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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 000-27247
___________________
ALTEON WEBSYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0429769
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 Great Oaks Boulevard
San Jose, California 95119
(Address and zip code of principal executive offices)
Registrant's telephone number, including area code: (408) 360-5500
Former name, former address and former fiscal year, if changed since last
year: N/A
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of January 31, 2000, 40,487,048 shares of the registrant's Common Stock
were outstanding.
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<PAGE>
ALTEON WEBSYSTEMS, INC.
TABLE OF CONTENTS
Page
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
December 31, 1999 and June 30, 1999 ............................ 3
Condensed Consolidated Statements of Operations
Quarters and Six Months Ended December 31, 1999 and 1998 ....... 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended December 31, 1999 and 1998 .................... 5
Notes to Condensed Consolidated Financial Statements ........... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..... 26
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K ............................... 27
Signatures ............................................................... 28
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
ALTEON WEBSYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
(Unaudited)
December 31, June 30,
1999 1999
-------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 56,236 $29,766
Short-term investments 34,348 --
Accounts receivable - net 7,781 3,853
Inventory 4,545 2,632
Prepaid expenses and other current assets 1,141 397
-------- -------
Total current assets 104,051 36,648
Property and equipment - net 6,812 3,931
Other long-term assets 9,077 42
-------- -------
Total assets $119,940 $40,621
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,935 $ 3,561
Accrued compensation and related liabilities 4,041 2,052
Other accrued expenses 9,218 3,783
Current portion of note payable to bank 1,363 1,363
Current portion of capital lease obligations 338 348
Income taxes payable 295 53
-------- -------
Total current liabilities 19,190 11,160
Note payable to bank 1,082 1,798
Capital lease obligations -- 121
Sublease deposits 93 93
-------- -------
Total liabilities 20,365 13,172
-------- -------
Stockholders' equity:
Preferred stock, $0.001 par value, 15,000
shares authorized; shares outstanding:
December 31, 1999 none; June 30, 1999 13,785 -- 58,294
Common stock, $0.001 par value, 300,000
shares authorized; shares outstanding:
December 31, 1999 39,134; June 30, 1999 12,987 153,237 3,224
Notes receivable from stockholders (6,028) (2,465)
Deferred compensation (170) (196)
Accumulated deficit (47,464) (31,408)
-------- -------
Total stockholders' equity 99,575 27,449
-------- -------
Total liabilities and stockholders' equity $119,940 $40,621
======== =======
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
<TABLE>
<CAPTION>
ALTEON WEBSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Quarters Ended Six Months Ended
December 31, December 31,
------------------ -------------------
1999 1998 1999 1998
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net sales $17,115 $ 6,559 $ 29,865 $11,686
Cost of sales 6,573 3,675 12,020 6,224
------- ------- -------- -------
Gross profit 10,542 2,884 17,845 5,462
Operating expenses:
Sales and marketing 8,563 3,072 15,383 5,588
Research and development 5,462 2,641 9,451 4,806
General and administrative 1,644 631 2,927 1,123
Stock compensation to consultants -- -- 7,638 --
------- ------- -------- -------
Total operating expenses 15,669 6,344 35,399 11,517
------- ------- -------- -------
Loss from operations (5,127) (3,460) (17,554) (6,055)
Interest income (expense), net 1,396 91 1,727 156
------- ------- -------- -------
Loss before income taxes (3,731) (3,369) (15,827) (5,899)
Income tax expense 189 -- 229 --
------- ------- -------- -------
Net loss $(3,920) $(3,369) $(16,056) $(5,899)
======= ======= ======== =======
Basic and diluted loss per
common share $ (0.11) $ (0.46) $ (0.70) $ (0.85)
======= ======= ======== =======
Basic and diluted common shares
used in computation 35,509 7,312 22,802 6,926
======= ======= ======== =======
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
<TABLE>
<CAPTION>
ALTEON WEBSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
December 31,
---------------------
1999 1998
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(16,056) $(5,899)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,293 777
Deferred rent 12 206
Charges from common stock for services 410 9
Stock options granted to consultants 7,638 11
Changes in assets and liabilities:
Accounts receivable (3,928) (523)
Inventory (1,913) 1,881
Prepaid expenses and other current accounts (744) (169)
Accounts payable 374 (476)
Accrued compensation and related liabilities 1,989 99
Other accrued expenses 5,665 813
-------- -------
Net cash used in operating activities (5,260) (3,271)
-------- -------
Cash flows from investing activities:
Purchases of short-term investments (34,348) --
Purchases of property and equipment (4,146) (1,967)
Other assets (9,037) 20
-------- -------
Net cash used in investing activities (47,531) (1,947)
-------- -------
Cash flows from financing activities:
Net proceeds from sale of preferred stock -- 7,272
Net proceeds from sale of common stock 79,625 --
Borrowings under note payable -- 1,240
Repayments of note payable (716) (272)
Proceeds from exercise of stock
options, net of repurchases 312 (13)
Repayment of notes receivable for common stock 171 25
Repayment of capital lease obligations (131) (111)
Repayment of line of credit -- (802)
-------- -------
Net cash provided by financing activities 79,261 7,339
-------- -------
Net increase in cash and equivalents 26,470 2,121
Cash and equivalents, beginning of period 29,766 9,047
-------- -------
Cash and equivalents, end of period $ 56,236 $11,168
======== =======
Supplemental schedule of noncash investing and
financing activities:
Exercise of stock options for notes
receivable, net of repurchases $ 3,734 $ 667
Cash paid during the period for:
Interest $ 153 $ 141
Income taxes $ 1 $ --
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
ALTEON WEBSYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of presentation
The unaudited condensed consolidated financial statements contained in
this report have been prepared by Alteon WebSystems, Inc. ("Alteon" or the
"Company"). In the opinion of management, such financial statements include
all normal recurring adjustments and accruals necessary for a fair
presentation of the Company's financial position as of December 31, 1999,
the results of operations for the quarters and six months ended December
31, 1999 and 1998 and cash flows for the six months ended December 31, 1999
and 1998. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in accordance with the
rules and regulations of the Securities and Exchange Commission. This
unaudited quarterly information should be read in conjunction with the
audited consolidated financial statements of Alteon and the notes thereto
for the year ended June 30, 1999 included in the Company's Registration
Statement on Form S-1, as amended.
Note 2. Initial public offering of stock
On September 29, 1999, the Company completed the sale of 4.6 million
shares of common stock in an underwritten initial public offering at a
price of $19.00 per share. Offering proceeds to the Company, net of
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
preferred stock were converted into 20,685,741 shares of common stock at a
conversion rate of 1.5-to-1.
Note 3. Inventory
Inventories consist of:
<TABLE>
December 31, June 30,
1999 1999
------ ------
(in thousands)
<S> <C> <C>
Raw materials and subassemblies $2,104 $ 973
Inventory at manufacturer in Thailand 1,199 769
Work in process 511 394
Finished goods 731 496
------ ------
Total $4,545 $2,632
====== ======
</TABLE>
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<PAGE>
Note 4. Other accrued expenses
Other Accrued expenses consist of:
<TABLE>
December 31, June 30,
1999 1999
------ ------
(in thousands)
<S> <C> <C>
Deferred revenue $1,816 $ 711
Accrued warranty 1,204 893
Marketing and related accruals 810 275
Professional fees and related accruals 1,757 907
Deferred rent 413 399
Other 3,218 598
------ ------
Total $9,218 $3,783
====== ======
</TABLE>
Note 5. Net loss per share
Basic loss per common share is computed by dividing loss attributable
to common stockholders by the weighted-average number of common shares
outstanding for the period (excluding shares subject to repurchase).
Diluted loss per common share is computed by dividing loss attributable to
common stockholders by the weighted-average number of common shares and
potentially dilutive common securities outstanding for the period.
Potentially dilutive common shares are excluded from the computation in
loss periods as their effect would be antidilutive.
At the closing of the initial public offering, all outstanding shares
of preferred stock were converted into common stock at a rate of 1.5-to-1.
The following is a reconciliation of the numerators and denominators
used in computing basic and diluted net loss per share (in thousands,
except per share amounts):
<TABLE>
Quarter Ended December 31, Six Months Ended December 31,
1999 1998 1999 1998
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net loss (numerator), basic and diluted $(3,920) $(3,369) $(16,056) $(5,899)
======= ======= ======== =======
Shares (denominator):
Weighted average common shares outstanding 39,125 12,047 26,744 11,820
Weighted average common shares outstanding
subject to repurchase (3,616) (4,735) (3,942) (4,894)
------- ------- -------- -------
Shares used in computation, basic and diluted 35,509 7,312 22,802 6,926
======= ======= ======== =======
Net loss per share, basic and diluted $ (0.11) $ (0.46) $ (0.70) $ (0.85)
======= ======= ======== =======
</TABLE>
As of December 31, 1999 and 1998, the Company had securities
outstanding that could potentially dilute basic earnings per share in the
future, but were excluded from the computation of diluted net loss per
share in the periods presented as their effect would have been
antidilutive. Such outstanding securities consist of the following at
December 31 (in thousands):
<TABLE>
1999 1998
----- ------
<S> <C> <C>
Preferred stock -- 16,936
Shares of common stock subject to repurchase 3,148 4,735
Stock options 6,370 2,859
----- ------
Total 9,518 24,530
===== ======
</TABLE>
Note 6. Comprehensive loss
The Company had no items of other comprehensive income to report
through December 31, 1999.
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<PAGE>
Note 7. New accounting pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS No. 133 will be effective for the
Company's fiscal year ending June 30, 2001. The Company believes that this
statement will not have a significant impact on its financial results.
Note 8. Subsequent event
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 being
offered, 1,250,000 were sold by the Company and 3,750,000 were sold by
stockholders. Offering proceeds to the Company, net of underwriting
discount and aggregate expenses of approximately $7.4 million, were
approximately $122 million.
-8-
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The forward-looking statements involve risks and
uncertainties. Actual results could differ materially from those projected
in the forward-looking statements as a result of certain factors, including
those set forth in this Item 2, those described elsewhere in this report
and those described in the Company's Registration Statement on Form S-1.
The Company assumes no obligation to update any forward-looking statements.
Overview
We provide next generation Internet infrastructure solutions that are
designed to increase the performance, availability, scalability,
manageability and control of Web servers and Web data centers. Our products
include Web switches, server adapters and software that combine intelligent
Web session management with the high performance and availability of
leading networking infrastructure solutions. We refer to this combination
of capabilities as Web-working.
We derive revenues primarily from direct product sales and sales to
original equipment manufacturers, or OEMs, and resellers. Revenues are
generally recognized upon product shipment unless significant Alteon
obligations remain. Revenues are recorded net of sales returns, and
allowances are calculated based on actual historical and expected results.
We market our products through our direct sales force, OEMs and
resellers. We sell our products both directly and through OEMs in the
United States, and we sell our products internationally primarily through
resellers. A majority of our sales to date have been to customers located
in the United States. In the fiscal year ended June 30, 1999, our fiscal
1999, sales in the United States accounted for approximately 75% of net
sales, and in the first and second quarters of fiscal 2000, sales in the
United States accounted for approximately 63% and 66% of net sales,
respectively. We expect sales in the United States to continue to account
for the majority of our revenues.
A small number of our OEM and reseller customers account for a
significant portion of our revenues. In fiscal 1999, sales to 3Com
accounted for 14% of net sales, sales to IBM accounted for 10% of net sales
and sales to Hewlett-Packard accounted for 10% of net sales. In the fiscal
year ended June 30, 1998, our fiscal 1998, sales to Sun Microsystems
accounted for 42% of net sales, sales to Fuji Xerox accounted for 14% of
net sales and sales to 3Com accounted for 10% of net sales. In the first
and second quarters of fiscal 2000, no individual customer accounted for
10% or more of net sales.
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<PAGE>
Quarters Ended December 31, 1999 and 1998
The following table sets forth certain operating data as a percentage
of net sales for the quarters ended December 31, 1999 and 1998:
<TABLE>
Quarter Ended December 31,
1999 1998
----- -----
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 38.4 56.0
----- -----
Gross profit 61.6 44.0
Operating expenses:
Sales and marketing 50.0 46.8
Research and development 31.9 40.3
General and administrative 9.6 9.6
----- -----
Total operating expenses 91.6 96.7
----- -----
Loss from operations (30.0) (52.8)
Interest income (expense), net 8.2 1.4
----- -----
Loss before income taxes (21.8) (51.4)
Income tax expense 1.1 0.0
----- -----
Net loss (22.9)% (51.4)%
===== =====
</TABLE>
Net Sales. Net sales grew to $17.1 million in the second quarter of
fiscal 2000 from $6.6 million in the corresponding quarter of fiscal 1999.
Sales of our second generation ACEnic server adapter products in this
period represented $4.5 million, an increase of $0.7 million from the same
period last year. Sales of our Web switch products represented $12.6
million in the second quarter of fiscal 2000, an increase of $9.8 million
from the corresponding quarter of fiscal 1999.
Cost of Sales. Cost of sales consists primarily of costs related to
product components, contract manufacturing and testing, warranty service
and quality assurance for products, as well as costs of associated
personnel. Cost of sales increased to $6.6 million in the second quarter of
fiscal 2000 from $3.7 million in the second quarter of fiscal 1999. This
increase was due primarily to an increase in component and manufacturing
costs and warranty reserves associated with increased product sales. Gross
profit as a percentage of net sales, or gross margin, increased to 61.6% in
the second quarter of fiscal 2000 from 44.0% in the corresponding quarter
of fiscal 1999. This increase in gross margin was due primarily to a change
in our product mix to include more Web switches, which generally have
higher average gross margins than ACEnic products. The increase was
partially offset by higher warranty reserves as a percentage of sales.
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 $8.6 million in
the second quarter of fiscal 2000 from $3.1 million in the second quarter
of fiscal 1999. Of the $5.5 million increase, $3.0 million was due to
increased personnel costs, including commissions, associated with
establishing a significant domestic sales force and supporting increased
marketing efforts, $1.0 million was due to increased product marketing
costs related primarily to our Web switches and $0.7 million was due to
travel related expenses. We expect that sales and marketing expenses will
increase as we add personnel to support domestic and international sales
efforts.
Research and Development. Research and development expenses consist
primarily of salaries and related costs of employees engaged in research,
design and development activities. We have not capitalized any software
development costs. These costs are expensed as incurred because we believe
our current development process is completed at essentially the same time
as we establish technological feasibility. Research and development
expenses increased to $5.5 million in the second quarter of fiscal 2000
from $2.6 million in the corresponding quarter of fiscal 1999. Of the $2.9
million increase, $1.0 million was due to increased outside service costs
primarily associated with product testing, $0.7 million was due to
increased personnel costs associated with the design and development of
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<PAGE>
products based on our next generation of WebICs, including our Alteon 700
Series of Web switches, and $0.3 million was due to non-recurring
engineering and prototype assembly expenses related to the design and
development of these products. We expect that research and development
expenses will increase as we continue to develop new products and product
enhancements.
General and Administrative. General and administrative expenses
consist primarily of personnel costs for our administrative and financial
groups, as well as legal, accounting and other professional fees. General
and administrative expenses increased to $1.6 million in the second quarter
of fiscal 2000 from $0.6 million in the first quarter of fiscal 1999. This
increase was due to increased personnel costs and professional fees
required to support our growth. We expect that general and administrative
expenses will increase as we establish the infrastructure to support
growing operations and due to the reporting requirements imposed on a
public company.
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 $1.4 million in
the second quarter of fiscal 2000 from $0.1 million in the corresponding
quarter of fiscal 1999. This increase was due primarily to higher interest
income associated with higher average cash and equivalent and short-term
investment balances.
Income Taxes. We have not provided for or paid federal income taxes
due to our net losses. The $189,000 provision for income taxes represents
foreign income taxes and state franchise taxes.
Six Months Ended December 31, 1999 and 1998
The following table sets forth certain operating data as a percentage
of net sales for the six months ended December 31, 1999 and 1998:
<TABLE>
Six Months Ended December 31,
1999 1998
----- -----
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 40.2 53.3
----- -----
Gross profit 59.8 46.7
Operating expenses:
Sales and marketing 51.5 47.8
Research and development 31.6 41.1
General and administrative 9.8 9.6
Stock compensation to consultants 25.6 0.0
----- -----
Total operating expenses 118.5 98.6
----- -----
Loss from operations (58.8) (51.8)
Interest income (expense), net 5.8 1.3
----- -----
Loss before income taxes (53.0) (50.5)
Income tax expense 0.8 0.0
----- -----
Net loss (53.8)% (50.5)%
===== =====
</TABLE>
Net Sales. Net sales grew to $29.9 million in the six months ended
December 31, 1999 from $11.7 million in the corresponding period of fiscal
1999. Sales of our second generation ACEnic server adapter products in this
period represented $9.5 million, an increase of $2.3 million from the same
period last year. Sales of our Web switch products represented $20.4
million in the six months ended December 31, 1999, an increase of
$15.9 million from the corresponding period of fiscal 1999.
Cost of Sales. Cost of sales increased to $12.0 million in the six
months ended December 31, 1999 from $6.2 million in the six months ended
December 31, 1998. This increase was due primarily to an increase in
component and manufacturing costs and warranty reserves associated with
increased product sales. Gross profit as a percentage of net sales, or
gross margin, increased to 59.8% in the six months ended December 31, 1999
from 46.7% in the corresponding period of fiscal 1999. This increase in
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<PAGE>
gross margin was due primarily to a change in our product mix to include
more Web switches, which generally have higher average gross margins. The
increase was partially offset by higher inventory reserves.
Sales and Marketing. Sales and marketing expenses increased to $15.4
million in the six months ended December 31, 1999 from $5.6 million in the
six months ended December 31, 1998. Of the $9.8 million increase, $5.2
million was due to increased personnel costs, including commissions,
associated with establishing a significant domestic sales force and
supporting increased marketing efforts, $1.7 million was due to increased
product marketing costs related primarily to our Web switches, $1.1 million
was due to travel related expenses and $0.9 million was due to consulting
and other services fees.
Research and Development. We have not capitalized any software
development costs. These costs are expensed as incurred because we believe
our current development process is completed at essentially the same time
as we establish technological feasibility. Research and development
expenses increased to $9.5 million in the six months ended December 31,
1999 from $4.8 million in the corresponding period of fiscal 1999. Of the
$4.7 million increase, $1.5 million was due to increased personnel costs
associated with the design and development of products based on our next
generation of WebICs, including our Alteon 700 Series of Web switches,
$1.1 million was due to increased outside service costs primarily
associated with product testing, and $0.9 million was due to non-recurring
engineering and prototype assembly expenses related to the design and
development of these products.
General and Administrative. General and administrative expenses
increased to $2.9 million in the six months ended December 31, 1999 from
$1.1 million in the six months ended December 31, 1998. This increase was
due to increased personnel costs and professional fees required to support
our growth.
Stock Compensation to Consultants. Since inception, Alteon granted
stock options to consultants to provide services over the vesting periods
of the options. The Company incurred a noncash, nonrecurring charge of $7.6
million in the first quarter of fiscal 2000 in connection with changes to
the vesting periods. At September 30, 1999, all of these options were
vested.
Interest Income (Expense), Net. Interest income (expense), net
increased to $1.7 million in the six months ended December 31, 1999 from
$0.2 million in the corresponding period of fiscal 1999. This increase was
due primarily to higher interest income associated with higher average cash
and equivalent and short-term investment balances.
Income Taxes. The $229,000 provision for income taxes during the six
months ended December 31, 1999 represents foreign income taxes and state
franchise taxes.
Liquidity and Capital Resources
In September 1999, we sold 4.6 million shares of our common stock in an
initial public offering. The net offering proceeds to the Company were
approximately $79.6 million. Working capital increased to $84.9 million at
December 31, 1999 from $25.5 million at June 30, 1999. As of December 31,
1999, we had cash and equivalents and short-term investments of $90.6
million.
Our operating activities used cash of $5.3 million in the six months
ended December 31, 1999 primarily to fund operating losses, partially
offset by changes in working capital. Receivable days outstanding decreased
to 41 days at December 31, 1999 from 44 days at June 30, 1999. At December 31,
1999, we had approximately $2.7 million of noncancellable purchase commitments
associated with inventory purchases.
During the six months ended December 31, 1999, investing activities,
exclusive of purchases of $34.3 million of short-term investments, used
cash of $13.2 million. We used $4.1 million for the acquisition of property
and equipment and $9.0 million for the purchase of long-term investments.
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<PAGE>
We expect capital expenditures during the remaining six months of fiscal
2000 to be approximately $2.9 million.
We have a loan and security agreement with a committed line of $12.0
million which bears interest at the rate of prime plus 0.75% (9.25% at
December 31, 1999). 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 December 31, 1999, we had approximately
$2.4 million outstanding from advances for equipment purchases, payable in
monthly installments, through May 2002.
In future periods, we anticipate significant increases in working
capital on a period-to-period basis primarily as a result of planned
increased product sales and higher relative levels of inventory. We also
anticipate that we will continue to invest significant amounts in property
and equipment related to expansion of our facilities and to support
increased sales and marketing as well as ongoing research and development
activities. We believe that our December 31, 1999 balances of cash, cash
equivalents and short-term investments, and amounts available under our
credit facilities, will satisfy our expected operating losses and working
capital and capital expenditure requirements for at least the next
12 months. However, we cannot assure you that our predictions with respect
to our operating expenses and capital expenditure requirements are
accurate. Therefore, we may require additional funds to support our working
capital and operating expenses or for other purposes sooner than expected.
We may seek to raise additional funds through public or private offerings
or debt financings. We cannot assure you that financings will be available,
or if available, will be on reasonable terms, nor can we assure you that
these financings will not be dilutive to our stockholders.
Year 2000 Compliance
Background of Year 2000 issues. Many currently installed computer and
communications systems and software products are unable to distinguish
dates following December 31, 1999 from dates prior to such date. In
addition, certain systems and products do not correctly process "leap year"
dates. This situation could result in system failures or miscalculations
causing business disruptions. As a result, many companies' software and
computer and communications systems may need to be upgraded or replaced to
become Year 2000 compliant as specified below.
We have defined Year 2000 compliant as the ability to:
o Correctly handle date information needed for the December 31, 1999 to
January 1, 2000 date change;
o Function according to the product documentation provided for this date
change, without changes in operation resulting from the advent of a new
century, assuming correct configuration;
o Respond to two-digit date input in a way that resolves the ambiguity
as to century in a disclosed, defined and predetermined manner;
o Store and provide output of date information in ways that are
unambiguous as to century if the date elements in interfaces and data
storage specify the century; and
o Recognize year 2000 as a leap year.
Our product testing and licensing. We have tested all of our current
products for Year 2000 compliance. We derived our testing method from our
review and analysis of the Year 2000 testing practices of software vendors,
relevant industry Year 2000 compliance standards and the specific
functionality and operating environments of our products. The tests are run
on all supported platforms for each release of our products and include
testing for date calculations and internal storage of date information with
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test numbers starting in 1999 and going beyond the Year 2000. Based on
these tests, we believe our products to be Year 2000 compliant.
Customer claims. We may be subject to customer claims to the extent our
products are not Year 2000 compliant. Liability may result to the extent
our products are not able to store, display, calculate, compute and
otherwise process date-related data. We could also be subject to claims
based on the failure of our products to work with software or hardware from
other vendors. As of the date of this filing, we have not experienced any
Year 2000 problems with our products.
Our external vendors. We have identified and contacted our significant
suppliers, significant service providers and sole manufacturer to determine
the extent to which our interface systems are vulnerable to those third
parties' failures to remediate their own Year 2000 issues. All of our
significant suppliers, significant service providers and our sole
manufacturer have indicated that they are or expected to achieve Year 2000
compliance by December 31, 1999. We cannot be certain that the
representations of these third parties are accurate or that they will reach
Year 2000 compliance if they are not already compliant. In the event that
any of our significant suppliers, significant service providers or our sole
manufacturer do not achieve Year 2000 compliance in a timely manner, and we
are unable to replace them with alternate sources, our business would be
harmed. As of the date of this filing, we have not experienced any Year
2000 problems with our vendors.
Our internal business software. During fiscal 1999, we upgraded our
internal business software to a version that the software vendor has
indicated is Year 2000 compliant. This upgrade has been fully implemented.
As a result, we believe that our internal financial systems are Year 2000
compliant. However, if due to unforeseen circumstances, the upgrade fails
to store, display, calculate, compute and otherwise process date-related
data, the Year 2000 could have a material impact on our operations. As of
the date of this filing we have not experienced any Year 2000 problems with
our business software.
Our internal non-financial software and equipment. We have taken an
inventory of all of our non-financial software and equipment that may be
affected by the Year 2000 and have identified the non-financial software
and equipment that is critical to our operations. We believe that our non-
financial software and equipment are Year 2000 compliant. If our major non-
financial systems and equipment are not Year 2000 compliant, the Year 2000
could have a material impact on our operations. As of the date of this
filing, we have not experienced any Year 2000 problems with our non-
financial software and equipment.
Costs of addressing Year 2000 compliance. Based on our evaluation, we
have not in the past, and do not believe that in the future, we will incur
significant expenses or be required to invest heavily in additional
computer system improvements to be Year 2000 compliant. We do not believe
the cost of addressing the Year 2000 non-compliance issues identified to
date will exceed $250,000. However, significant uncertainty exists
concerning the potential costs and effects associated with Year 2000
compliance. Any Year 2000 compliance problem experienced by us or our
customers could decrease demand for our products, which could harm our
business.
Contingency planning. We have a contingency plan and will continue to
monitor our internal communication and management systems.
Recent legislation. Legislation was recently passed by Congress that
purports to limit liability for failure to be Year 2000 compliant. We
cannot assure you that this legislation will limit our liability.
Year 2000 issues affecting our business, if not adequately addressed by
us, our significant suppliers, our significant service providers and our
sole manufacturer could have a number of "worst case" consequences. These
include:
o our inability to ship our products due to the failure of our sole
suppliers, our significant service providers and our sole manufacturer to
achieve Year 2000 compliance;
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o claims from our customers asserting liability, including liability for
breach of warranties related to the failure of our products and services to
function properly; and
o our inability to manage our own business.
Factors That May Affect Future Results
Because our limited operating history makes it difficult to evaluate our
business, our future financial performance may disappoint securities
analysts or investors and result in a decline in our common stock price.
We were founded on March 18, 1996 and have a limited operating history,
which makes an evaluation of our current business and prospects difficult.
Due to our limited operating history, it will be difficult to accurately
predict our future revenue or results of operations. This may result in one
or more future quarters where our financial results may fall below
expectations of analysts and investors. As a result, the price of our
common stock may decline. In addition, because of our limited operating
history, we have a limited insight into trends that may emerge in our
market and affect our business. The revenue and income potential of our
business and market are unproven. You must consider our business and
prospects in light of the risks and difficulties typically encountered by
companies in their early stages of development, particularly those in new
and rapidly evolving markets such as the Internet traffic management
industry.
Our quarterly operating results are not indicative of future performance
and are difficult to forecast, and our stock price may fall if our
quarterly performance does not meet analysts' or investors' expectations.
Our quarterly operating results have varied significantly in the past
and are likely to vary significantly in the future, which makes it
difficult for us to predict our future operating results. We believe that
period-to-period comparisons of our results of operations are not
meaningful and should not be relied upon as an indicator of our future
performance. In particular, historically, a significant portion of our
sales has occurred near the end of a quarter. For example, for the year
ended June 30, 1999, our fiscal 1999, in some cases up to one-half of our
sales occurred in the last month of the quarter. Accordingly, delays in
anticipated sales past the end of a particular quarter may harm our results
of operations for that quarter. Furthermore, we base our decisions
regarding our operating expenses on anticipated revenue trends, and our
expense levels are relatively fixed. Consequently, if revenue levels fall
below our expectations, we may suffer unexpected losses because only a
small portion of our expenses vary with our net sales.
In one or more future quarters, our operating results will likely be
below the expectations of public market analysts and investors. If this
occurs, the price of our common stock will probably decline.
We expect to incur significant future operating expenses and losses and may
never achieve profitability, which may cause our stock price to decline.
We have experienced net losses in each quarterly and annual period
since inception. We incurred a net loss of $3.9 million for the quarter
ended December 31, 1999, and at December 31, 1999 had an accumulated
deficit of $47.5 million. Although our net sales have grown in recent
quarters, we may not be able to achieve future revenue growth or achieve or
sustain profitability. We intend to increase our operating expenses
substantially, particularly expenses related to expanding our sales and
marketing activities, developing new distribution channels and increasing
levels of research and development. If we fail to achieve and sustain
significant increases in our quarterly net sales, we may not be able to
increase our investment in these areas. In addition, with increased
expenses, we will need to generate significant additional revenue to
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achieve profitability. If we continue to incur net losses and never attain
profitability, our stock price is likely to decline.
Because we do not have any experience commercially manufacturing products
incorporating our next generation of WebICs and Web OS, we may not be
successful in launching our Alteon 700 Series of Web switches in a timely
manner.
We expect to derive a significant portion of our future net sales from
sales of products containing our next generation of WebICs. To date, we
have produced only a few of our Alteon 700 Series of Web switches for
customer testing purposes and do not have any experience in manufacturing
them in commercial quantities. Because of the complexity of the WebICs and
the supporting Web OS software, there is a risk that we will experience
unanticipated problems with the manufacturing, volume shipment or
performance of these products.
Since July 1999, the first product using this generation of WebICs, our
Alteon 700 Series of Web switches, has been in customer testing and we
expect to begin customer shipments of these switches in March 2000. The
WebIC in this product is complicated, and its development has been delayed
on two prior occasions, which resulted in our postponing customer testing
of this product by approximately six months. We have not completed internal
testing of this WebIC. If we discover significant defects, commercial
release of our next-generation Web switch could be delayed significantly,
particularly if the WebIC must be re-designed and re-manufactured by LSI
Logic Corporation, our WebIC manufacturer. Our next generation of Web
switches also requires the successful development of a new version of
Web OS. Development of this software is also complex and could be subject
to delay.
If we fail to launch commercially our Alteon 700 Series of Web switches
in a timely manner:
o revenues from our existing products could be inadequate to cover our
expenses, including the cost of selling, marketing, developing and
manufacturing new products;
o our brand and reputation will be damaged;
o our competitors' products could achieve market acceptance; and
o we would lose market share.
If our Alteon 700 Series of Web switches or other new products or product
enhancements fail to achieve customer acceptance, or if we fail to manage
product transitions successfully, our business reputation and financial
performance would suffer.
Our industry is characterized by very rapid technological change,
frequent new product introductions and enhancements, changes in customer
demands and evolving industry standards. Our existing products will be
rendered less competitive or obsolete if we fail to introduce new products
or product enhancements that anticipate the features and functionality that
customers demand or to ensure that they interoperate with current and
emerging networking technologies. Our Alteon 700 Series of Web switches is
still under development and has not been commercially released to
customers, and we cannot assure you that it will achieve customer
acceptance. The success of our Alteon 700 Series of Web switches and other
new product introductions will depend on:
o the ability of our products to meet customer needs and expectations
regarding features, performance and robustness;
o our ability to accurately anticipate industry trends and changes in
technology standards; and
o timely completion and introduction of new product designs and
features.
In addition, the introduction of new or enhanced products also requires
that we manage the transition from older products to minimize disruption in
customer ordering patterns and ensure that adequate supplies of new
products can be delivered to meet customer demand. In particular, our
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Alteon 700 Series of Web switches has been in customer testing since July
1999 and we expect to begin customer shipments of these switches in March
2000. Our failure to commercialize and manage the transition to this new
product series successfully would harm our business.
Because the Internet infrastructure consists primarily of products
manufactured by Cisco Systems, Inc., Cisco has the ability to alter the
fundamental technology underlying computer networking, which could render
our products less competitive or obsolete.
Our products are developed based on the current Internet
infrastructure, consisting primarily of routers, switches and a network of
hardware and software. Cisco is the leader in developing and marketing
equipment and software that form the backbone of this infrastructure. Cisco
has a dominant market share and an extensive, loyal and entrenched customer
base. If Cisco introduced or made an announcement regarding a new
technology or product that had the potential to alter the manner in which
computing devices communicated with each other over the Internet
infrastructure, our products might be rendered less competitive or
obsolete.
In addition, Cisco offers a variety of Internet appliances and software
that manage Internet traffic volume. We believe that Cisco is providing to
certain customers pricing incentives to purchase a complete series of Cisco
products. This policy could cause us to lose sales which could harm our
business. Recently, Cisco announced plans to integrate some of these
products into their LAN switches. This integrated product offering will
compete directly with our products. Cisco has a longer operating history
and significantly greater financial, technical, marketing and other
resources than we do. Cisco also has broad strategic relationships with
server vendors, OEMs, resellers and other software and hardware providers.
As a result of these factors, Cisco may be able to respond more quickly to
new or emerging technologies and changes in customer requirements than we
can.
If our products do not interoperate with our customers' networks,
installations will be delayed or cancelled and a substantial portion of our
products could be returned.
Our products are designed to interface with our customers' existing
networks, each of which has different specifications and utilizes multiple
protocol standards. Many of our customers' networks contain multiple
generations of products that have been added over time as these networks
have grown and evolved. Our products must interoperate with all of the
products within these networks. If our products fail to interoperate with
the existing software or hardware components used in our customers'
networks, we would have to modify our products to overcome the defects
which would delay installations of our products, cause orders for our
products to be cancelled or result in product returns. This could result in
negative publicity and could harm our business reputation.
Problems arising from use of our products in conjunction with other
vendors' products could disrupt our business and cause significant customer
relations problems.
Service providers typically use our products in conjunction with
products from other vendors. As a result, when problems occur, it may be
difficult to identify the source of the problem. These problems may cause
us to incur significant, unanticipated expenses, divert the attention of
our engineering personnel from our product development efforts and cause
significant customer relations problems.
If our products contain defects, we may be subject to significant liability
claims from our customers or their customers and could incur significant
unexpected expenses and lost sales.
Because our products are designed to provide critical communications
services to emerging Web applications such as e-commerce, we may be subject
to significant liability claims if our products contain undetected or
unresolved errors. Our agreements with customers typically contain
provisions intended to limit our exposure to liability claims. However,
these limitations may not preclude all potential claims resulting from a
defect in one of our products. Although we maintain product liability
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insurance of up to $5.0 million covering damages arising from
implementation and use of our products, our insurance may not cover every
claim brought against us. Liability claims could require us to spend
significant time and money in litigation or to pay significant damages. As
a result, any liability claims, whether or not successful, could harm our
reputation and our business.
Future consolidation in the networking industry may improve our
competitors' position, which could reduce our revenues, potential profits
and overall market share.
The networking industry is characterized by continued consolidation. We
may not be able to compete successfully in an increasingly consolidated
industry. Consolidation in our industry may result in a smaller number of
competitors with greater resources and broader product lines, which could
force us to reduce the prices of our products or result in a loss of market
share. Additionally, because we depend on strategic relationships with
third parties in our industry, any consolidation involving these parties
could reduce the demand for our products or otherwise harm our business.
Because our markets are highly competitive, customers may choose to
purchase our competitors' products, which would result in reduced revenues
or loss of market share, any of which could damage the long-term or short-
term prospects of our business.
We compete in a new, rapidly evolving and highly competitive sector of
the networking industry. We expect competition to intensify in the future.
Increased competition would likely reduce our prices, which would reduce
our gross margins. Increased competition also would likely cause us to lose
market share. Our principal competitors include:
o Large telecommunications and networking equipment companies. We face
competition from large telecommunications and networking equipment
companies such as Cisco and Nortel Networks Corporation. These companies
have greater financial resources, longer operating histories, broader
customer relationships, greater brand recognition and a broader set of
products than we do. Cisco and other large telecommunications companies
have announced plans to incorporate an Internet traffic management
component into existing switches. If Cisco or other companies form
alliances with or acquire companies offering competing Web traffic
management products, even if those products do not have capabilities
comparable to our products, they would be significant competitors and their
activities could cause us to reduce our prices.
o Other vendors of Internet traffic management products and services. A
number of other private and public companies offer products designed to
provide Internet traffic management solutions. Some of these companies
offer products focused on a particular function, such as bandwidth
management or load balancing. With respect to a particular function, these
products may be superior to ours. Some of these companies have longer
operating histories, more resources and broader customer relationships than
we do.
Our competitors may respond more quickly to emerging technologies than
we do. In the past, we have lost customers to competitors because we were
not able to respond to their requests for additional features in a timely
fashion. We may not be able to maintain or improve our competitive position
against current or potential competitors, especially those with greater
resources.
Because of our lengthy sales cycle, it is difficult to predict future
revenue and we may not be able to compensate for unanticipated revenue
shortfalls.
We cannot predict the timing of our revenues accurately because of the
length of our sales cycles. As a result, if sales forecasted from specific
customers are not realized, we may be unable to compensate for the revenue
shortfall and our operating results would be harmed. The sales cycle for
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our products has ranged from two to three months for sales to smaller
customers to one year or more for sales to large, established enterprises.
Customers frequently begin by evaluating our products on a limited basis
before deciding to purchase them. Generally, they consider a wide range of
issues before committing to purchase our products, including product
benefits, ability to interoperate with networking equipment and product
reliability. Our competitors offer a wide variety of hardware or software
products that purport to serve the needs addressed by our products. As a
result, we must educate potential customers on the benefits of our
products. While potential customers are evaluating our products and before
they place an order with us, we may incur substantial sales and marketing
expenses and expend significant management effort. Consequently, if orders
for our products do not occur as anticipated, our operating results could
be harmed.
If Internet traffic management solutions do not achieve widespread
commercial acceptance, we will not be able to sell our products and our
ability to increase revenues would be harmed.
Widespread commercial acceptance of our products is critical to our
future success. The market for Internet traffic management solutions is
relatively new and rapidly evolving. Rather than utilizing comprehensive
Internet traffic management solutions, most Web data center administrators
manage Internet traffic by adding servers and interconnecting a variety of
single function traffic management tools. Our ability to increase revenues
in the future depends on the extent to which our potential customers
recognize the value of our integrated Internet traffic management
solutions. The acceptance of our products may be hindered by:
o the failure of prospective customers to recognize the value of
Internet traffic management solutions;
o the reluctance of our prospective customers to replace or expand their
current networking solutions, which may be supplied by more established
vendors, with our products; and
o the emergence of new technologies or industry standards that could
cause our products to be less competitive or obsolete.
In addition, because the market for Internet traffic management
solutions is in an early stage of development, we cannot assess the size of
the market accurately, and we have limited insight into trends that may
emerge and affect our business. For example, we may have difficulty in
predicting customer needs, developing products that could address those
needs, and establishing a distribution strategy for these products. We may
also have difficulties in predicting the competitive environment that will
develop.
Because we purchase several of our key components from single source
suppliers, we could lose sales if these suppliers fail to meet our
requirements.
We purchase several key product components from single source vendors
for which alternative sources are either not currently available or
difficult to develop. The inability to obtain sufficient quantities of
these components may result in delays or reductions in product shipments
that would harm our business. We presently purchase two key components,
WebICs and power supplies, from vendors for which there are currently no
alternative suppliers. In addition, we expect that a significant portion of
our products in the next year will incorporate a key networking component
which is available only from a single source. The sole manufacturer of our
WebICs is LSI. The process used to manufacture our WebICs is proprietary to
LSI. If LSI terminated our relationship, we would be required to redesign
our WebICs to make them compatible with the manufacturing process of a new
supplier and to develop or license additional technology. We estimate that
this process could take as long as 12 months and cost $4.0 million or more.
Furthermore, we would lose significant revenue opportunities while working
to achieve volume production with a new vendor. We do not have supply
contracts with LSI or other sole source vendors. In the event of a
reduction or interruption of supply of any such components, a period of 12
months or longer could pass before we would begin receiving adequate
supplies from alternative suppliers, if at all, and our business would be
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harmed. It is possible that our sources may not be available for us or be
in a position to satisfy our production requirements at acceptable prices
and on a timely basis, if at all.
In addition, the manufacture of some of these single source components,
particularly WebICs, is complex and time consuming, and our reliance on the
suppliers of these components exposes us to potential production
difficulties and quality variations, including, in the case of WebICs,
yield issues, which could increase prices and delay delivery of our
products. Any significant interruption in the supply or degradation in the
quality of any component could harm our business.
Because the worldwide demand for one of our key components has increased,
adequate quantities of this component may not be available to satisfy our
needs which could increase the price and delay delivery of our products.
During the last year, the worldwide demand for memory chips, a key
component in our products, has increased. Although we purchase our memory
chips from several suppliers, if these suppliers are unable to provide
adequate quantities of memory chips to satisfy our needs, product shipments
may be delayed and our business would be harmed. In addition, if, as a
result of increased demand, our suppliers raise the price of memory chips,
the cost of manufacturing our products would increase and the sales of our
products could decrease.
Because we depend on a single independent manufacturer to make our
products, we are susceptible to interruptions in our product flow which
could limit our revenue and adversely affect our competitive position and
reputation.
We currently outsource substantially all of the manufacturing and
testing of our hardware platforms to a single independent manufacturer,
Celestica Thailand Ltd., a subsidiary of Celestica Inc. Our reliance on a
single independent manufacturer involves a number of risks, including
possible limitations on manufacturing capacity and reduced control over
delivery schedules, manufacturing yields and costs. As our relationship
with Celestica develops, manufacturing yields or product performance could
be adversely affected due to difficulties associated with adapting our
technology and product design to Celestica's manufacturing process. In
addition, we do not have a supply contract with Celestica. As a result,
Celestica is not obligated to supply products to us for any specific
period, in any specific quantity or at any specific price, except as may be
provided in a particular purchase order. If Celestica is unable or
unwilling to continue manufacturing our components in required volumes, we
will have to identify acceptable alternative manufacturers, which could
take six months or more. Any significant interruption in the manufacturing
of our products would also result in product shortages or delivery delays,
which could harm our customer relationships and our business and
reputation. Moreover, because substantially all of our final assembly is
performed in one of Celestica's facilities, located in Chanburi, Thailand,
any fire or other disaster at this facility would harm our business.
We derive a substantial portion of our revenues from a small number of
customers, and our revenues may decline significantly if any major customer
cancels or delays a purchase of our products.
A relatively small number of our OEM and reseller customers has
accounted for a significant portion of our net sales. In the first and
second quarters of fiscal 2000, no individual customer accounted for 10% or
more of net sales. In fiscal 1999, sales to 3Com accounted for 14% of net
sales, sales to IBM accounted for 10% of net sales and sales to Hewlett-
Packard accounted for 10% of net sales. In fiscal 1998, sales to Sun
Microsystems accounted for 42% of net sales, sales to Fuji Xerox accounted
for 14% of net sales and sales to 3Com accounted for 10% of net sales. If
any of our large customers stop or delay purchases, our revenue and
profitability may be adversely affected. For example, over the last three
fiscal years, sales to Sun Microsystems have decreased significantly from
49% of net sales in fiscal 1997, to 42% of net sales in fiscal 1998, and to
6% of net sales in fiscal 1999. We expect that revenues from a relatively
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small number of our OEM and reseller customers will continue to account for
a significant portion of our net sales. Accordingly, unless and until we
diversify and expand our customer base, our future success will depend upon
the timing and size of future purchase orders, if any, from our largest
customers and, in particular:
o the success of these customers in marketing solutions, including our
products;
o the product requirements of these customers; and
o the financial and operational success of these customers.
Some of our customers are significantly larger than we are and have
sufficient bargaining power to demand lower prices and better terms. The
loss of any one of our major customers or the delay of significant orders
from these customers, could reduce or delay our recognition of revenues,
harm our reputation in the industry, and reduce our ability to predict cash
flow accurately.
We have experienced rapid growth that has placed a strain on our resources,
and our failure to manage our growth could disrupt our operations and
prevent us from generating increased revenue.
We have experienced rapid growth and expansion since our inception.
From June 30, 1998 to December 31, 1999, we increased the number of our
employees from 85 to 222. This growth has placed, and will continue to
place, a significant strain on our management and information systems and
operational and financial resources. To manage our growth effectively, we
must continue to improve our operational, financial and management
controls. Although we believe that our management and information systems
are adequate for the next 12 months, depending on the volume of our sales,
we may have to replace or enhance our management and information systems
sooner than anticipated. We expect that the cost of implementing these new
systems would be approximately $2.0 million. If we have to implement
modifications sooner than we expected, we will incur substantial additional
expense earlier than anticipated. If we fail to scale our management
systems to accommodate our growth, our operating results would be adversely
impacted and our business would be harmed.
If we do not substantially expand our sales channels, our ability to
increase market acceptance of our products and generate revenue would be
compromised.
We sell our products in the United States directly, through resellers
and OEMs, and we sell our products internationally primarily through
resellers. Our distribution strategy focuses principally on:
o developing and expanding our direct sales organization; and
o expanding our indirect distribution channels by establishing
relationships with vendors of complementary technology, OEMs and resellers.
We expect to significantly increase the number of direct sales
personnel in the next six months in order to support and develop leads for
our indirect distribution channels and increase the direct sale of our
products. This expansion will significantly increase personnel costs and
related expenditures. Sales personnel will not be productive immediately,
and costs of this expansion may exceed the revenues generated by the sales
personnel. To achieve broader distribution of our products, we expect to
increase our reliance on indirect sales channels both internationally and
in North America. If we fail to develop and maintain relationships with
significant OEMs and resellers, or if these OEMs and resellers are not
successful in their sales efforts, sales of our products may decrease or
fail to increase as expected.
Currently, we have only a few agreements with OEMs and resellers, most
of which are not exclusive. Generally, these relationships may be
terminated with little or no notice. Many of these OEMs and resellers sell
or may develop competitive products, or have or may have pre-existing
relationships with our current or potential competitors, which may reduce
their efforts to sell our products. Also, these OEMs and resellers may
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directly compete with each other with respect to sales of our products in a
particular market or region. We cannot assure you that our existing OEM and
reseller customers will market our products effectively or continue to
devote the resources necessary to provide us with effective sales,
marketing and technical support. Also, we may not be able to retain our OEM
or reseller customers. Any inability to effectively establish our indirect
sales channels would compromise our ability to increase market acceptance
of our products and limit our ability to generate revenue.
Because we rely on indirect channels to sell our products, we are unable to
predict the demand for our products accurately which contributes to the
uncertainty of our operating results.
We expect to have difficulties predicting the demand for our products
because we rely on indirect sales channels. For example, one aspect of our
sales strategy is to develop relationships with OEMs and resellers that
sell our products under either our label or their own label. However, the
level and timing of orders placed by OEMs and resellers varies due to many
factors, including their attempts to balance their inventories, changes in
their manufacturing strategies and variation in demand for their products.
Our inability to forecast the level of orders from these indirect sales
channels may make it difficult to schedule production, manage the
manufacturing of our products or forecast our revenues. The orders that we
anticipate from our current or future OEM and reseller customers may not
materialize or delivery schedules may be deferred as a result of changes in
their business needs. This fluctuation in orders and general sales cycle
variability contributes to the uncertainty of our operating results.
If we are unable to develop and maintain strategic relationships with third
parties, our distribution strategy would be compromised.
We depend upon our strategic alliances to expand our distribution
channels and marketing efforts. We have developed relationships with server
vendors as well as other key participants in the Internet marketplace. We
believe that these relationships will provide us with valuable insights
into industry trends and technologies and help us supply more complete
solutions to joint customers. However, the amount and timing of resources
that our strategic partners devote to our business is not within our
control. Our strategic partners may not perform as expected. Many of our
strategic relationships are relatively new, and we cannot be certain that
any revenue will be derived from these arrangements. In addition, our
arrangements with strategic partners typically do not restrict them from
working with competitors. If any of these relationships are terminated, we
may not be able to maintain or develop alternative strategic relationships
or to replace strategic partners.
International sales of our products account for a significant portion of
our net sales, which exposes us to risks inherent in international
operations.
Our ability to grow will depend in part on the expansion of
international operations and sales, which are likely to continue to be a
significant portion of our net sales. Sales to customers outside of the
United States accounted for approximately 29% of our net sales in fiscal
1998, 25% of our net sales in fiscal 1999 and 35% of our net sales in the
six months ended December 31, 1999. Conducting business internationally
involves many risks, including:
o longer accounts receivable collection cycles;
o difficulties in managing operations in different locations;
o difficulties associated with enforcing agreements through foreign
legal systems;
o seasonal reductions in business activities in some parts of the world,
such as during the summer months in Europe;
o import or export licensing requirements;
o potentially adverse tax consequences, including higher tax rates
generally in Europe;
o unexpected changes in foreign regulatory requirements, especially
those relating to telecommunications and the Internet;
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o volatility in the political and economic conditions of foreign
countries, particularly China, Taiwan, Japan, Malaysia and North and South
Korea; and
o fluctuations in foreign currency exchange rates.
China, Taiwan, Japan and South Korea are substantial markets for our
products. Consequently, any political instability in these countries, such
as hostilities between North and South Korea, could significantly reduce
demand for our products from some of our major customers. Currently, most
of our international sales are denominated in U.S. dollars. As a result, an
increase in the value of the U.S. dollar relative to foreign currencies
could make our products less competitive in international markets. In
addition, we have elected to invoice some of our Japanese customers in yen.
We plan to engage in currency hedging activities, but we cannot guarantee
that these activities will shield us from fluctuations in exchange rates
between the U.S. dollar and the Japanese yen.
The average selling prices of our products may decrease, which may reduce
our gross profit.
We anticipate that the average selling prices of our products will
decrease in the future in response to competitive pricing pressures,
increased sales discounts, new product introductions by us or our
competitors and other factors. Therefore, in order to maintain our gross
profit, we must develop and introduce new products and product enhancements
on a timely basis and continually reduce our product costs. Any failure to
do so would cause our net sales and gross profit to decline, which would
harm our operating results and cause the price of our common stock to
decline. In addition, we may experience substantial period-to-period
fluctuations in future operating results due to any decrease in our average
selling prices.
If we lose key personnel or are unable to hire additional qualified
personnel as necessary, we may not be able to successfully manage our
business or sell our products.
Our success depends to a significant degree upon the continued
contributions of our key management, product development, sales and
marketing and finance personnel, many of whom would be difficult to
replace. In particular, we rely on our President, Chief Executive Officer
and Chairman, Dominic P. Orr. If we were to lose the services of Mr. Orr,
our business and results of operations would be harmed. None of our
officers or key employees is bound by an employment agreement for any
specific term and we do not maintain key person life insurance on any of
our key personnel.
If we fail to attract, train and retain qualified marketing, sales and
customer support personnel our ability to increase sales of our products
would be compromised.
Our products require a complex marketing and sales effort targeted at
several levels within a prospective customer's organization. Although we
have recently expanded our sales force, unless we continue to expand our
sales force, we will not be able to increase revenues. In addition, in
order to support and develop leads for our indirect distribution channels
and increase the direct sale of our products, we expect to significantly
increase the number of sales personnel in the next six months. Competition
for qualified sales personnel is intense, and we might not be able to hire
the kind and number of sales personnel we are targeting. Our inability to
retain and hire qualified sales personnel may harm our results of
operations and our ability to increase market share. On the other hand, if
we are successful in hiring our target number of sales personnel, we will
be faced with significantly increased personnel costs and related
expenditures. Sales personnel will not be productive immediately, and the
revenues generated by the sales personnel may not exceed the costs of our
planned expansion.
We have a small customer support organization and will need to increase
our staff to support new customers and the expanding needs of existing
customers. The installation of Internet traffic management solutions, the
integration of these solutions into existing networks and the ongoing
support can be complex. Accordingly, we need highly-trained customer
support personnel. Hiring customer support personnel is very competitive in
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our industry due to the limited number of people available with the
necessary technical skills and understanding of our products. Our inability
to attract, train or retain highly qualified customer support personnel
would harm our business and results of operations.
Our failure to comply with regulations and evolving industry standards
could delay our introduction of new products.
The market for our products is characterized by the need to meet
communications regulations and standards, some of which are evolving as new
technologies are deployed. To meet the requirements of our customers, our
products may be required to comply with various regulations including
standards established by Underwriters Laboratories and Bell Communications
Research. Failure of our products to comply or delays in compliance with
the various existing and evolving industry regulations and standards could
delay the introduction of our products. Moreover, enactment by federal,
state or foreign governments of new laws or regulations, changes in the
interpretation of existing laws or regulations, or a reversal of the trend
toward deregulation in the telecommunications industry could have a harmful
effect on our customers, and therefore on our business.
Our inability to protect our intellectual property rights from third-party
challenges may significantly impair our competitive position.
We rely on a combination of patent, copyright, trademark and trade
secret laws and restrictions on disclosure to protect our intellectual
property rights. We also enter into confidentiality or license agreements
with our employees, consultants and corporate partners, and control access
to and distribution of our software, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use our
products or technology. Monitoring use of our products is difficult, and we
cannot be certain that the steps we have taken will prevent unauthorized
use of our technology, particularly in foreign countries where the laws may
not protect our proprietary rights as fully as in the United States.
Our products and marketing efforts may infringe on the intellectual
property rights of third parties, which may result in lawsuits and prevent
us from selling our products.
In recent years, there has been significant litigation in the United
States involving patents and other intellectual property rights. Our
business activities may infringe upon the proprietary rights of others, and
other parties may assert infringement claims against us. In August 1999, we
received a letter from Resonate, Inc. alleging that some of our products
infringe one if its patents. If this claim, or any similar claims we may
receive in the future cannot be resolved through a license or similar
arrangement, we could become a party to litigation. In the past, we have
been involved in trademark litigation over the use of the name and mark
Alteon. Intellectual property claims and any resulting lawsuits, if
successful, could subject us to significant liability for damages and
invalidation of our proprietary rights. These kinds of disputes are subject
to inherent uncertainties. In addition, these claims, regardless of whether
they result in litigation and regardless of the outcome of the litigation,
would be time-consuming and expensive to resolve and divert management time
and attention. Any intellectual property dispute may cause us to do one or
more of the following:
o stop selling, incorporating or using our products that use the
challenged intellectual property;
o 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
o redesign those products that use the relevant technology.
If we are forced to take any of these actions, our business may be
harmed. Although we carry general liability insurance, our insurance may
not cover claims of this type or may not be adequate to indemnify us for
all liability that may be imposed.
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<PAGE>
If additional funds are not available as needed, we may not be able to take
advantage of market opportunities or otherwise grow our business.
We expect that cash from operations and borrowings available under our
credit facility will be sufficient to meet our working capital and capital
expenditure needs for at least the next 12 months. After that, we may need
to raise additional funds, and additional financing may not be available on
favorable terms, if at all. Further, if we issue additional equity
securities, stockholders may experience dilution, and the new equity
securities may have rights, preferences or privileges senior to those of
our common stock. If we cannot raise funds on acceptable terms, we may not
be able to develop new products or enhance our existing products, take
advantage of future opportunities or respond to competitive pressures or
unanticipated requirements.
If we engage in future acquisitions, we may fail to assimilate the acquired
operations, which could disrupt our ongoing business and generate negative
publicity.
We may acquire businesses that would complement our current product
offerings, augment our market coverage, enhance our technical capabilities,
or otherwise offer growth opportunities. While we have no current
agreements with respect to any acquisitions, we may acquire businesses,
products or technologies in the future. We may not be able to successfully
integrate any businesses, products, technologies or personnel that we might
acquire in the future, and our failure to do so could harm our business.
We are at risk of securities class action litigation due to our expected
stock price volatility.
The market price for our common stock will vary in response to a number
of factors, some of which are beyond our control. In the past, securities
class action litigation has often been brought against a company following
periods of volatility in the market price of its securities. We may in the
future be the target of similar litigation. Regardless of its outcome,
securities litigation may result in substantial costs and divert
management's attention and resources, which could harm our business and
results of operations.
Provisions in our corporate charter and bylaws may discourage take-over
attempts and thus depress the market price of our stock.
Provisions of our amended and restated certificate of incorporation and
bylaws, as well as provisions of Delaware law, could make it more difficult
for a third party to acquire us, even if doing so would benefit our
stockholders. These provisions:
o establish a classified board of directors so that not all members of
the board may be elected at one time; authorize the issuance of "blank
check" preferred stock that could be issued by our board of directors to
increase the number of outstanding shares and thwart a takeover attempt;
o substantially limit cumulative voting in the election of directors,
which would otherwise allow less than a majority of stockholders to elect
director candidates;
o limit who may call a special meeting of stockholders;
o prohibit stockholder action by written consent, thereby requiring all
stockholder actions to be taken at a meeting of our stockholders; and
o establish advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted upon by
stockholders at stockholder meetings.
In addition, Section 203 of the Delaware General Corporation Law and
the terms of our stock option plans may discourage, delay or prevent a
third party from acquiring us.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company maintains an investment portfolio consisting mainly of
income securities with an average maturity of less than one year. The
market value of this portfolio was $39.4 million at December 31, 1999.
These available-for-sale securities are subject to interest rate risk and
will fall in value if market interest rates increase. Because the Company
believes that it has the ability to hold its fixed income investments until
maturity, the Company 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. The Company does not
hedge any interest rate or foreign exchange exposures.
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<PAGE>
ALTEON WEBSYSTEMS, INC.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.5 Loan and Security Agreement dated March 20, 1998 between
Registrant and Silicon Valley Bank, as modified on May 29,
1998, July 15, 1998, September 4, 1998, December 8, 1998 and
December 8, 1999 (incorporated by reference from Exhibit 10.5
Amendment No. 2 to the Company's Registration Statement on
Form S-1, Registration No. 333-93123).
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Alteon WebSystems, Inc.
(Registrant)
Dated: February 9, 2000 By: /s/ James G. Burke
-------------------- --------------------
James G. Burke
Chief Financial Officer
and Secretary
(Principal Financial and
Accounting Officer)
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<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------- -------------
10.5 Loan and Security Agreement dated March 20, 1998 between
Registrant and Silicon Valley Bank, as modified on May 29,
1998, July 15, 1998, September 4, 1998, December 8, 1998 and
December 8, 1999 (incorporated by reference from Exhibit 10.5
Amendment No. 2 to the Company's Registration Statement on
Form S-1, Registration No. 333-93123).
27.1 Financial Data Schedule.
<PAGE>
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<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> DEC-31-1999
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