger.
(g) Financial Reports and SEC Documents.
(i) With respect to the periods since September 23, 1999 the
Company and its Subsidiaries have filed all reports and statements,
together with any amendments required to be made thereto, that were
required to be filed with the SEC.
(ii) The Company's Quarterly Reports on Form 10-Q for the periods
ended December 31, 1999 and March 31, 2000, Registration Statements on
Form S-1 dated July 9, 1999 (no. 333-82605) and December 20, 1999 (no.
333-93123) and all amendments thereto and all other reports,
registration statements, definitive proxy statements or information
statements filed or to be filed by it or any of its Subsidiaries
subsequent to September 23, 1999 under the Securities Act, or under
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, in the form
filed, or to be filed (collectively, the "COMPANY SEC DOCUMENTS"), with
the SEC, as of the date filed (or, with respect to a document filed
prior to the date of this Agreement and amended or superseded by a
subsequent filing prior to the date of this Agreement, then on the date
of such filing as so amended or superseded) (A) complied or will comply
in all material respects as to form with the applicable requirements
under the Securities Act or the Exchange Act, as the case may be; and
(B) did not and will not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading; and each of the balance
sheets contained in or incorporated by reference into any such Company
SEC Document (including the related notes and schedules thereto) fairly
presents and will fairly present the financial position of the entity or
entities to which it relates as of its date, and each of the statements
of income and changes in stockholders' equity and cash flows or
equivalent statements in such Company SEC Documents (including any
related notes and schedules thereto) fairly presents and will fairly
present the results of operations, changes in stockholders' equity and
changes in cash flows, as the case may be, of the entity or entities to
which it relates for the periods to which they relate, in each case in
accordance with U.S. GAAP consistently applied during the periods
involved and Regulation S-X of the SEC, except in each case as may be
noted therein, subject to normal year-end audit adjustments and the
absence of footnotes in the case of unaudited statements.
(iii) Between March 31, 2000 and the date of this Agreement, the
Company has not incurred any liabilities (whether absolute, accrued,
contingent or otherwise) that are of a nature that would be required to
be disclosed on a balance sheet of the Company or the footnotes related
thereto, all prepared in conformity with U.S. GAAP, except (x)
liabilities as set forth or reserved for in the Company SEC Documents
filed prior to the date of this Agreement (the "COMPANY FILED SEC
DOCUMENTS") and (y) other liabilities incurred in the ordinary course of
business consistent with past practice, which do not have, and would not
reasonably be
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expected to have, individually or in the aggregate, a Material Adverse
Effect on the Company.
(h) Litigation. No litigation, claim or other proceeding before any
court or governmental agency that is pending or, to the Company's
Knowledge, threatened against the Company or any of its Subsidiaries would
reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect on the Company. No litigation, claim or other
proceeding before any court or governmental agency is pending or, to the
Company's Knowledge, threatened against the Company or any of its
Subsidiaries which would reasonably be expected to result in a loss of more
than $250,000 or the imposition of any material restrictions on the
business of the Company or any such Subsidiary.
(i) Compliance with Laws. The Company and each of its Subsidiaries:
(i) is in compliance with all applicable federal, state, local and
foreign statutes, laws, regulations, ordinances, rules, judgments,
orders or decrees applicable thereto or to the employees conducting such
businesses, except where failure to so comply does not have, and would
not reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect on the Company;
(ii) has all permits, licenses, authorizations, orders and
approvals of, and has made all filings, applications and registrations
with, all Governmental Authorities that are required in order to permit
them to conduct their businesses substantially as presently conducted,
and all such permits, licenses, certificates of authority, orders and
approvals are in full force and effect and, to its Knowledge, no
suspension or cancellation of any of them is threatened, except for (x)
failures to hold such permits, licenses, authorizations, orders and
approvals and (y) failures to make such filings, applications, and
registrations, which do not have, and would not reasonably be expected
to have, individually or in the aggregate, a Material Adverse Effect on
the Company; and
(iii) has received since January 25, 2000 no written notification
or communication from any Governmental Authority (A) asserting that the
Company or any of its Subsidiaries is not in compliance with any of the
statutes, regulations or ordinances which such Governmental Authority
enforces or (B) threatening to revoke any license, franchise, permit or
governmental authorization.
(j) Material Contracts; Defaults. Except for this Agreement and
those agreements and other documents filed as exhibits to the Company Filed
SEC Documents, as of the date of this Agreement, neither the Company nor
any of its Subsidiaries is a party to or bound by (i) any "material
contract" within the meaning of Item 601(b)(10) of the SEC's Regulation S-K
or (ii) any non-competition agreement or other agreement or arrangement
that materially restricts it or any of its Subsidiaries from competing in
any line of business. Neither the Company nor any of its Subsidiaries is in
default under any material contract, agreement, commitment, arrangement,
lease, insurance policy or other instrument to which it is a party, by
which its respective assets, business, or operations may be bound or
affected, and there has not occurred any event that, with the lapse of time
or the giving of notice or both, would constitute such a default, except
for such defaults that, individually or in the aggregate, would not
reasonably be expected to have a Material Adverse Effect on the Company.
(k) No Brokers. No action has been taken by the Company or its
officers, directors or employees that would give rise to any valid claim
against any party hereto for a brokerage commission, finder's fee or other
like payment with respect to the
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transactions contemplated by this Agreement, excluding fees to be paid to
the Company Financial Advisor pursuant to the Company's written agreement
with such firm, a true and complete copy of which has been furnished to
Nortel Networks prior to the date of this Agreement.
(l) Employee Benefits; Employee Relations.
(i) Section 5.01(l) of the Company Disclosure Schedule contains a
complete and correct list of each Company Plan in effect as of the date
of this Agreement or for which the Company or any Company Affiliates may
have any liability as of the date of this Agreement. With respect to
each Company Plan, true and complete copies have been provided or made
available to Nortel Networks of: (i) the plan document or agreement or,
with respect to any Company Plan that is not in writing, a written
description of the terms thereof; (ii) the trust agreement, insurance
contract or other documentation of any related funding arrangement;
(iii) the summary plan description; (iv) the most recent required
Internal Revenue Service Form 5500, including all schedules thereto, and
actuarial report; (v) any material communication to or from any
Governmental Authority, including a written description of any oral
communication; and (vi) all amendments or modifications to any such
document.
(ii) Neither the Company nor any Subsidiary thereof has
disseminated in writing or otherwise broadly or generally notified
employees of any intent or commitment (whether or not legally binding)
to create or implement any additional Plan or to amend or terminate any
Company Plan, except for amendments to any Company Plan that will not
result in a material increase in the annual costs in respect of such
plan incurred or to be incurred by the Company or any of its
Subsidiaries.
(iii) Each Company Plan has been operated and administered, and
is, in compliance with its terms and all applicable laws, rules and
regulations (including ERISA and the Code and any regulations
thereunder). There are no actions, suits, claims or governmental audits
(other than routine claims for benefits in the ordinary course) pending
or, to the Knowledge of the Company, threatened with respect to any
Company Plan that would reasonably be expected to have, individually or
in the aggregate, a Material Adverse Effect on the Company.
(iv) No Company Plan is, and neither the Company nor any
Subsidiary thereof contributes to or has any material liability or
obligation with respect to any Plan that is, (A) a multiemployer plan
within the meaning of Section 4001(a)(3) of ERISA, (B) any single
employer plan or other pension plan subject to Title IV or Section 302
of ERISA or Section 412 of the Code or (C) a multiple employer plan
within the meaning of Section 4063 or 4064 of ERISA. Neither the Company
nor any Subsidiary thereof is or has been a party to any collective
bargaining or other collective labor agreement or understanding.
(v) There is no pending or, to the Knowledge of the Company,
threatened labor dispute, strike, work stoppage or other concerted labor
activity against the Company or any Subsidiary thereof or involving any
of their respective employees. During the three year period immediately
preceding the date hereof, to the Knowledge of the Company, there have
been no organizing activities conducted by any labor organization or
work council or the like with respect to any employee of the Company or
any Subsidiary thereof. To the Knowledge of the Company, neither the
Company nor any Subsidiary thereof, nor their respective businesses, has
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committed any unfair labor practices or violated in any material respect
any applicable employment laws, regulations, ordinances, rules, orders
or decrees in connection with the operation of the respective businesses
of the Company or any Subsidiary thereof, and there is no pending or, to
the Knowledge of the Company, threatened charge, complaint,
investigation or proceeding against the Company or any of its
Subsidiaries by or before the National Labor Relations Board, the
Department of Labor, the Equal Employment Opportunity Commission, the
Occupational Health and Safety Administration or any comparable state or
municipal agency, or by or on behalf of any employee or class of
employees or by or before any governmental agency relating to a
purported violation of any applicable employment laws, regulations,
ordinances, rules, orders or decrees.
(vi) Each Company Plan that is intended to qualify under Section
401(a) and/or 401(k) of the Code so qualifies and its trust is exempt
from taxation under Section 501(a) of the Code. The Company and its
Subsidiaries have timely paid all contributions, premiums and expenses
payable to or in respect of each Company Plan under the terms thereof
and in accordance with applicable law, including ERISA and the Code,
and, to the extent any such contributions, premiums or expenses are not
yet due, the liability therefor (to the extent it arose before March 31,
2000) has been properly and adequately accrued on the Company's
financial statements included in its Quarterly Report on Form 10-Q for
the period ended March 31, 2000.
(vii) Neither the Company nor any of its Subsidiaries has incurred
or will incur, either directly or indirectly (including as a result of
an indemnification obligation), any material liability under or pursuant
to any provision of Title I or IV of ERISA or the penalty, excise tax or
joint and several liability provisions of the Code relating to employee
benefit plans, and to the Knowledge of the Company, no event,
transaction or condition has occurred, exists or is expected to occur
which would reasonably be expected to result in any such material
liability to the Company, any of its Subsidiaries or, after the
Effective Time, Nortel Networks or any of its affiliates.
(viii) Neither the execution and delivery of this Agreement, nor
the consummation of the transactions contemplated hereby, either alone
or in combination with another event (whether contingent or otherwise)
will (A) entitle any current or former employee, consultant, officer or
director of the Company or any of its Subsidiaries to any increased or
modified benefit or payment; (B) increase the amount of compensation due
to any such employee, consultant, officer or director; (C) accelerate
the vesting, payment or funding of any compensation, stock-based
benefit, incentive or other benefit; (D) result in any "parachute
payment" under Section 280G of the Code (whether or not such payment is
considered to be reasonable compensation for services rendered); or (E)
cause any compensation to fail to be deductible under Section 162(m), or
any other provision of the Code or any similar foreign Law.
(m) Takeover Laws. The Company Board has validly approved this
Agreement and the Stockholder Agreements and the transactions contemplated
hereby and thereby (including the Merger) for purposes of Section 203 of
the DGCL. Except for Section 203 of the DGCL (which has been rendered
inapplicable), to the Company's Knowledge, no "moratorium", "control
share", "fair price" or other antitakeover laws and regulations of any
state (collectively, "TAKEOVER LAWS") are applicable to the
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Merger or the other transactions contemplated by this Agreement and the
Stockholder Agreements.
(n) Major Customers. Section 5.01(n) of the Company Disclosure
Schedule sets forth a list of the top ten direct sales customers (by sales
revenue) of the Company's Web switch products during the fiscal year ended
June 30, 2000 and the volume of sales to each such customer for such
period. None of such customers (nor any of their respective affiliates)
has, to the Company's Knowledge, between March 31, 2000 and the date of
this Agreement, cancelled or otherwise terminated or indicated an intent to
cancel or otherwise terminate, its business relationship with the Company,
or has materially decreased, or indicated an intent to materially decrease
the volume of business it conducts with the Company.
(o) Environmental Matters.
(i) As used in this Agreement, "ENVIRONMENTAL LAWS" means all
applicable local, state, provincial and federal environmental, health
and safety laws (including common law) and regulations in effect on the
date of this Agreement, relating to the protection of human health and
safety as affected by exposure to pollutants, contaminants, or hazardous
or toxic wastes, substances or materials and to the protection of the
environment including, without limitation, the Resource Conservation and
Recovery Act, the Comprehensive Environmental Response, Compensation,
and Liability Act, the Clean Water Act, the Federal Clean Air Act, and
the Occupational Safety and Health Act, each as amended, regulations
promulgated thereunder, and state counterparts.
(ii) (x) Neither the conduct or operations of the Company or its
Subsidiaries nor any condition of any property presently or previously
owned, leased or operated by any of them violates or, within the
applicable statute or limitations period, violated Environmental Laws,
except for violations that are not material and (y) no condition has
existed or event has occurred with respect to any of them or any such
property that is reasonably likely to result in a Material Adverse
Effect on the Company. Neither the Company nor any of its Subsidiaries
has received any written notice from any Governmental Authority that it
or its Subsidiaries or the operation or condition of any property ever
owned, leased, operated, held as collateral or held as a fiduciary by
any of them are or were in material violation of or otherwise are
alleged to have material liability under any Environmental Law,
including, but not limited to, responsibility (or potential
responsibility) for the cleanup or other remediation of any
pollutants,contaminants, or hazardous or toxic wastes, substances or
materials at, on, beneath, or originating from any such property.
(iii) To the Company's Knowledge, none of the property currently
owned, leased or operated by the Company or by its Subsidiaries is
subject to, or as a result of this transaction would be subject to, (i)
any state or local Environmental Laws which would impose restrictions,
such as notice, disclosure or obtaining advance approval prior to this
transaction, or (ii) any liens under any Environmental Laws.
(p) Intellectual Property.
(i) The Company and its Subsidiaries own or are licensed to use
all Intellectual Property Rights currently used in the business of the
Company or its Subsidiaries or necessary to conduct the business of the
Company and its Subsidiaries as currently conducted or currently
anticipated to be conducted (the "COMPANY INTELLECTUAL PROPERTY
RIGHTS").
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(ii) Section 5.01(p)(ii) of the Company Disclosure Schedule
contains an accurate and complete list as of the date of this Agreement
of the following categories of Company Intellectual Property Rights: (A)
Trademarks that are registered or for which an application for
registration is pending; (B) Patents; (C) Software (other than
commercial shrink-wrap, click-wrap or other similarly available
off-the-shelf type software); (D) Copyrights that are registered or for
which an application for registration is pending; (E) key Trade Secrets;
and (F) mask works that are registered or for which an application for
registration is pending. Where listed Intellectual Property Rights are
registered with a Governmental Authority or an application for
registration is pending, the jurisdiction, registration or application
number, date of registration or application, named owner and/or
assignee, and international classes of registration are indicated, as
applicable.
(iii) Section 5.01(p)(iii) of the Company Disclosure Schedule
contains an accurate and complete list as of the date of this Agreement
of (A) all licenses, sublicenses and other agreements under which the
Company or its Subsidiaries are licensed to use third party Intellectual
Property Rights (other than (1) shrink-wrap, click-wrap or other
similarly available off-the-shelf type software and any related Trade
Secrets and (2) customary rights included in confidentiality,
non-disclosure or similar agreements) and (B) all licenses and
sublicenses, except for rights granted specifically for use with a
hardware product sold by the Company, under which the Company and its
Subsidiaries have granted rights to third parties to use the Company
Intellectual Property Rights. The Company and its Subsidiaries are not
currently required to pay any royalties, fees or other amounts to any
Person in connection with the use of the Company Intellectual Property
Rights.
(iv) The Company and its Subsidiaries have good and valid title to
all Company Intellectual Property Rights owned by any of them and valid
and enforceable license rights to all Company Intellectual Property
Rights used under license, free and clear, to the Company's Knowledge,
of all Liens (other than Taxes not yet due and payable), and to the
Company's Knowledge, all Company Intellectual Property Rights are in
full force and effect and will remain in full force and effect
immediately following the Effective Time.
(v) The Company and its Subsidiaries have a practice to secure,
and have secured, from all current and former employees, consultants and
independent contractors who contribute or have contributed to the
creation or development of Company Intellectual Property Rights valid
written assignments by such persons to the Company and its Subsidiaries
of the rights to such contributions the Company and its Subsidiaries do
not already own by operation of law. To the Knowledge of the Company, no
employee, independent contractor (excluding OEMs, distributors,
resellers and other purchasers) or consultant of the Company is
obligated under any agreement (including licenses, covenants or
commitments of any nature) or subject to any judgement, decree or order
of any civil or administrative agency, or any restriction that would
interfere with the use of his or her best efforts to carry out his or
her duties for the Company or to promote the interests of the Company or
that would conflict with the Company's business as presently conducted
and proposed to be conducted. The carrying on of the Company's business
by the employees, independent contractors and consultants of the Company
and the conduct of the Company's business as presently conducted and
proposed to be conducted, will not, to the Knowledge of the Company,
conflict with or result in a breach of the terms, conditions or
provisions of, or constitute a default under, any
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contract, covenant or instrument under which any of such employees,
consultants or independent contractors of the Company is now obligated.
The Company and its Subsidiaries have taken reasonable steps to protect
and preserve the confidentiality of all of their Trade Secrets, and to
the Company's Knowledge (i) as of the date of this Agreement, there are
no unauthorized uses, disclosures or infringements of any Company
Intellectual Property Rights, and (ii) as of the date of this Agreement,
all use by, and disclosure to, any Person of Trade Secrets that comprise
any part of the Company Intellectual Property Rights has been pursuant
to the terms of a written agreement with such Person, and (iii) all use
by the Company and its Subsidiaries of Trade Secrets owned by another
Person has been pursuant to the terms of a written agreement with such
Person or is otherwise lawful. If after the date of this Agreement the
Company has Knowledge of any of the foregoing conditions, the Company
shall take appropriate and prompt action to remedy such conditions. To
the Knowledge of the Company, at no time during the conception of or
reduction to practice of any of the Company Intellectual Property was
any developer, inventor or other contributor to such Intellectual
Property Right operating under any grants from any Governmental
Authority or private source, performing research sponsored by any
Governmental Authority or private source or subject to any employment
agreement or invention assignment or nondisclosure agreement or other
obligation with any other person that would adversely affect the
Company's rights in such Intellectual Property Right. To the Knowledge
of the Company, it is not utilizing nor will it be necessary to utilize
(A) any inventions of any independent contractors or consultants, or
confidential information (including Trade Secrets) of another person to
which any independent contractors or consultants have been exposed, and
(B) any inventions of any employees of the Company (or persons the
Company intends to hire) made, or any confidential information
(including Trade Secrets) of another person to which such employees were
exposed, prior to their employment by the Company. Neither the Company
Intellectual Property Rights owned by the Company and its Subsidiaries
or incorporated into any products or services currently provided by the
Company and its Subsidiaries nor the use or other exploitation thereof
by the Company and its Subsidiaries in the conduct of their business,
nor any product or service currently provided by the Company and its
Subsidiaries, infringes on, misappropriates, breaches or violates any
third party Intellectual Property Rights. Without limiting the
generality of the foregoing, Section 5.01(p)(v) of the Company
Disclosure Schedule specifically identifies each inventor named in any
patent application filed by the Company (either individually or jointly
with others) or assigned or exclusively licensed to the Company in whole
or in part.
(vi) Neither the Company nor any of its Subsidiaries: (A) has been
notified or has Knowledge of any actual or threatened adverse proceeding
brought by any Person pertaining to any challenge to the scope, validity
or enforceability of (provided, however, no representation or warranty
is made regarding the scope, validity or enforceability of any patent
application), or the Company's ownership of, any of the Company
Intellectual Property Rights owned by the Company and its Subsidiaries;
(B) is the subject of any claim of infringement or misappropriation by
the Company or any of its Subsidiaries of any third party Intellectual
Property Rights; or (C) to the Company's Knowledge, has any claim for
infringement or misappropriation of, or breach of any license or
agreement involving, any of the Company Intellectual Property Rights
owned by the Company and its Subsidiaries.
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(vii) All of the Company Intellectual Property Rights are valid
and enforceable without any qualification, limitation, or restriction
thereon or on the use thereof (provided, however, no representation or
warranty is made regarding the validity or enforceability of any patent
application) and the Company has not received any notice or claim
(whether written, oral or otherwise) challenging or questioning the
validity or enforceability of any of the Company Intellectual Property
Rights or indicating an intention on the part of any person to bring a
claim that any of the Company Intellectual Property Rights are invalid
or unenforceable or has been misused, nor to the Knowledge of the
Company is there a reasonable basis for a claim that the Company
Intellectual Property Rights are invalid or unenforceable or have been
misused, and with respect to Patents owned by the Company, there is no
relevant prior art pertaining to any issued patents thereof which the
Company has become aware that was not disclosed during the prosecution
of the patent application(s) therefor, but which if such prior art had
been disclosed would have affected the prosecution thereof or the scope
of the patent claims ultimately granted in respect thereof,
(viii)(A) The Company has not taken any action or failed to take
any action (including the manner in which it has conducted its business,
or used or enforced, or failed to use or enforce, any of the Company
Intellectual Property Rights) that would result in the abandonment,
cancellation, forfeiture, relinquishment, invalidation or
unenforceability of any of the Company Intellectual Property Rights
(including, with respect to Patents owned by the Company, failing to
disclose any known material prior art in connection with the prosecution
of patent applications, and with respect to the Company registered
copyrights, failing to disclosure required information to the United
States Copyright Office), (B) the Company has taken reasonable steps
(based on standard industry practices) to protect and maintain the
Company's rights in and to the Company Intellectual Property Rights, (C)
all registered Company trademarks and all Company registered copyrights
and Company registered mask works have been registered and all Company
owned Patents have been filed and obtained, in accordance with all
applicable legal requirements and are currently in effect and in
compliance with all applicable legal requirements (including, in the
case of registered Company trademarks, the timely post-registration
filing of affidavits of use and incontestability and renewal
applications), and without limiting the generality of any of the
foregoing, the Company has timely paid all filing, examination,
issuance, post-registration and maintenance fees, annuities and the like
associated or required with respect to any of the Company Intellectual
Property Rights.
(q) Tax Matters.
(i)(A) All returns, declarations, reports, estimates, information
returns and statements required to be filed on or before the Effective
Time under federal, state, local or any foreign tax laws ("TAX RETURNS")
with respect to the Company or any of the Company's Subsidiaries, have
been or will be, as the case may be, timely filed, or requests for
extensions have been or will be, as the case may be, timely filed and
have not expired, except where a failure or failures to so timely file
would not, individually or in the aggregate, be expected to be material;
(B) all material Tax Returns filed by it are complete and accurate in
all material respects; (C) all Taxes shown to be due and payable
(without regard to whether such Taxes have been assessed) on such Tax
Returns have been paid or adequate reserves have been established for
the payment of such Taxes; (D) the proper and accurate amounts
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have been or will be, as the case may be, withheld from all employees
(and timely paid to the appropriate Governmental Authority or set aside
in an account for such purposes) for all periods through the Effective
Time in compliance in all material respects with all Tax withholding
provisions of applicable federal, state, local and foreign laws
(including, without limitation, income, social security, and employment
tax withholding for all types of compensation); (E) neither the Company
nor any of the Company's Subsidiaries is a party to any tax sharing or
similar agreement or any agreement pursuant to which it or any of its
Subsidiaries has an obligation to indemnify any party (other than it or
one of its Subsidiaries) with respect to Taxes; (F) all Taxes due with
respect to completed and settled examinations or concluded litigation
relating to the Company or any of the Company's Subsidiaries have been
paid in full or adequate reserves have been established for the payment
thereof; and (G) no material audit or examination or refund litigation
with respect to any Tax Return is pending.
(ii) The Company has no reason to believe that any conditions
exist that might prevent or impede the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code.
(r) Regulatory Approvals. No consents or approvals of, or filings or
registrations with, any Governmental Authority or instrumentality are
required to be obtained or made by the Company or any of its Subsidiaries
to consummate the Merger except (i) as may be required under applicable
requirements of the Hart-Scott Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR ACT"), the Competition Act (Canada) and antitrust or
other competition laws of other jurisdictions; (ii) applicable filings
under NASD rules, bylaws or regulations; (iii) the filing with the SEC of
the Company Proxy Statement and other applicable reports and documents;
(iv) the filing of a certificate of merger with the Secretary of State of
the State of Delaware pursuant to the DGCL; and (v) as may be required
under Section 721 of the U.S. Defense Production Act of 1950, as amended,
and the rules promulgated thereunder ("EXON-FLORIO") and the rules and
regulations promulgated by the U.S. Department of Defense.
(s) Fairness Opinion. On or before the date hereof, the Company
Financial Advisor has delivered its opinion to the Company Board that the
Exchange Ratio is fair, from a financial point of view, to the holders of
Company Common Stock and such opinion has not been withdrawn.
(t) Year 2000 Compliance.
(i) All Material Systems of the Company and its Subsidiaries have
been remediated through modification, upgrade or replacement so that
they are (A) able to receive, record, store, process, calculate,
manipulate and output dates from and after January 1, 2000, time periods
that include January 1, 2000 and information that is dependent on or
relates to such dates or time periods, in the same manner and with the
same accuracy, functionality, data integrity and performance as when
dates or time periods prior to January 1, 2000 are involved and (B) able
to store and output date information in a manner that is unambiguous as
to century ("YEAR 2000 COMPLIANT").
(ii) All Company products shipped to customers since June 1, 1999,
are Year 2000 Compliant in all material respects and have been tested by
the Company (including custom testing of all third-party manufactured
content of such Company products) to confirm such status. With respect
to Company products shipped prior to such date, the Company and its
Subsidiaries have undertaken reasonable efforts
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to notify all end-users of such products of the need to upgrade such
products to be Year 2000 Compliant and of the need to audit any custom
application products to identify any respects in which they are not Year
2000 Compliant.
(iii) The Company has furnished to Nortel Networks copies of, or
copies of all documents relating to, (A) all complaints, investigations
or audits of any Governmental Authority, (B) all unresolved customer
complaints, demands or claims (excluding routine requests for
information regarding matters relating to the year 2000 turnover), (C)
all attorney letters or demands and (D) all litigation, arbitrations or
similar proceedings, in each case insofar as they relate to the Year
2000 Compliant status of Company products, the cost of upgrading Company
products to a Year 2000 Compliant status or injuries and damages
suffered as a result of the non-Year 2000 Compliant condition of Company
products.
(u) No Material Adverse Effect. Between March 31, 2000 and the date
hereof, the Company and its Subsidiaries have conducted their respective
businesses each in the ordinary course (excluding the incurrence of
reasonable and customary liabilities related to this Agreement and the
transactions contemplated hereby). Between March 31, 2000 and the date
hereof, no event has occurred or circumstance arisen that, individually or
taken together with all other facts, circumstances and events (described in
any paragraph of Section 5.01 or otherwise), has had or is reasonably
likely to have a Material Adverse Effect with respect to the Company.
5.02. Representations and Warranties of Nortel Networks and Sub. Except
as set forth in the Nortel Networks SEC Documents filed prior to the date of
this Agreement, Nortel Networks and Sub hereby represent and warrant to the
Company as follows:
(a) Organization, Standing and Authority. Each of Nortel Networks
and Sub (x) is a corporation duly organized, validly existing and, in the
case of Sub, in good standing under the laws of the jurisdiction of its
organization and (y) is duly qualified to do business and, as applicable,
is in good standing (in jurisdictions which recognize such concept) in the
provinces of Canada and in the states of the United States and foreign
jurisdictions where its ownership or leasing of property or assets or the
conduct of its business requires it to be so qualified, except where the
failure to be duly organized, validly existing, in good standing, or duly
qualified does not have and would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Nortel
Networks. Each of Nortel Networks and Sub has in effect all federal,
provincial, state, local and foreign governmental authorizations necessary
for it to own or lease its properties and assets and to carry on its
business as it is now conducted, except where failure to have in effect
such authorizations does not have and would not reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect on Nortel
Networks. Each of Nortel Networks and Sub has made available to the Company
a complete and correct copy of its constitutive documents, each as amended
to date and in full force and effect.
(b) Shares.
(i) As of the date hereof, the authorized capital stock of Nortel
Networks consists solely of an unlimited number of Nortel Networks
Common Shares, of which 2,991,321,341 shares were outstanding as of July
26, 2000 and an unlimited number of Class A Preferred Shares and Class B
Preferred Shares of which none were outstanding as of the date of this
Agreement. As of the date hereof, there are no outstanding Rights to
acquire capital stock from Nortel Networks other than pursuant to the
stock option and other employee compensation plans of Nortel
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Networks and its subsidiaries, Nortel Networks' shareholder dividend
reinvestment and stock purchase plan, the rights issued under the
shareholder rights plan established pursuant to the shareholder rights
plan agreement made as of March 13, 2000, between Nortel Networks (then
known as "New Nortel Inc.") and Montreal Trust Company of Canada as
rights agent, and the exchange rights associated with Nortel Networks
Limited's Cumulative Redeemable Class A Preferred Shares Series 4 that
are described in the Nortel Networks SEC Documents.
(ii) The authorized capital stock of Sub consists of 300,000,000
shares of Sub Common Stock, $0.001 par value per share, of which one
share is outstanding and is owned directly by Nortel Networks, and
shares of preferred stock, of which no shares are outstanding. Sub has
not conducted any business prior to the date hereof and has no
Subsidiaries and no assets, liabilities or obligations of any nature
other than incident to its formation and incident to this Agreement.
(iii) The outstanding shares of Nortel Networks' and Sub's capital
stock have been duly authorized and are validly issued and outstanding,
fully paid and nonassessable, and subject to no preemptive rights (and
were not issued in violation of any preemptive rights). As of the date
hereof, there are no shares of capital stock of Sub authorized and
reserved for issuance and Sub does not have any Rights issued or
outstanding with respect to its capital stock or any commitment to
authorize, issue or sell any such shares or Rights, except pursuant to
this Agreement.
(iv) The Nortel Networks Common Shares to be issued in exchange
for shares of Company Common Stock in the Merger or upon exercise of
Company Stock Options and Company Purchase Rights to be assumed by
Nortel Networks in connection with the Merger, when issued will be duly
authorized, validly issued, fully-paid and non-assessable and will not
have been issued in violation of any subscriptive or preemptive rights.
(c) Corporate Power. Each of Nortel Networks and Sub has the
corporate power and authority to carry on its business as it is now being
conducted and to own all its properties and assets; and each of Nortel
Networks and Sub has the corporate power and authority to execute, deliver
and perform its obligations under this Agreement and to consummate the
transactions contemplated hereby.
(d) Corporate Authority. (i) This Agreement and the transactions
contemplated hereby, including the issuance of Nortel Networks Common
Shares in the Merger or upon the exercise of Company Stock Options and
Company Purchase Rights to be assumed by Nortel Networks in connection with
the Merger, have been authorized and approved by all necessary corporate
action of Nortel Networks (no shareholder approvals being required under
the Canada Business Corporations Act or otherwise), Sub, the Nortel
Networks Board and the Board of Directors of Sub prior to the date hereof
(which action has not been rescinded or modified in any way) and (ii) this
Agreement is a legal, valid and binding agreement of each of Nortel
Networks and Sub, enforceable in accordance with its terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and similar laws of general
applicability relating to or affecting creditors' rights or by general
equity principles, whether considered at law or in equity).
(e) No Defaults. Subject to receipt of the regulatory approvals, and
expiration of the waiting periods, referred to in Section 5.02(i), any
required filings under federal, state and provincial securities laws and
applicable TSE or NYSE rules, the execution,
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delivery and performance of this Agreement and the consummation by Nortel
Networks and Sub of the transactions contemplated hereby do not and will
not (i) constitute a material breach or violation of, or a material default
under, any law, rule or regulation or any judgment, decree, order,
governmental permit or license, or agreement, indenture or instrument of
Nortel Networks or of any of Nortel Networks' Subsidiaries or to which it
or any of its Subsidiaries or any of their respective properties or assets
are subject or bound, (ii) constitute a breach or violation of, or a
default under, the articles or certificate of incorporation or bylaws of
either Nortel Networks or Sub, or (iii) require any consent or approval
under any such material law, rule, regulation, judgment, decree, order,
governmental permit or license, agreement, indenture or instrument, except
in the case of (i) and (iii), where such breach, violation or default or
the failure to obtain such consents or approvals would not in the aggregate
have a Material Adverse Effect on the Company, the Surviving Corporation or
Nortel Networks and would not prevent or materially impair Nortel Networks'
ability to consummate the transactions contemplated by this Agreement.
(f) Financial Reports and SEC Documents. With respect to the periods
since January 1, 1999, Nortel Networks, or its predecessor, and its
Subsidiaries have filed all reports and statements, together with any
amendments required to be made thereto, that were required to be filed with
the SEC. Nortel Networks' Annual Reports on Form 10-K for the fiscal years
ended December 31, 1997, 1998 and 1999, its Quarterly Report on Form 10-Q
for the period ended March 31, 2000 and all other reports or registration
statements, filed or to be filed by it or its predecessor, subsequent to
December 31, 1997 under the Securities Act, or under Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act, in the form filed, or to be filed
(collectively, the "NORTEL NETWORKS SEC DOCUMENTS"), with the SEC, as of
the date filed (or, with respect to a document filed prior to the date of
this Agreement and amended or superseded by a subsequent filing prior to
the date of this Agreement, then on the date of such filing as so amended
or superseded) (A) complied or will comply in all material respects as to
form with the applicable requirements under the Securities Act or the
Exchange Act, as the case may be; and (B) did not and will not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading;
and each of the balance sheets contained in or incorporated by reference
into any such Nortel Networks SEC Document (including the related notes and
schedules thereto) fairly presents and will fairly present the financial
position of the entity or entities to which it relates as of its date, and
each of the statements of income and changes in stockholders' equity and
cash flows or equivalent statements in such Nortel Networks SEC Documents
(including any related notes and schedules thereto) fairly presents and
will fairly present the results of operations, changes in stockholders'
equity and changes in cash flows, as the case may be, of the entity or
entities to which it relates for the periods to which they relate, in each
case in accordance with Canadian GAAP in the case of the years ended
December 31, 1997, 1998, 1999 or U.S. GAAP in the case of the period ended
March 31, 2000 consistently applied during the periods involved and
Regulation S-X of the SEC, except in each case as may be noted therein,
subject to normal year-end audit adjustments in the case of unaudited
statements. The books and records of Nortel Networks and its Subsidiaries
have been, and are being, maintained in all material respects in accordance
with Canadian GAAP and any other applicable legal and accounting
requirements and reflect only actual transactions.
(g) Litigation. No litigation, claim or other proceeding before any
court or governmental agency that is pending or, to Nortel Networks'
Knowledge, threatened
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against Nortel Networks or any of its Subsidiaries would reasonably be
expected to have, individually or in the aggregate, a Material Adverse
Effect on Nortel Networks.
(h) No Brokers. No action has been taken by Nortel Networks or its
officers, directors or employees that would give rise to any valid claim
against any party hereto for a brokerage commission, finder's fee or other
like payment with respect to the transactions contemplated by this
Agreement, excluding fees to be paid to Credit Suisse First Boston
Corporation.
(i) Regulatory Approvals. No consents or approvals of, or filings or
registrations with, any Governmental Authority or with any third party are
necessary to consummate the Merger except (i) as may be required under, and
other applicable requirements of, the HSR Act, the Investment Act (Canada)
and the Competition Act (Canada); (ii) as may be required by the bylaws,
rules, regulations or policies of the TSE in respect of the assumption by
Nortel Networks, and the exercisability by the holders, of the Company
Stock Options and Company Purchase Rights and of the NYSE and the TSE in
respect of the Nortel Networks Common Shares to be issued in the Merger and
upon the exercise of the Company Stock Options and the Company Purchase
Rights to be assumed by Nortel Networks in connection with the Merger and
the listing of such Nortel Networks Common Shares on such stock exchanges;
(iii) the filing with the SEC of the Company Proxy Statement in definitive
form and the filing and declaration of effectiveness of the Registration
Statement; (iv) the filing of a certificate of merger with the Secretary of
State of the State of Delaware pursuant to the DGCL; (v) such filings as
are required to be made or approvals as are required to be obtained under
the securities or "Blue Sky" laws of various states in connection with the
issuance of Nortel Networks Common Shares in the Merger; (vi) such filings
as are required to be made and exemption rulings or orders as are required
to be obtained under Canadian securities laws; and (vii) as may be required
under Exon-Florio and the rules and regulations promulgated by the U.S.
Department of Defense.
(j) No Material Adverse Effect. Since March 31, 2000, until the date
hereof, no event has occurred or circumstance arisen that, individually or
taken together with all other facts, circumstances and events (described in
any paragraph of Section 5.02 or otherwise), has had or is reasonably
likely to have a Material Adverse Effect with respect to Nortel Networks.
ARTICLE VI
COVENANTS
The Company hereby covenants to and agrees with Nortel Networks, and each
of Nortel Networks and Sub hereby covenants to and agrees with the Company,
that:
6.01. Reasonable Efforts. Subject to the terms and conditions of this
Agreement, it shall use its reasonable efforts in good faith to take, or cause
to be taken, all actions, and to do, or cause to be done, all things necessary,
proper or desirable (including obtaining any consents of third parties required
under any agreement to be obtained by it or its Subsidiaries prior to, or as a
result of, the consummation of the Merger so that such agreement is not
terminable as a result of the Merger), or advisable under applicable laws, so as
to permit consummation of the Merger as promptly as practicable and otherwise to
enable consummation of the transactions contemplated hereby and shall cooperate
fully with the other party hereto to that end. In case at any time after the
Effective Time any further action is necessary or desirable to carry out the
purpose of this Agreement or to vest the Surviving Corporation with full title
to all properties, assets, rights, approvals, immunities and
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franchises of any of the parties to the Merger, the proper officers and
directors of each party to this Agreement and their respective Subsidiaries
shall take all such necessary action as may be reasonably requested by, and at
the sole expense of, Nortel Networks.
6.02. Stockholder Approvals. The Company shall take, in accordance with
this Agreement, applicable law, applicable NASD rules and the Company
Certificate and bylaws, all action necessary to convene an appropriate meeting
of stockholders of the Company to consider and vote upon the adoption of the
"agreement of merger" (as such term is used in Section 251 of the DGCL)
contained in this Agreement and approval of any other matters required to be
approved by the Company's stockholders for consummation of the Merger (including
any adjournment or postponement, the "COMPANY MEETING") as promptly as
practicable after the Registration Statement is declared effective by the SEC.
The Company Board, subject to Section 6.06, shall at all times recommend such
adoption and approval and shall take all reasonable lawful action to solicit
such adoption and approval by its stockholders.
6.03. Registration Statement. (a) Each of Nortel Networks and the Company
agrees to cooperate in the preparation of a registration statement on Form S-4
(the "REGISTRATION STATEMENT") to be filed by Nortel Networks with the SEC in
connection with (and only in connection with) the issuance of Nortel Networks
Common Shares in the Merger (including the proxy statement and prospectus and
other proxy solicitation materials of the Company constituting a part thereof
(the "COMPANY PROXY STATEMENT") and all related documents). The Registration
Statement and the Company Proxy Statement shall comply as to form in all
material respects with the applicable provisions of the Securities Act and the
Exchange Act and the rules and regulations thereunder. Provided the other party
has cooperated as required above, Nortel Networks agrees to file the
Registration Statement with the SEC as promptly as practicable, after the date
of this Agreement. Each of Nortel Networks and the Company shall, as promptly as
practicable after receipt thereof, provide copies of any written comments
received from the SEC with respect to the Registration Statement and the Company
Proxy Statement, as the case may be, to the other party, and advise the other
party of any oral comments with respect to the Registration Statement received
from the SEC. Each of Nortel Networks and the Company agrees to use reasonable
efforts to cause the Registration Statement to be declared effective under the
Securities Act as promptly as practicable after filing thereof, and the Company
agrees to mail the Company Proxy Statement to its stockholders as promptly as
practicable after the Registration Statement is declared effective. Nortel
Networks also agrees to use reasonable efforts to obtain all necessary state
securities law or "Blue Sky" and all foreign permits and approvals required to
carry out the transactions contemplated by this Agreement. The Company agrees to
furnish to Nortel Networks all information concerning the Company and its
Subsidiaries, officers, directors and stockholders as may be reasonably
requested in connection with the foregoing, and Nortel Networks agrees to
furnish to the Company all information concerning Nortel Networks and its
Subsidiaries, officers, directors and stockholders as may be reasonably
requested in connection with the foregoing.
(b) Each of Nortel Networks and the Company agrees, as to itself and its
Subsidiaries, that none of the information supplied or to be supplied by it for
inclusion or incorporation by reference in (i) the Registration Statement will,
at the time the Registration Statement and each amendment or supplement thereto,
if any, becomes effective under the Securities Act, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading and (ii) the
Company Proxy Statement and any amendment or supplement thereto will, at the
date of mailing to stockholders and at the time of the Company Meeting, contain
any untrue
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statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading.
(c) Nortel Networks agrees to advise the Company, promptly after Nortel
Networks receives notice thereof, of the time when the Registration Statement
has become effective or any supplement or amendment has been filed, of the
issuance of any stop order or the suspension of the qualification of the Nortel
Networks Common Shares for offering or sale in any jurisdiction, of the
initiation or threat of any proceeding for any such purpose, or of any request
by the SEC for the amendment or supplement of the Registration Statement or for
additional information.
(d) Nortel Networks will use its reasonable efforts to obtain, and will
provide evidence reasonably satisfactory to the Company of, all necessary
rulings or orders of Canadian securities regulatory authorities exempting the
distribution by Nortel Networks of the Nortel Networks Common Shares and options
and other Rights to purchase Nortel Networks Common Shares under the Merger and
the resale of Nortel Networks Common Shares issued under the Merger in Canada as
contemplated by this Agreement from the registration and prospectus requirements
under applicable Canadian securities laws on terms reasonably satisfactory to
Nortel Networks and the Company.
6.04. Press Releases. Nortel Networks and the Company shall jointly agree
on an initial press release with respect to the Merger. Neither the Company nor
Nortel Networks will, without the prior approval of the other, issue any other
press release or written statement for general circulation (including any
written statement circulated to employees, customers or other third parties)
relating to the transactions contemplated hereby, except, based on the advice of
counsel, as otherwise required by applicable law or regulation or rules or
policies of the TSE, the NYSE or the NASD and only after consulting, or using
its reasonable efforts to consult, with the other.
6.05. Access; Information. (a) Subject to applicable laws relating to the
exchange of information and procedures adopted by the Company and reasonably
agreed to by Nortel Networks, the Company shall afford to the officers,
employees, counsel, accountants and other authorized representatives of Nortel
Networks, reasonable access, during normal business hours throughout the period
prior to the Effective Date, to all of its properties, books, contracts,
commitments and records and, during such period, it shall furnish promptly to
Nortel Networks upon request (i) a copy of each material report, schedule and
other document filed by it pursuant to the requirements of federal or state
securities laws, and (ii) all other information concerning the business,
properties and personnel of it as Nortel Networks may reasonably request;
provided that such information may not be used for any purpose unrelated to the
consummation of the transactions contemplated by this Agreement. The Company
shall promptly inform Nortel Networks of any material litigation, claim or other
proceeding before any court or other governmental authority that arises
following the date of this Agreement and any material development in any such
existing material litigation, claim or other proceeding. The Company and its
Subsidiaries shall not be required to provide access to or to disclose
information where such access or disclosure would contravene any law, rule,
regulation, order, judgment, decree or agreement. Nortel Networks and the
Company shall make appropriate substitute disclosure arrangements under
circumstances in which the restrictions of the preceding sentence apply.
(b) Subject to the requirements of applicable law, pending consummation of
the Merger, all non-public information provided by or on behalf of the Company
to Nortel Networks or its employees, directors, agents or advisors and Nortel
Networks to the Company or its employees, directors, agents or advisors pursuant
to this Agreement or
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otherwise will remain subject to the obligations of Nortel Networks and the
Company under the Confidentiality Agreement.
(c) No investigation by a party, pursuant to this Section 6.05 or
otherwise, shall affect or be deemed to modify any representation or warranty of
the other party contained herein.
6.06. Acquisition Proposals. (a) The Company shall not, and shall cause
its Subsidiaries and the officers, directors, agents and advisors of the Company
and its Subsidiaries not to, initiate, solicit or knowingly encourage inquiries
or proposals with respect to, or engage in any negotiations concerning, or
provide any confidential information to, or have any discussions with, any
Person relating to, any Acquisition Proposal. Notwithstanding the foregoing, the
Company and its Subsidiaries and their officers, directors, agents and advisors
shall be permitted to engage in any discussions or negotiations with, or provide
any information to, any Person in response to a bona fide written Acquisition
Proposal by any such Person received by the Company, if and only to the extent
that in each such case such proposal was not solicited or encouraged in
violation of this Agreement and (i) the Company Meeting shall not have occurred;
(ii) the Company Board determines in good faith that such Acquisition Proposal
would, if consummated, constitute a Superior Proposal and is reasonably likely
to be consummated; (iii) the Company Board determines, in good faith after
consultation with outside counsel, that such action is legally required as a
matter of the fiduciary duties of the directors under applicable law; and (iv)
prior to providing any information or data to any Person or entering into
discussions or negotiations with any Person, the Company receives from such
Person an executed confidentiality agreement containing terms no less
restrictive with respect to such Person than the terms of the Confidentiality
Agreement with respect to Nortel Networks. The Company shall notify Nortel
Networks promptly, but in any event within 24 hours after any officer or
director of the Company becomes aware, of any such inquiries, proposals, or
offers received by, any such information requested from, or any such discussions
or negotiations sought to be initiated or continued with, any of its
representatives indicating, in connection with such notice, the name of such
Person and the material terms and conditions of any proposals or offers. For the
purposes of this Agreement, "SUPERIOR PROPOSAL" shall mean any bona fide written
Acquisition Proposal made by a third party that was not solicited or encouraged
in violation of this Agreement and which the Company Board determines in its
good faith judgment (based on the written opinion to such effect by a financial
advisor of nationally recognized reputation) to be more favorable to the
stockholders of the Company than the transactions contemplated by this
Agreement. The Company shall immediately cease and cause to be terminated any
activities, discussions or negotiations conducted prior to the date of this
Agreement with any parties other than Nortel Networks with respect to any
Acquisition Proposal. The Company shall advise Nortel Networks of any material
developments with respect to any proposal as to which the Company is exercising
its rights pursuant to the second sentence of this Section 6.06 promptly upon
the occurrence thereof.
(b) Subject to Section 6.06(c) below, neither the Company Board nor any
committee thereof shall (i) withdraw or modify, or publicly propose to withdraw
or modify, in a manner adverse to Nortel Networks, the approval and declaration
of advisability by the Company Board of the "agreement of merger" (as such term
is used in Section 251 of the DGCL) contained in this Agreement, (ii) approve or
recommend, or publicly propose to approve or recommend, any Acquisition
Proposal, or (iii) cause the Company or any of its Subsidiaries to enter into
any letter of intent, agreement in principle, acquisition agreement, merger
agreement or other similar agreement with respect to any Acquisition Proposal.
(c) Notwithstanding subsections (b)(i)-(iii) above, in the event (but only
in the event) that the Company Board determines in good faith, after
consultation with outside counsel,
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that such action is legally required as a matter of the fiduciary duties of the
directors under applicable law, the Company Board may withdraw or modify its
recommendation to Company stockholders of the "agreement of merger" contained in
this Agreement (or not recommend it in the Company Proxy Statement), but only at
a time that is after the fifth Business Day following Nortel Networks' receipt
of written notice advising Nortel Networks that the Company Board has determined
so to withdraw or modify its recommendation as described above and stating the
reasons therefor.
(d) Nothing in this Section 6.06 shall (i) prohibit the Company from
complying, to the extent applicable, with Rules 14d-9 and 14e-2(a) promulgated
under the Exchange Act with respect to an Acquisition Proposal or (ii) permit
the Company to violate its obligations under the first sentence of Section 6.02.
6.07. Affiliate Agreements. (a) Not later than the mailing of the Company
Proxy Statement, the Company shall deliver to Nortel Networks a schedule of each
person that, to the best of its knowledge, is or is reasonably likely to be, as
of the date of the Company Meeting, deemed to be an "affiliate" of it (each, a
"COMPANY AFFILIATE") as that term is used in Rule 145 under the Securities Act.
Thereafter, the Company shall promptly notify Nortel Networks upon becoming
aware of any other person that is or is reasonably likely to be, as of the date
of the Company Meeting, deemed to be a Company Affiliate.
(b) The Company shall use its reasonable efforts to cause each person who
may be deemed to be a Company Affiliate to execute and deliver to Nortel
Networks on or before the date of mailing of the Company Proxy Statement (or, in
the case of any person identified as a possible Company Affiliate after such
date, as promptly thereafter as possible) an agreement in the form attached
hereto as Exhibit A.
6.08. Takeover Laws. Subject to Section 6.06, no party shall take any
action that would cause the transactions contemplated by this Agreement or the
Stockholder Agreements to be subject to requirements imposed by any Takeover Law
and each of Nortel Networks and the Company shall take all necessary steps
within its control to exempt (or ensure the continued exemption of), or minimize
the effect on, the transactions contemplated by this Agreement and the
Stockholder Agreements from, or if necessary challenge the validity or
applicability of, any applicable Takeover Law, as now or hereafter in effect,
including, without limitation, Section 203 of the DGCL or any other Takeover
Laws that purport to apply to this Agreement or the Stockholder Agreements or
the transactions contemplated hereby or thereby.
6.09. Shares Listed. Nortel Networks shall use its reasonable efforts to
list, prior to the Effective Date, on the NYSE and the TSE, subject to official
notice of issuance, the Nortel Networks Common Shares to be issued to the
holders of Company Common Stock in the Merger and upon exercise of Company Stock
Options and Company Purchase Rights to be assumed by Nortel Networks by reason
of the Merger.
6.10. Regulatory Applications. (a) Nortel Networks and the Company and
their respective Subsidiaries shall cooperate and use their respective
reasonable best efforts (i) to prepare all documentation, to effect all filings
(including, without limitation, filings under the HSR Act, the Investment Act
(Canada) and the Competition Act (Canada)) and to obtain all permits, consents,
approvals and authorizations of all third parties and Governmental Authorities
necessary to consummate the transactions contemplated by this Agreement and (ii)
to cause the Merger to be consummated as expeditiously as reasonably
practicable. Each of Nortel Networks and the Company shall have the right to
review in advance, and to the extent practicable each will consult with the
other, in each case subject to applicable laws relating to the exchange of
information, with respect to, all material written information
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submitted to any third party or any Governmental Authority in connection with
the transactions contemplated by this Agreement. In exercising the foregoing
right, each of the parties hereto agrees to act reasonably and as promptly as
practicable. Each party hereto agrees that it will consult with the other party
hereto with respect to the obtaining of all material permits, consents,
approvals and authorizations of all third parties and Governmental Authorities
necessary or advisable to consummate the transactions contemplated by this
Agreement and each party will keep the other party apprised of the status of
material matters relating to completion of the transactions contemplated hereby.
(b) Each party agrees, upon request, to furnish the other party with all
information concerning itself, its Subsidiaries, directors, officers and
stockholders and such other matters as may be reasonably necessary or advisable
in connection with any filing, notice or application made by or on behalf of
such other party or any of its Subsidiaries to any third party or Governmental
Authority.
(c) In furtherance and not in limitation of the covenants of the parties
contained in Sections 6.10(a) and (b), if any objections are asserted with
respect to the transactions contemplated by this Agreement under any Regulatory
Law or if any suit is instituted or threatened by any Governmental Authority or
any private party challenging any of the transactions contemplated by this
Agreement as violative of any Regulatory Law, each of Nortel Networks and the
Company shall use its reasonable best efforts to resolve any such objections or
challenge as such Governmental Authority or private party may have to such
transactions under such Regulatory Law so as to permit consummation of the
transactions contemplated by this Agreement, and if any administrative or
judicial action or proceeding, including any proceeding by a private party, is
instituted (or threatened to be instituted) challenging any transaction
contemplated by this Agreement as violative of any Regulatory Law, each of
Nortel Networks and the Company shall cooperate in all respects with each other
and use its respective reasonable best efforts to contest and resist any such
action or proceeding and to have vacated, lifted, reversed or overturned any
decree, judgment, injunction or other order, whether temporary, preliminary or
permanent, that is in effect and prohibits, prevents or restricts consummation
of the transactions contemplated by this Agreement. Notwithstanding the
foregoing or any other provision of this Agreement, nothing in this Section 6.10
shall limit a party's rights under Sections 7.01(b) and 8.01(d) so long as such
party has theretofore complied in all respects with its obligations under this
Section 6.10.
(d) Nothing contained in this Agreement shall require Nortel Networks or
any of its Subsidiaries to sell or otherwise dispose of, or to hold separately,
or permit the sale or other disposition of, any assets of Nortel Networks, the
Company or their respective Subsidiaries, or require Nortel Networks to refrain
from exercising full authority over the Company and its Subsidiaries after the
Effective Time, whether as a condition to obtaining any approval from a
Governmental Authority or any other Person or for any other reason.
6.11. Indemnification. (a) Following the Effective Date and until the
expiration of any applicable statutory limitations period, the Surviving
Corporation shall indemnify, defend and hold harmless the present and former
directors and officers of the Company and its Subsidiaries, determined as of the
Effective Time (each, an "INDEMNIFIED PARTY") against all costs or expenses
(including reasonable attorneys' fees), judgments, fines, losses, claims,
damages or liabilities (collectively, "COSTS") incurred in connection with any
claim, action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of actions or omissions occurring
at or prior to the Effective Time (including, without limitation, the
transactions contemplated by this Agreement) to the fullest extent that the
Company is permitted to indemnify its directors and officers under the laws of
the State
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of Delaware, the Company Certificate and the Company's bylaws as in effect on
the date hereof (and the Surviving Corporation shall also advance expenses as
incurred to the fullest extent permitted under applicable law), and shall
fulfill and honor in all respects the obligations of the Company pursuant to the
Company Certificate and bylaws and any indemnification agreements between the
Company and any Indemnified Party in effect as of the date of this Agreement.
(b) For a period of six years from the Effective Time, Nortel Networks
shall provide a "runoff" policy with respect to that portion of director's and
officer's liability insurance that serves to cover the Indemnified Parties with
respect to claims against such Indemnified Parties arising from facts or events
which existed or occurred at or before the Effective Time, which "runoff"
insurance shall contain at least the same maximum coverage and amounts to such
Indemnified Parties, and contain terms and conditions no less advantageous, as
that coverage currently provided by the Company; provided, however, that in no
event shall Nortel Networks be required to expend to maintain or obtain the
insurance called for by this Section 6.11(b) more than 200 percent of the
current annual amount expended by the Company to maintain or procure such
directors and officers insurance coverage for the current year (the "INSURANCE
AMOUNT"); provided, further, that if Nortel Networks is unable to maintain or
obtain the insurance called for by this Section 6.11(b), Nortel Networks shall
use its reasonable efforts to obtain as much comparable insurance as is
available for the Insurance Amount; and provided, further, that the Indemnified
Parties may be required to make application and provide customary
representations and warranties to Nortel Networks' insurance carrier for the
purpose of obtaining such insurance.
(c) Any Indemnified Party wishing to claim indemnification under Section
6.11(a), upon learning of any claim, action, suit, proceeding or investigation
described above, shall promptly notify the Surviving Corporation thereof;
provided, that the failure so to notify shall not affect the obligations of the
Surviving Corporation under Section 6.11(a) unless (and then only to the extent)
such failure materially increases the Surviving Corporation's liability under
such subsection (a).
(d) If Nortel Networks or any of its successors or assigns shall
consolidate with or merge into any other entity and shall not be the continuing
or surviving entity of such consolidation or merger or shall transfer all or
substantially all of its assets to any entity, then and in each case, proper
provision shall be made so that the successors and assigns of Nortel Networks
shall assume the obligations set forth in this Section 6.11.
(e) This Section 6.11 shall survive the consummation of the Merger and the
Effective Time. This Section 6.11 is intended to benefit, and may be enforced
by, the Indemnified Parties and their respective heirs, representatives,
successors and assigns, and shall be binding on all successors and assigns of
Nortel Networks and the Surviving Corporation.
6.12. Certain Employee Benefit Matters. (a) For the one year period
ending on the first anniversary of the Effective Date (the "CONTINUATION
PERIOD"), the Surviving Corporation shall, or shall cause its Subsidiaries to,
(i) pay to each of their respective employees, during any portion of the
Continuation Period that such employee is employed by the Surviving Corporation
or any such Subsidiary, an annual salary or hourly wage rate, as applicable,
that is no less than the annual salary or hourly wage rate payable to such
employee immediately prior to the Effective Time and (ii) provide such employees
(as a group) in the aggregate with employee benefits, during any portion of the
Continuation Period that such employees are employed by the Surviving
Corporation or any such Subsidiary, that are substantially similar in the
aggregate to either (i) the employee benefits provided to such employees
pursuant to the Company Plans (other than equity based benefits) immediately
prior to the Effective Time or (ii) the employee benefits provided to similarly-
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situated employees of Nortel Networks and its Subsidiaries. Notwithstanding any
other provision herein, none of the Surviving Corporation, any of its
Subsidiaries or Nortel Networks will have any obligation to continue the
employment of any such employee for any period following the Effective Time.
(b) With respect to the Plans, if any, of Nortel Networks or Nortel
Networks' Subsidiaries in which employees of the Company or its Subsidiaries
("COMPANY EMPLOYEES") become eligible to participate after the Effective Time
(the "NORTEL NETWORKS PLANS"), Nortel Networks shall, or shall cause its
Subsidiaries or the Surviving Corporation to: (i) with respect to each Nortel
Networks Plan that is a medical or health plan, (x) waive any exclusions for
pre-existing conditions under such Nortel Networks Plan that would result in a
lack of coverage for any condition for which the applicable Company Employee
would have been entitled to coverage under the corresponding Company Plan in
which such Company Employee was an active participant immediately prior to his
or her transfer to the Nortel Networks Plan; (y) waive any waiting period under
such Nortel Networks Plan to the extent that such period exceeds the
corresponding waiting period under the corresponding Company Plan in which such
Company Employee was an active participant immediately prior to his or her
transfer to the Nortel Networks Plan (after taking into account the service
credit provided for herein for purposes of satisfying such waiting period); and
(z) provide each Company Employee with credit for any co-payments and
deductibles paid by such Company Employee prior to his or her transfer to the
Nortel Networks Plan (to the same extent such credit was given under the
analogous Company Plan prior to such transfer) in satisfying any applicable
deductible or out-of-pocket requirements under such Nortel Networks Plan for the
plan year that includes such transfer; and (ii) recognize service of the Company
Employees with the Company or any of its Subsidiaries for purposes of
eligibility to participate and vesting credit, and, solely with respect to
vacation benefits, benefit accrual in any Nortel Networks Plan in which the
Company Employees are eligible to participate after the Effective Time to the
extent that such service was recognized for that purpose under the analogous
Company Plan prior to such transfer; provided that the foregoing shall not apply
to the extent it would result in duplication of benefits. Nothing in this
paragraph shall be interpreted to require Nortel Networks to provide for the
participation of any Company Employee in any Nortel Networks Plan.
(c) To the extent applicable, Nortel Networks and the Company shall each
take such reasonable steps as are required to cause the disposition and
acquisition of equity securities (including derivative securities) pursuant to
Article III of this Agreement in connection with the consummation of the Merger
by each individual who is an officer or director of the Company to qualify for
exemption from Section 16(b) of the Exchange Act pursuant to Rule 16b-3(d) and
(e) promulgated under the Exchange Act.
6.13. Accountants' Letters. The Company shall use its reasonable efforts
to cause to be delivered to Nortel Networks a letter of Deloitte & Touche LLP,
the Company's independent auditors ("DELOITTE SAN JOSE"), and Nortel Networks
shall use its reasonable efforts to cause to be delivered to the Company a
letter of Deloitte & Touche LLP, Nortel Networks' independent auditors
("DELOITTE"), each dated a date within two Business Days of the date on which
the Registration Statement shall become effective and addressed to such other
party, and in form and substance customary for "comfort" letters delivered by
independent accountants (x) in the case of Deloitte San Jose, in accordance with
Statement of Accounting Standards No. 72 and (y) in the case of Deloitte, in
accordance with the Handbook of The Canadian Institute of Chartered Accountants.
6.14. Notification of Certain Matters. (a) Each of the Company and
Nortel Networks shall use all reasonable efforts to give prompt notice to the
other of any fact, event
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or circumstance known to it that would cause or constitute a material breach of
any of its representations, warranties, covenants or agreements contained
herein.
(b) Nortel Networks shall promptly notify the Company, and the Company
shall promptly notify Nortel Networks, in writing, of any notice or other
communication from any regulatory authority or self-regulatory organization in
connection with the transactions contemplated by this Agreement.
(c) Each of Nortel Networks and the Company shall promptly notify the
other of any fact, event or circumstance known to it that could reasonably be
expected to, individually or taken together with all other facts, events and
circumstances known to it, cause the Merger to fail to qualify as a
"reorganization" within the meaning of Section 368(a) of the Code.
6.15. Certain Tax Matters. (a) Each of Nortel Networks and the Company
will use its reasonable efforts to cause the Merger to constitute a
reorganization within the meaning of Section 368(a) of the Code, and to timely
satisfy, or cause to be timely satisfied, all applicable tax reporting and
filing requirements contained in the U.S. Code and Treasury Regulations with
respect to the Merger, including the reporting requirements contained in U.S.
Treasury Regulation Section 1.367(a)-3(c)(6).
(b) In connection with the filing of the Registration Statement, the
Company and Nortel Networks shall execute and deliver to Cleary, Gottlieb, Steen
& Hamilton and Cooley Godward LLP, tax representation letters in customary form,
dated as of the date of such filing. Following delivery of such tax
representation letters, each of Nortel Networks and the Company will use
reasonable efforts to cause Cleary, Gottlieb, Steen & Hamilton and Cooley
Godward LLP, respectively, to deliver a tax option satisfying the requirements
of Item 601 of Regulation S-K promulgated under the Securities Act and to obtain
the consent of Cleary, Gottlieb, Steen & Hamilton and Cooley Godward LLP to the
filing of such tax opinions as exhibits to the Registration Statement. In
rendering such opinions, each of such counsel shall be entitled to rely on the
tax representation letters referred to in this Section 6.15.
6.16. Company Annual Meeting. The Company shall cause to be called, prior
to the time a vote is taken with respect to the adoption of this Agreement, the
Company's 2000 annual meeting of stockholders. In connection therewith, the
Company shall use its reasonable efforts to prepare and file with the SEC its
annual report on Form 10-K for the fiscal year ended June 30, 2000 and a proxy
statement with respect to such annual meeting as soon as reasonably practicable.
ARTICLE VII
CONDITIONS TO CONSUMMATION OF THE MERGER
7.01. Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each of Nortel Networks, Sub and the Company to
consummate the Merger is subject to the fulfillment or written waiver by Nortel
Networks, Sub and the Company prior to the Effective Time of each of the
following conditions:
(a) Stockholder Approval. This "agreement of merger" (as that term
is used in Section 251 of the DGCL) shall have been duly adopted by the
requisite vote of the stockholders of the Company.
(b) Regulatory Approvals. All material regulatory approvals required
to consummate the transactions contemplated hereby shall have been obtained
and shall remain in full force and effect and all statutory waiting periods
in respect thereof shall have expired or been terminated and (in the case
of Nortel Networks' obligation to consummate the Merger) no such approvals
shall contain any conditions, restrictions or
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requirements which would reasonably be expected to (i) following the
Effective Time, have a Material Adverse Effect on Nortel Networks and its
Subsidiaries taken as a whole or on the Surviving Corporation or (ii)
require Nortel Networks, in the case of a required approval of a United
States or Canadian Governmental Authority, to take any action that it is
not required to take under Section 6.10(d) hereof.
(c) No Injunction. No U.S. or Canadian Governmental Authority of
competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, judgment, decree, injunction or
other order (whether temporary, preliminary or permanent) which is in
effect and enjoins or prohibits consummation of the Merger.
(d) Registration Statement. The Registration Statement shall have
become effective under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and be
in effect and no proceedings for that purpose shall have been initiated or
threatened by the SEC and not concluded or withdrawn.
(e) Listing. The Nortel Networks Common Shares to be issued in the
Merger and upon exercise of Company Stock Options and Company Purchase
Rights to be assumed by Nortel Networks in connection with the Merger shall
have received conditional approval for listing on the NYSE and the TSE,
subject to official notice of issuance.
7.02. Conditions to Obligation of the Company. The obligation of the
Company to consummate the Merger is also subject to the fulfillment or written
waiver by the Company prior to the Effective Time of each of the following
conditions:
(a) Representations and Warranties. All representations and
warranties of Nortel Networks set forth in this Agreement (without giving
effect to any standard, qualification or exception contained therein with
respect to materiality or Material Adverse Effect) shall be true and
correct, as of the date of this Agreement and as of the Effective Date as
though made on and as of the Effective Date (except that representations
and warranties that by their terms speak as of the date of this Agreement
or some other date shall be true and correct as of such date), except as
would not have or reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on Nortel Networks; and the Company
shall have received a certificate, dated the Effective Date, signed on
behalf of Nortel Networks by the Chief Executive Officer or the Chief
Financial Officer of Nortel Networks to such effect.
(b) Performance of Obligations. Nortel Networks shall have performed
in all material respects all obligations required to be performed by it
under this Agreement at or prior to the Effective Time, and the Company
shall have received a certificate, dated the Effective Date, signed on
behalf of Nortel Networks by the Chief Executive Officer or the Chief
Financial Officer of Nortel Networks to such effect.
(c) Opinion of the Company's Counsel. The Company shall have
received an opinion of Cooley Godward LLP, counsel to the Company, dated
the Effective Date, to the effect that, on the basis of facts,
representations and assumptions set forth in such opinion (including tax
representation letters in customary form from each of Nortel Networks and
the Company), (a) the Merger constitutes a reorganization within the
meaning of Section 368(a) of the Code, (b) Nortel Networks shall be treated
as a corporation under Section 367(a)(1) of the Code with respect to each
transfer of property thereto pursuant to the Merger, and (c) that,
accordingly, (i) no gain or loss will be recognized by the Company as a
result of the Merger and (ii) no gain or loss will be recognized by a
stockholder of the Company who receives Nortel Networks
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Common Shares in exchange for shares of Company Common Stock, except with
respect to cash received in lieu of fractional share interests. In
rendering its opinion, such counsel may require and rely upon
representations contained in letters from the Company, Nortel Networks, Sub
and stockholders of the Company. Counsel's opinion shall not address the
tax consequences applicable to any stockholder of the Company who,
immediately after the Merger, will be a "five percent transferee
shareholder" with respect to Nortel Networks within the meaning of U.S.
Treasury Regulation Section 1.367(a)-3(c)(5).
(d) No Material Adverse Effect. From the date of this Agreement
through the Effective Date, no event shall have occurred or circumstance
arisen that, individually or taken together with all other such events and
circumstances, has had or would reasonably be expected to have a Material
Adverse Effect on Nortel Networks.
7.03. Conditions to Obligation of Nortel Networks and Sub. The
obligations of Nortel Networks and Sub to consummate the Merger are also subject
to the fulfillment or written waiver by Nortel Networks and Sub prior to the
Effective Time of each of the following conditions:
(a) Representations and Warranties. All representations and
warranties of the Company set forth in this Agreement (without giving
effect to any standard, qualification or exception contained therein with
respect to materiality or Material Adverse Effect) shall be true and
correct, as of the date of this Agreement and as of the Effective Date as
though made on and as of the Effective Date (except that representations
and warranties that by their terms speak as of the date of this Agreement
or some other date shall be true and correct as of such date), except as
would not have or reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on the Company; and Nortel Networks
and Sub shall have received a certificate, dated the Effective Date, signed
on behalf of the Company by the Chief Executive Officer of the Company to
such effect.
(b) Performance of Obligations of the Company. The Company shall
have performed in all material respects all obligations required to be
performed by it under this Agreement at or prior to the Effective Time, and
Nortel Networks and Sub shall have received a certificate, dated the
Effective Date, signed on behalf of the Company by the Chief Executive
Officer of the Company to such effect.
(c) No Material Adverse Effect. From the date of this Agreement
through the Effective Date, no event shall have occurred or circumstance
arisen that, individually or taken together with all such other such events
and circumstances, has had or would reasonably be expected to have a
Material Adverse Effect on the Company.
(d) Opinion of Nortel Networks and Sub's Counsel. Nortel Networks
shall have received an opinion of Cleary, Gottlieb, Steen & Hamilton,
special counsel to Nortel Networks and Sub dated the Effective Date, to the
effect that, on the basis of facts, representations and assumptions set
forth in such opinion (including tax representation letters in customary
form from each of Nortel Networks and the Company), (a) the Merger
constitutes a reorganization under Section 368(a) of the Code, (b) Nortel
Networks shall be treated as a corporation under Section 367(a)(1) of the
Code with respect to each transfer of property thereto pursuant to the
Merger and (c) that, accordingly, (i) no gain or loss will be recognized by
the Company as a result of the Merger and (ii) no gain or loss will be
recognized by a stockholder of the Company who receives Nortel Networks
Common Shares in exchange for shares of the Company Common Stock, except
with respect to cash received in lieu of fractional share interests.
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In rendering its opinion, such counsel may require and rely upon
representations contained in letters from the Company, Nortel Networks, Sub
and stockholders of the Company. Counsel's opinion shall not address the
tax consequences applicable to any stockholder of the Company who,
immediately after the Merger, will be a "five percent transferee
shareholder" with respect to Nortel Networks within the meaning of U.S.
Treasury Regulation Section 1.367(a)-3(c)(5).
(e) No Action Seeking Injunction. No U.S. or Canadian Governmental
Authority of competent jurisdiction shall have brought, and there shall not
continue to be pending, an action or proceeding (which is still pending on
the Effective Date) seeking to enjoin or prohibit consummation of the
Merger, or to impose substantial penalties as a result of the Merger, which
action or proceeding is reasonably likely to succeed.
ARTICLE VIII
TERMINATION
8.01. Termination. This Agreement may be terminated, and the Merger may
be abandoned:
(a) Mutual Consent. At any time prior to the Effective Time, by the
mutual consent of Nortel Networks and the Company by action taken by their
respective Boards of Directors.
(b) Breach. At any time prior to the Effective Time, by Nortel
Networks or the Company, in the event of either: (i) a breach by the other
party of any representation or warranty contained herein which would result
in the non-satisfaction of the conditions set forth in Sections 7.02(a) or
7.03(a), as the case may be, which breach is not capable of being cured or
has not been cured within 30 calendar days after the giving of written
notice to the breaching party of the fact and principal details of such
breach; or (ii) a material breach by the other party of any of the
covenants or agreements contained herein, which breach is not capable of
being cured or has not been cured within 30 calendar days after the giving
of written notice to the breaching party of the fact and principal details
of such breach. Without limiting the foregoing, for all purposes of this
Agreement, any breach of the agreements contained in Section 6.06 shall
constitute a breach which is not capable of being cured.
(c) Delay. At any time prior to the Effective Time, by Nortel
Networks or the Company, if its Board of Directors so determines, in the
event that the Merger is not consummated by February 28, 2001, or, in the
event that an approval of any Governmental Authority required to be
obtained for the consummation of the transactions contemplated by this
Agreement has not been obtained, by April 30, 2001, except to the extent
that the failure of the Merger then to be consummated arises out of or
results from the knowing action or inaction of the party seeking to
terminate pursuant to this Section 8.01(c) which action or inaction is in
violation of its obligations under this Agreement.
(d) No Approval.
(i) By the Company or Nortel Networks, by action taken by its
Board of Directors, in the event the approval of any U.S. or Canadian
Governmental Authority required for consummation of the Merger and the
other transactions contemplated by this Agreement shall have been denied
by final nonappealable action of such Governmental Authority.
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(ii) By Nortel Networks, by action taken by its Board of
Directors, in the event any required approval of a Governmental
Authority contains any final nonappealable conditions, restrictions or
requirements which would reasonably be expected to (A) following the
Effective Time, have a Material Adverse Effect on Nortel Networks and
its Subsidiaries taken as a whole or on the Surviving Corporation or (B)
require Nortel Networks, in the case of a required approval of a United
States or Canadian Governmental Authority, to take any action that it is
not required to take under Section 6.10(d) hereof.
(iii) By the Company, by action taken by its Board of Directors,
in the event any required approval of a Governmental Authority contains
any final, nonappealable conditions, restrictions or requirements which
would reasonably be expected to (A) following the Effective Time, have a
Material Adverse Effect on Nortel Networks and its Subsidiaries taken as
a whole or (B) require Nortel Networks, in the case of a required
approval of a United States or Canadian Governmental Authority, to take
any action that it is not required to take under Section 6.10(d) hereof,
unless (in either case) within 30 days following receipt by Nortel
Networks of written notice of the Company's intent to terminate this
Agreement under this clause (iii) Nortel Networks notifies the Company
that it waives its right to terminate this Agreement under clause (ii)
above.
(iv) By Nortel Networks or the Company, if its Board of Directors
so determines, in the event the approval of the Company's stockholders
required by Section 7.01(a) herein is not obtained at the Company
Meeting at which a vote was taken by reason of the failure to obtain the
requisite vote required by Section 7.01(a).
(e) Withdrawal of Recommendation. By Nortel Networks, if the Board
of Directors of the Company, prior to the Company Meeting, (A) shall
withdraw or modify in any adverse manner its recommendation of the
"agreement of merger" (as such term is used in Section 251 of the DGCL)
contained in this Agreement (whether or not such withdrawal or modification
is permitted by Section 6.06(c)), or (B) shall resolve to do so.
8.02. Effect of Termination and Abandonment. (a) In the event of
termination of this Agreement and the abandonment of the Merger pursuant to this
Article VIII, no party to this Agreement (nor any of their respective officers,
directors or agents) shall have any liability or further obligation to any other
party hereunder except as set forth in subsections (b) and (c) below and in
Section 9.01, except that termination shall not relieve a party from liability
for any willful breach of this Agreement.
(b) Nortel Networks and the Company agree that the Company shall pay to
Nortel Networks the sum of $225,000,000 (the "TERMINATION FEE") solely as
follows:
(i) if (x) the Company shall terminate this Agreement pursuant to
Section 8.01(c) due to the failure of the parties to consummate the Merger
by the relevant date (unless such failure results primarily from the action
or inaction of Nortel Networks or any Subsidiary or other affiliate of
Nortel Networks or from Nortel Networks' or Sub's inability to obtain
consent or approval on a timely basis (in a manner satisfying the
conditions set forth in 7.01(b)) of, or make any filing or registration
with, any Governmental Authority) and (y) at any time after the date of
this Agreement and at or before such termination there shall have been made
to the Company or its stockholders an Acquisition Proposal and (z) within
12 months of the termination of this Agreement, the Company enters into a
definitive agreement with any third party providing for the
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consummation of an Acquisition Proposal or an Acquisition Proposal is
consummated (it being understood that for the purposes of this Section
8.02(b)(i), all references to "20%" in the definition of "Acquisition
Proposal" shall be replaced with "40%");
(ii) if (x) the Company or Nortel Networks shall terminate this
Agreement pursuant to Section 8.01(d)(iv) due to the failure of the
Company's stockholders to approve and adopt this Agreement and (y) at any
time after the date of this Agreement and at or before the Company Meeting
there shall exist an Acquisition Proposal which has been publicly announced
or the existence of which is a matter of public knowledge and (z) within 12
months of the termination of this Agreement, the Company enters into a
definitive agreement with any third party providing for the consummation of
an Acquisition Proposal or an Acquisition Proposal is consummated (it being
understood that for the purposes of this Section 8.02(b)(ii), all
references to "20%" in the definition of "Acquisition Proposal" shall be
replaced with "40%");
(iii) if Nortel Networks shall terminate this Agreement pursuant to
Section 8.01(b)(ii) following a willful breach by the Company of (A) the
covenants or agreements contained in Section 6.06, or (B) following the
making of an Acquisition Proposal to the Company or its stockholders, any
of the covenants or agreements contained in Sections 6.01, 6.02, 6.03, 6.08
or 6.10; or
(iv) if Nortel Networks shall terminate this Agreement pursuant to
Section 8.01(e).
(c) The Termination Fee required to be paid pursuant to subsection (b)(i)
or (b)(ii) above shall be payable by the Company to Nortel Networks not later
than two Business Days after the date the Company enters into a definitive
agreement providing for, or the date of consummation of, an Acquisition
Proposal, whichever is earlier. The Termination Fee required to be paid pursuant
to subsection (b)(iii) or (b)(iv) above shall be payable by the Company to
Nortel Networks not later than two Business Days after the termination referred
to therein. Notwithstanding the foregoing, (i) in no event shall more than one
Termination Fee be payable, and (ii) Nortel Networks may elect, by notice to the
Company, to defer the payment of the Termination Fee from time to time for a
period or periods of up to an aggregate of twelve months after the date such fee
would otherwise be payable. All payments under this Section 8.02 shall be made
by wire transfer of immediately available funds to an account designated by
Nortel Networks.
ARTICLE IX
MISCELLANEOUS
9.01. Survival. All representations, warranties, agreements and covenants
contained in this Agreement shall not survive the Effective Time or termination
of this Agreement if this Agreement is terminated prior to the Effective Time;
provided, however, that if the Effective Time occurs, the agreements of the
parties in Sections 6.01, 6.03, 6.04, 6.09, 6.11, 6.12 and 6.15 and this Article
IX shall survive the Effective Time, and if this Agreement is terminated prior
to the Effective Time, the agreements of the parties in the proviso to Section
6.05(a) with respect solely to the unauthorized use of information, Sections
6.05(b) and 8.02 and this Article IX and the Confidentiality Agreement shall
survive such termination.
9.02. Amendment; Extension; Waiver. (a) Subject to compliance with
applicable law, this Agreement may be amended by the parties hereto, by action
taken or authorized by their respective Boards of Directors, at any time before
or after adoption of this Agreement and approval of any other matter by the
stockholders of the Company; provided, however, that after any such adoption and
approval of this Agreement by the stockholders of the Company, there may not be,
without further adoption or approval of such stockholders, any
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amendment of this Agreement which by law requires such further approval by such
stockholders. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto.
(b) Prior to the Effective Time, the parties hereto, by action taken or
authorized by their respective Boards of Directors, may, to the extent legally
allowed, (i) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (ii) waive with respect to the other
parties hereto any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto and (iii) waive compliance
by the other parties hereto with any of the agreements or conditions contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in a written instrument signed on behalf
of such party, but such extension or waiver or failure to insist on strict
compliance with an obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
9.03. Counterparts. This Agreement may be executed in one or more
counterparts, each of which when executed shall be deemed to constitute an
original but all of which when taken together shall constitute one and the same
instrument.
9.04. Governing Law. This Agreement shall be governed by, and interpreted
in accordance with, the laws of the State of New York (except that matters of
corporate law and fiduciary duties of directors shall be governed by the laws of
the State of Delaware), without regard to the conflict of law principles
thereof.
9.05. Expenses. Subject to Section 8.02(b) and except as otherwise
provided herein, each party hereto will bear all expenses incurred by it in
connection with this Agreement and the transactions contemplated hereby, except
that printing and mailing expenses and SEC registration and filing fees shall be
shared equally between the Company and Nortel Networks.
9.06. Notices. All notices, requests and other communications hereunder
to a party shall be in writing and shall be deemed given (a) upon delivery if
personally delivered or (b) three Business Days after being mailed by registered
or certified mail (return receipt requested) or (c) one Business Day after being
delivered by overnight courier or by facsimile (with confirmation) to such party
at its address or facsimile set forth below or such other address or facsimile
as such party may specify by notice to the parties hereto.
If to Nortel Networks or to Sub, to:
Nortel Networks Corporation
8200 Dixie Road, Suite 100
Brampton, Ontario
Canada L6T 5P6
Attention: Corporate Secretary
Fax: (905) 863-8386
Phone: (905) 863-0000
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With a copy to:
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, New York 10006
Attention: Victor I. Lewkow, Esq.
Paul J. Shim, Esq.
Fax: (212) 225-3999
Phone: (212) 225-2000
If to the Company, to:
Alteon WebSystems, Inc.
50 Great Oaks Boulevard
San Jose, California 95119
Attention: Dominic P. Orr
Fax: (408) 360-5500
Phone: (408) 360-5501
With a copy to:
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, California 94306-2155
Attention: Eric Jensen, Esq.
Keith A. Flaum, Esq.
Fax: (650) 849-7400
Phone: (650) 843-5000
9.07. Entire Understanding. This Agreement (including the Company
Disclosure Schedule) and the Confidentiality Agreement represent the entire
understanding of the parties hereto with reference to the transactions
contemplated hereby and thereby and this Agreement supersedes any and all other
oral or written agreements (other than the Confidentiality Agreement) heretofore
made.
9.08. Assignment; No Third Party Beneficiaries. Neither this Agreement,
nor any of the rights, interests or obligations shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns. Except for Section
6.11, nothing in this Agreement expressed or implied, is intended to confer upon
any person, other than the parties hereto or their respective successors, any
rights, remedies, obligations or liabilities under or by reason of this
Agreement.
9.09. Interpretation. When a reference is made in this Agreement to
Sections, Exhibits or the Company Disclosure Schedule, such reference shall be
to a Section of, or Exhibit or Company Disclosure Schedule to, this Agreement
unless otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and are not part of this Agreement.
Whenever the words "include", "includes" or "including" are used in this
Agreement, they shall be deemed to be followed by the words "without
limitation". Any reference to "herein" or "hereof" or similar terms shall refer
to the agreement as a whole rather than to the individual paragraph, section or
article.
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9.10. Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as it is enforceable.
9.11. Specific Performance; Attorneys' Fees; Waiver of Jury
Trial. (a) The parties agree that: (i) in the event of any breach or
threatened breach of any covenant, obligation or other provision set forth in
this Agreement, any party shall be entitled (in addition to any other remedy
that may be available to it) to (A) a decree or order of specific performance or
mandamus to enforce the observance and performance of such covenant, obligation
or other provision, and (B) an injunction restraining such breach or threatened
breach; and (ii) no Person shall be required to provide any bond or other
security in connection with any such decree, order or injunction or in
connection with any related action or proceeding.
(b) In any action at law or suit in equity to enforce this Agreement or
the rights of any of the parties hereunder, the prevailing party in such action
or suit shall be entitled to receive a reasonable sum for its attorneys' fees
and all other reasonable costs and expenses incurred in such action or suit.
(c) Each of the parties hereto irrevocably waives the right to trial by
jury.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in counterparts by their duly authorized officers, all as of the day
and year first above written.
NORTEL NETWORKS CORPORATION
/s/ CLARENCE J. CHANDRAN
By:
-------------------------------------------
Name: Clarence J. Chandran
Title: Chief Operating Officer
/s/ WILLIAM R. KERR
By:
-------------------------------------------
Name: William R. Kerr
Title: Senior Vice President
DARIUS CORP.
/s/ KHUSH DADYBURJOR
By:
-------------------------------------------
Name: Khush Dadyburjor
Title:
ALTEON WEBSYSTEMS, INC.
/s/ DOMINIC P. ORR
By:
-------------------------------------------
Name: Dominic P. Orr
Title: Chief Executive Officer
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EXHIBIT A
FORM OF AFFILIATE LETTER
Nortel Networks Corporation
Ladies and Gentlemen:
I have been advised that as of the date of this letter I may be deemed to
be an "affiliate" of Alteon WebSystems, Inc., a Delaware corporation (the
"Company"), as the term "affiliate" is defined for purposes of paragraphs (c)
and (d) of Rule 145 of the rules and regulations (the "Rules and Regulations")
of the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Act"). Pursuant to the terms of the
Agreement and Plan of Merger dated as of July 28, 2000 (the "Agreement"), by and
among Nortel Networks Corporation, a Canadian corporation ("Nortel Networks"),
Darius Corp., a Delaware corporation and wholly owned subsidiary of Nortel
Networks ("Sub") and the Company, Sub will merge with and into the Company (the
"Merger") (capitalized terms used and not otherwise defined herein shall have
the respective meanings ascribed to them in the Agreement).
As a result of the Merger, I may receive common shares, without par value,
of Nortel Networks (the "Nortel Networks Common Shares") in exchange for shares
owned by me of common stock, par value $0.001 per share, of the Company.
I represent, warrant and covenant to Nortel Networks that in the event I
receive any Nortel Networks Common Shares as a result of the Merger:
A. I shall not make any sale, transfer or other disposition of Nortel
Networks Common Shares I receive in the Merger in violation of the Act or the
Rules and Regulations.
B. I have carefully read this letter and the Agreement and discussed the
requirements of such documents and other applicable limitations upon my ability
to sell, transfer or otherwise dispose of the Nortel Networks Common Shares, to
the extent I felt necessary, with my counsel or counsel for Nortel Networks or
the Company.
C. I have been advised that the issuance of Nortel Networks Common Shares
to me pursuant to the Merger has been registered with the Commission under the
Act on a Registration Statement on Form S-4. However, I have also been advised
that, since at the time the Merger was submitted for a vote of the stockholders
of the Company, I may be deemed to have been an affiliate of the Company and the
distribution by me of the Nortel Networks Common Shares has not been registered
under the Act, I may not sell, transfer or otherwise dispose of the Nortel
Networks Common Shares issued to me in the Merger unless (i) such sale, transfer
or other disposition has been registered under the Act, (ii) such sale, transfer
or other disposition is made in conformity with Rule 145 promulgated by the
Commission under the Act, (iii) in the opinion of counsel reasonably acceptable
to Nortel Networks, such sale, transfer or other disposition is otherwise exempt
from registration under the Act, or (iv) an authorized representative of the
Commission takes a position in writing to the effect that the Commission would
take no action, or that the staff of the Commission would not recommend that the
Commission take action, with respect to such sale, transfer or other
disposition, and a copy of such written position is delivered to Nortel
Networks.
D. I understand that, except as may be provided in any registration rights
agreement entered into by Nortel Networks and the undersigned, Nortel Networks
is under no obligation to register the sale, transfer or other disposition of
the Nortel Networks Common Shares by me or on my behalf under the Act or to take
any other action necessary in order to make compliance with an exemption from
such registration available.
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E. Notwithstanding any other provision contained herein, this letter and
all of my obligations hereunder shall terminate upon the termination of the
Agreement prior to the Effective Time.
Execution of this letter should not be considered an admission on my part
that I am an "affiliate" of the Company as described in the first paragraph of
this letter or as a waiver of any rights I may have to object to any claim that
I am such an affiliate on or after the date of this letter.
Very truly yours,
-------------------------------------------
Agreed to and Accepted this
day of , 2000
NORTEL NETWORKS CORPORATION
By:
Name:
Title:
By:
Name:
Title:
A-53
<PAGE> 210
ANNEX B
Execution Version
FORM OF STOCKHOLDER AGREEMENT
This STOCKHOLDER AGREEMENT (this "Agreement"), dated as of July 28,
2000, is entered into by and between the undersigned stockholder (the
"Stockholder Party") of Alteon WebSystems, Inc., a corporation organized under
the laws of Delaware (the "Company"), and Nortel Networks Corporation, a
corporation organized under the laws of Canada ("Nortel Networks").
WHEREAS, simultaneously with the execution of this Agreement, Nortel
Networks, Darius Corp., a wholly owned subsidiary of Nortel Networks ("Sub"),
and the Company, are entering into an Agreement and Plan of Merger, dated as of
the date hereof (as the same may be amended or supplemented, the "Merger
Agreement"), providing, among other things, for the merger of Sub with and into
the Company (the "Merger"); and
WHEREAS, as of the date hereof, the Stockholder Party is the Beneficial
Owner (as defined below) of the shares of common stock, par value $0.001 per
share, of the Company ("Common Stock") set forth in Schedule I hereto (the
"Owned Shares"); and
WHEREAS, as an inducement and a condition to its entering into the
Merger Agreement and incurring the obligations set forth therein, Nortel
Networks has required that the Stockholder Party enter into this Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual
premises, representations, warranties, covenants and agreements contained herein
and in the Merger Agreement, the parties hereto, intending to be legally bound
hereby, agree as follows:
1. Certain Definitions. Capitalized terms used but not defined in this
Agreement are used in this Agreement with the meanings given to such terms in
the Merger Agreement. In addition, for purposes of this Agreement:
"Affiliate" means, with respect to any specified Person, any Person that
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, the Person specified. For
purposes of this Agreement, with respect to the Stockholder Party, "Affiliate"
shall not include the Company and the Persons that directly, or indirectly
through one or more intermediaries, are controlled by the Company.
"Beneficially Owned" or "Beneficial Ownership" with respect to any
securities means having beneficial ownership of such securities (as determined
pursuant to Rule 13d-3 under the Exchange Act, disregarding the phrase "within
60 days" in paragraph (d)(1)(i) thereof), including pursuant to any agreement,
arrangement or understanding, whether or not in writing. Without duplicative
counting of the same securities by the same holder, securities Beneficially
Owned by a Person shall include securities Beneficially Owned by all Affiliates
of such Person and all other Persons with whom such Person would constitute a
"Group" within the meaning of Section 13(d) of the Exchange Act and the rules
promulgated thereunder.
"Beneficial Owner" with respect to any securities means a Person who has
Beneficial Ownership of such securities.
"Shares" mean the Owned Shares and any shares of Common Stock the
Beneficial Ownership of which is acquired in any manner by the Stockholder Party
(including without limitation, pursuant to the exercise of existing stock
options or warrants) after the date hereof.
B-1
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"Transfer" means, with respect to a security, the sale, transfer,
pledge, hypothecation, encumbrance, assignment or disposition of such security
or the Beneficial Ownership thereof, the offer to make such a sale, transfer or
other disposition, and each option, agreement, arrangement or understanding,
whether or not in writing, to effect any of the foregoing. As a verb, "Transfer"
shall have a correlative meaning.
2. No Disposition or Solicitation.
(a) The Stockholder Party agrees that from and after the date hereof,
except as contemplated by this Agreement, such party will not Transfer or agree
to Transfer any of the Shares other than with Nortel Networks' prior written
consent, or grant any proxy or power-of-attorney with respect to the Shares
other than pursuant to this Agreement; provided, that nothing in this Agreement
shall prohibit the Stockholder Party from (a) exercising any option to purchase
shares of Common Stock, or (b) effecting any Transfer of Shares (i) by will or
applicable laws of descent and distribution or (ii) to any member of the
immediate family of the Stockholder Party, or any trust, limited partnership or
other similar entity the Beneficial Ownership of which is held by the
Stockholder Party or such family members (each a "Permitted Transferee"), so
long as such Permitted Transferee agrees in writing, in form and substance
reasonably satisfactory to Nortel Networks, to be bound by the terms of this
Agreement to the same extent as the Stockholder Party is bound.
(b) The Stockholder Party agrees that from and after the date hereof,
except as contemplated by this Agreement or, solely in the Stockholder Party's
capacity as an officer or director of the Company to the extent specifically
permitted by the Merger Agreement, the Stockholder Party will not directly or
indirectly solicit, initiate, or knowingly encourage any inquiries or proposals
from, discuss or negotiate with, or provide any non-public information to, any
Person relating to, or otherwise facilitate, any Acquisition Proposal.
(c) The Stockholder Party agrees that, except for communications made in
the course of such party's duties as an officer or director of the Company or
unless required by applicable law, neither the Stockholder Party nor any of such
party's Affiliates shall make any press release or public announcement with
respect to Nortel Networks or this Agreement and the Merger Agreement and the
transactions contemplated hereby and thereby, without the prior written consent
of Nortel Networks.
3. Stockholder Vote. The Stockholder Party agrees that (i) at such
time as the Company conducts a meeting of or otherwise seeks a vote or consent
of its stockholders for the purpose of adopting the Merger Agreement (such
meeting or any adjournment thereof, or such consent process, the "Company
Meeting"), the Stockholder Party will vote, or provide a consent with respect
to, all issued and outstanding shares of Common Stock over which the Stockholder
Party has voting power ("Voting Shares") in favor of the adoption of the Merger
Agreement, provided that the Stockholder Party shall not be required to vote
for, or provide a consent with respect to, any action that would reduce the
number of Nortel Networks Common Shares to be received by the Stockholder Party
in respect of such party's Common Stock in the Merger, and (ii) the Stockholder
Party will (at any meeting of stockholders) vote the Voting Shares against, and
will not consent to, any Acquisition Proposal or any action that would delay,
prevent or frustrate the transactions contemplated by the Merger Agreement.
Without limiting the foregoing, it is understood that the obligations
under clause (i) above shall remain applicable in respect of each meeting of
stockholders of the Company duly called for the purpose of adopting the Merger
Agreement regardless of the position of the Company Board as to the Merger at
the time of such meeting, and that the obligations
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under clause (ii) above shall continue until the termination of this Agreement
in accordance with Section 9.
4. Reasonable Efforts to Cooperate. The Stockholder Party will provide
any information reasonably requested by the Company, Nortel Networks or Sub for
any regulatory application or filing made or approval sought for the
transactions contemplated by the Merger Agreement (including filings with the
SEC).
5. Irrevocable Proxy. (a) In furtherance of the agreements contained in
Section 3 of this Agreement, the Stockholder Party hereby irrevocably grants to,
and appoints, Nortel Networks and any designees of Nortel Networks, and each of
them individually, the Stockholder Party's proxy and attorney-in-fact (with full
power of substitution), for and in the name, place and stead of the Stockholder
Party, to vote all Voting Shares, or grant a consent or approval in respect of
the Voting Shares, or execute and deliver a proxy to vote the Voting Shares, (x)
subject to the proviso set forth in clause (i) of the first paragraph of Section
3, in favor of the adoption of the Merger Agreement and approval of the terms
thereof and each of the other transactions contemplated by the Merger Agreement
and (y) against any Acquisition Proposal or any other matter referred to in
clause (ii) of the first sentence of Section 3 hereof.
(b) The Stockholder Party represents and warrants to Nortel Networks
that any proxies heretofore given in respect of the Voting Shares are not
irrevocable, and hereby revokes any such proxies.
(c) The Stockholder Party hereby affirms that the irrevocable proxy set
forth in this Section 5 is given in connection with, and in consideration of,
the execution of the Merger Agreement by Nortel Networks and Sub, and that such
irrevocable proxy is given to secure the performance of the duties of such
Stockholder Party under this Agreement. The Stockholder Party hereby further
affirms that the irrevocable proxy is coupled with an interest and may under no
circumstances be revoked. The Stockholder Party hereby ratifies and confirms all
that such irrevocable proxy may lawfully do or cause to be done by virtue
hereof. Such irrevocable proxy is executed and intended to be irrevocable in
accordance with the provisions of Section 218 of the DGCL. The proxy granted in
this Section 5 shall remain valid until terminated pursuant to Section 9 hereof.
6. Covenant of Stockholder Party. The Stockholder Party agrees to take
all reasonable action to (i) permit (x) the Shares to be acquired in the Merger
and (y) the voting of the Voting Shares in accordance with the terms of this
Agreement and (ii) prevent creditors in respect of any pledge of the Shares from
exercising their rights under such pledge.
7. Representations, Warranties and Covenants of Stockholder Party. The
Stockholder Party hereby represents and warrants to, and agrees with, Nortel
Networks as follows:
(a) The Stockholder Party has all necessary power and authority and
legal capacity to execute and deliver this Agreement and perform his obligations
hereunder.
(b) This Agreement has been duly and validly executed and delivered by
the Stockholder Party and constitutes the valid and binding agreement of the
Stockholder Party, enforceable against the Stockholder Party in accordance with
its terms except to the extent limited by (i) applicable bankruptcy, insolvency
or similar laws affecting creditors' rights or (ii) general equity principles,
whether considered at law or in equity.
(c) Subject to applicable community property laws, the Stockholder Party
is the sole Beneficial Owner of the Owned Shares. The Stockholder Party has good
and marketable title (which may include holding in nominee or "street" name) to
all of the Owned Shares,
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free and clear of all liens, claims, options, proxies, voting agreements and
security interests (other than as created by this Agreement and restrictions on
Transfer under applicable securities laws). The Owned Shares constitute all of
the capital stock of the Company Beneficially Owned by the Stockholder Party and
neither the Stockholder Party nor any of such party's Affiliates is the
Beneficial Owner of, or has any right to acquire (whether currently, upon lapse
of time, following the satisfaction of any conditions, upon the occurrence of
any event or any combination of the foregoing) any Common Stock or any
securities convertible into or exchangeable or exercisable for Common Stock.
(d) Neither the execution and delivery of this Agreement by the
Stockholder Party nor the consummation of the transactions contemplated hereby
will (i) conflict with, result in any violation of, require any consent under or
constitute a default (whether with notice or lapse of time or both) by the
Stockholder Party under any mortgage, bond, indenture, agreement, instrument or
obligation to which the Stockholder Party is a party or by which the Stockholder
Party or any of the Shares is bound; (ii) violate any judgment, order,
injunction, decree or award of any court, administrative agency or governmental
body that is binding on the Stockholder Party; or (iii) constitute a violation
by the Stockholder Party of any law or regulation of any jurisdiction, in each
case except for violations, conflicts or defaults that would not have a material
adverse effect on the ability of the Stockholder Party to perform the party's
obligations under this Agreement.
8. Representations and Warranties of Nortel Networks. Nortel Networks
represents and warrants to the Stockholder Party that Nortel Networks has full
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder. The execution, delivery and performance of
this Agreement by Nortel Networks will not constitute a violation of, conflict
with or result in a default under, (i) any contract, understanding or
arrangement to which Nortel Networks is a party or by which it is bound or
require the consent of any other Person or any party pursuant thereto, (ii) any
judgment, decree or order applicable to Nortel Networks, or (iii) any law, rule
or regulation of any governmental body, in each case except for violations,
conflicts or defaults that would not have a material adverse effect on the
ability of Nortel Networks to perform its obligations under this Agreement; and
this Agreement constitutes a legal, valid and binding agreement on the part of
Nortel Networks, enforceable against Nortel Networks in accordance with its
terms, except as such enforceability may be limited by principles applicable to
creditors' rights generally or governing the availability of equitable relief.
The execution and delivery by Nortel Networks of this Agreement and the
consummation by Nortel Networks of the transactions contemplated hereby have
been duly and validly authorized by the Board of Directors of Nortel Networks
and no other corporate proceedings on the part of Nortel Networks are necessary
to authorize this Agreement or to consummate the transactions contemplated
hereby. This Agreement has been duly and validly executed and delivered by
Nortel Networks.
9. Termination. This Agreement (including the proxy referred to
herein) shall terminate upon the earliest to occur of (a) the Effective Time,
(b) the termination of the Merger Agreement (unless Nortel Networks is or may be
entitled to receive a Termination Fee under the Merger Agreement following such
termination), and (c) 30 days following the termination of the Merger Agreement
in the event that Nortel Networks is or may be entitled to receive a Termination
Fee under the Merger Agreement following such termination; provided that, during
such 30 day period, the Stockholder Party shall be permitted to make sales of
Shares in broker transactions effected through the Nasdaq Stock Market. No such
termination shall relieve any party from liability for any breach of this
Agreement prior to termination.
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10. Miscellaneous.
(a) This Agreement represents the entire understanding of the parties
hereto with reference to the subject matter hereof and supersedes any and all
other oral or written agreements and understandings among the parties heretofore
made.
(b) The Stockholder Party agrees that this Agreement and the respective
rights and obligations of such Stockholder Party hereunder shall attach to all
Common Stock, and all securities convertible into such shares, that become
Beneficially Owned by the Stockholder Party.
(c) Except as otherwise provided in this Agreement, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses.
(d) This Agreement and all of the provisions hereof shall be binding
upon and inure to the benefit of the parties and their respective successors,
personal or legal representatives, executors, administrators, heirs,
distributees, devisees, legatees and permitted assigns, but neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any party (whether by operation of law or otherwise) without the
prior written consent of the other party; provided, that Nortel Networks may
assign any or all rights under this Agreement to Sub or any other Subsidiary of
Nortel Networks. Nothing in this Agreement,express or implied, is intended to or
shall confer upon any other Person any rights, benefits or remedies of any
nature whatsoever under or by reason of this Agreement.
(e) This Agreement may not be amended, changed, supplemented, or
otherwise modified or terminated, except upon the execution and delivery of a
written agreement executed by the parties hereto; provided, that Nortel Networks
may waive compliance by the Stockholder Party with any representation, agreement
or condition otherwise required to be complied with by the Stockholder Party
under this Agreement or release the Stockholder Party from its obligations under
this Agreement, but any such waiver or release shall be effective only if in
writing executed by Nortel Networks.
(f) All notices, requests and other communications hereunder to a party
shall be in writing and shall be deemed given (a) upon delivery if personally
delivered or (b) three Business Days after being mailed by registered or
certified mail (return receipt requested) or (c) one Business Day after being
delivered by overnight courier or by facsimile (with confirmation) to such party
at its address or facsimile set forth below or such other address or facsimile
as such party may specify by notice to the parties hereto.
(i) In the case of the Stockholder Party, to the address set forth
beside his, her or its name on Schedule I hereto; and
(ii) If to Nortel Networks, to:
Nortel Networks Corporation
8200 Dixie Road, Suite 100
Brampton, Ontario
Canada L6T 5P6
Attention: Corporate Secretary
Fax: (905) 863-8386
Phone: (905) 863-0000
B-5
<PAGE> 215
with a copy to:
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, New York 10006
Attention: Victor I. Lewkow, Esq.
Paul J. Shim, Esq.
Fax: (212) 225-3999
Phone: (212) 225-2000
(g) If any term, provision, covenant or restriction contained in this
Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Agreement
shall remain in full force and effect, and shall in no way be affected, impaired
or invalidated.
(h) The Stockholder Party acknowledges and agrees that in the event of
any breach of this Agreement, Nortel Networks would be irreparably and
immediately harmed and could not be made whole by monetary damages. It is
accordingly agreed that (i) the Stockholder Party will waive, in any action for
specific performance, the defense of adequacy of a remedy at law, and (ii)
Nortel Networks shall be entitled, in addition to any other remedy to which it
may be entitled at law or in equity, to compel specific performance of this
Agreement and (iii) specific performance of this Agreement shall be the
exclusive remedy for any breach by the Stockholder Party of such party's
obligations under Section 2 hereof (it being understood that this clause (iii)
shall in no way limit Nortel Networks' rights and remedies against the Company
under the Merger Agreement).
(i) All rights, powers and remedies provided under this Agreement or
otherwise available in respect hereof at law or in equity shall be cumulative
and not alternative, and the exercise of any thereof by any party shall not
preclude the simultaneous or later exercise of any other such right, power or
remedy by such party. The failure of any party hereto to exercise any right,
power or remedy provided under this Agreement or otherwise available in respect
hereof at law or in equity, or to insist upon compliance by any other party
hereto with its obligations hereunder, and any custom or practice of the parties
at variance with the terms hereof, shall not constitute a waiver by such party
of its right to exercise any such or other right, power or remedy or to demand
such compliance.
(j) This Agreement shall be governed by, and interpreted in accordance
with, the laws of the State of New York (except that matters of corporate law
and fiduciary duties shall be governed by the laws of the State of Delaware).
(k) The section and paragraph captions herein are for convenience of
reference only, do not constitute part of this Agreement and shall not be deemed
to limit or otherwise affect any of the provisions hereof.
(l) This Agreement may be executed in one or more counterparts, each of
which shall be deemed to constitute an original.
(m) The spouse of the Stockholder Party, if any (the "Spouse"), by
executing the Spousal Consent attached hereto as Annex A, agrees to be bound in
all respects by the terms of this Agreement to the same extent as the
Stockholder Party. The Spouse further agrees that should he or she predecease or
become divorced from the Stockholder Party, any of the Common Shares in which he
or she may have an interest shall remain subject to all of the restrictions and
to all of the rights of the Company as contained in this Agreement. Whenever
reference is made in this agreement to "Shares", "Owned Shares" or "Voting
Shares", unless the context clearly requires otherwise, such reference will
include any
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<PAGE> 216
community property or other interest of the Spouse, if any, in such Shares,
Owned Shares or Voting Shares.
11. Stockholder Capacity. The Stockholder Party, to the extent such
party is or becomes during the term hereof a director or officer of the Company,
does not make any agreement or understanding herein in such party's capacity as
such director or officer. The Stockholder Party signs solely in such party's
capacity as the record holder and/or beneficial owner of the Owned Shares and
Voting Shares, and nothing herein shall limit or affect any actions taken or
omitted to be taken by the Stockholder Party in such party's capacity as an
officer or director of the Company to the extent specifically permitted by the
Merger Agreement.
12. Further Assurances. From time to time, at Nortel Networks'
reasonable request and without further consideration, the Stockholder Party
shall execute and deliver such additional documents and take all such further
lawful action as may be necessary or desirable to consummate and make effective,
in the most expeditious manner practicable, the transactions contemplated by
this Agreement.
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<PAGE> 217
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
NORTEL NETWORKS CORPORATION
By:
Name:
Title:
By:
Name:
Title:
STOCKHOLDER PARTY
----------------------------------
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SCHEDULE I
STOCKHOLDER PARTY
<TABLE>
<CAPTION>
VESTED AND
UNVESTED
NAME SHARES OPTIONS ADDRESS
---- ------- ---------- ------------------------------
<S> <C> <C> <C>
</TABLE>
B-9
<PAGE> 219
ANNEX A
SPOUSAL CONSENT
The undersigned is fully aware of, understands, and fully consents to the
provisions of this Agreement and its binding effect upon any community property
or other interest that he or she may now or hereafter own in the Common Shares
subject to this Agreement, and agrees that the termination of his or her marital
relationship with the Stockholder Party for any reason, including his or her
death, will not remove any Common Shares otherwise subject to this Agreement,
from the coverage of this Agreement and that his or her awareness,
understanding, consent, and agreement are evidenced by his or her signature to
this Agreement.
---------------------------------------------------------
B-10
<PAGE> 220
SCHEDULE A
STOCKHOLDER PARTIES WHO EXECUTED THE ATTACHED
FORM STOCKHOLDER AGREEMENT
- Dominic P. Orr
- Tench Coxe
- Andrew W. Verhalen
- Adam Grosser
- Joe T. Booker
- Selina Y. Lo
- James G. Burke
- Barton M. Burstein
- Anthony Narducci
- Shirish S. Sathaye
- 1999 Annuity Trust
- Coxe/Otus Revocable Trust
- SHV M/P/T fbo Tench Coxe
- Andrew W. Verhalen & Janet L. Brownstone 1989 TR UA DTP 12/1/89
- Booker Annuity Trust
- Selina Lo 1999 Annuity Trust
- Selina Y. Lo Trust UA DTD 07/22/1997
- Burnstein Family Trust Agreement dated July 28, 1999
- Sathaye Family TR DTD 4/10/00
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<PAGE> 221
ANNEX C
Execution Version
FORM OF STOCKHOLDER AGREEMENT
This STOCKHOLDER AGREEMENT (this "Agreement"), dated as of July 28,
2000, is entered into by and between the undersigned stockparty, located at 2500
Sand Hill Road, Suite 113 Menlo Park, California 94025 (the "Stockholder
Party"), a stockholder of Alteon WebSystems, Inc., a corporation organized under
the laws of Delaware (the "Company"), and Nortel Networks Corporation, a
corporation organized under the laws of Canada ("Nortel Networks").
WHEREAS, simultaneously with the execution of this Agreement, Nortel
Networks, Darius Corp., a wholly owned subsidiary of Nortel Networks ("Sub"),
and the Company, are entering into an Agreement and Plan of Merger, dated as of
the date hereof (as the same may be amended or supplemented, the "Merger
Agreement"), providing, among other things, for the merger of Sub with and into
the Company (the "Merger"); and
WHEREAS, as of the date hereof, the Stockholder Party is the Beneficial
Owner (as defined below) of the shares of common stock, par value $0.001 per
share, of the Company ("Common Stock") set forth in Schedule I hereto (the
"Owned Shares"); and
WHEREAS, as an inducement and a condition to its entering into the
Merger Agreement and incurring the obligations set forth therein, Nortel
Networks has required that the Stockholder Party enter into this Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual
premises, representations, warranties, covenants and agreements contained herein
and in the Merger Agreement, the parties hereto, intending to be legally bound
hereby, agree as follows:
1. Certain Definitions. Capitalized terms used but not defined in this
Agreement are used in this Agreement with the meanings given to such terms in
the Merger Agreement. In addition, for purposes of this Agreement:
"Affiliate" means, with respect to any specified Person, any Person that
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, the Person specified. For
purposes of this Agreement, with respect to the Stockholder Party, "Affiliate"
shall not include the Company and the Persons that directly, or indirectly
through one or more intermediaries, are controlled by the Company.
"Beneficially Owned" or "Beneficial Ownership" with respect to any
securities means having beneficial ownership of such securities (as determined
pursuant to Rule 13d-3 under the Exchange Act, disregarding the phrase "within
60 days" in paragraph (d)(1)(i) thereof), including pursuant to any agreement,
arrangement or understanding, whether or not in writing. Without duplicative
counting of the same securities by the same holder, securities Beneficially
Owned by a Person shall include securities Beneficially Owned by all Affiliates,
excluding any partner of the Stockholder Party who is not a director of the
Company, of such Person and all other Persons with whom such Person would
constitute a "Group" within the meaning of Section 13(d) of the Exchange Act and
the rules promulgated thereunder.
"Beneficial Owner" with respect to any securities means a Person who has
Beneficial Ownership of such securities.
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"Shares" mean the Owned Shares and any shares of Common Stock the
Beneficial Ownership of which is acquired in any manner by the Stockholder Party
(including without limitation, pursuant to the exercise of existing stock
options or warrants) after the date hereof.
"Transfer" means, with respect to a security, the sale, transfer,
pledge, hypothecation, encumbrance, assignment or disposition of such security
or the Beneficial Ownership thereof, the offer to make such a sale, transfer or
other disposition, and each option, agreement, arrangement or understanding,
whether or not in writing, to effect any of the foregoing. As a verb, "Transfer"
shall have a correlative meaning.
2. No Disposition or Solicitation.
(a) The Stockholder Party agrees that from and after the date hereof,
except as contemplated by this Agreement, such party will not Transfer or agree
to Transfer any of the Shares other than with Nortel Networks' prior written
consent, or grant any proxy or power-of-attorney with respect to the Shares
other than pursuant to this Agreement; provided, that nothing in this Agreement
shall prohibit the Stockholder Party from (a) exercising any option to purchase
shares of Common Stock, or (b) effecting any Transfer of Shares (i) by will or
applicable laws of descent and distribution, (ii) to any member of the immediate
family of the Stockholder Party, or any trust, limited partnership or other
similar entity the Beneficial Ownership of which is held by the Stockholder
Party or such family members, or (iii) to partners of the Stockholder Party
(each a "Permitted Transferee"), so long as such Permitted Transferee(s) agrees
in writing, in form and substance reasonably satisfactory to Nortel Networks, to
be bound by the terms of this Agreement to the same extent as the Stockholder
Party is bound.
(b) The Stockholder Party agrees that from and after the date hereof,
except as contemplated by this Agreement or, solely in the Stockholder Party's
capacity as an officer or director of the Company to the extent specifically
permitted by the Merger Agreement, the Stockholder Party will not directly or
indirectly solicit, initiate, or knowingly encourage any inquiries or proposals
from, discuss or negotiate with, or provide any non-public information to, any
Person relating to, or otherwise facilitate, any Acquisition Proposal.
(c) The Stockholder Party agrees that, except for communications made in
the course of such party's duties as an officer or director of the Company or
unless required by applicable law, neither the Stockholder Party nor any of such
party's Affiliates shall make any press release or public announcement with
respect to Nortel Networks or this Agreement and the Merger Agreement and the
transactions contemplated hereby and thereby, without the prior written consent
of Nortel Networks.
3. Stockholder Vote. The Stockholder Party agrees that (i) at such
time as the Company conducts a meeting of or otherwise seeks a vote or consent
of its stockholders for the purpose of adopting the Merger Agreement (such
meeting or any adjournment thereof, or such consent process, the "Company
Meeting"), the Stockholder Party will vote, or provide a consent with respect
to, all issued and outstanding shares of Common Stock over which the Stockholder
Party has voting power ("Voting Shares") in favor of the adoption of the Merger
Agreement, provided that the Stockholder Party shall not be required to vote
for, or provide a consent with respect to, any action that would reduce the
number of Nortel Networks Common Shares to be received by the Stockholder Party
in respect of such party's Common Stock in the Merger, and (ii) the Stockholder
Party will (at any meeting of stockholders) vote the Voting Shares against, and
will not consent to, any Acquisition Proposal or any action
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that would delay, prevent or frustrate the transactions contemplated by the
Merger Agreement.
Without limiting the foregoing, it is understood that the obligations
under clause (i) above shall remain applicable in respect of each meeting of
stockholders of the Company duly called for the purpose of adopting the Merger
Agreement regardless of the position of the Company Board as to the Merger at
the time of such meeting, and that the obligations under clause (ii) above shall
continue until the termination of this Agreement in accordance with Section 9.
4. Reasonable Efforts to Cooperate. The Stockholder Party will provide
any information reasonably requested by the Company, Nortel Networks or Sub for
any regulatory application or filing made or approval sought for the
transactions contemplated by the Merger Agreement (including filings with the
SEC).
5. Irrevocable Proxy. (a) In furtherance of the agreements contained
in Section 3 of this Agreement, the Stockholder Party hereby irrevocably grants
to, and appoints, Nortel Networks and any designees of Nortel Networks, and each
of them individually, the Stockholder Party's proxy and attorney-in-fact (with
full power of substitution), for and in the name, place and stead of the
Stockholder Party, to vote all Voting Shares, or grant a consent or approval in
respect of the Voting Shares, or execute and deliver a proxy to vote the Voting
Shares, (x) subject to the proviso set forth in clause (i) of the first
paragraph of Section 3, in favor of the adoption of the Merger Agreement and
approval of the terms thereof and each of the other transactions contemplated by
the Merger Agreement and (y) against any Acquisition Proposal or any other
matter referred to in clause (ii) of the first sentence of Section 3 hereof.
(b) The Stockholder Party represents and warrants to Nortel Networks
that any proxies heretofore given in respect of the Voting Shares are not
irrevocable, and hereby revokes any such proxies.
(c) The Stockholder Party hereby affirms that the irrevocable proxy set
forth in this Section 5 is given in connection with, and in consideration of,
the execution of the Merger Agreement by Nortel Networks and Sub, and that such
irrevocable proxy is given to secure the performance of the duties of such
Stockholder Party under this Agreement. The Stockholder Party hereby further
affirms that the irrevocable proxy is coupled with an interest and may under no
circumstances be revoked. The Stockholder Party hereby ratifies and confirms all
that such irrevocable proxy may lawfully do or cause to be done by virtue
hereof. Such irrevocable proxy is executed and intended to be irrevocable in
accordance with the provisions of Section 218 of the DGCL. The proxy granted in
this Section 5 shall remain valid until terminated pursuant to Section 9 hereof.
6. Covenant of Stockholder Party. The Stockholder Party agrees to take
all reasonable action to (i) permit (x) the Shares to be acquired in the Merger
and (y) the voting of the Voting Shares in accordance with the terms of this
Agreement and (ii) prevent creditors in respect of any pledge of the Shares from
exercising their rights under such pledge.
7. Representations, Warranties and Covenants of Stockholder Party. The
Stockholder Party hereby represents and warrants to, and agrees with, Nortel
Networks as follows:
(a) The Stockholder Party has all necessary power and authority and
legal capacity to execute and deliver this Agreement and perform his obligations
hereunder.
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(b) This Agreement has been duly and validly executed and delivered by
the Stockholder Party and constitutes the valid and binding agreement of the
Stockholder Party, enforceable against the Stockholder Party in accordance with
its terms except to the extent limited by (i) applicable bankruptcy, insolvency
or similar laws affecting creditors' rights or (ii) general equity principles,
whether considered at law or in equity.
(c) Subject to applicable community property laws, the Stockholder Party
is the sole Beneficial Owner of the Owned Shares. The Stockholder Party has good
and marketable title (which may include holding in nominee or "street" name) to
all of the Owned Shares, free and clear of all liens, claims, options, proxies,
voting agreements and security interests (other than as created by this
Agreement and restrictions on Transfer under applicable securities laws). The
Owned Shares constitute all of the capital stock of the Company Beneficially
Owned by the Stockholder Party and neither the Stockholder Party nor any of such
party's Affiliates, excluding any partner of the Stockholder Party who is not a
director of the Company, is the Beneficial Owner of, or has any right to acquire
(whether currently, upon lapse of time, following the satisfaction of any
conditions, upon the occurrence of any event or any combination of the
foregoing) any Common Stock or any securities convertible into or exchangeable
or exercisable for Common Stock.
(d) Neither the execution and delivery of this Agreement by the
Stockholder Party nor the consummation of the transactions contemplated hereby
will (i) conflict with, result in any violation of, require any consent under or
constitute a default (whether with notice or lapse of time or both) by the
Stockholder Party under any mortgage, bond, indenture, agreement, instrument or
obligation to which the Stockholder Party is a party or by which the Stockholder
Party or any of the Shares is bound; (ii) violate any judgment, order,
injunction, decree or award of any court, administrative agency or governmental
body that is binding on the Stockholder Party; or (iii) constitute a violation
by the Stockholder Party of any law or regulation of any jurisdiction, in each
case except for violations, conflicts or defaults that would not have a material
adverse effect on the ability of the Stockholder Party to perform the party's
obligations under this Agreement.
8. Representations and Warranties of Nortel Networks. Nortel Networks
represents and warrants to the Stockholder Party that Nortel Networks has full
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder. The execution, delivery and performance of
this Agreement by Nortel Networks will notconstitute a violation of, conflict
with or result in a default under, (i) any contract, understanding or
arrangement to which Nortel Networks is a party or by which it is bound or
require the consent of any other Person or any party pursuant thereto, (ii) any
judgment, decree or order applicable to Nortel Networks, or (iii) any law, rule
or regulation of any governmental body, in each case except for violations,
conflicts or defaults that would not have a material adverse effect on the
ability of Nortel Networks to perform its obligations under this Agreement; and
this Agreement constitutes a legal, valid and binding agreement on the part of
Nortel Networks, enforceable against Nortel Networks in accordance with its
terms, except as such enforceability may be limited by principles applicable to
creditors' rights generally or governing the availability of equitable relief.
The execution and delivery by Nortel Networks of this Agreement and the
consummation by Nortel Networks of the transactions contemplated hereby have
been duly and validly authorized by the Board of Directors of Nortel Networks
and no other corporate proceedings on the part of Nortel Networks are necessary
to authorize this Agreement or to consummate the transactions contemplated
hereby. This Agreement has been duly and validly executed and delivered by
Nortel Networks.
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9. Termination. This Agreement (including the proxy referred to
herein) shall terminate upon the earliest to occur of (a) the Effective Time,
(b) the termination of the Merger Agreement (unless Nortel Networks is or may be
entitled to receive a Termination Fee under the Merger Agreement following such
termination), and (c) 30 days following the termination of the Merger Agreement
in the event that Nortel Networks is or may be entitled to receive a Termination
Fee under the Merger Agreement following such termination; provided that, during
such 30 day period, the Stockholder Party shall be permitted to make sales of
Shares in broker transactions effected through the Nasdaq Stock Market. No such
termination shall relieve any party from liability for any breach of this
Agreement prior to termination.
10. Miscellaneous.
(a) This Agreement represents the entire understanding of the parties
hereto with reference to the subject matter hereof and supersedes any and all
other oral or written agreements and understandings among the parties heretofore
made.
(b) The Stockholder Party agrees that this Agreement and the respective
rights and obligations of such Stockholder Party hereunder shall attach to all
Common Stock, and all securities convertible into such shares, that become
Beneficially Owned by the Stockholder Party.
(c) Except as otherwise provided in this Agreement, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses.
(d) This Agreement and all of the provisions hereof shall be binding
upon and inure to the benefit of the parties and their respective successors,
personal or legal representatives, executors, administrators, heirs,
distributees, devisees, legatees and permitted assigns, but neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any party (whether by operation of law or otherwise) without the
prior written consent of the other party; provided, that Nortel Networks may
assign any or all rights under this Agreement to Sub or any other Subsidiary of
Nortel Networks. Nothing in this Agreement, express or implied, is intended to
or shall confer upon any other Person any rights, benefits or remedies of any
nature whatsoever under or by reason of this Agreement.
(e) This Agreement may not be amended, changed, supplemented, or
otherwise modified or terminated, except upon the execution and delivery of a
written agreement executed by the parties hereto; provided, that Nortel Networks
may waive compliance by the Stockholder Party with any representation, agreement
or condition otherwise required to be complied with by the Stockholder Party
under this Agreement or release the Stockholder Party from its obligations under
this Agreement, but any such waiver or release shall be effective only if in
writing executed by Nortel Networks.
(f) All notices, requests and other communications hereunder to a party
shall be in writing and shall be deemed given (a) upon delivery if personally
delivered or (b) three Business Days after being mailed by registered or
certified mail (return receipt requested) or (c) one Business Day after being
delivered by overnight courier or by facsimile (with confirmation) to such party
at its address or facsimile set forth below or such other address or facsimile
as such party may specify by notice to the parties hereto.
(i) In the case of the Stockholder Party, to the address set
forth beside his, her or its name on Schedule I hereto; and
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(ii) If to Nortel Networks, to:
Nortel Networks Corporation
8200 Dixie Road, Suite 100
Brampton, Ontario
Canada L6T 5P6
Attention: Corporate Secretary
Fax: (905) 863-8386
Phone: (905) 863-0000
with a copy to:
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, New York 10006
Attention: Victor I. Lewkow, Esq.
Paul J. Shim, Esq.
Fax: (212) 225-3999
Phone: (212) 225-2000
(g) If any term, provision, covenant or restriction contained in this
Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Agreement
shall remain in full force and effect, and shall in no way be affected, impaired
or invalidated.
(h) The Stockholder Party acknowledges and agrees that in the event of
any breach of this Agreement, Nortel Networks would be irreparably and
immediately harmed and could not be made whole by monetary damages. It is
accordingly agreed that (i) the Stockholder Party will waive, in any action for
specific performance, the defense of adequacy of a remedy at law, and (ii)
Nortel Networks shall be entitled, in addition to any other remedy to which it
may be entitled at law or in equity, to compel specific performance of this
Agreement and (iii) specific performance of this Agreement shall be the
exclusive remedy for any breach by the Stockholder Party of such party's
obligations under Section 2 hereof (it being understood that this clause (iii)
shall in no way limit Nortel Networks' rights and remedies against the Company
under the Merger Agreement).
(i) All rights, powers and remedies provided under this Agreement or
otherwise available in respect hereof at law or in equity shall be cumulative
and not alternative, and the exercise of any thereof by any party shall not
preclude the simultaneous or later exercise of any other such right, power or
remedy by such party. The failure of any party hereto to exercise any right,
power or remedy provided under this Agreement or otherwise available in respect
hereof at law or in equity, or to insist upon compliance by any other party
hereto with its obligations hereunder, and any custom or practice of the parties
at variance with the terms hereof, shall not constitute a waiver by such party
of its right to exercise any such or other right, power or remedy or to demand
such compliance.
(j) This Agreement shall be governed by, and interpreted in accordance
with, the laws of the State of New York (except that matters of corporate law
and fiduciary duties shall be governed by the laws of the State of Delaware).
(k) The section and paragraph captions herein are for convenience of
reference only, do not constitute part of this Agreement and shall not be deemed
to limit or otherwise affect any of the provisions hereof.
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(l) This Agreement may be executed in one or more counterparts, each of
which shall be deemed to constitute an original.
(m) The spouse of the Stockholder Party, if any (the "Spouse"), by
executing the Spousal Consent attached hereto as Annex A, agrees to be bound in
all respects by the terms of this Agreement to the same extent as the
Stockholder Party. The Spouse further agrees that should he or she predecease or
become divorced from the Stockholder Party, any of the Common Shares in which he
or she may have an interest shall remain subject to all of the restrictions and
to all of the rights of the Company as contained in this Agreement. Whenever
reference is made in this agreement to "Shares", "Owned Shares" or "Voting
Shares", unless the context clearly requires otherwise, such reference will
include any community property or other interest of the Spouse, if any, in such
Shares, Owned Shares or Voting Shares.
11. Stockholder Capacity. The Stockholder Party, to the extent such
party is or becomes during the term hereof a director or officer of the Company,
does not make any agreement or understanding herein in such party's capacity as
such director or officer. The Stockholder Party signs solely in such party's
capacity as the record holder and/or beneficial owner of the Owned Shares and
Voting Shares, and nothing herein shall limit or affect any actions taken or
omitted to be taken by the Stockholder Party in such party's capacity as an
officer or director of the Company to the extent specifically permitted by the
Merger Agreement.
12. Further Assurances. From time to time, at Nortel Networks'
reasonable request and without further consideration, the Stockholder Party
shall execute and deliver such additional documents and take all such further
lawful action as may be necessary or desirable to consummate and make effective,
in the most expeditious manner practicable, the transactions contemplated by
this Agreement.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
NORTEL NETWORKS CORPORATION
By:
Name:
Title:
By:
Name:
Title:
STOCKHOLDER PARTY
By:
Name:
Title:
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SCHEDULE I
STOCKHOLDER PARTY
<TABLE>
<CAPTION>
VESTED AND
UNVESTED
NAME SHARES OPTIONS ADDRESS
---- --------- ---------- -------
<S> <C> <C> <C>
</TABLE>
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SCHEDULE A
STOCKHOLDER PARTIES WHO EXECUTED THE ATTACHED
FORM STOCKHOLDER AGREEMENT
- Matrix Partners IV L.P.
- Matrix IV Entrepreneurs Fund L.P.
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ANNEX D
LEHMAN BROTHERS
July 27, 2000
Board of Directors
Alteon WebSystems, Inc.
50 Great Oaks Blvd.
San Jose, CA 95119
Members of the Board:
We understand that Alteon WebSystems, Inc. ("Alteon" or the Company") is
contemplating entering into an agreement with Nortel Networks Corporation
("Nortel") pursuant to which a wholly-owned subsidiary of Nortel will be merged
with Alteon (the "Proposed Transaction"). We further understand that under the
proposed agreement with Nortel each share of common stock of Alteon will be
exchanged for 1.83148 shares of Nortel (the "Exchange Ratio"). In addition, all
outstanding options to purchase shares of common stock of Alteon will be
exchanged for options to purchase shares of common stock of Nortel at the
Exchange Ratio. The terms and conditions of the Proposed Transaction are set
forth in more detail in the Agreement and Plan of Merger (the "Agreement") dated
July 28, 2000.
We have been requested by the Board of Directors of the Company to render
our opinion with respect to the fairness, from a financial point of view, to the
Company's stockholders of the Exchange Ratio to be offered to such stockholders
in the Proposed Transaction. We have not been requested to opine as to, and our
opinion does not in any manner address, the Company's underlying business
decision to proceed with or effect the Proposed Transaction or potential future
trading values for Nortel common stock following announcement or consummation of
the Proposed Transaction.
In arriving at our opinion, we reviewed and analyzed: (1) the Agreement and
the specific terms of the Proposed Transaction, (2) publicly available
information concerning the Company and Nortel that we believe to be relevant to
our analysis, (3) financial and operating information with respect to the
business, operations and prospects of the Company furnished to us by the
Company, (4) publicly available estimates of the future financial performances
of the Company and Nortel prepared by third party research analysts, (5) a
trading history of the Company's common stock from September 24, 1999 to the
present and a comparison of that trading history with those of other companies
that we deemed relevant, (6) a trading history of Nortel common stock from
January 1, 1995 to the present and a comparison of that trading history with
those of other companies that we deemed relevant, (7) a comparison of the
historical financial results and present financial condition of the Company with
those of other companies that we deemed relevant, (8) a comparison of the
historical financial results and present financial condition of Nortel with
those of other companies that we deemed relevant, (9) a comparison of the
financial terms of the Proposed Transaction with the financial terms of certain
other recent transactions that we deemed relevant, and (10) the potential pro
forma financial effects of the Transaction on Nortel and a comparison of the
relative contributions of Alteon and Nortel to the combined company following
consummation of the Proposed Transaction. In addition, we have had discussions
D-1
<PAGE> 232
with the management of the Company concerning its business, operations, assets,
financial condition and prospects and have undertaken such other studies,
analyses and investigations as we deemed appropriate.
In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information and
have further relied upon the assurances of management of the Company that they
are not aware of any facts or circumstances that would make such information
inaccurate or misleading. With respect to the financial projections of the
Company, upon advice of the Company we have assumed that such projections have
been reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the management of the Company as to the future
financial performance of the Company. We also have considered the publicly
available consensus view of third party research analysts with respect to
estimates of the future financial performance of the Company. For purposes of
our analysis, upon the advice of the Company, we have assumed that the Company
will perform in a range between the projections prepared by management and the
consensus estimates of third party research analysts. In arriving at our
opinion, with the consent of the Company, we were not provided with and did not
have any access to any financial forecasts or projections prepared by the
management of Nortel as to the future financial performance of Nortel , and
accordingly, upon advice from Nortel and with the consent of the Company, we
have assumed that the publicly available estimates of third party research
analysts are a reasonable basis upon which to evaluate and analyze the future
financial performance of Nortel and we have relied upon such estimates in
performing our analysis. In arriving at our opinion, we have not conducted a
physical inspection of the properties and facilities of the Company and Nortel
and have not made or obtained any evaluations or appraisals of the assets or
liabilities of the Company or Nortel. In addition, you have not authorized us to
solicit, and we have not solicited, any indications of interest from any third
party, other than the company codenamed "Cherokee", with respect to the purchase
of all or a part of the Company's business. Upon advice of the Company and its
legal and accounting advisors, we have assumed that the Proposed Transaction
will qualify as a reorganization with the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended, and therefore as a tax-free
transaction to the stockholders of the Company. Our opinion necessarily is based
upon market, economic and other conditions as they exist on, and can be
evaluated as of, the date of this letter.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the Exchange Ratio to be
offered to the stockholders of the Company in the Proposed Transaction is fair
to such stockholders.
We have acted as financial advisor to the Company in connection with the
Proposed Transaction and will receive a fee for our services which is contingent
upon the consummation of the Proposed Transaction. In addition, the Company has
agreed to indemnify us for certain liabilities that may arise out of the
rendering of this opinion. We also have performed various investment banking
services for the Company in the past including acting as lead underwriter for
the Company's initial public offering of common stock on September 24, 1999 and
as lead underwriter for the Company's secondary offering of common stock on
January 25, 2000 and have received customary fees for such services. In the
ordinary course of our business, we actively trade in the equity securities of
the Company for our own account and for the accounts of our customers and,
accordingly, may at any time hold a long or short position in such securities.
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<PAGE> 233
This opinion is for the use and benefit of the Board of Directors of the
Company and is rendered to the Board of Directors in connection with its
consideration of the Proposed Transaction. This opinion is not intended to be
and does not constitute a recommendation to any stockholder of the Company as to
how such stockholder should vote with respect to the Proposed Transaction.
Very truly yours,
/s/ Lehman Brothers
LEHMAN BROTHERS
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<PAGE> 234
PROXY ALTEON WEBSYSTEMS, INC. PROXY
SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS
The undersigned hereby appoints Dominic P. Orr and James G. Burke, or
either of them, each with the power of substitution, and hereby authorizes them
to represent and to vote, as designated on the reverse side, all shares of
common stock of Alteon WebSystems, Inc. (the "Company") held of record by the
undersigned on August 16, 2000 at the Annual Meeting of Stockholders to be held
on October 4, 2000 and any adjournments thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED, IF NO
DIRECTION IS GIVEN WITH RESPECT TO A PARTICULAR PROPOSAL, THIS PROXY WILL BE
VOTED FOR SUCH PROPOSAL.
PLEASE MARK, DATE, SIGN, AND RETURN THIS PROXY CARD PROMPTLY, USING THE
ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
1. Election of two Directors.
NOMINEES: (01) Joe T. Booker, (02) Andrew W. Verhalen
<TABLE>
<CAPTION>
FOR WITHHELD
ALL NOMINEES FROM ALL NOMINEES
<S> <C>
[ ]
[ ]
[ ]
---------------------------------
</TABLE>
If you have selected "FOR" above, to withhold authority to vote for an
individual nominee Check box, and list such nominee(s) above.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
2. To ratify the selection of Deloitte & Touche LLP as [ ] [ ] [ ]
independent auditors of the Company for its fiscal year
ending June 30, 2001.
3. To adopt the Agreement and Plan of Merger, dated as of [ ] [ ] [ ]
July 28, 2000, among the Company, Nortel Networks
Corporation and Darius Corp. pursuant to which Darius
Corp. will be merged with and into the Company.
4. In their discretion, to act upon any other matters [ ] [ ] [ ]
properly brought before the annual meeting.
</TABLE>
Date: , 2000
Signature
Signature if held jointly
Please sign exactly as name appears hereon. Joint owners should each sign.
Executors, administrators, trustees, guardians or other fiduciaries should give
full title as such. If signing for a corporation, please sign in full corporate
name by a duly authorized officer. If a partnership, please sign in partnership
name by authorized person.
FOLD AND DETACH HERE
<PAGE> 235
VOTE BY TELEPHONE OR INTERNET
QUICK *** EASY *** IMMEDIATE
YOUR TELEPHONE OR INTERNET VOTE AUTHORIZES THE NAMED PROXIES TO VOTE YOUR SHARES
IN THE SAME MANNER AS IF YOU HAVE MARKED, SIGNED AND RETURNED YOUR PROXY CARD.
TO VOTE BY TELEPHONE: Call the toll-free number listed below. You will be asked
to enter a CONTROL NUMBER which is located at the bottom of this form.
OPTION A: To vote as the Board of Directors recommends on ALL proposals: Press
1
OPTION B: If you choose to vote on each item separately, press O. You will
hear these instructions:
ITEM 1: To vote FOR ALL nominees, press 1; to WITHHOLD FOR ALL nominees,
press 9; To WITHHOLD FOR AN INDIVIDUAL nominee, Press 0 and listen
to the instructions.
ITEM 2: To vote FOR, press 1: AGAINST, press 9; ABSTAIN, press 0. The
instructions are the same for all remaining items to be voted. When
asked, you must confirm you vote by pressing 1.
TO VOTE BY INTERNET: Connect to the Website listed below. You will be asked to
enter a CONTROL NUMBER which is located at the bottom of this form. Then follow
the instructions. THE WEB SITE FOR VOTING IS:
www.proxyvoting.com/alteonwebsystems
IF YOU VOTE BY TELEPHONE OR INTERNET, DO NOT MAIL IN THE PROXY CARD.
THANK YOU FOR VOTING!
<TABLE>
<S> <C>
Call ** Toll Free ** 1-(800)-676-5925-
On a Touch Tone Telephone ANYTIME
There is NO CHARGE to you for this call
CONTROL NUMBER
For Telephone/Internet Voting
</TABLE>
