<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 17, 2000
REGISTRATION STATEMENT NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SITARA NETWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7373 04-3323334
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
52 SECOND AVENUE
WALTHAM, MASSACHUSETTS 02451
(781) 487-5900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
------------------------
MICHAEL PALIN
CHIEF FINANCIAL OFFICER
SITARA NETWORKS, INC.
52 SECOND AVENUE
WALTHAM, MASSACHUSETTS 02451
(781) 487-5900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
ARTHUR I. ANDERSON, P.C. PETER B. TARR, ESQ.
JOHN B. STEELE, ESQ. HALE AND DORR LLP
MCDERMOTT, WILL & EMERY 60 STATE STREET
28 STATE STREET BOSTON, MASSACHUSETTS 02109
BOSTON, MASSACHUSETTS 02109-1775 (617) 526-6000
(617) 535-4000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act of 1933 registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.00001 par value per share................... $80,500,000 $21,252
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(a), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY
BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS DECLARED
EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL AND IS
NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED NOVEMBER 17, 2000
[LOGO]
[ ] SHARES
COMMON STOCK
This is the initial public offering of Sitara Networks, Inc. We are offering
[ ] shares of our common stock. We anticipate that the initial public
offering price per share will be between $ and $ . We have
applied to list our common stock on the Nasdaq National Market under the symbol
"SITA."
INVESTING IN OUR COMMON STOCK INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 8.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Public offering price $ $
Underwriting discounts and commissions $ $
Proceeds, before expenses, to Sitara Networks $ $
</TABLE>
We have granted the underwriters the right to purchase up to
additional shares of common stock to cover over-allotments.
DEUTSCHE BANC ALEX. BROWN
CHASE H&Q
THOMAS WEISEL PARTNERS LLC
THE DATE OF THIS PROSPECTUS IS , 2001.
<PAGE> 3
[ARTWORK]
[INSIDE FRONT COVER]
In the upper left-hand corner, the words "Sitara Networks" appear. The
bottom middle of the page shows the back of the head of a person, and a computer
screen which the person is viewing. The computer screen contains a depiction of
data. There are three arrows above the top of the computer. Above the left arrow
appears the word "Scalable," and above that appears a pictures of Sitara's
QoSWorks product. Above the middle arrow appears the word "Flexible," and above
that appears a box identified as Sitara's QoSDirector product. Above the right
arrow appears the word "Manageable," and above that appears a picture of
Sitara's QoSArray product.
[GATEFOLD]
The page contains a large rectangle. In the upper middle portion of the
rectangle, the words "Sitara Networks" appear, and right below that the words
"Optimizing Applications and Networks with an Overlay of Quality Service"
appear. Inside the large rectangle appear four smaller rectangles, and in
between these rectangles appear four circles of varying size which are connected
to each other. The upper left rectangle is entitled "Enterprise." In the
rectangle is a picture of Sitara's QoSWorks product, and boxes and objects
labeled as a router, a switch, an IP voice gateway, two PC's and Sitara's
QoSDirector. Under the rectangle is the text: "Mission-critical application
prioritization," "Enabling Voice over IP," "Network-wide QoS policies" and
"Accelerating new application deployment." The lower left rectangle is entitled
"Hosting Site." In the rectangle is a picture of two of Sitara's QoSArray
products, and boxes and objects labeled as routers, switches, a web server farm,
storage and Sitara's QoSDirector. Under the rectangle is the text: "Service
level agreement reporting and arrangement," "Bandwidth allocation by customer,"
and "Application prioritization." The upper right rectangle is entitled
"Internet Service Provider." In the rectangle is a picture of two of Sitara's
QoSArray products and a QoSWorks product, and boxes and objects labeled as
routers, switches, QoSDirector, the Internet, and Authentication, Billing
Administration Servers. Under the rectangle is the text: "Service level
agreement reporting and management," "Billing statistics," "Bandwidth allocation
by user," and "New revenue from differentiated services." The bottom right
rectangle is entitled "Multimedia Service Provider." In the rectangle is a
picture of two of Sitara's QoSArray products and a QoSWorks product, and boxes
and objects labeled as routers, switches, QoSDirector, a web server farm,
storage, a private network and OSS. The lines connecting some of the boxes and
objects are noted to be GE Gigabit Ethernet, GE, OC3, T1, and T3. Under the
rectangle is the text: "Bandwidth metering," "User class of service,"
"Network-wide policy implementation," "Billing data" and "On-demand bandwidth
prioritization." The top circle is labeled "OC3 Metropolitan Access Ring." The
next circle down is labeled "OC12 Metropolitan Access Ring." The next circle
down is entitled "OC48 Metropolitan Core Ring." The bottom circle is entitled
"OC192 Long Haul." The throughput speeds applicable to the lines connecting the
top three circles to the rectangles are noted to be T3, OC3, and OC48.
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights selected information contained in greater detail
elsewhere in this prospectus. This summary may not contain all of the
information that you should consider before investing in our common stock. You
should carefully read the entire prospectus, including "Risk Factors" and the
financial statements, before making an investment decision.
OUR BUSINESS
Sitara Networks designs, develops, and markets a comprehensive, integrated
suite of high-performance quality of service networking products for enterprises
and communications service providers. Quality of service, or QoS, is an umbrella
term for techniques used to monitor network resource usage and to intelligently
match the needs of specific applications such as video conferencing, email,
voice over IP, or VoIP, and other data traffic with available network resources
based on pre-determined business priorities and allocations. Our products are
designed to address the inherent limitations of Internet protocol, or IP, in
order to optimize overall network performance, ensure the availability of
mission-critical applications, and ultimately allow service providers to deliver
additional revenue-generating services, on demand, with the level of service
their customers require.
The rapid growth of the Internet and the transition from multiple dedicated
communications networks to converged IP networks has resulted in a loss of
control over the reliability, predictability and manageability of network
traffic. This loss of control has limited the ability of enterprises and service
providers to fully realize the many potential benefits of IP convergence, such
as improved business process efficiency, greater connectivity between employees,
customers and suppliers, as well as significant revenue-generating opportunities
and cost savings. We believe that our QoS products provide the intelligence and
control necessary for our customers to efficiently operate converged IP
networks.
Our products integrate a variety of QoS techniques into a single platform
to allow enterprises and service providers to monitor, set, and enforce network
resource usage policies based on business priorities and the intelligence gained
from real-time analysis of data traffic across an entire network. Our products
can scale from low-speed connections at remote offices to large network
aggregation points with higher data throughput requirements. We have architected
our products to be independent from the physical network infrastructure so that
they have the flexibility to adapt to changes in network configuration and
business needs.
Our products include QoSWorks, QoSArray and QoSDirector. QoSWorks is a QoS
device designed for deployment on enterprise premises, whether at headquarters,
remote offices or data centers that require data transmission speeds, or
throughput, of up to 100 million bits per second, or Mbps. QoSArray is a
multi-module QoS system that supports complex network configurations and is
designed for deployment at large enterprises and by service providers that
require throughput of up to optical carrier 3, or OC3. QoSDirector is a central
policy management software system that is designed to enable our customers to
manage large installations of QoSWorks and QoSArray systems from a single
intuitive user interface.
Our QoS products provide the following operational benefits:
Improved application and network performance. Our products are designed to
optimize utilization of network resources and improve the performance of
applications. Specifically, our products can improve network and application
response time and reliability while minimizing data loss and network downtime.
As a result, mission-critical application performance is protected against
degradation by traffic from lower-priority applications. Our products also
enable the efficient deployment of emerging IP-based applications, such as VoIP
and multimedia applications that are more demanding of network resources.
3
<PAGE> 5
Scalability over multiple network sizes and speeds. Our QoS products are
designed to deliver quality of service to any point on a network ranging in
speed from 64 kilobits per second, or Kbps, to OC3. Our products can be scaled
from a single unit deployment to across an entire service provider network. We
believe that our product architecture will be able to support a migration to
higher speed applications and larger network deployments in our future product
releases.
Real-time network performance visibility and resource control. Our QoS
products are designed to enable network managers to use a single user interface
to view and monitor all traffic types and set and refine policies for all QoS
functions network-wide on a continuous basis.
Flexibility to handle any IP-based application and many other diverse data
types. Enterprises and service providers that implement our QoS products can
quickly and easily deploy additional IP-based applications without
reconfiguration of their networks because of the ability of our products to
operate with any IP traffic. Our QoS products are also able to operate with
traffic from many legacy non-IP applications.
Ease of use. Our QoS products can be installed to implement an end-to-end
QoS solution across a network with no changes to routers or other network
equipment and minimal, if any, changes to customer or host application software.
In addition, our products are transparent on a network and contain monitoring
features and an intuitive user interface to enable network managers to set and
implement network-wide QoS policies expeditiously. Our products reduce the time
and complexity of deployment of QoS across a network.
These operational benefits can provide the following financial benefits to
our customers:
Enhanced service provider revenue opportunities. We believe our QoS
products enable service providers to deliver additional revenue-generating
services beyond merely providing bandwidth. Service providers can use our QoS
products to enable the delivery of additional services, such as bandwidth on
demand, VoIP and other offerings based on differing guaranteed levels of
service.
Cost savings. Our QoS products are designed to enable enterprises and
service providers to realize potential cost savings by utilizing a converged IP
network rather than multiple dedicated networks. In addition, the comprehensive
nature of our QoS products allow our customers to address their QoS needs with a
single product rather than having to purchase multiple single-point QoS
products.
Our goal is to become the leading worldwide provider of QoS solutions to
enterprises and service providers. Key elements of our strategy include:
Leveraging our product architecture to extend technological leadership. We
intend to leverage our unique product architecture to enable us to respond
quickly to evolving market requirements through periodic enhancements of
existing products and rapid development of new QoS products.
Increasing our focus on the service provider market. We are actively
pursuing opportunities to expand sales of our products to and through service
providers. We believe that service providers represent a large market
opportunity and that our products can provide them and their customers with
multiple benefits.
Growing our global sales force, distribution channel network and support
capabilities. We are investing significant resources worldwide to expand our
direct sales force and further develop our indirect sales channels to accelerate
sales of our expanding product line. In addition, we intend to expand our
support capabilities to ensure our customers and distribution channels receive
the level of support that they require.
4
<PAGE> 6
Accelerating our product introductions. We are focusing on providing
comprehensive, high-performance, easy-to-use and cost-effective QoS solutions to
enterprises and service providers operating converged IP networks. We intend to
continue to enhance and expand our suite of QoS products to broaden our QoS
solutions portfolio and bolster our competitive position in the market.
Expanding our strategic relationships. We continue to seek to expand our
distribution, marketing and technology relationships with new and existing
strategic partners that will enable us to increase the market opportunity for
our products.
Establishing global brand recognition for our products. We are investing
significant resources in expanding and enhancing our global brand recognition to
establish Sitara Networks as the standard for comprehensive QoS solutions.
We sell and support our products through a network of resellers and a
direct sales force. We have sales representatives located in ten metropolitan
areas across the United States and in 12 foreign countries. As of September 30,
2000, we had 66 resellers, including 27 in the United States and 39 in 19
foreign countries.
Our principal offices are located at 52 Second Avenue, Waltham,
Massachusetts 02451. Our telephone number is (781) 487-5900. Our website address
is www.sitaranetworks.com, but the information on our website does not
constitute a part of this prospectus.
5
<PAGE> 7
THE OFFERING
Common stock offered by Sitara
Networks............................ shares
Common stock to be outstanding after
this offering....................... shares
Use of proceeds..................... We plan to use the proceeds from the
offering for working capital and
general corporate purposes.
Dividend policy..................... We intend to retain all future
earnings, if any, to fund the
development and growth of our business.
We do not anticipate paying cash
dividends on our common stock.
Proposed Nasdaq National Market
symbol.............................. SITA
The number of shares of our common stock outstanding after the offering is
based on shares outstanding as of October 31, 2000. This number assumes the
conversion into common stock of all shares of our preferred stock but does not
include:
- 6,304,216 shares of common stock issuable upon exercise of outstanding
stock options under our stock incentive program as of October 31, 2000 at
a weighted average exercise price of $2.26,
- 679,819 shares of common stock reserved and available for issuance under
our stock incentive program,
- 2,000,000 shares of common stock reserved and available for issuance
under our employee stock purchase plan, and
- 591,429 shares of common stock issuable upon exercise of warrants at a
weighted average exercise price of $2.53 as of October 31, 2000.
------------------------
Unless otherwise indicated, all information contained in this prospectus
assumes:
- no exercise of the underwriters' over-allotment option,
- a three-for-two stock split of our stock effected on June 16, 2000,
- the conversion of all outstanding shares of our preferred stock into
34,400,573 shares of common stock concurrently with the closing of this
offering, and
- the filing of our amended and restated certificate of incorporation which
will increase the number of authorized shares of our common stock and
decrease the number of authorized shares of our preferred stock.
"Sitara," the Sitara Networks logo, and "Sitara" together with the Sitara
Networks logo are registered trademarks, and "Sitara Networks," "QoSWorks,"
"QoSArray," "QoSDirector" and "AccuRate" are trademarks, of Sitara Networks.
This prospectus also contains tradenames, trademarks and service marks of other
companies.
6
<PAGE> 8
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- ----------------------
1997 1998 1999 1999 2000
------- ------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $ -- $ 175 $ -- $ -- $ 2,353
Cost of revenue (excluding stock-based compensation of $0,
$0, $0, $0 and $100, respectively)........................ -- 104 -- -- 1,639
------- ------- -------- ------- --------
Gross margin................................................ -- 71 -- -- 714
Operating expenses:
Selling and marketing (excluding stock-based compensation
of $0, $0, $441, $96 and $448, respectively)............ 1,517 3,785 3,588 2,603 14,963
General and administrative (excluding stock-based
compensation of $0, $0, $0, $0 and $44, respectively)... 989 1,413 1,485 1,073 1,881
Research and development (excluding stock-based
compensation of $37, $40, $345, $65 and $1,260,
respectively)........................................... 2,058 2,959 6,831 4,343 8,125
Stock-based compensation.................................. 37 40 786 161 1,852
------- ------- -------- ------- --------
Total operating expenses................................ 4,601 8,197 12,690 8,180 26,821
------- ------- -------- ------- --------
Loss from operations........................................ (4,601) (8,126) (12,690) (8,180) (26,107)
Interest income, net........................................ 244 294 312 128 717
------- ------- -------- ------- --------
Net loss.................................................... (4,357) (7,832) (12,378) (8,052) (25,390)
Accrued dividends for preferred stockholders................ (736) (1,448) (2,825) (1,752) (3,711)
Accretion of preferred stock to redemption value............ (1) (3) (104) (63) (203)
------- ------- -------- ------- --------
Net loss attributable to common stockholders................ $(5,094) $(9,283) $(15,307) $(9,867) $(29,304)
======= ======= ======== ======= ========
Basic and diluted net loss per share........................ $ (1.26) $ (1.60) $ (2.09) $ (1.41) $ (3.36)
======= ======= ======== ======= ========
Shares used in computing basic and diluted net loss per
share..................................................... 4,035 5,790 7,307 7,006 8,711
Pro forma basic and diluted net loss per share
(unaudited)............................................... $ (0.39) $ (0.66)
======== ========
Shares used in computing pro forma basic and diluted net
loss per share (unaudited)................................ 31,620 38,759
</TABLE>
Shares used in computing pro forma share amounts reflect the conversion of
all of the outstanding shares of our preferred stock as of September 30, 2000
into shares of our common stock as if the shares had converted into shares of
common stock immediately upon their issuance.
The pro forma balance sheet data shown below assumes the conversion of all
of our outstanding shares of preferred stock as of September 30, 2000 into
common stock upon the closing of this offering. The pro forma as adjusted data
gives effect to this conversion and to the sale of [ ] shares of common
stock that we are offering under this prospectus at an initial public offering
price of $ per share after deducting the underwriting discounts and
commissions and estimated offering expenses. The actual, pro forma and pro forma
as adjusted balance sheet data excludes issuances of our capital stock after
September 30, 2000, including 897,078 shares of our series G convertible
redeemable preferred stock.
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $18,055 $18,055 $
Working capital............................................. 15,986 15,986
Total assets................................................ 23,858 23,858
Long-term portion of capital lease obligations.............. 1,133 1,133
Convertible redeemable preferred stock...................... 73,201 --
Total stockholders' equity (deficit)........................ (55,328) 17,873
</TABLE>
7
<PAGE> 9
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
carefully consider the following risk factors and all other information
contained in this prospectus before purchasing shares of our common stock. The
risks and uncertainties described below are not the only ones facing us.
Additional risks and uncertainties that we are unaware of, or that we currently
deem immaterial, also may become important factors that affect us.
If any of the following risks occur, our business, financial condition or
results of operations could be materially and adversely affected. In that case,
the trading price of our common stock could decline, and you may lose some or
all of your investment.
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY AND EXPECT TO ENCOUNTER DIFFICULTIES FACED
BY EARLY-STAGE COMPANIES.
We commenced operations in December 1996 and commercially released our
first network performance product, QoSWorks, in the first quarter of 2000. We
commercially released our other network performance products, QoSArray and
QoSDirector, in the fourth quarter of 2000. Accordingly, we have only a limited
operating history upon which our business and prospects can be evaluated. In
addition, our limited operating history means that we have limited insight into
how technological and market trends may affect our business. The revenue and
income potential of our business and market are unproven. We operate in a highly
competitive and rapidly evolving industry, and as a result, we face risks and
uncertainties relating to our ability to successfully implement our business
plan. We cannot assure you that we will adequately address these risks and
uncertainties or that we will be able to implement our business plan
successfully.
WE HAVE A HISTORY OF LOSSES, WE EXPECT TO CONTINUE TO INCUR LOSSES AND WE MAY
NOT ACHIEVE PROFITABILITY IN THE FUTURE.
We have never been profitable. We have experienced quarterly and annual
losses since we were founded, and have funded our business primarily through the
issuance of our stock and debt and not from cash generated by our business. We
incurred a net loss of $25.4 million in the nine months ended September 30, 2000
and our accumulated deficit was $50.3 million as of September 30, 2000.
We anticipate that our operating expenses will continue to increase as we
develop our technology, increase our sales and marketing activities, create and
expand the distribution channels for our products and broaden our customer
support capabilities. However, our limited operating history makes the
prediction of future operating results difficult, and our revenue may not
generate sufficient cash from operations in future periods. Our failure to
significantly increase our revenue would seriously harm our business and
operating results.
OUR OPERATING RESULTS ARE DIFFICULT TO FORECAST AND MAY FLUCTUATE FROM QUARTER
TO QUARTER, WHICH MAY HAVE A NEGATIVE IMPACT ON THE MARKET PRICE OF OUR COMMON
STOCK.
Our quarterly revenue and operating results may fluctuate significantly as
a result of a variety of factors, many of which are outside our control. If our
quarterly revenue or operating results fall below the expectations of investors
or securities analysts, the price of our common stock could decline
substantially. Factors that might cause fluctuations in our quarterly revenue
and operating results include the following:
- the timing of execution of large contracts and product implementations by
our customers, which would impact the periods in which we recognize
revenue,
8
<PAGE> 10
- the timing of new product and service introductions or upgrades by us or
our competitors, which could impact demand for our existing products,
- the purchasing and budgeting cycles of our customers, which could result
in seasonal fluctuations in our revenue,
- changes in our pricing policies or those of our competitors,
- the mix of domestic and international sales and products sold and the
channels through which they are sold,
- any increased costs related to any business expansion we may undertake or
to the enhancement or customization of our products,
- any change in global economic conditions, and
- any costs related to possible acquisitions of technology or businesses.
Most of our expenses, such as employee compensation and rent, are
relatively fixed in the short term and our expense levels are based, in part, on
our expectations regarding future revenue levels. As a result, if total revenue
for a particular quarter is below our expectations, we will not be able to
proportionately reduce operating expenses for that quarter.
Due to these factors, we believe that quarter-to-quarter comparisons of our
operating results are not necessarily meaningful and you should not rely on them
as an indication of our future performance.
THE MARKET FOR OUR PRODUCTS AND SERVICES IS IN THE EARLY STAGES OF DEVELOPMENT
AND OUR BUSINESS WILL SUFFER IF THE MARKET FAILS TO DEVELOP AS WE EXPECT.
Our products and services are designed to enable companies to enhance the
performance of public and private wide-area networks, including the Internet.
The market for our network performance products is in the early stages of
development and is rapidly evolving. Demand for and market acceptance of
recently introduced products and services in a rapidly evolving industry is
subject to a high level of uncertainty and risk. A viable market may fail to
emerge or be sustainable, in which case our business and operating results will
be significantly harmed.
OUR SALES AND PROFITS, IF ANY, ARE SUBSTANTIALLY DEPENDENT UPON THE CONTINUED
WIDESPREAD ACCEPTANCE AND USE OF PUBLIC AND PRIVATE NETWORKS AS AN EFFECTIVE
MEDIUM OF COMMUNICATION AND COMMERCE BY END-USERS AND ENTERPRISES.
Rapid growth in the use of the Internet and other networks is a recent
development, and we cannot assure you that acceptance and use will continue to
develop or that a sufficiently broad base of users will adopt, and continue to
use, the Internet and other networks as a medium of commerce and communication.
In addition, the Internet may not be accepted as a viable commercial
marketplace. To the extent that the Internet and other networks continue to
experience significant growth in the number of users, their frequency of use or
an increase in their bandwidth resources, we cannot assure you that the
infrastructure for the Internet and these networks will be able to support the
demands placed upon them. In addition, these networks could lose their viability
due to delays in the development or adoption of new standards and protocols
required to handle increased levels of activity, or due to increased
governmental regulation. Changes in or insufficient availability of
communications services to support these networks also could result in slower
response times and adversely affect their usage.
9
<PAGE> 11
WE EXPECT TO DERIVE SUBSTANTIALLY ALL OF OUR REVENUE FOR THE FORESEEABLE FUTURE
FROM OUR QOSWORKS, QOSARRAY AND QOSDIRECTOR NETWORK PERFORMANCE PRODUCTS, AND IF
THESE PRODUCTS ARE NOT WIDELY ACCEPTED BY THE MARKET, WE MAY BE UNABLE TO
SUSTAIN OR INCREASE OUR REVENUE.
We expect to derive substantially all of our revenue in the future from
sales of our QoSWorks, QoSArray and QoSDirector network performance products. We
commercially released QoSWorks in the first quarter of 2000 and commercially
released QoSArray and QoSDirector in the fourth quarter of 2000. We cannot be
certain that our target customers will widely adopt and deploy our products. Our
business and operating results will be harmed if our products do not achieve and
maintain broad market acceptance.
WE FACE INTENSE COMPETITION IN OUR MARKET, AND OUR FAILURE TO COMPETE
SUCCESSFULLY COULD RESULT IN PRICE REDUCTIONS AND DECREASED DEMAND FOR OUR
PRODUCTS.
The markets in which we compete are new, intensely competitive, highly
fragmented and characterized by rapidly changing technology and evolving
standards. We face competition in the overall network computing equipment market
as well as the market segments in which we expect our products to compete. We
believe that the market for QoS products is growing and, therefore, we expect to
experience increased competition from current and potential competitors as more
solutions are brought to market to address QoS concerns.
Some of our current and potential competitors are large public companies
that have longer operating histories and significantly greater financial,
technical, marketing and other resources than we do. As a result, these
competitors are able to devote greater resources to the development, promotion,
sale and support of their products. In addition, our competitors with large
market capitalizations or cash reserves are much better positioned than we are
to acquire new technologies or products that may displace our product lines. Any
of these acquisitions could give the acquiring competitor a strategic advantage
over us. Our competitors may also bundle their products with other software or
hardware in a manner which may discourage users from purchasing our products.
Many of our competitors have significantly more established customer
support and professional services organizations than we do. In addition, many of
our competitors have much greater name recognition and have a more extensive
customer base, broader customer relationships and broader product offerings than
us, including relationships with many of our current and potential customers.
These competitors can leverage their customer relationships and broader product
offerings and adopt aggressive pricing policies to gain market share. As a
result, we may be required to accept price reductions and reduced gross margins
and we may not be able to maintain a competitive position against current or
future competitors. Our failure to maintain and enhance our competitive position
within the markets in which we compete could seriously harm our business.
OUR FAILURE TO DEVELOP AND MAINTAIN STRATEGIC RELATIONSHIPS, EXPAND DISTRIBUTION
CHANNELS AND DEVELOP AND RETAIN A QUALIFIED SALES FORCE AND CUSTOMER SERVICE
ORGANIZATION COULD PREVENT US FROM PENETRATING MARKETS FOR OUR PRODUCTS AND
COULD HARM OUR FINANCIAL RESULTS.
We believe that our success in penetrating markets for our products
significantly depends on our ability to develop and maintain strategic
relationships with key hardware and software vendors, distribution partners and
customers. In particular, we intend to augment our product portfolio by entering
into strategic relationships that will enable us to acquire, license and
distribute complementary technologies. Our failure to enter into such agreements
could prevent us from introducing competitive products. Our future success is
also dependent upon establishing relationships with a variety of distribution
partners, including system integrators and
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value-added resellers, or VARs. We cannot assure you that we will be able to
establish relationships with desired distribution partners on a timely basis, or
at all, or that such distributors will be successful in selling our products.
We believe that our future success is also dependent upon substantially
increasing the capabilities of our direct and indirect domestic and
international sales force and our customer service and support organization. We
cannot assure you that we will attract or retain additional qualified sales
personnel on a timely basis, or at all. We currently have a small customer
service and support organization, and have limited experience supporting our QoS
products. We cannot assure you that we will be able to increase the size of our
customer service and support organization on a timely basis, or at all, or that
we will be able to provide the level of support required by our customers.
FAILURE TO DEVELOP AND EXPAND OUR MARKETING CAPABILITIES COULD HARM OUR
BUSINESS.
We need to expand our marketing operations in order to increase market
awareness of our products, market our products to a greater number of
organizations and generate increased revenue. Competition in the market for
network performance solutions is intense. If we fail to differentiate our
products from those of our competitors and fail to acquire greater market share,
our ability to grow our business will be seriously harmed. Furthermore, we have
limited experience in marketing our products broadly to a large number of
clients and may be unable to do so successfully.
OUR PRODUCTS MAY HAVE A LONG SALES CYCLE WHICH MAKES IT DIFFICULT TO PREDICT OUR
QUARTERLY RESULTS AND MAY CAUSE OPERATING RESULTS TO VARY SIGNIFICANTLY.
The sales cycle for our products is long, typically ranging from one to six
months. Our products often are part of a significant strategic decision by our
customers regarding their information systems infrastructure. We spend
significant time educating and providing information to prospective clients
regarding the use and benefits of our products. The decision to purchase our
products may require significant pre-purchase evaluation and may be subject to
delays over which we have little or no control. Our sales cycle may make it
difficult to predict the quarter in which sales and revenue recognition may
occur, and our operating results may vary significantly from quarter to quarter.
LONG-TERM CONTRACTS ARE NOT TYPICAL IN OUR BUSINESS, AND REDUCTIONS,
CANCELLATIONS OR DELAYS IN CUSTOMER ORDERS COULD ADVERSELY AFFECT OUR OPERATING
RESULTS.
We do not usually obtain long-term purchase orders or commitments from our
customers. Rather, we work with our resellers to develop non-binding forecasts
of the future volume of orders. Customers may cancel their orders, change
production quantities from forecasted volumes or delay production for a number
of reasons beyond our control. For example,
- our reseller agreements generally do not require minimum purchases,
- our customers can stop purchasing and our resellers can stop marketing
our products at any time,
- our reseller agreements generally are not exclusive and are for one year
terms, with no obligation of the resellers to renew the agreements, and
- our reseller agreements provide for discounts based on expected or actual
volumes or products purchased or resold by the reseller in a given
period.
Because our expenses are based on our revenue forecasts, a substantial reduction
or delay in sales of our products to, or unexpected returns from, customers and
resellers or the loss of any significant customer or reseller could harm our
business.
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OUR EARNINGS WILL DECREASE BECAUSE OF STOCK-BASED COMPENSATION CHARGES THAT WE
HAVE INCURRED.
Non-cash compensation expenses are related to grants of common stock, stock
options and warrants made to employees, directors, consultants and vendors. For
the nine months ended September 30, 2000, we recorded $1.9 million in non-cash
compensation charges. Based principally on grants of common stock, stock options
and warrants made to date, we will record approximately $6.7 million of
additional non-cash compensation through 2004 as follows: $0.6 million, $2.1
million, $1.9 million, $1.6 million and $0.5 million in the three months ended
December 31, 2000 and the years ended December 31, 2001, 2002, 2003 and 2004,
respectively. These charges will reduce our earnings in future periods.
WE DEPEND UPON A SINGLE MANUFACTURER TO MANUFACTURE ALL OF OUR PRODUCTS AND IF
THAT MANUFACTURER IS UNABLE OR UNWILLING TO MANUFACTURE A SUFFICIENT NUMBER OF
OUR PRODUCTS, WE MAY NOT BE ABLE TO FILL CUSTOMER ORDERS IN A TIMELY MANNER.
We currently contract the manufacturing and testing of our products to
Plexus, an independent manufacturer. Our reliance on a single manufacturer
exposes us to a number of risks, including reduced control over manufacturing
capacity, product completion and delivery times, product quality and
manufacturing costs. If we experience increased demand for our products, the
challenges we face in managing our relationship with Plexus will be increased.
Furthermore, Plexus has the right to terminate its relationship with us upon 90
days notice. If Plexus is unable or unwilling to manufacture a sufficient
quantity of products for us, on the time schedule and with the quality that we
demand, we may be forced to engage additional or replacement manufacturers,
which could result in additional expenses and delays in product shipments.
BECAUSE WORLDWIDE DEMAND FOR RAW MATERIALS AND COMPONENTS USED IN OUR PRODUCTS
HAS INCREASED, ADEQUATE QUANTITIES OF THESE MATERIALS MAY NOT BE AVAILABLE TO
SATISFY OUR NEEDS, WHICH COULD INCREASE THE COST AND DELAY DELIVERY OF OUR
PRODUCTS.
During the last year, worldwide demand for raw materials and components
used in our products has increased. If suppliers of these materials are unable
to provide adequate quantities to satisfy our needs, product shipments may be
delayed, we could experience a loss or delay in revenue and our competitive
position would be harmed. In addition, if, as a result of increased demand, our
suppliers raise the price of these materials, the cost of manufacturing our
products would increase and sales of our products could decrease.
RAPID GROWTH IN OUR BUSINESS COULD STRAIN OUR MANAGERIAL, OPERATIONAL,
FINANCIAL, ACCOUNTING AND INFORMATION SYSTEMS, CUSTOMER SERVICE STAFF AND OFFICE
RESOURCES.
The anticipated growth necessary to expand our business operations and
distribution channels will place a significant strain on our resources. In order
to implement our growth strategy, we need to expand all aspects of our business,
including our computer systems and related infrastructure, customer service
capabilities and sales and marketing efforts. The demands on our network
infrastructure, technical staff and technical resources have grown rapidly with
our expanding customer base. From January 1, 2000 to September 30, 2000, our
number of full-time employees grew from approximately 46 to approximately 156.
We cannot assure you that our management, operations and technical resources
will adequately accommodate or facilitate the anticipated growth of our
operations. We also expect that we will need to continually improve our
financial and managerial controls, billing systems, reporting systems and
procedures. We also need to continue to expand, train and manage our workforce.
If we fail to manage our growth effectively, our business, financial condition
and results of operations could be materially adversely affected.
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In addition, as we offer new products and services, we will need to
increase the size and expand the training of our customer service staff to
ensure that they can adequately respond to customer inquiries. We currently have
a small customer service and support staff, and have limited experience
supporting our products. If we fail to provide our customer service staff
training and staffing sufficient to support new products and services, we may
lose customers who feel that their needs have not adequately been satisfied.
IF WE ARE UNABLE TO ATTRACT AND RETAIN HIGHLY QUALIFIED MANAGEMENT AND TECHNICAL
PERSONNEL, OUR BUSINESS MAY BE HARMED.
Our success depends in large part on the contributions of our senior
management team, our technology, sales and marketing personnel, and in
particular, Malik Z. Khan, our chairman and chief executive officer. We face
intense competition in hiring and retaining personnel from a number of sectors,
including technology and Internet companies. Many of these companies have
greater financial resources than we do to attract and retain qualified
personnel. In addition, we have not in the past executed, and do not have any
current plans to execute, employment agreements with any of our employees,
including Mr. Khan. As a result, we may be unable to retain our employees or
attract, integrate, train or retain other highly skilled employees in the
future. If we fail to attract new personnel or retain and motivate our current
personnel, our business, financial condition and results of operations could be
materially adversely affected.
OUR FAILURE TO MEET SIGNIFICANT CAPITAL REQUIREMENTS MAY SERIOUSLY HARM OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our capital requirements in connection with our development and marketing
activities have been and will continue to be significant. Our future capital
requirements will depend on many factors, some of which are not within our
control. These factors include:
- sales of our existing products,
- the continued progress in, and magnitude of, our research and product
development programs,
- competing technological and market developments, and
- the costs of our commercialization activities.
We may need to raise additional funds in the future in order to fund more
aggressive brand promotions and more rapid expansion, to develop newer or
enhanced products, to respond to competitive pressures or to acquire
complementary businesses, technologies or services. If additional funds are
raised through the issuance of equity or convertible debt securities, the
percentage ownership of our stockholders will be reduced, stockholders may
experience additional dilution and such securities may have rights, preferences
or privileges senior to those of the rights of our common stock. We cannot
assure you that additional financing will be available on terms favorable to us,
or at all. As a result, we may need to significantly scale back our expansion
and growth plans.
OUR INTERNATIONAL BUSINESS EXPOSES US TO UNIQUE RISKS WE DO NOT FACE IN OUR
BUSINESS AS CONDUCTED IN THE UNITED STATES.
As of September 30, 2000, we had sales representatives located in 12
foreign countries and resellers located in 19 foreign countries. Revenue from
customers located outside the United States accounted for approximately 75% of
our total revenue for the nine months ended September 30, 2000. Substantially
all of our international sales have been denominated in United States dollars.
We anticipate deriving in the future a significant portion of our revenue from
sales outside the United States. Our significant international business exposes
us to a
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number of risks that we do not have to address in our United States operations.
These risks include:
- longer accounts receivable collection cycles,
- challenges and costs inherent in managing geographically dispersed
operations,
- protectionist laws and business practices that favor local competitors,
- economic or political instability in some international markets,
- difficulties in finding and managing local resellers, and
- diverse and changing governmental laws and regulations.
In addition, although we currently conduct substantially all of our sales
transactions in United States currency and anticipate continuing to do so,
foreign currency exchange rate fluctuations could have the effect of reducing
the demand for our products outside the United States. If we are unsuccessful in
addressing these risks, our international business will not achieve the revenue
or profits we expect.
ACQUISITIONS COULD DISRUPT OUR ON-GOING BUSINESS, DISTRACT OUR MANAGEMENT AND
EMPLOYEES, INCREASE OUR EXPENSES AND ADVERSELY AFFECT OUR BUSINESS.
If we are presented with appropriate opportunities, we intend to make
investments in complementary companies, products or technologies. We may not
realize the anticipated benefits of any acquisition or investment. If we
purchase a company, we could have difficulty in assimilating that company's
personnel and operations. In addition, the key personnel of the acquired company
may decide not to work for us. If we make other types of acquisitions, we could
have difficulty in assimilating the acquired technology or products into our
operations. These difficulties could disrupt our ongoing business, distract our
management and employees and increase our expenses. Furthermore, in the event
that we do complete an acquisition, we could be required to do one or more of
the following:
- issue equity securities,
- incur substantial debt,
- assume contingent liabilities,
- incur a one-time charge, or
- amortize goodwill and other intangible assets.
IF OUR PRODUCTS DO NOT COMPLY WITH INDUSTRY STANDARDS OR WORK EFFECTIVELY WITH
OUR CUSTOMERS' NETWORKS, WE MAY LOSE SALES AND INCUR ADDITIONAL EXPENSES.
Our success depends in part on both the adoption of industry standards for
technologies in the Internet infrastructure solutions market and our products'
compliance with those industry standards. The absence of industry standards for
a particular technology may prevent widespread adoption of products based on
that technology. In addition, because many technological developments occur
prior to the adoption of related industry standards, we may develop products
that do not comply with industry standards that are eventually adopted, which
would significantly impair our ability to sell those products. Moreover, some
companies that sell products that comprise the infrastructure of the Internet
may have the ability to establish de facto standards within the industry.
Actions by any of these companies, for competitive or other reasons, that
diminish our products' compliance with industry or de facto standards or their
ability to interoperate with other Internet-related products would be damaging
to our ability to generate revenue and to our corporate reputation.
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Our products must work effectively with our customers' existing networks,
which typically include products from a variety of different vendors, and
utilize multiple protocol standards. The complexity of these networks makes it
difficult for us to ensure that our products will function properly within these
networks and also makes it difficult for us to identify the source of any
problems which occur in the operation of our products. If our products fail to
work properly within our customers' networks, we will likely:
- lose sales,
- incur additional expenses in our efforts to identify and remedy the
problems, and
- suffer damage to our corporate reputation.
SOFTWARE OR HARDWARE ERRORS MAY SERIOUSLY HARM OUR BUSINESS AND RESULTS OF
OPERATIONS.
Internet and other network performance enhancement products frequently
contain undetected software errors when first introduced or as new versions are
released. We expect that such errors will be detected from time to time in new
or enhanced products after commencement of commercial shipments. These problems
may cause us to incur significant warranty and repair costs, divert the
attention of our engineering personnel from our product development efforts and
cause significant customer relations problems. Our products must successfully
operate with products from other vendors. The occurrence of hardware and
software errors, whether caused by our products or another vendor's products,
could cause us to experience one or more of the following negative consequences:
- loss of or delay in revenues,
- loss of market share,
- failure to achieve market acceptance,
- diversion of development resources, or
- injury to our corporate reputation.
WE COULD INCUR SUBSTANTIAL COSTS AS A RESULT OF PRODUCT LIABILITY CLAIMS
RELATING TO OUR CUSTOMERS' CRITICAL BUSINESS OPERATIONS.
Our products are critical to the operations of our customers' businesses.
If one of our products fails, a customer may assert a claim for substantial
damages against us, regardless of our responsibility for the failure. Product
liability claims could require us to spend significant time and money in
litigation or to pay significant damages. Any such claims, whether or not
successful, could seriously damage our reputation and our business.
IF WE FAIL TO RESPOND EFFECTIVELY TO RAPIDLY CHANGING TECHNOLOGY AND EVOLVING
INDUSTRY STANDARDS, OUR PRODUCTS MAY BECOME OBSOLETE.
The Internet and network computing generally are characterized by rapid
technological change, changes in user and client requirements and preferences,
frequent new product and service introductions embodying new technologies and
the emergence of new industry standards and practices that could render our
products obsolete. Our success will depend, in part, on our ability to both
internally develop and license leading technologies useful in our business,
develop new products and technology that address the increasingly sophisticated
and varied needs of customers, and respond to technological advances and
emerging industry standards and practices on a cost-effective and timely basis.
The development of our existing products and other proprietary technology
involves significant technical and business risks. We cannot assure you that we
will use new technologies effectively or adapt our proprietary technology and
products to customer requirements or emerging industry standards. We
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continually strive to incorporate new technology into our products. Introducing
new technology involves numerous technical challenges, substantial amounts of
personnel resources and often takes many months to complete. We cannot assure
you that we will be successful at integrating such technology into our products
on a timely basis or that, once integrated, such technology will function as
expected.
Rapid technological change will also require us to effectively use leading
technologies, continue to develop our technological expertise, enhance our
current products and continue to improve the performance, features and
reliability of our products. Accordingly, our success will depend on our ability
to adapt to rapidly changing technologies and industry standards, and our
ability to continually improve the speed, performance, features, ease of use and
reliability of our products in response to both evolving demands of the
marketplace and competitive service and product offerings.
RISKS RELATED TO INTELLECTUAL PROPERTY
WE MAY BE UNABLE TO PROTECT AND ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS FROM
INFRINGEMENT.
The success of our business is largely dependent upon our ability to
protect our proprietary technology. We rely on a combination of patent,
copyright, trademark, trade secret, patent and other intellectual property laws,
as well as confidentiality and assignment of invention agreements and licensing
arrangements, to establish and protect our proprietary rights. We currently have
two United States patents and eight United States patent applications pending,
but do not anticipate that any patents that do issue will provide any assurance
of our success in the future. While we typically enter into confidentiality
agreements with our employees, consultants and strategic partners, and generally
control access to and distribution of our proprietary information, we cannot
ensure that our efforts to protect our proprietary information will be adequate
to protect against infringement and misappropriation of our intellectual
property by third parties, particularly in foreign countries where laws or law
enforcement practices may not protect our proprietary rights as fully as in the
United States.
Furthermore, because the validity, enforceability and scope of protection
of proprietary rights in Internet-related industries is uncertain and still
evolving, we cannot assure you that we will be able to defend our proprietary
rights. In addition to being difficult to police, once any infringement is
detected, disputes concerning ownership or rights to use intellectual property
could be costly and time-consuming to litigate, may distract management from
operating the business and may result in our losing significant rights and our
ability to operate our business.
WE CANNOT ASSURE YOU THAT THIRD PARTIES WILL NOT DEVELOP TECHNOLOGIES OR
PROCESSES SIMILAR OR SUPERIOR TO OURS.
We cannot ensure that third parties will not be able to independently
develop technology, processes or other intellectual property that is similar to
or superior to ours. The unauthorized reproduction or other misappropriation of
our intellectual property rights, could enable third parties to benefit from our
technology without our receiving any compensation and could materially adversely
affect our business, financial condition and results of operations.
WE MAY BE SUBJECT TO CLAIMS OF ALLEGED INFRINGEMENT OF INTELLECTUAL PROPERTY
RIGHTS OF THIRD PARTIES.
We do not conduct comprehensive patent searches to determine whether our
technology infringes patents held by others. In addition, technology development
in Internet-related industries is inherently uncertain due to the rapidly
evolving technological environment. Accordingly, there may be numerous patent
applications pending, many of which are
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confidential when filed, with regard to similar technologies. Third parties may
assert infringement claims against us and these claims and any resulting
litigation, should it occur, could subject us to significant liability for
damages. Even if we prevail, litigation could be time-consuming and expensive to
defend, and could result in the diversion of management's time and attention.
Any claims from third parties may also result in limitations on our ability to
use the intellectual property subject to these claims unless we are able to
enter into agreements with the third parties making these claims. Such royalty
or licensing agreements, if required, may be unavailable on terms acceptable to
us, or at all. If a successful claim of infringement is brought against us and
we fail to develop non-infringing technology or to license the infringed or
similar technology on a timely basis, it could materially adversely affect our
business, financial condition and results of operations.
LOSS OF ACCESS TO THIRD-PARTY TECHNOLOGY USED IN OUR PRODUCTS COULD DELAY
DEVELOPMENT OF NEW PRODUCTS OR PRODUCT ENHANCEMENTS.
We incorporate technology licensed from third parties into our products.
For example, SNMP Research International has granted us a non-exclusive license
to use its technology in our products. The loss of access to this technology
could result in delays in the development and introduction of new products or
enhancements to existing products, until equivalent or replacement technology
could be accessed, if available, or developed internally, if feasible. These
delays could harm our business, revenue, operating results and financial
condition. It is possible that technology from others will not be available to
us on commercially reasonable terms, if at all.
RISKS RELATED TO OUR INDUSTRY
GOVERNMENT REGULATION OF, AND OTHER LEGAL UNCERTAINTIES CONCERNING, THE INTERNET
MAY SERIOUSLY HARM OUR BUSINESS AND RESULTS OF OPERATIONS.
We are not currently subject to direct regulation by any government agency,
other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to or commerce
on the Internet. As e-commerce, e-business and the Internet continue to evolve,
we expect that federal, state and foreign governments will adopt laws and
regulations covering issues such as user privacy, taxation of goods and services
provided over the Internet, pricing, content and quality of products and
services. Currently, several legislative and regulatory proposals are under
consideration by federal, state, local and foreign governmental organizations,
and it is possible that a number of laws or regulations affecting the Internet
may be adopted regarding such issues as user privacy, taxation, infringement,
pricing, quality of products and services and intellectual property ownership.
The adoption of any such laws or regulations may decrease the growth in the use
of the Internet, which could in turn decrease demand for our products, increase
our cost of doing business, or otherwise seriously harm our business.
THE IMPOSITION OF SALES AND OTHER TAXES ON PRODUCTS SOLD OVER THE INTERNET COULD
HAVE A NEGATIVE EFFECT ON ONLINE COMMERCE AND THE DEMAND FOR OUR PRODUCTS AND
SERVICES.
The imposition of new sales or other taxes could limit the growth of
Internet commerce generally and, as a result, the demand for our products and
services. Recent federal legislation limits the imposition of state and local
taxes on Internet-related sales. Congress may choose not to renew this
legislation in 2001, in which case state and local governments would be free to
impose taxes on electronically purchased goods.
We believe that most companies that sell products over the Internet do not
currently collect sales or other taxes on shipments of their products into
states or foreign countries where they
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are not physically present. However, one or more states or foreign countries may
seek to impose sales or other tax collection obligations on out-of-jurisdiction
companies that engage in e-commerce. A successful assertion by one or more
states or foreign countries that companies that engage in e-commerce should
collect sales or other taxes on the sale of their products over the Internet,
even though not physically in the state or country, could indirectly reduce
demand for our products.
RISKS RELATED TO THIS OFFERING
IF WE FAIL TO MEET OUR FUTURE CAPITAL REQUIREMENTS, WE WILL BE UNABLE TO GROW
OUR BUSINESS OR SUSTAIN OR INCREASE REVENUE.
We believe that the net proceeds from this offering, together with existing
cash balances and anticipated lines of credit and capital lease financing, will
be sufficient to meet our cash requirements for at least the next 12 months.
However, it is difficult for us to predict with certainty our future cash
requirements and we may be required, or elect, to raise additional funds during
this period, and we may need to raise additional funds in future periods. In
addition, we may need to raise additional funds to develop or enhance our
products or services, to fund expansion, to respond to competitive pressures or
to acquire complementary products, businesses or technologies. The issuance of
additional equity or equity-related securities will be dilutive to our
stockholders. We may not be able to raise additional funds in the future or, if
available, additional funds may not be available on terms that are acceptable to
us. Further, if we raise additional funds through the issuance of equity or
convertible debt securities, the percentage ownership of our stockholders would
be reduced and these securities might have rights, preference and privileges
senior to those of our current stockholders. If adequate funds, if needed, are
not available on acceptable terms, we may be unable to expand our operations,
take advantage of unanticipated opportunities, develop or enhance products or
services, or respond to competitive pressures or unanticipated requirements.
OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE.
The market price of our common stock is likely to be highly volatile and
significantly affected by factors such as:
- general market and economic conditions affecting technology and Internet
stocks,
- limited availability of our shares on the open market,
- actual or anticipated fluctuations in our quarterly or annual
registrations or operating results,
- announcements of technological innovations, acquisitions or investments,
developments in Internet governance or corporate actions such as stock
splits, and
- industry conditions and trends.
The stock market has experienced extreme price and volume fluctuations that
have particularly affected the market prices of the securities of technology
companies. These fluctuations may adversely affect the market price of our
common stock.
IF OUR STOCK PRICE IS VOLATILE, WE MAY BE SUBJECT TO CLASS-ACTION LITIGATION.
In the past, securities class-action litigation has often been instituted
against publicly-traded companies following periods of volatility in the market
price of its securities. We may in the future be the target of similar
litigation. Such litigation, if instituted, could result in substantial costs
and the diversion of management's attention and resources.
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OUR EXECUTIVE OFFICERS, DIRECTORS AND ENTITIES ASSOCIATED WITH THEM OWN A
SIGNIFICANT PERCENTAGE OF OUR SHARES, WHICH WILL LIMIT YOUR ABILITY TO INFLUENCE
CORPORATE MATTERS.
Our executive officers, directors and entities associated with them
beneficially own approximately 61.4% of our common stock prior to this offering
and will beneficially own approximately [ ]% upon its consummation. Accordingly,
these stockholders will have significant influence over the outcome of any
corporate transaction or other matter submitted to our stockholders for
approval, including mergers, consolidations and the sale of all or substantially
all of our assets, and also could prevent or cause a change in control. The
interests of these stockholders may differ from the interests of our other
stockholders. In addition, third parties may be discouraged from making a tender
offer or bid to acquire us because of this concentration of ownership.
SHARES OF OUR COMMON STOCK ELIGIBLE FOR PUBLIC SALE AT OR AFTER THE CONSUMMATION
OF THIS OFFERING COULD ADVERSELY AFFECT OUR STOCK PRICE.
Once a trading market develops for our common stock, many of our
stockholders will have an opportunity to sell their stock for the first time.
Sales of a substantial number of shares of our common stock in the public market
after this offering could depress the market price of our common stock and could
impair our ability to raise capital through the sale of additional equity
securities. For a more detailed description, see "Shares Eligible for Future
Sale."
Existing stockholders owning an aggregate of 41,719,502 shares of common
stock and common stock issuable upon the exercise of warrants have the right to
require us to register their shares under the Securities Act of 1933. If we
register these shares, they can be sold in the public market. The market price
of our common stock could decline as a result of sales by these existing
stockholders of their shares of common stock in the market place after this
offering, or the perception that these sales could occur. These sales also might
make it difficult for us to sell equity securities in the future at a time and
price that we deem appropriate.
OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER THAT STOCKHOLDERS
MAY CONSIDER FAVORABLE.
Provisions in our amended and restated certificate of incorporation, our
amended and restated bylaws and Delaware law could delay or prevent a change of
control or change in management that would provide stockholders with a premium
to the market price of their common stock. The authorization of undesignated
preferred stock, for example, gives our board of directors the ability to issue
preferred stock with voting or other rights or preferences that could impede the
success of any attempt to change control of Sitara Networks. If a change of
control or change in management is delayed or prevented, this premium may not be
realized or the market price of our common stock could decline. See "Description
of Capital Stock -- Delaware Anti-Takeover Law and Certain Charter and By-law
Provisions."
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION.
The public offering price per share will significantly exceed the net
tangible book value per share. Accordingly, investors purchasing shares in this
offering will suffer immediate dilution of their investment equal to
$[ ] per share, based on an assumed initial public offering price of
$[ ]. If we issue additional shares of common stock in the future,
investors purchasing shares in this offering may experience further dilution.
Any further dilution could adversely affect the trading price of our common
stock. See "Dilution."
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OUR MANAGEMENT HAS BROAD DISCRETION IN HOW IT INVESTS OR SPENDS THE PROCEEDS OF
THIS OFFERING AND WE MAY INVEST OR SPEND THE PROCEEDS OF THIS OFFERING IN WAYS
WITH WHICH INVESTORS MAY NOT AGREE AND IN WAYS THAT MAY NOT YIELD FAVORABLE
RETURNS.
The net proceeds of this offering have not been allocated for any specific
purpose. Accordingly, our management will have significant discretion as to how
to spend the proceeds from this offering and may spend these proceeds in ways
with which our stockholders may not agree. We may not be successful in investing
the proceeds of this offering, in our operations or external investments, to
yield a favorable return. For more details of use of proceeds, see "Use of
Proceeds."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Many statements made in this prospectus under the captions "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and elsewhere in this
prospectus are forward-looking statements that are not based on historical
facts. We use words such as "believes," "anticipates," "future," "intends,"
"plans," "expects," "estimates" and similar expressions to identify
forward-looking statements. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this prospectus.
Because these forward-looking statements involve risks and uncertainties, there
are important factors that could cause actual results to differ materially from
those expressed or implied by these forward-looking statement, including those
discussed under "Risk Factors." We undertake no obligation, except as required
by law, to update any forward-looking statement to reflect events or
circumstances after the date on which the statement is made or to reflect the
occurrence of unanticipated events.
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of the common stock
in this offering will be approximately $ million, at an assumed initial
offering price of $ per share and after deducting the estimated underwriting
discounts and commissions and offering expenses payable by us in connection with
the offering. If the underwriters' over-allotment option is exercised in full,
we estimate that our net proceeds will be approximately $ million. We expect
to use these estimated net proceeds for selling and marketing, capital
expenditures, research and development, working capital and general corporate
purposes, including possible acquisitions of businesses, products and
technologies. We have no current plans, commitments or agreements with respect
to any acquisitions, and we may not make any acquisitions.
We have not identified with certainty the particular uses for the net
proceeds to be received upon completion of this offering. Accordingly, our
management will have significant flexibility in using the net proceeds of this
offering. Pending these uses, we plan to invest the net proceeds in short-term,
investment grade, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock, and
do not anticipate paying cash dividends on our common stock. We anticipate that
we will retain all of our future earnings, if any, for use in the development
and expansion of our business and for general corporate purposes. Any
determination to pay dividends in the future will be at the discretion of our
board of directors and will depend upon our financial condition and operating
results.
20
<PAGE> 22
CAPITALIZATION
This table sets forth our capitalization as of September 30, 2000:
- On an actual basis,
- On a pro forma basis to reflect:
-- the conversion of all outstanding shares of our preferred stock into
33,503,495 shares of our common stock effective automatically upon
the closing of this offering, and
-- the filing of our amended and restated certificate of incorporation
upon the closing of this offering, and
- On a pro forma as adjusted basis to reflect the sale of [ ]
shares of common stock in this offering at an initial public offering
price of $[ ] per share.
This table should be read with our financial statements and the related
notes included elsewhere in this prospectus and Management's Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere in
this prospectus.
The number of shares outstanding as of September 30, 2000 excludes:
- 5,538,714 shares of common stock issuable upon exercise of outstanding
stock options under our stock incentive program as of September 30, 2000
at a weighted average exercise price of $1.91,
- 679,819 shares of common stock reserved and available for issuance under
our stock incentive program, as of October 31, 2000,
- 2,000,000 shares of common stock reserved and available for issuance
under our employee stock purchase plan, as of October 31, 2000,
- shares of capital stock issued after September 30, 2000, including
897,078 shares of our series G convertible redeemable preferred stock,
and
- 591,429 of common stock issuable upon exercise of warrants at a weighted
average exercise price of $2.53 as of September 30, 2000.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Long-term portion of capital lease obligations....... $ 1,133 $ 1,133
-------- --------
Convertible redeemable preferred stock, 26,800,000
shares authorized actual; no shares authorized pro
forma and pro forma as adjusted:
Series A, 6,500,000 shares designated, 6,470,589
shares issued and outstanding actual; no shares
designated, issued and outstanding pro forma and
pro forma as adjusted........................... 7,580 --
Series B, 5,000,000 shares designated, issued and
outstanding actual; no shares designated, issued
and outstanding pro forma and pro forma as
adjusted........................................ 8,824 --
Series C, 1,350,000 shares designated, 1,312,336
shares issued and outstanding actual; no shares
designated, issued and outstanding pro forma and
pro forma as adjusted........................... 6,079 --
</TABLE>
21
<PAGE> 23
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Series D, 800,000 shares designated, 787,402 shares
issued and outstanding actual; no shares
designated, issued and outstanding pro forma and
pro forma as adjusted........................... 3,479 --
Series E, 6,500,000 shares designated, 5,722,903
shares issued and outstanding actual; no shares
designated, issued and outstanding pro forma and
pro forma as adjusted........................... 22,620 --
Series F, 2,000,000 shares designated, 1,130,000
shares issued and outstanding actual; no shares
designated, issued and outstanding pro forma and
pro forma as adjusted........................... 5,989 --
Series G, 4,650,000 shares designated, 2,868,661
shares issued and outstanding actual; no shares
designated, issued and outstanding pro forma and
pro forma as adjusted........................... 18,630 --
-------- --------
Total convertible redeemable preferred stock.... 73,201 --
Stockholders' equity:
Preferred stock, no shares authorized actual, and
5,000,000 shares authorized pro forma and pro
forma as adjusted; no shares issued and
outstanding actual, pro forma and pro forma as
adjusted........................................ -- --
Common stock, 70,000,000 shares authorized actual,
and 350,000,000 shares authorized pro forma and
pro forma as adjusted; 9,737,751 shares issued
and outstanding actual; 43,241,246 shares issued
and outstanding pro forma; [ ] shares
issued and outstanding pro forma as adjusted.... -- --
Additional paid-in capital........................... 10,389 74,841
Deferred compensation................................ (6,687) (6,687)
Cumulative dividends on convertible redeemable
preferred stock.................................... (8,749) --
Accumulated deficit.................................. (50,281) (50,281)
-------- --------
Total stockholders' equity (deficit)............ (55,328) 17,873
-------- --------
Total capitalization............................ $ 19,006 $ 19,006
======== ========
</TABLE>
22
<PAGE> 24
DILUTION
As of September 30, 2000, we had a pro forma net tangible book value of
$17.9 million, or $0.41 per share. Pro forma net tangible book value per share
is equal to our total tangible assets less total liabilities, divided by the
number of outstanding shares of our common stock, after giving effect to the
conversion of all shares of our convertible preferred stock into common stock.
After giving effect to our receipt of the estimated net proceeds from the sale
of the shares of common stock in this offering at an assumed initial public
offering price of $
per share, after deducting the estimated underwriting discounts and commissions
and the estimated expenses relating to this offering, our pro forma net tangible
book value as of September 30, 2000 would have been $ , or $ per
share. This represents an immediate increase in pro forma net tangible book
value of $ per share to existing stockholders and an immediate dilution
of $ per share to new investors purchasing shares in this offering. If the
initial public offering price is higher or lower than $ per share, the
dilution to new investors will be higher or lower. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...... $
Pro forma net tangible book value per share as of
September 30, 2000.............................. $ 0.41
Increase per share attributable to new investors...
-------
Pro forma net tangible book value per share after the
offering...........................................
-------
Dilution per share to new investors.................. $
-------
</TABLE>
The following table summarizes, as of September 30, 2000, on the pro forma
basis described above, the difference between the number of shares of common
stock purchased from us, the total consideration paid and the average price per
share paid by the existing stockholders and by new public investors purchasing
shares from us in this offering before deducting estimated underwriting
discounts and commissions and offering expenses:
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE
-------------------- --------------------- ---------
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 43,241,246 % $68,189,464 % $1.58
New investors............
---------- ----- ----------- ----- -----
Total.................... 100.0% $ 100.0% $
========== ===== =========== ===== =====
</TABLE>
The foregoing computations are based on the number of shares of our common
stock outstanding as of September 30, 2000 and include 33,503,495 shares of our
common stock issuable upon conversion of our convertible preferred stock, and
exclude 5,538,714 shares of our common stock subject to outstanding options at
September 30, 2000 at a weighted average exercise price of approximately $1.91
per share and 591,429 shares of our common stock issuable upon exercise of
warrants outstanding as of September 30, 2000 at a weighted average exercise
price of $2.53 per share. To the extent that all of these options and warrants
are exercised, pro forma net tangible book value per share after this offering
would be $ and total dilution per share to new investors would be
$ .
If the underwriters' over-allotment option is exercised in full, pro forma
net tangible book value per share after this offering would be $ and total
dilution per share to new investors would be $ .
23
<PAGE> 25
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
You should read the selected financial data with Management's Discussion
and Analysis of Financial Condition and Results of Operations and our
consolidated financial statements and related notes included elsewhere in this
prospectus. The selected financial data set forth as of December 31, 1998 and
1999 and September 30, 2000 and for the years ended December 31, 1997, 1998 and
1999 and for the nine months ended September 30, 2000 are derived from the
financial statements included elsewhere in this prospectus which have been
audited by PricewaterhouseCoopers LLP, independent accountants. The selected
balance sheet data as of December 31, 1996 and 1997 and the statement of
operations data for the period from July 19, 1996 (date of inception) through
December 31, 1996 are derived from audited financial statements not included in
this prospectus. The statement of operations data for the nine months ended
September 30, 1999 is derived from unaudited financial statements included in
this prospectus. In the opinion of management, the unaudited consolidated
financial statements for the nine months ended September 30, 1999, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the interim information. Historical results are not
necessarily indicative of results that may be achieved in any future period.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
FROM JULY 19, 1996 DECEMBER 31, SEPTEMBER 30,
THROUGH ---------------------------- ----------------------
DECEMBER 31, 1996 1997 1998 1999 1999 2000
------------------ ------- ------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.................................... $ -- $ -- $ 175 $ -- $ -- $ 2,353
Cost of revenue (excluding stock-based
compensation of $0, $0, $0, $0, $0 and
$100, respectively)...................... -- -- 104 -- -- 1,639
------ ------- ------- -------- ------- --------
Gross margin............................... -- -- 71 -- -- 714
Operating expenses:
Selling and marketing (excluding stock-
based compensation of $0, $0, $0, $441,
$96 and $448, respectively)............ 23 1,517 3,785 3,588 2,603 14,963
General and administrative (excluding
stock-based compensation of $0, $0, $0,
$0, $0 and $44, respectively).......... 196 989 1,413 1,485 1,073 1,881
Research and development (excluding
stock-based compensation of $0, $37,
$40, $345, $65 and $1,260,
respectively).......................... 112 2,058 2,959 6,831 4,343 8,125
Stock-based compensation................. -- 37 40 786 161 1,852
------ ------- ------- -------- ------- --------
Total operating expenses............... 331 4,601 8,197 12,690 8,180 26,821
------ ------- ------- -------- ------- --------
Loss from operations....................... (331) (4,601) (8,126) (12,690) (8,180) (26,107)
Interest income, net....................... 7 244 294 312 128 717
------ ------- ------- -------- ------- --------
Net loss................................... (324) (4,357) (7,832) (12,378) (8,052) (25,390)
Accrued dividends for preferred
stockholders............................. (30) (736) (1,448) (2,825) (1,752) (3,711)
Accretion of preferred stock to redemption
value.................................... -- (1) (3) (104) (63) (203)
------ ------- ------- -------- ------- --------
Net loss attributable to common
stockholders............................. $ (354) $(5,094) $(9,283) $(15,307) $(9,867) $(29,304)
====== ======= ======= ======== ======= ========
Basic and diluted net loss per share....... $(0.22) $ (1.26) $ (1.60) $ (2.09) $ (1.41) $ (3.36)
====== ======= ======= ======== ======= ========
Shares used in computing basic and diluted
net loss per share....................... 1,596 4,035 5,790 7,307 7,006 8,711
Pro forma basic and diluted net loss per
share (unaudited)........................ $ (0.39) $ (0.66)
======== ========
Shares used in computing pro forma basic
and diluted net loss per share
(unaudited).............................. 31,620 38,759
</TABLE>
24
<PAGE> 26
Shares used in computing pro forma share amounts reflect the conversion of
all of the outstanding shares of our preferred stock as of September 30, 2000
into shares of our common stock as if the shares had converted into shares of
common stock immediately upon their issuance.
The pro forma balance sheet data shown below assumes the conversion of all
of our outstanding shares of preferred stock as of September 30, 2000 into
common stock upon the closing of this offering. The pro forma as adjusted data
gives effect to this conversion and to the sale of [ ] shares of
common stock that we are offering under this prospectus at an initial public
offering price of $ per share after deducting the underwriting discounts and
commissions and estimated offering expenses. The actual, pro forma and pro forma
as adjusted balance sheet data excludes issuances of our capital stock after
September 30, 2000, including 897,078 shares of our series G preferred
convertible redeemable stock.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000
AS OF DECEMBER 31, ----------------------------------
--------------------------------------- PRO FORMA
1996 1997 1998 1999 ACTUAL PRO FORMA AS ADJUSTED
------- ------- -------- -------- -------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 5,167 $ 7,996 $ 5,705 $ 17,354 $ 18,055 $18,055 $
Working capital........................... 5,115 7,356 4,717 15,766 15,986 15,986
Total assets.............................. 5,217 9,048 9,792 19,494 23,858 23,858
Long-term portion of capital lease
obligations............................. -- 540 687 539 1,133 1,133
Convertible redeemable preferred stock.... 5,513 13,236 22,653 45,466 73,201 --
Total stockholders' equity (deficit)...... (354) (5,407) (14,629) (28,230) (55,328) 17,873
</TABLE>
25
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our financial
statements and the notes to those statements appearing elsewhere in this
prospectus. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. The actual results may differ
materially from those anticipated in these forward-looking statements as a
result of many factors, including but not limited to those set forth under "Risk
Factors" and elsewhere in this prospectus.
OVERVIEW
Sitara Networks designs, develops, and markets a comprehensive, integrated
suite of high-performance quality of service networking products for enterprises
and communications service providers. Our products are designed to address the
inherent limitations of Internet protocol, or IP, in order to optimize overall
network performance, ensure the availability of mission-critical applications,
and ultimately allow service providers to deliver additional revenue-generating
services, on demand, with the level of service their customers require.
Since our inception in July 1996 through December 31, 1999, we were a
development stage enterprise primarily engaged in research and development
activities focused on quality of service initiatives, and we had no revenues
relating to our current products. In early 1999, we began to focus on the
commercialization of our current suite of QoS products. QoSWorks was
commercially released in the first quarter of 2000 and QoSArray and QoSDirector
were commercially released in the fourth quarter of 2000.
Beginning in the latter part of 1999, we began to accelerate our recruiting
efforts to substantially increase our sales and marketing organization in
preparation for our product launch in early 2000, as well as expand our research
and development organization. From January 1, 2000 to September 30, 2000, we
increased our employee headcount from 46 to 156. As of September 30, 2000 we had
88 employees in sales, marketing and customer service, 52 employees in research
and development, and 16 employees in finance, administration and operations.
We sell and market our products through a network of resellers and a direct
sales force. As of September 30, 2000, we had 66 resellers, including 27 in the
United States and 39 in 19 foreign countries that sell our products to the
enterprise market. We have sales offices in 10 United States metropolitan areas
and in 12 foreign countries that sell directly to the service provider market
and provide sales support to our resellers.
All of our revenue in the nine months ended September 30, 2000 was from
sales of QoSWorks. The substantial majority of sales during this period was to
resellers. In the nine months ended September 30, 2000, KoreaLink, one of our
resellers in Korea, accounted for approximately 11% of our total revenue.
Revenue from customers located outside the United States accounted for
approximately 75% of our total revenue for this period. Substantially all of our
international sales have been denominated in United States dollars.
We recognize product revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed and determinable, and
collectibility is probable. Revenue from service and maintenance contracts is
deferred and recognized ratably over the period of the obligation. We make
certain sales to partners in distribution channels. These partners are generally
given privileges to return a portion of inventory and provided that all other
revenue recognition criteria are met, we recognize revenue from distributors
when the right of return expires. We accrue for estimated warranty costs upon
shipment.
We outsource our manufacturing and customer repair operations to a contract
manufacturer. Our contract manufacturer is responsible for procurement of
materials, assembly, testing,
26
<PAGE> 28
packaging and shipment of our products to customers according to our
specifications. Our contract manufacturer also provides product repairs and
delivery to our customers for products under warranty or service agreements.
Accordingly, a significant portion of our cost of revenue is payments to this
contract manufacturer. Our cost of revenue also includes the costs of our
internal manufacturing support organization, post-sales support and warranty
costs.
Selling and marketing expenses consist primarily of salaries and related
employee costs, sales commissions, travel, and marketing activities which
include public relations, trade shows and advertising. We expect that selling
and marketing expenses will increase in absolute dollars in the future as we
hire additional personnel, expand our worldwide sales organization and initiate
additional marketing programs.
General and administrative expenses consist primarily of salaries and
related employee costs for executive, finance, human resource and information
technology personnel as well as professional fees and other general overhead
costs. We expect that general and administrative costs will increase in absolute
dollars in the future as we add personnel and incur additional costs to support
the growth of our business and operate as a public company.
Research and development expenses consist primarily of salaries and related
employee costs, contract engineering personnel, prototype materials and
third-party costs related to the development of our existing and future planned
products. We expense research and development costs as incurred. We expect our
research and development costs to increase in absolute dollars in the future as
we continue to invest in the development of new products.
In connection with the grant of fully vested stock, restricted stock and
stock options to employees, directors, consultants and vendors, we recorded
deferred compensation of $1.6 million for 1999 and $6.5 million for the nine
months ended September 30, 2000. For employees and directors, this expense
represents the difference between the exercise price and the deemed fair market
value of our common stock for financial reporting purposes on the date these
options were granted. For consultants and vendors, the expense represents the
fair value of the stock options granted. To the extent that the equity vests
over a period of time, this amount is included in stockholders' equity (deficit)
and is being amortized to operations ratably over the vesting period of the
stock options. Fully vested equity grants are immediately expensed. We recorded
stock-based compensation expense of $0.8 million for 1999 and $1.9 million for
the nine months ended September 30, 2000. As of September 30, 2000, we had
approximately $6.7 million remaining to be amortized to expense over the future
vesting period of the restricted stock and stock options.
Since inception, we have incurred significant losses and, as of September
30, 2000, we had an accumulated deficit of $50.3 million. These losses have
resulted primarily from our research and development efforts, establishment of
our worldwide sales organization and reseller network, and the cost of our
marketing programs.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1999
Revenue. We began shipping QoSWorks in the first quarter of 2000. Revenue
for the first nine months of this year was $2.4 million. Our quarterly revenue
increased from $0.2 million in the first quarter to $0.8 million in the second
quarter to $1.4 million in the third quarter. We had no revenue in the nine
months ended September 30, 1999.
Cost of Revenue. Cost of revenue for the nine months ended September 30,
2000 was $1.6 million, or 69.7% of revenue. We anticipate cost of revenue, as a
percentage of revenue, to decline in the future as manufacturing volume
increases and we continue to realize the benefit of cost reductions in the
hardware design of our products.
27
<PAGE> 29
Selling and Marketing. Selling and marketing expenses increased to $15.0
million for the nine months ended September 30, 2000 from $2.6 million for the
nine months ended September 30, 1999. This increase reflects the significant
expansion of our worldwide sales organization and substantial increase in
marketing activities. As a result of the increased sales staffing, compensation
expense, including commissions, increased $3.9 million and travel costs
increased $1.4 million. We increased expenditures for marketing programs,
primarily advertising, trade shows and public relations, by $4.9 million.
General and Administrative. General and administrative expenses increased
to $1.9 million for the nine months ended September 30, 2000 from $1.1 million
for the nine months ended September 30, 1999. This increase is a result of an
increase in compensation expense, primarily as a result of personnel additions,
of $0.3 million, higher professional fees of $0.2 million, as well as higher
occupancy and other overhead costs as a result of our expanded operations.
Research and Development. Research and development expenses increased to
$8.1 million for the nine months ended September 30, 2000 from $4.3 million for
the nine months ended September 30, 1999. This increase was due largely to an
increase in compensation expense of $1.7 million, relating primarily to
personnel additions, an increase of $1.3 million for contract engineers and an
increase of $0.7 million for prototype materials and third party consulting and
design costs. This increase was partially offset by lower amortization costs of
$0.7 million relating to a technology license that was amortized over an
eighteen month period ending in the second quarter of this year.
Stock-Based Compensation. Stock-based compensation increased to $1.9
million for the nine months ended September 30, 2000 from $0.2 million for the
nine months ended September 30, 1999. This increase was primarily due to stock
options granted in connection with our increased hiring efforts as well as
performance-based grants.
Interest Income. Interest income, net of interest expense, increased to
$0.7 million for the nine months ended September 30, 2000 from $0.1 million for
the nine months ended September 30, 1999. The increase in interest income was a
result of higher cash balances primarily generated from the sale of preferred
stock.
YEAR ENDED DECEMBER 31, 1999 AND COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenue. We had no revenue in 1999. In 1998, we had revenue of $0.2
million relating to a software product we developed.
Cost of Revenue. We had no cost of revenue in 1999. In 1998, we had cost
of revenue of $0.1 million relating to our early software product.
Selling and Marketing. Selling and marketing expenses decreased to $3.6
million in 1999 from $3.8 million in 1998. This decrease is primarily due to
lower marketing expenditures partially offset by increased sales compensation
expense in 1999.
General and Administrative. General and administrative expenses remained
relatively flat at $1.5 million in 1999 and $1.4 million in 1998.
Research and Development. Research and development expenses increased to
$6.8 million in 1999 from $3.0 million in 1998. This increase was primarily due
to an increase in compensation expense of $0.7 million, an increase of $0.4
million in contract engineers and prototype material, and third party consulting
and design costs of $0.3 million. In addition, research and development expenses
included $2.0 million in 1999 and $0.2 million in 1998 for the amortization of a
technology license acquired in exchange for 787,402 shares of our series D
preferred stock.
28
<PAGE> 30
Stock-Based Compensation. Stock-based compensation increased to $0.8
million in 1999 from $40,000 in 1998. This increase was primarily due to stock
options granted in connection with new hires and performance-based grants.
Interest Income. Interest income, net of interest expense, was $0.3
million in both 1999 and 1998.
YEAR ENDED DECEMBER 31, 1998 AND COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenue. In 1998, we had revenue of $0.2 million relating to a software
product we developed. We had no revenue in 1997.
Cost of Revenue. In 1998, we had cost of revenue of $0.1 million relating
to the software product. We had no cost of revenue in 1997.
Selling and Marketing. Selling and marketing expenses increased to $3.8
million in 1998 from $1.5 million in 1997. This increase is primarily due to an
increase in sales compensation expense of $1.3 million, higher marketing program
expenditures of $0.4 million and increased travel expenses of $0.2 million.
General and Administrative. General and administrative expenses increased
to $1.4 million in 1998 from $1.0 million in 1997. The increase was primarily
due to an increase in compensation expense of $0.2 million and higher occupancy
costs of $0.1 million.
Research and Development. Research and development expenses increased to
$3.0 million in 1998 from $2.1 million in 1997. This increase was primarily due
to an increase in compensation expense of $0.6 million and $0.2 million for the
amortization of a technology license.
Stock-Based Compensation. Stock-based compensation was relatively flat at
$40,000 in 1998 and $37,000 in 1997.
Interest Income. Interest income, net of interest expense, was $0.3
million in 1998 compared to $0.2 million in 1997.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth a summary of our unaudited statement of
operations for each of our seven most recent quarters ended September 30, 2000.
You should read the following table in conjunction with our financial statements
and related notes in this prospectus. This unaudited quarterly financial
information has been prepared on the same basis as our audited financial
statements appearing elsewhere in this prospectus. This information includes all
adjustments, consisting only of normal recurring adjustments, that we considered
necessary for a fair presentation of the information for the periods presented.
The operating results for any quarter are not necessarily indicative of the
results for a full year or any future periods.
29
<PAGE> 31
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1999 1999 1999 1999 2000 2000 2000
--------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue..................... $ -- $ -- $ -- $ -- $ 213 $ 756 $ 1,384
Cost of revenue(1).......... -- -- -- -- 233 535 871
------- ------- ------- ------- ------- ------- --------
Gross margin.............. -- -- -- -- (20) 221 513
Operating expenses:
Selling and marketing(2).. 1,027 994 582 985 2,241 6,088 6,634
General and
administrative(3)....... 449 301 323 412 525 558 798
Research and
development(4).......... 1,342 1,407 1,594 2,488 2,587 2,537 3,001
Stock-based
compensation............ 10 60 91 625 545 700 607
------- ------- ------- ------- ------- ------- --------
Total operating
expenses.............. 2,828 2,762 2,590 4,510 5,898 9,883 11,040
------- ------- ------- ------- ------- ------- --------
Loss from operations........ (2,828) (2,762) (2,590) (4,510) (5,918) (9,662) (10,527)
Interest income (expense),
net....................... 12 (14) 130 184 238 202 277
------- ------- ------- ------- ------- ------- --------
Net loss.................... $(2,816) $(2,776) $(2,460) $(4,326) $(5,680) $(9,460) $(10,250)
======= ======= ======= ======= ======= ======= ========
</TABLE>
------------
(1) Excludes stock-based compensation of $0, $0, $0, $0, $33, $43, and $24,
respectively.
(2) Excludes stock-based compensation of $0, $47, $50, $344, $95, $162, and
$191, respectively.
(3) Excludes stock-based compensation of $0, $0, $0, $0, $3, $4, and $37,
respectively.
(4) Excludes stock-based compensation of $10, $13, $41, $281, $414, $491, and
$355, respectively.
Revenue increased from $0.2 million in the first quarter of 2000 to $1.4
million in the third quarter of 2000 as a result of the expansion of our
QoSWorks product line, increasing market acceptance of our products and the
significant expansion of our worldwide sales organization and network of
resellers.
Our gross profit margin as a percentage of revenue has increased
sequentially since the first quarter of 2000. This increase is a result of
higher average selling prices due to sales of higher throughput capacity
QoSWorks products beginning in June, as well as the benefit of cost reductions
in the hardware design of the product. In addition, the costs of our
manufacturing support organization have become proportionately lower on the
higher level of revenue.
The growth in our operating expenses, beginning in the fourth quarter of
1999, primarily reflects the significant increase in staffing levels,
particularly in sales and research and development, along with a higher level of
expenditures for marketing programs.
We believe that quarterly comparisons of revenue and operating results are
not necessarily meaningful or indicative of future performance as our operating
history is limited and the market for our products is rapidly evolving.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily through sales of convertible
redeemable preferred stock. From inception through October 2000, we received net
proceeds of $68.1 million from a series of convertible redeemable preferred
stock financings. We have also used capital equipment lease financing to fund a
significant portion of our property and equipment acquisitions. As of September
30, 2000, our principal source of liquidity was $18.1 million in
30
<PAGE> 32
cash and cash equivalents. In October 2000, we received an additional $5.8
million in net proceeds from the sale of convertible redeemable preferred stock.
Cash used in operating activities was $22.0 million for the nine months
ended September 30, 2000. In 1999 and 1998, we used $8.7 million and $7.2
million of cash in operating activities, respectively. The cash used in the nine
months ended September 30, 2000 was primarily a result of our net loss,
excluding depreciation and amortization of $1.3 million and stock-based
compensation charges of $1.9 million. Accounts receivable at September 30, 2000
were approximately 72% of our revenues for the quarter ended September 30, 2000,
which reflects the higher proportion of sales occurring during the final month
of the quarter and longer payment terms associated with our international sales
relative to our domestic sales. Inventories of $0.3 million at September 30,
2000 primarily represents inventory related to sales transactions for which we
have deferred revenue, and service inventory.
The cash used in operating activities in 1999 and 1998 was primarily a
result of our operating losses, excluding non-cash depreciation and amortization
charges, and stock-based compensation charges.
Cash used in investing activities was $1.1 million in the nine months ended
September 30, 2000 and was primarily due to $1.5 million in purchases of
property and equipment, of which $0.8 million was financed through capital
equipment leases through sale and leaseback transactions. Most of our lease
financing to date has been under a master lease line with one lease financing
source. As of September 30, 2000, we had no remaining availability under our
current master lease line. We are in the process of negotiating a $1.5 million
extension of this lease line. In each of 1999 and 1998, we purchased $0.5
million of property and equipment, and received proceeds from sale and leaseback
transactions under capital equipment lease lines of $0.4 million and $0.5
million, respectively. For the nine months ended September 30, 2000, property
and equipment purchases were primarily for computer equipment for our research
and development organization, as well as office furniture and the purchase of
business application software. In 1999 and 1998, property and equipment
purchases were primarily for computer equipment for our research and development
organization.
At September 30, 2000, the principal amount outstanding under various
capital leases was $1.8 million, of which $0.7 million is due over the next
twelve months.
Cash provided by financing activities was $23.8 million in the nine months
ended September 30, 2000 primarily from the sale of convertible redeemable
preferred stock. In October 2000, we received additional net proceeds of $5.8
million from the sale of convertible redeemable preferred stock. In 1999 and
1998, we received total net proceeds of $20.8 million and $5.0 million,
respectively, from the sale of convertible preferred stock.
We are currently in the process of negotiating a $4.0 million working
capital line of credit and a $1.0 million equipment lease line with a domestic
bank.
We believe that the net proceeds from this offering, together with existing
cash balances and anticipated lines of credit and capital lease financing, will
be sufficient to meet our cash requirements and plans for growth for at least
the next 12 months. However, it is difficult for us to predict with certainty
our future cash requirements and we may be required, or elect, to raise
additional funds during this period, and we may need to raise additional funds
in future periods. The issuance of additional equity or equity-related
securities will be dilutive to our stockholders. We may not be able to raise
additional funds in the future or, if available, additional funds may not be
available on terms that are acceptable to us. In the event that this offering is
not completed as anticipated and additional financing is not obtained on a
timely basis, we would reassess our current business plans and significantly
reduce planned operating expenditures accordingly in order to maintain ongoing
operations.
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<PAGE> 33
NET OPERATING LOSSES AND RESEARCH AND EXPERIMENTATION CREDIT CARRYFORWARDS
We have not recorded a provision for income taxes because we have
experienced net losses from inception through September 30, 2000. As of
September 30, 2000, we had federal net operating losses of approximately $28.1
million and research and experimentation credit carryforwards of approximately
$0.7 million, against which we have provided a 100% valuation allowance. These
carryforwards will expire at various dates through 2019, if not used.
Utilization of these carryforwards may be subject to annual limitations due to
ownership change provisions.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or the FASB, issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities
which was subsequently amended by SFAS No. 138." The standard, as amended,
established accounting and reporting standards requiring the recognition of all
derivative instruments as either assets or liabilities in the statement of
financial position and the measure of those instruments at fair value. In June
1999, the FASB issued SFAS No. 137, which defers the effective date of SFAS No.
133 to fiscal years beginning after June 15, 2000. Because we do not currently
hold any derivative instruments and do not currently engage in hedging
activities, the adoption of SFAS No. 133 is not expected to have a material
impact on our financial position or operating results.
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<PAGE> 34
BUSINESS
OVERVIEW
Sitara Networks designs, develops, and markets a comprehensive, integrated
suite of high-performance quality of service networking products for enterprises
and communications service providers. Quality of service, or QoS, is an umbrella
term for techniques used to monitor network resource usage and to intelligently
match the needs of specific applications such as video conferencing, email,
voice over IP, or VoIP, and other data traffic with available network resources
based on pre-determined business priorities and allocations. Our products are
designed to address the inherent limitations of Internet protocol, or IP, in
order to optimize overall network performance, ensure the availability of
mission-critical applications, and ultimately allow service providers to deliver
additional revenue-generating services, on demand, with the level of service
their customers require.
Our products integrate a variety of QoS techniques into a single platform
to allow enterprises and service providers to monitor, set, and enforce network
resource usage policies based on business priorities and the intelligence gained
from real-time analysis of data traffic across an entire network. Our products
can scale from low-speed connections at remote offices to large network
aggregation points with higher data throughput requirements. We have architected
our products to be independent from the physical network infrastructure so that
they have the flexibility to adapt to changes in network configuration and
business needs.
INDUSTRY BACKGROUND
During the past decade, the Internet has emerged as a critical platform of
commerce, communications and business management. The number of enterprises and
consumers using the Internet and the amount and complexity of the data traffic
traversing the Internet has increased at a significant rate. Likewise, many
networking and communications service providers are increasingly using the
Internet to deliver a variety of new networking and communication services.
According to International Data Corporation, or IDC, there were approximately
240 million users of the Internet at the end of 1999 and the number of users is
expected to grow to 602 million by 2003. RHK, Inc. estimates that Internet
traffic volume will grow from approximately 350,000 terabytes per month in 1999
to approximately 15 million terabytes per month in 2003. A terabyte is equal to
approximately 1.1 trillion bytes.
The emergence of the Internet has led to the prominence of IP, the standard
that defines how computers communicate with each other over the Internet. Before
the emergence of IP, enterprises and service providers traditionally deployed
multiple dedicated networks to handle each of their applications and types of
data traffic. At the same time, computer security technology, such as firewalls,
computer virus detection, network intrusion detection, and data encryption,
which is the coding of data for security purposes, has improved significantly
such that so-called "virtual private networks", or VPNs, can now be deployed
securely over the Internet. The establishment of IP as a single, standard
protocol for network communications and the improvement of VPN security
technology enables IP convergence.
As IP has emerged as the dominant network communications protocol,
enterprises and service providers have found it increasingly attractive to
deploy network applications and services over converged IP networks. Doing so
allows them to reduce expenses by operating on a single IP network rather than
multiple dedicated networks. In the case of service providers, IP convergence is
particularly appealing because it allows them to reduce expenses associated with
maintaining separate voice and data networks and instead consolidate all traffic
onto a single broadband IP network. IP convergence, because it takes advantage
of widely deployed open-standard technology, such as Internet browsers, enables
enterprises to improve their business processes and enhance communications,
marketing, and sales to their customers,
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<PAGE> 35
suppliers and other business partners. Similarly, IP convergence enables service
providers to offer new types of value-added services to their customers. For
example, according to Frost & Sullivan, Internet telephony data traffic, known
as voice over IP or VoIP, measured in minutes per month is expected to grow to
approximately 8.7 billion minutes in 2002 from 6.3 million minutes in 1997. The
ubiquity and flexibility of IP and recent substantial increases in bandwidth
availability also have led to the further emergence of application service
providers, or ASPs. ASPs provide IP-based applications to enterprises on an
outsourced basis. The use of ASPs enables enterprises to reduce expenses
associated with the operation and maintenance of dedicated networks and
enterprise applications, and increase the utility of scarce human resources
within the enterprise. According to Dataquest, the ASP market is expected to
grow to approximately $25 billion in 2004 from $1 billion in 1999.
To date, enterprises and service providers have failed to realize the many
potential benefits made possible by IP convergence. The transition to converged
IP networks has resulted in a loss of control of the reliability, predictability
and manageability of networks and the ability to ensure the performance of
mission-critical applications. Traditionally, enterprises have used private
networks to deliver and ensure the performance of mission-critical applications
using technologies, such as asynchronous transfer mode, commonly known as ATM,
and dedicated networks, such as frame-relay networks and leased-line
circuit-switched networks. Dedicated networks are expensive to operate and
maintain, their bandwidth resources are generally underutilized except at times
of peak usage, and they require the deployment of multiple types of equipment at
various sites on a network. However, in transitioning away from the use of ATM
and dedicated networks, enterprises and service providers have lost the ability
to intelligently monitor network usage, deliver a consistent quality of service
and guarantee service levels to users and customers. This is because of the
inherent limitations of IP networks without QoS.
IP networks are generally unable to distinguish among different traffic
types. Without this intelligence, network managers are unable to monitor and
prioritize network applications and groups of users with respect to the
allocation of limited network resources. Moreover, IP networks without QoS are
only "best efforts" networks, which means that these networks cannot provide any
assurance that IP traffic on the network will be delivered to the target device
reliably and within the time required by the particular application. As a
result, non-critical IP-based applications, such as email and web browsing, can
crowd out mission-critical enterprise application traffic, such as VoIP and
transaction processing, where unpredictable delay or loss of communication can
negatively impact application performance. The inability to provide real-time
intelligence on network usage and traffic type on an IP network limits efficient
monitoring, managing and reporting on network usage and availability. As a
result, enterprises are limited in their ability to effectively deploy and
expand network functionality. Likewise, service providers are limited in their
ability to provide an array of value-added services, including supplying and
maintaining different rated classes of service, bandwidth on demand, web
hosting, application outsourcing and application service level management.
Thus, despite the potential benefits of the use of converged IP networks,
the inability of enterprises and service providers to ensure the necessary
levels of quality of service to various groups of network users, applications
and traffic types on a network has slowed the progress toward true IP
convergence. This has given rise to a number of QoS solutions for IP networks.
There are several products on the market today that are designed to deliver
QoS to specific points on IP networks. These include bandwidth managers, Layer 4
through 7 switches, which can switch IP traffic based on its content up to the
application layer, Web caches, which locally store frequently-used accessed
content, and routers, which direct traffic to the proper destination. However,
using multiple, single-function QoS products does not provide a comprehensive,
end-to-end QoS solution for an IP network. The use of multiple QoS products
generally creates increased network traffic delay, further complexity and cost,
and additional
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<PAGE> 36
points of potential network failure, all of which can reduce the overall
performance of a network. Additionally, it is difficult to scale each of the
products individually with the growth of network traffic because the products
are single function or "point" solutions. The use of multiple point products
also prevents a network manager from setting consistent network resource
allocation policies and priorities across an entire network. Moreover, because
of their narrow focus on specific current traffic types and network congestion
points, these point products may fail to address QoS problems arising from
future types of IP traffic. For example, one approach recently employed is to
add some QoS capabilities to network routers. This approach provides only a
narrow range of QoS functionality and has the negative effect of reducing the
speed of a router's core function, routing traffic as quickly as possible. We
believe these point products have failed to deliver the quality of service
attributes necessary to enable true IP convergence.
We believe that the trend toward IP convergence combined with the
inherently limited reliability, predictability and manageability of IP networks
and the non-integrated nature of current QoS products has created a market
opportunity for a comprehensive, high-performance QoS solution for enterprises
and service providers operating converged IP networks.
THE SITARA NETWORKS' SOLUTION
Our comprehensive, integrated suite of high-performance QoS products is
designed to enable enterprises and service providers to optimize converged IP
network resources to ensure the availability and performance of mission-critical
applications and to enhance overall network performance. Our products are
designed to enable service providers to offer additional revenue-generating
services on-demand with the level of quality that their customers require. Our
products are designed to classify, prioritize and manage multiple traffic types
and network users across a common IP infrastructure using a wide range of QoS
techniques. Our products are designed to be independent of the physical network
and, as a result, can easily scale and adapt to changes in network configuration
and business needs. Specifically, our products can allocate the necessary
bandwidth for a given application, prioritize handling of certain applications
and users versus other traffic or users, influence the latency or speed at which
the application moves through a network, and store the content locally when
possible to facilitate its re-use. Furthermore, we design our products to enable
a network to respond to specific periodic business initiatives which require
pre-determined bandwidth and QoS functionality on a network-wide basis for
certain applications or specific users. We believe that the comprehensive and
integrated nature of our QoS products offers significant advantages over other
QoS products.
Our QoS products provide the following operational benefits:
Improved application and network performance. Our QoS products are
designed to optimize utilization of network resources and improve the
performance of applications. Specifically, our products can improve network and
application response time and reliability while minimizing data loss and network
downtime. As a result, mission-critical application performance is protected
against degradation by traffic from lower-priority applications. Our products
enable the deployment of a network-wide overlay of QoS solutions to allow our
customers to prioritize their applications, traffic types and users, and
allocate network bandwidth resources appropriately. This QoS overlay allows our
customers to ensure the availability and performance of mission-critical,
communication latency-sensitive and bandwidth-intensive applications over
converged IP networks. Further, this QoS overlay is designed to enable the
efficient deployment of emerging IP-based applications, such as VoIP and
multimedia applications that are more demanding of network resources.
Scalability over multiple network sizes and speeds. Our QoS products are
designed to deliver quality of service to any point on a network ranging in
speed from 64 kilobits per second, or
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<PAGE> 37
Kbps, to optical carrier 3, or OC3. Our products can be scaled from a single
unit deployment to across an entire service provider network. We believe that
our product architecture will be able to support a migration to higher speed
applications and larger network deployments in our future product releases.
Real-time network performance visibility and resource control. Our QoS
products enable network managers to use a single user interface to view and
monitor all traffic types and set and refine policies for all QoS functions
network-wide on a continuous basis. This network-wide intelligence overlay
allows our QoS products to provide immediate policy management information
regarding which network applications are being accessed, how these applications
are behaving, how effective current network QoS policies are, and how policies
might be refined or changed to optimize network functionality while protecting
mission-critical applications. Network managers can also produce easy-to-read
graphical reports on historical and current network traffic throughput and
bandwidth utilization.
Flexibility to handle any IP-based application and many other diverse data
types. Enterprises and service providers that implement our QoS products can
quickly and easily deploy additional IP-based applications without
reconfiguration of their networks because of the ability of our products to
operate with any IP traffic. Our QoS products are also able to operate with
traffic from many legacy non-IP applications. Our QoS products are designed to
recognize all standard network traffic types, allowing them to efficiently
operate in multiple network environments. Further, because our QoS products are
based on industry-standard open hardware and software platforms, we can add new
features to our products quickly through software updates and additional
hardware cards, which provides investment protection for our customers.
Ease of use. Our QoS products can be installed to implement an end-to-end
QoS solution across a network without changes to routers or other network
equipment and minimal, if any, changes to customer or host application software.
In addition, our products are designed to be transparent on a network and
contain monitoring features, such as an intuitive user interface to enable
network managers to set and implement network-wide QoS policies expeditiously.
Our products reduce the time and complexity of deployment of QoS across a
network. Further, service providers can deploy our products on customer sites
between the customer's network access router and the customer's local area
network to maintain and track application performance through the browser
interface and react to application and network performance problems.
These operational benefits can provide the following financial benefits to
our customers:
Enhanced service provider revenue opportunities. We believe our QoS
products enable service providers to deliver additional revenue-generating
services beyond merely providing bandwidth. Service providers can use our QoS
products to enable the efficient delivery of value-added services, such as
bandwidth on demand, VoIP, web hosting, application outsourcing and other
offerings based on differing guaranteed levels of service, including supplying
and maintaining different rated classes of service and application service level
management.
Cost savings. Our QoS products are designed to enable enterprises and
service providers to realize potential cost savings by efficiently utilizing a
converged IP network rather than multiple dedicated networks. The comprehensive
nature of our QoS products allow our customers to address their QoS needs with a
single-product rather than having to purchase multiple single-point QoS
products. Our products can also reduce the costs associated with network
downtime by enabling network managers to maintain optimal prioritization and
allocation of available network resources. The ability to prioritize and
allocate available network resources also allows enterprises and service
providers to avoid over-provisioning networks with bandwidth resources in an
often futile attempt to ensure resource availability.
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BUSINESS STRATEGY
Our goal is to become the leading worldwide provider of QoS solutions to
enterprises and service providers. Key elements of our strategy include:
Leveraging our product architecture to extend technological leadership. We
intend to leverage our unique product architecture to enable us to respond
quickly to evolving market requirements through periodic enhancements of
existing products and rapid development of new QoS products. We have developed
significant expertise in the integration of QoS technologies for the deployment
of a network-wide QoS solution. We intend to ensure that our hardware and
software architectures continue to incorporate emerging QoS technologies, as
well as being flexible, extensible and designed to support emerging network
technologies, including those made available to us through strategic
relationships. We also may selectively pursue strategic acquisitions of
products, technologies and businesses that will complement or enhance our QoS
products.
Increasing our focus on the service provider market. We are actively
pursuing opportunities to expand sales of our products to and through service
providers. We believe service providers are under increasing pressure to attract
new subscribers, increase demand for their services, reduce subscriber turnover,
improve operating margins and develop new revenue streams. Service providers
seek to differentiate themselves through value-added service offerings, such as
supplying and maintaining differentiated classes of service, bandwidth on
demand, Web hosting, application outsourcing and application service level
management. We believe our QoS solutions enable service providers to deliver
these higher value services by enhancing network and application performance and
better managing and allocating network resources.
Growing our global, sales force, distribution channel network and support
capabilities. We are investing significant resources worldwide to expand our
direct sales force and further develop our indirect sales channels to accelerate
sales of our expanding product line. We plan to increase our direct sales force
principally to support our extended and expanded focus on the service provider
market. We plan to expand our indirect sales channels through strategic
relationships with leading industry resellers, original equipment manufacturers,
systems integrators, service providers and other channel partners to address the
enterprise market. We also intend to expand our service and support
infrastructure to meet the needs of our growing customer base to enable our
customers to maximize their network functionality through the use of our QoS
products by offering a wide range of service and support programs to meet
individual customer needs.
Accelerating our product introductions. We are focusing on providing
comprehensive, high-performance, easy-to-use and cost-effective QoS solutions to
enterprises and service providers operating converged IP networks. As the
Internet proliferates and new IP-based applications and services emerge, we
believe enterprises and service providers will continue to adopt and expand the
use of IP-based applications at a rapid rate and that effective QoS solutions
will become an increasingly important requirement for maintaining efficient
network operations. We intend to continue to enhance and expand our suite of QoS
products to broaden our QoS solutions portfolio and bolster our competitive
position in the market.
Expanding our strategic relationships. We continue to seek to expand our
relationships with new and existing strategic partners that will enable us to
increase the market opportunity for our products. We believe that the continuing
trend of rapid convergence of networks and applications to the use of IP
presents a unique opportunity to partner with the developers of emerging
applications. We believe that the developers of such emerging technologies will
require powerful QoS solutions and that relationships with those developers will
enable us to best adapt our product line to the requirements of such
technologies. For example, we have entered into a strategic relationship with
Siemens to deploy our QoS solutions with Siemens'
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<PAGE> 39
VoIP products and with Citrix to ensure our QoS solutions are able to protect
and prioritize Citrix application traffic.
Establishing global brand recognition for our products. We are investing
significant resources in expanding and enhancing our global brand recognition
campaign. We believe that the comprehensive and integrated nature of our QoS
products gives us an opportunity to establish Sitara Networks as the standard
for comprehensive QoS solutions.
PRODUCTS
Our suite of QoS products is designed to enable enterprises and service
providers to deploy multiple applications and to handle multiple traffic types
over a single converged IP network. We also deliver management tools to enable
QoS decision-making across a large network. Our suite of QoS products is
comprised of QoSWorks and QoSArray, devices that deliver a flexible solution to
provide the QoS functionality necessary to manage diverse traffic types over a
network, and QoSDirector, our central policy management system utilized for
large deployments of QoSWorks and QoSArray.
QoSWorks is a QoS device designed for deployment on enterprise premises,
whether at headquarters, remote offices or data centers that require throughput
of up to 100 Mbps. QoSWorks classifies and prioritizes different traffic types
and groups of users on a network and enables network managers to set policies
that protect mission-critical application traffic, enforce those policies
through a combination of integrated traffic management, and a policy-smart Web
cache and enables reporting on the effectiveness of policies. QoSWorks is
designed to be a complete QoS device for deployment in enterprise remote
offices.
[FIRST PRODUCT SECTION DIAGRAM]
[The diagram depicts a topology for use of QoSWorks and QoSDirector. In the
middle of the diagram appears a box, which is labeled "QoSWorks," and above
that, connected by a line, is a box entitled QoSDirector. To the left of the
QoSWorks box is a square connected by a line which is labeled "Switch." To the
right of the box connected by a line is a flat cylinder which is labeled
"Router." To the right of the cylinder connected by a line is "64-T3," which is
a range of throughput speeds within which QoSWorks can operate.]
QoSArray is a multi-module QoS system that supports complex network
topologies and is designed for deployment at large enterprises and service
providers, such as communications service providers, Internet service providers,
or ISPs, competitive local exchange carriers, or CLECs, ASPs, data centers and
Web hosting facilities. QoSArray offers all of the QoS features available in
QoSWorks, and uses a modular scalable architecture and patent pending clustering
technology to scale to large networks operating at speeds of up to OC3 with
gigabit ethernet interfaces. QoSArray is designed to learn from the network
environment in which it is deployed and adapts to it transparently, requiring
minimal configuration. QoSArray is designed to deliver the throughput and
fault-tolerance required for enforcing and monitoring service level agreements,
or SLAs, and management and dynamic service provisioning across many customers.
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[SECOND PRODUCT SECTION DIAGRAM]
[The diagram depicts a network topology for use of QoSArray and
QoSDirector. In the middle of the diagram appear two boxes arranged vertically,
which are labeled QoSArray, and above the upper box appears a box which is
connected by a line which is labeled QoSDirector. To the left of each QoSArray
connected by lines are two squares which are labeled "Switch." To the right of
each QoSArray connected by lines are two flat cylinders which are labeled
"Router." To the right of each cylinder connected by lines is "10mb-155OC3,"
which is the range of throughput speeds within which QoSArray can operate.]
QoSDirector is a central policy management software system that enables our
customers to manage large installations of QoSWorks and QoSArray systems from a
single intuitive user interface. QoSDirector is designed to enable customers to
enjoy the benefits of QoS more fully by enabling an entire customer network with
the efficiency, security and reliability of centralized management. QoSDirector
provides a global view of network traffic and application performance, and
enables accurate billing and charge-backs and guaranteed SLAs.
<TABLE>
<CAPTION>
DATE FIRST TARGET MARKET/
RELEASED THROUGHPUT TARGET CUSTOMERS PRICE RANGE
<S> <C> <C> <C> <C>
QoSWorks First quarter From 64 Kbps Enterprise $2,500 to $25,000
2000 to 100 Mbps Market/Enterprises
with a mix of
mission-critical and
lower-priority
traffic, international
operations or multiple
branches
QoSArray Fourth From 20 Mbps Service Provider $25,000 to $75,000
quarter 2000 to OC3 with Market/Communications
gigabit service providers,
ethernet ISPs, CLECs, ASPs,
interfaces data centers, and Web
hosting facilities
QoSDirector Fourth Not Customers with large $10,000; licenses for
quarter 2000 applicable deployments of managed QoSWorks nodes
QoSWorks or QoSArray range from $100 to $1,000
and licenses for managed
QoSArray nodes range from
$1,000 to $3,000
</TABLE>
Our QoS products are designed to optimize converged IP network performance
and ensure the reliability of mission-critical applications by utilizing the
following QoS features:
Wire-speed classification. Classification is the first step in
establishing and managing network policies and determining the handling of IP
data traffic across a network. Our QoS products are designed to classify packets
by source port, destination port, source IP address, destination IP address,
protocol and other attributes. The products are designed to automatically
classify all IP and non-IP traffic at wire-speed, which means at the speed of
the network
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with no perceptible delay. Our QoS products can classify based on default and
user-defined parameters and also distinguish between applications using the same
protocol.
Intuitive policy management. Our QoS products are designed to enable
policy setting with a powerful, intuitive user interface design that hides the
complexity of underlying technologies. The products enable network managers to
use a single screen to set application priorities, allocate bandwidth by user or
application class, session and burst, enable or disable caching, set
admission-control policies, mark IP precedence or type-of-service bits and
designate the times when policies are in effect. The products' monitoring
feature is designed to allow network managers to observe the effects of policies
and revise them based on actual network performance, thereby creating an
efficient feedback loop and a fast, easy way to set and administer policies.
Sitara Networks AccuRate Traffic Management. Our QoS products' integrated
traffic management capability, called Sitara Networks AccuRate Traffic
Management, or AccuRate, combines the following QoS tools: TCP rate shaping,
class-based queuing, an algorithm for fair allocation of bandwidth by
connection, and optimization of the size of data packets moving across a
network. TCP rate shaping is a QoS tool that works with TCIP/IP traffic
specifically. TCP/IP traffic is a subset of IP traffic. The purpose of the TCP
rate shaper is to reduce the volatility of TCP/IP traffic flow by instructing
the transmitter to reduce the amount of data being transmitted by affecting the
rate at which the data is sent. The goal is to minimize the TCIP/IP traffic
bursts that can cause a traffic jam in the router and introduce delays that
adversely affect latency-sensitive applications. Class-based queuing manages
both IP and non-IP traffic and manages traffic at the packet level. Class-based
queuing provides more accurate information on traffic conditions than TCP rate
shaping and can therefore ensure precise allocation of bandwidth even at lower
speeds. In addition, to ensure fairness to all users within a common class of
traffic, our QoS products include techniques for fair allocation of bandwidth by
connection. The last components of AccuRate are the QoS techniques called
packet-size optimization and queue depth control. Packet-size optimization
allows network managers to set parameters that control the size of transmitted
packets when latency-sensitive applications, such as VoIP, are operating on a
converged IP network at the same time as applications that require large file
transfers, such as email with attachments. In this case, packet-size
optimization reduces the packet size of the large file transfer to a
pre-specified smaller size, ensuring that the latency-sensitive traffic, such as
VoIP, is provided the priority it needs. Queue depth control allows network
managers to control the number of packets waiting in queues so that latency-
sensitive mission-critical data can be processed within specified delay limits.
Policy-smart Web caching. Our QoS products are architected with an
internal, transparent cache. Caching provides QoS benefits at the edge of a
network, especially at the remote office, by storing frequently accessed Web
pages in a local cache that all users in a remote office can use, rather than
going over an enterprise's wide-area network, or WAN, to the Internet to
retrieve the same pages on each occasion that a user needs to access those Web
pages. Caching not only reduces traffic over the WAN, it also improves response
time for the end user. Our cache requires no reconfiguration of routers or other
equipment or deployment of a Layer 4 through 7 switch. Web page requests are
transparently intercepted and internally redirected to the integrated cache.
Then, content is either served locally if it is already stored in the cache or
retrieved from the origin site. If content must be retrieved from the origin
site, it is concurrently stored in the cache, so that it can be served out
locally to the next user. Another benefit of our cache is that it is under
policy control. Users can enable or disable caching within each policy, and
features can be subject to bandwidth limitations, to ensure that they do not
crowd out critical applications. In addition, the integration of caching with
traffic management and other features in our products enables traffic to be
classified only once, minimizing latency. The system can be configured using one
console, with monitoring and accounting data collected in one place for faster
and easier analysis of network performance.
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Real-time monitoring and reporting. Our products are designed to provide a
network manager with the ability to monitor both IP and non-IP traffic. This
helps network managers set policies to optimize mission-critical data traffic.
Our QoS products feature an overview screen that provides useful information on
all traffic types running on a network. Network managers can also generate
easy-to-read graphical reports on historical and current throughput and
bandwidth utilization. Planning tools included in our QoS products can show
average, peak and minimum bandwidth usage by application over different time
intervals.
TECHNOLOGY
Our technology is based on a layered architecture that is designed to
provide scalable, flexible and manageable QoS solutions for a variety of
applications. Our design philosophy focuses on the integration of the following
key elements: clustering technology, application-specific traffic management and
policy-based network management. Our architecture has well-defined interfaces
among its layers that we believe make the architecture extremely scalable and
flexible. Each of the functions mentioned above can be run on a single processor
or split and run on separate processors.
Clustering. The fundamental technique for providing scalability to our
architecture is our patent-pending clustering technology. This technology is
designed to synchronize two or more QoS modules that, when linked, perform as a
single QoS product, enabling quality of service at wire-speed. The key to this
technique is the ability to synchronize and load balance incoming data traffic
across multiple cluster elements or QoS products to provide quality of service.
Each element of the cluster manages only a portion of the overall traffic
without overloading its processing capacity. In the event of a failure of a
cluster element, the other elements in the cluster detect the failure and the
traffic flowing through the failed element is automatically rerouted and
load-balanced among other elements of the cluster. As bandwidth on a network is
increased, more cluster elements can be added incrementally to provide
additional processing power.
Application-specific QoS. Our QoS products can provide
application-specific QoS through application-specific traffic management
providing the flexibility needed to provision specialized quality of service, at
the application layer, for specific applications, including, but not limited to,
HTTP, which is used to move Web content across the Internet, Citrix Independent
Computing Architecture, or Citrix ICA, which is Citrix' software for its
server-based applications, and VoIP. Application-specific traffic management is
based on the technique called transparent proxy. Application traffic is
transparently intercepted and redirected to specialized proxies for further QoS
processing. Signaling is provided from the application layer to the application
servers to indicate the state of a network, which allows the servers to
participate in administering QoS network-wide and the optimization of our
products' built-in Web cache if content being delivered across a network is
cacheable. Each proxy on a network is implemented as a separate module with
well-defined interfaces to the other layers of a network enabling flexible
deployment of application specific quality of service.
Policy-based network management. Our policy management system is designed
to manage thousands of Sitara QoS modules through a centralized policy manager.
This enables enterprises and service providers to deploy QoS across complex
networks that support many different application and traffic types and thousands
of users. It provides a complete feedback loop for traffic analysis, policy
decisions and policy enforcement. Multiple standards and access methods are
supported to ensure compatibility with existing systems. Interfaces to external
databases such as Oracle and external directory services such as lightweight
directory access protocol, or LDAP, are provided from the policy manager. This
provides complete interoperability with other operations support and customer
management systems.
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At the present time, we have two issued United States patents and eight
pending United States patent applications. The patents and patent applications
that we have filed cover technology designed to enhance network communication,
improve data traffic throughput and bandwidth management, reduce network
congestion, and enable centralized network-wide quality of service policy
setting and management.
SELLING AND MARKETING
We sell our products through a network of resellers and a direct sales
force. In the enterprise market, our strategy is to primarily sell our products
through our network of resellers. As of September 30, 2000 we had 66 resellers
in the following countries: Australia, Austria, Canada, China, Costa Rica,
Finland, Germany, India, Japan, Malaysia, Mexico, Philippines, Singapore, South
Korea, Sweden, Switzerland, Taiwan, the United Arab Emirates, the United Kingdom
and the United States. During 2000, we also established 23 regional sales teams
worldwide to support sales through our resellers.
The main responsibility of the regional sales team has been to drive demand
through directly calling on and establishing relationships with large and
strategic enterprise customers. The regional sales teams bring in our resellers
at the appropriate time to assist in the sale and perform the installation of
our products. The regional sales teams are also responsible for assisting the
reseller in various aspects of sales support in their region. This includes
making joint calls with the reseller to their established customers, as well as
supporting customer installations in their region. Our regional sales teams
typically consist of a sales manager and a systems engineer. We have sales
representatives located in a number of major metropolitan areas including
Atlanta, Boston, Chicago, Dallas, Denver, Detroit, New York, San Francisco,
Seattle, and Washington, D.C. We also have sales representatives located in the
following foreign countries: Australia, Brazil, Canada, France, Germany, Hong
Kong, Japan, Mexico, Singapore, South Africa, South Korea and the United
Kingdom. As of September 30, 2000, our total sales and marketing headcount was
78, consisting of 32 sales managers, 29 systems engineers, ten marketing support
personnel, five channel support personnel and two administrative support
personnel.
In the service provider sector, our sales strategy is to sell to large
service providers directly and utilize our network of resellers to sell and
support smaller service providers. In the fourth quarter of 2000, our regional
sales teams started to shift their focus to include selling to and supporting
large service providers in addition to their enterprise sales responsibilities.
In the fourth quarter of 2000, we also plan to add a dedicated service provider
team in the United States. In 2001, we intend to significantly increase our
number of sales managers and systems engineers worldwide. The bulk of the new
personnel are planned as dedicated service provider resources.
Our marketing organization utilizes various programs to build brand
awareness, convey the benefits of our QoS products and technology leadership
position, and create demand for our solutions. Our marketing efforts include
advertising campaigns, seminars, trade shows, conferences, public relations
activities, speaking engagements, direct mail, telemarketing programs, reseller
sales kits, brochures, data sheets, white papers, and our Web site.
CUSTOMERS AND END-USERS
Our products are sold to end-users in the enterprise and service provider
markets. In the nine months ended September 30, 2000, KoreaLink, one of our
resellers in Korea, accounted for approximately 11% of our total revenue during
that period. The following is a list of entities
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who have purchased $75,000 or more of our products in the 10 month period ended
October 31, 2000:
<TABLE>
<S> <C> <C>
Equinox Solutions Sysage Technology Primus Telecommunications
KoreaLink Tai Full Technologies Data Accessories
Comtec Systems DATS Inster
Anixter
</TABLE>
An example of the manner in which our products have been used by an
enterprise is set forth below:
Bose Corporation. Bose Corporation manufactures and markets sound systems.
In 2000, Bose extended its enterprise resource planning, or ERP, operation with
an automated shipping and manifest system. After implementing this system,
shipping traffic needed to coexist with traditional email, office applications,
and file transfer traffic already present on the network. For this application,
latency is not an option because any delay in network throughput can bottleneck
the entire shipping process. With QoSWorks, Bose actively manages network
traffic without overprovisioning bandwidth on its wide-area network. QoSWorks
provides the level of granularity needed to monitor network traffic, set
policies, and control data flow to ensure the shipping and manifest system
operates at optimal levels. By using QoS techniques, Bose can also use thin
client technology over the wide area network, avoid the need for complex server
hardware at distribution sites and ensure efficiency and rapid response time for
users on its network.
Examples of the manner in which our products have been used by service
providers are set forth below:
CHD Meridian Health Care. CHD Meridian Health Care operates as a medical
management service company delivering Citrix-based applications to clinics and
pharmacies located on corporate campuses. One CHD Meridian site, a pharmacy that
fills more than 2,000 prescriptions per week, was experiencing long delays when
attempting to print prescription labels, as print traffic was contending for
bandwidth with other data traffic. The delays were causing customer
dissatisfaction. By deploying our QoSWorks product at the edge of its network,
CHD Meridian was able to obtain quicker response times for the print jobs
without jeopardizing the data traffic. CHD Meridian serves both a pharmacy and a
clinic at this corporate site and had been running separate lines to each
location to ensure quality of service. QoSWorks also enabled CHD Meridian to
eliminate one of these lines, a 56 Kbps link, and serve both locations over a
single 128 Kbps link, resulting in considerable monthly savings.
Nexus Estates Plc. With three business centers in London, Nexus provides
its clients with serviced offices that include advanced voice and data systems,
wide-area network capability, leased line connectivity and remote access for
shared-office arrangements, supported by on-site qualified technicians. Nexus
must ensure that each customer has access to the bandwidth levels they require
to operate their businesses efficiently. Nexus uses our QoSWorks to allocate
each customer the amount of bandwidth they require. QoSWorks classifies, manages
and reports on application traffic flowing over the network. With this
information, Nexus can allocate equal bandwidth to customers, analyze traffic
flows from each customer, and determine if additional or reallocated bandwidth
is required.
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STRATEGIC RELATIONSHIPS
Our business development group is responsible for the establishment of
strategic relationships with technology and market leaders. We have established,
or intend to establish, strategic relationships primarily in the following four
areas:
- Revenue generating relationships intended to produce sales through
reseller, private label and OEM agreements with global systems
integrators, network equipment vendors, computer and server vendors, and
a variety of service providers such as application service providers,
- Influence generating relationships intended to produce mutually
beneficial co-marketing agreements, and joint promotional and reference
selling programs that support sales activities in market segments
including server-based computing, network management, operations support
systems, and monitoring and reporting,
- Technology relationships to acquire the technology or components
necessary for current or new markets, and
- Joint development relationships to create value-added capabilities to
enable entrance or expansion into new markets.
We have emphasized the development of relationships with companies whose
products and solutions may have a strong need for QoS capabilities. While QoS
capabilities are becoming increasingly important for most enterprise networks,
we believe QoS capabilities are mandatory for certain types of applications and
deployments, such as VoIP, server-based computing and real-time multimedia
streaming that require low end-to-end latency/delay and are particularly
sensitive to bandwidth starvation. Examples of our strategic relationships are
set forth below.
Siemens. In September 2000, we announced a strategic relationship with
Siemens, a leading supplier of enterprise and carrier voice/data convergence
solutions. Our agreement with Siemens establishes a non-exclusive, worldwide
reseller arrangement for our QoSWorks products. Through this arrangement,
QoSWorks will be deployed with Siemens' HiPath VoIP Solutions, or HiPath, in an
effort to ensure low latency/delay and high voice quality in enterprise
networks. Our arrangement with Siemens also provides for the private labeling of
our QoSWorks products by Siemens. We are also working with Siemens on the joint
development of enhanced and standards-based VoIP capabilities that will add
further value to both companies' offerings. Specifically, our advanced product
line architecture allows us to incorporate the application-specific traffic
management functions unique to VoIP. Such signaling is necessary between HiPath
and our policy enforcement point to ensure a high level of connectivity and
quality. We believe that the relationship with Siemens will help us in
establishing leadership as a VoIP and IP convergence provisioning solution.
Citrix. In March 2000, we became a member of Citrix Business Alliance.
This relationship began as a joint marketing effort for promoting our QoS
solution to end users of Citrix's server-based network computing products. As
this relationship matured, it became evident that both companies could benefit
from a joint development effort that would produce tighter integration of our
QoS functionality with the Citrix MetaFrame server. Enterprises use Citrix
products to centralize deployment and management of their network applications.
Citrix MetaFrame server software uses Citrix ICA technology to enable client
devices of all types to shift application processing to the server with very low
bandwidth requirements. In October 2000, we announced a technology agreement
with Citrix whereby we license the Citrix ICA software for the purpose of
delivering QoS for Citrix applications. The objective of this effort is to
classify, prioritize and manage traffic types within the Citrix ICA protocol
stack and to allocate bandwidth to mission-critical applications to enhance and
maintain quality of service.
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CUSTOMER SERVICE AND SUPPORT
Our worldwide customer support organization maintains and supports our
products in the field, and is committed to complete customer satisfaction. Our
approach to customer service is an integral part of the product offering, and
therefore requires an operation that can provide world class technical support.
We offer various types of fee-based technical support programs to our customers.
Sitara Networks Direct Standard and Sitara Networks Direct Premium are offered
only in the United States to our direct end-user customers. Direct Standard
includes telephone support during regular business hours, unlimited email and
fax support, advanced replacement of hardware, and software updates. Direct
Premium includes twenty-four hour telephone support, in addition to the services
described above. For our channel partners and value-added resellers, we offer
the fee-based Sitara Networks Partner service plan on a worldwide basis. We also
have a support partner service plan under which our channel partners provide
support to their end-user customer, and we provide back-up support, if
necessary.
MANUFACTURING
Our manufacturing strategy is to outsource all of our production and
logistics operations to contract manufacturing partners who are experienced in
building and testing high-end networking systems and have global manufacturing
capabilities. We have selected Plexus, a large contract manufacturer in Neenah,
Wisconsin, as our current contract manufacturer. Plexus has the right to
terminate its relationship with us upon 90 days notice.
Plexus is certified to ISO 9000, a set of standards maintained by the
International Standards Organization that provide quality assurance requirements
and quality management guidance, and maintains manufacturing and design centers
throughout the United States and in the United Kingdom. Plexus is responsible
for procurement of materials, fabrication and assembly of our boards, production
of our chassis, final assembly and testing, packaging and shipping.
We track availability of materials together with Plexus, and plan ahead for
any potential shortage or allocation of parts. Since we do not use any
proprietary or single source parts, the risk of materials shortage is reduced,
but not completely eliminated.
We also perform extensive testing of our products, from the design phase,
through production. All of our products go through highly-accelerated life
expectancy tests in which the products are subjected to extreme operational
conditions. All printed circuit board assemblies go through in-circuit testing,
and every assembled unit goes through a 48-hour burn-in test and a final
functional test.
RESEARCH AND DEVELOPMENT
To be successful, we must continue to enhance and build on our existing
products and develop competitive new products. We have assembled a team of
highly experienced software, hardware and test engineers and systems architects.
Our engineering team possesses particular expertise in the areas of networking
protocols, QoS technologies, policy management, caching and network management.
As of September 30, 2000, we employed 52 full-time employees in research and
development. During the years ended December 31, 1998 and 1999 and the nine
months ended September 30, 1999 and 2000, we spent $3.0 million, $6.8 million,
$4.3 million and $8.1 million, respectively, on research and development,
excluding stock-based compensation.
COMPETITION
The markets in which we compete and intend to compete are new, intensely
competitive, highly fragmented and characterized by rapidly changing technology
and evolving standards. We face competition in the overall network computing
software market as well as the market
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segments in which we expect our products to compete. We believe the market for
QoS products is growing and, therefore, we expect to experience increased
competition from current and potential competitors as more solutions are brought
to market to address QoS concerns.
Because the demand for QoS products has only recently been widely
acknowledged and varying solutions are being offered to address QoS issues, we
consider companies in a number of different market segments to be our
competitors. One avenue of competition is single point QoS products which
typically provide narrow functionality rather than a fully integrated feature
set. Examples of single-point QoS products include stand-alone caches such as
those offered by Cacheflow and InfoLibria, TCP rate shapers and other bandwidth
management products such as those offered by Packeteer and Allot, and Level 4-7
switches and load balancers such as those offered by Alteon, which was recently
acquired by Nortel, ArrowPoint, which was recently acquired by Cisco, Foundry
Networks and F5 Networks. In the area of policy management tools, we compete
with various heterogeneous policy managers such as that offered by Hewlett
Packard. Another area of competition is the inclusion of QoS functionality in
network routers sold by major network equipment manufacturers such as Cisco,
Nortel and Lucent, as well as in other network equipment, such as integrated
access devices and service provisioning platforms sold by companies such as
Cosine Communications, Redback, Shasta Networks, which was recently acquired by
Nortel, and Springtide, which was recently acquired by Lucent.
Some of our current and potential competitors are large public companies
that have longer operating histories and significantly greater financial,
technical, marketing and other resources than we do. As a result, these
competitors are able to devote greater resources to the development, promotion,
sale and support of their products. In addition, our competitors with large
market capitalizations or cash reserves are much better positioned than we are
to acquire new technologies or products that may displace our product lines. Any
of these acquisitions could give the acquiring competitor a strategic advantage
over us. Our competitors may also bundle their products with other software or
hardware in a manner which may discourage users from purchasing our products.
Many of our competitors have significantly more established customer
support and professional services organizations than we do. In addition, many of
our competitors have much greater name recognition and have a more extensive
customer base, broader customer relationships and broader product offerings than
us, including relationships with many of our current and potential customers.
These competitors can leverage their customer relationships and broader product
offerings and adopt aggressive pricing policies to gain market share. As a
result, we may be required to accept price reductions and reduced gross margins
and we may not be able to maintain a competitive position against current or
future competitors. Our failure to maintain and enhance our competitive position
within the markets in which we compete and intend to compete could seriously
harm our business.
INTELLECTUAL PROPERTY
We rely on a combination of patent, copyright and trademark laws, and on
trade secrets, confidentiality provisions and other contractual provisions to
protect our proprietary rights. These measures afford only limited protection.
We currently have two issued United States patents and eight pending United
States patent applications. Our future success depends in part on our ability to
protect our proprietary rights to the technologies used in our products. We
cannot assure you that our means of protecting our proprietary rights in the
United States or abroad will be adequate or that competitors will not
independently develop similar technologies. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy aspects of our
technology or to obtain and use trade secrets or other information that we
regard as proprietary. In addition, the laws of some foreign countries do not
protect our proprietary rights as fully as do the laws of the United States. We
cannot assure you that any
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<PAGE> 48
issued patent will preserve our proprietary position, or that competitors or
others will not develop technologies similar to or superior to our technology.
Our failure to enforce and protect our intellectual property rights could harm
our business, operating results and financial condition.
From time to time, third parties, including our competitors, may assert
patent, copyright and other intellectual property rights to technologies that
are important to us. The results of litigation are inherently uncertain. In the
event of an adverse result in any litigation with third parties that could arise
in the future, we could be required to pay substantial damages, including treble
damages if we are held to have willfully infringed, to cease the manufacture,
use and sale of infringing products, to expend significant resources to develop
non-infringing technology, or to obtain licenses to the infringing technology.
Licenses may not be available from any third party that asserts intellectual
property claims against us on commercially reasonable terms, or at all. In
addition, litigation frequently involves substantial expenditures and can
require significant management attention, even if we ultimately prevail.
EMPLOYEES
As of September 30, 2000, we employed 156 full-time persons, of whom 52
were engaged in research and development, 88 in sales, marketing and customer
service and 16 in finance, administration and operations. We believe our future
performance will depend in large part on our ability to attract and retain
highly-skilled employees. None of our employees is represented by a labor union
and we have not experienced any work stoppages to date. We consider our employee
relations to be good.
FACILITIES
Our corporate headquarters is located in Waltham, Massachusetts under a
sublease that expires in 2003. We occupy approximately 25,000 square feet in
this facility under the sublease, approximately 4,000 square feet in a nearby
building under a separate sublease that expires in 2001 and approximately 2,000
square feet in Oregon under a lease that expires in 2003. We plan to lease
additional space in the vicinity of our headquarters. We also lease office space
for our sales personnel in Georgia and Virginia in the United States and in
Australia, Brazil, France, Germany, Hong Kong, Japan, Mexico, Singapore, South
Africa, South Korea and the United Kingdom. We believe that additional space can
be obtained on commercially reasonable terms to meet future requirements.
LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising in the ordinary course of business. We are not currently a party to any
material legal proceedings.
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MANAGEMENT
OUR EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning each of our
executive officers and directors and their ages as of September 30, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Malik Z. Khan........................ 44 Chairman, Chief Executive Officer, President and Class I
Director
Michael Palin........................ 49 Chief Financial Officer
Manickam R. Sridhar.................. 42 Chief Technology Officer
Nachum Sadan......................... 45 Executive Vice President -- Technical Operations
Edward DeArias....................... 44 Executive Vice President -- Worldwide Sales
Mark Strangio........................ 50 Vice President -- Business Development
Robert Steingart..................... 47 Vice President -- Strategic Alliances
John M. Caffrey...................... 41 Vice President -- Human Resources
Menachem Abraham(1).................. 52 Class II Director
Joseph W. Alsop(2)................... 55 Class III Director
David G. Brown(1).................... 43 Class III Director
Edwin M. Kania, Jr.(1)(2)............ 42 Class II Director
Arthur J. Marks...................... 55 Class I Director
Michael J. Zak(2).................... 47 Class I Director
</TABLE>
------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
MALIK Z. KHAN, our founder, has served as the Chairman of our board of
directors, Chief Executive Officer and President since we were founded in July
1996. Before founding Sitara Networks in 1996, Mr. Khan served in several senior
executive roles from 1984 to 1996 at Motorola. These roles included Vice
President and General Manager of the Network Systems Division, Vice President of
Worldwide Marketing at Motorola's Information Systems Group, and Vice President
and General Manager of Motorola's ISG business in Europe, the Middle East and
Africa. Mr. Khan was also an "entrepreneur-in-residence" for OneLiberty Ventures
in 1996, which led to the founding of two start-up companies: Sitara Networks
and Indus River Networks, a privately held virtual private network solutions
company. From 1982 to 1984, Mr. Khan was Vice President of International Sales
with Management Technologies, a software company.
MICHAEL PALIN has served as our Chief Financial Officer since December
1996. From April 1997 to January 1998, he also served as Chief Financial Officer
of Indus River Networks. From July 1996 to December 1996, he served as Chief
Financial Officer of Mission Critical Technologies, a computer software and
services company. From January 1996 to July 1996, Mr. Palin served as Managing
Director of Downhole Injection Systems, an oil and gas well services company.
From February 1992 until December 1995, he served as the President and Chief
Financial Officer of HomeView, a provider of interactive multimedia applications
for the residential real estate industry. Mr. Palin was also previously employed
by Deloitte & Touche.
MANICKAM R. SRIDHAR has served as our Chief Technology Officer since
September 1997 and as our Director of Engineering from September 1996 to
September 1997. From July 1983 until August 1996, he served as a principal
consulting engineer and project leader at Motorola.
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Prior to his time at Motorola, Mr. Sridhar designed the architecture for a
high-speed signal processor chip while employed as a designer engineer at GTE.
Mr. Sridhar has been awarded 18 United States patents in high-speed modem,
multimedia and networking technologies in prior positions, and is a named
inventor on several patent applications pending. He is an active member of the
Internet Engineering Task Force and the World Wide Web Consortium.
NACHUM SADAN has served as our Executive Vice President -- Technical
Operations since November 1998. From January 1988 to June 1997, he served as
Vice President of Engineering of BusTech and from July 1997 to November 1998, he
held the same position at CommHome Systems, both of which are internetworking
companies that he co-founded. From 1983 to 1988, he served in several principal
engineering positions at Nixdorf Computer Corp.
EDWARD DEARIAS has served as our Executive Vice President -- Worldwide
Sales since October 1998. From April 1977 until May 1998, he served as the
Division Director of Worldwide Channel Sales and Marketing for IBM's Networking
Division. He held several other key executive positions at IBM including
Director of Emerging Geographic Markets for IBM PC Company, Director of
Marketing and Sales Operations for IBM PC Company-Latin America and Branch
Manager for IBM US National Distribution.
MARK STRANGIO has served as our Vice President -- Business Development
since June 1999. From January 1997 to June 1999, he served as our Vice President
of Marketing and Customer Support. From March 1987 until December 1996, he
served as the Director of Sales Development and Corporate Systems Engineering at
Bay Networks/Wellfleet Communications where he managed the worldwide
multi-channel corporate sales and engineering support functions. From 1980 to
1986, Mr. Strangio worked in product management and marketing functions at Codex
Corporation.
ROBERT STEINGART has served as our Vice President -- Strategic Alliances
since November 2000. From September 2000 to October 2000, he served as our Vice
President -- Product Management, and from June 1999 to August 2000, he served as
our Vice President of Marketing. From October 1998 to May 1999, he served as our
Vice President of Strategic Alliances. From June 1997 to September 1998 he
served as Director of Marketing for SynaPix, a multimedia systems manufacturer.
From September 1995 to May 1997 he served as Senior Product Line Manager for
Avid Technology, a multimedia systems manufacturer. From September 1991 to
August 1994, Mr. Steingart held the positions of Director, Business Development
and Director, Mobile Computing at Lotus Development Corporation. Mr. Steingart
previously held senior marketing and product management positions at EMC and
Digital Equipment Corporation.
JOHN M. CAFFREY has served as our Vice President -- Human Resources since
February 1998. From August 1997 to January 1998, he served as the Vice President
of Human Resources of Dataware Technologies, an information retrieval company.
From July 1996 to August 1997, he served as the Director of Human Development
and Organizational Productivity of Nets, Inc., an e-commerce company. From
December 1994 to July 1996, he was Human Resources Director at AT&T New Media
Services. From May 1991 until December 1994, Mr. Caffrey was Manager of Human
Resources with Ziff Davis Communications Company, and from 1982 until 1991, he
was a Senior Executive Recruiter with Multi Processing Inc.
MENACHEM ABRAHAM has served as one of our directors since July 2000. He is
Founder, President, and Chief Executive Officer of Mintera, an optical
networking start-up company. From January 1998 until February 2000, Mr. Abraham
was president of Lucent Technologies' Enterprise Internetworking Systems Group.
He joined Lucent in January 1998 following Lucent's acquisition of Prominet
Corporation, where he was President, Chief Executive Officer and one of that
company's co-founders since March 1996. Before starting Prominet in March 1996,
Mr. Abraham was Senior Vice President of Product Development at Chipcom
Corporation where
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he worked from August 1984 to October 1995. Mr. Abraham is also a director of
Floware Wireless Systems and Tioga Technologies.
JOSEPH W. ALSOP has served as one of our directors since July 2000. Joseph
Alsop is President of Progress Software, a supplier of application development
and deployment products, which he founded in December 1981.
DAVID G. BROWN has served as one of our directors since September 1999. He
has been the Managing Partner of Oak Hill Venture Partners, a venture capital
firm, since September 1999, a Principal of Arbor Investors, a private equity
investment firm, since August 1995, and Chief Financial Officer from July 1998
to December 1999, as well as a Vice President of Keystone since July 1993. Mr.
Brown also serves on the board of directors of AER Energy Resources, Bell &
Howell and eGain Communications as well as several privately-held companies.
EDWIN M. KANIA, JR. has served as one of our directors since December 1996.
Mr. Kania is managing general partner of OneLiberty Ventures, a venture capital
firm. Previously, he was a general partner at a predecessor firm, Morgan Holland
Ventures, which he joined in 1985. Mr. Kania is also a director of Aspect
Medical Systems and several privately-held companies.
ARTHUR J. MARKS has served as one of our directors since December 1996. He
joined New Enterprise Associates, a venture capital firm, in 1984 as a general
partner where his investment activities focus on information technology
companies. From 1975 until 1984, Mr. Marks was with General Electric where he
served as President of the Software Products Operation at CE Information
Services and General Manager of the X-Ray Products Department of GE Medical
Systems. From 1971 to 1975, he held various marketing, sales and finance
positions at Baxter-Travenol Laboratories. Mr. Marks is a director of eXcelon
Corporation, Progress Software, Epicor Software, Advanced Switching
Communications and Talk.com and several privately-held companies.
MICHAEL J. ZAK has served as one of our directors since December 1996. He
has been employed by Charles River Ventures, a venture capital firm, since 1991
and has been a general partner of Charles River Partnership VII and its related
entities since 1994. In addition, Mr. Zak was a founder of Concord
Communications, a developer of communications software. He is a director of
several privately-held companies.
BOARD OF DIRECTORS AND COMMITTEES
Following this offering, our board of directors will consist of seven
directors divided into three classes, with members of each class serving for a
term of three years. At each annual meeting of stockholders, directors of one
class will be elected for a three-year term to succeed the directors whose terms
are expiring. Arthur J. Marks, Malik Z. Khan and Michael J. Zak are Class I
directors whose terms will expire in 2002, Menachem Abraham and Edwin M. Kania,
Jr. are Class II directors whose terms will expire in 2003 and Joseph Alsop and
David G. Brown are Class III directors whose terms will expire in 2004.
Our board of directors has an audit committee which reviews and supervises
our financial controls, including the selection of our auditors, reviews our
books and accounts, meets with our officers regarding financial controls, acts
upon recommendations of the auditors and takes any further actions the audit
committee deems necessary to complete an audit of our books and accounts, as
well as addressing other matters that may come before it or as directed by our
board of directors. The audit committee currently consists of three directors,
Messrs. Abraham, Brown and Kania.
Our board of directors also has a compensation committee, which reviews and
recommends the compensation and benefits for our executive officers, administers
our stock plans and performs other duties as may from time to time be determined
by our board of directors.
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<PAGE> 52
The compensation committee currently consists of three directors, Messrs. Alsop,
Kania and Zak.
Our board of directors may establish, from time to time, other committees
to facilitate the management of our business.
DIRECTOR COMPENSATION
Our directors do not receive cash compensation for their services as
directors but are reimbursed for their reasonable and necessary expenses
incurred in connection with attendance at meetings of our board of directors or
its committees. We may, in our discretion, grant stock options and other equity
awards to our non-employee directors from time to time under our Amended and
Restated 1996 Stock Incentive Program. On July 18, 2000, we granted stock
options to Messrs. Abraham and Alsop, two of our directors, for 180,000 and
90,000 shares, respectively, with an exercise price of $2.67 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers serves on the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of our board of directors or compensation committee.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the compensation
earned for services rendered to us by our chief executive officer and each of
our four other most highly compensated executive officers whose salary and bonus
compensation for the fiscal year ended December 31, 1999 exceeded $100,000. We
refer to these executives collectively as our named executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ---------------------
--------------------- SECURITIES UNDERLYING
NAME & PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#)
------------------------- --------- -------- ---------------------
<S> <C> <C> <C>
Malik Z. Khan................................ $225,000 $100,000 --
Chairman, Chief Executive Officer and
President
Edward DeArias............................... 150,000 22,500 75,000
Executive Vice President -- Worldwide Sales
Nachum Sadan................................. 132,884 15,000 --
Executive Vice President -- Technical
Operations
Robert Steingart............................. 126,700 20,000 75,000
Vice President -- Strategic Alliances
Michael Palin................................ 120,000 -- --
Chief Financial Officer
</TABLE>
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<PAGE> 53
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding stock options granted
during the fiscal year ended December 31, 1999 to our named executive officers.
The amounts described in the following table under the heading "Potential
Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option
Term" represents hypothetical gains that could be achieved for the options if
exercised at the end of the option term. These gains are based on assumed rates
of stock value appreciation of 0%, 5% and 10% compounded annually from the date
the options were granted until their expiration date. Actual gains, if any, on
stock option exercises will depend on the future performance of our common stock
and the date on which the options are exercised.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF
SHARES GRANTED TO STOCK PRICE
UNDERLYING EMPLOYEES EXERCISE APPRECIATION FOR OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION -----------------------------
NAME GRANTED(#) YEAR ($/SH) DATE 0%($) 5%($) 10%($)
---- ---------- ---------- -------- ---------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Edward DeArias.......... 75,000 6.4% $ 1.00 1/14/2009 $ 0 $ 47,168 $119,531
Robert Steingart........ 75,000 6.4% 1.33 9/16/2009 93,000 214,219 400,194
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the number and value
of unexercised options to purchase shares of our common stock held by our named
executive officers. Our named executive officers did not exercise any stock
options during the fiscal year ended December 31, 1999. There was no public
trading market for our common stock as of December 31, 1999. Accordingly, the
values of the unexercised in-the-money options have been calculated on the basis
of the fair market value at that time of $2.57 per share, as determined for
financial reporting purposes.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END(#) AT FISCAL YEAR-END ($)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Edward DeArias................... 63,753 168,747 $163,845 $433,680
Nachum Sadan..................... 131,247 206,253 337,305 530,070
Robert Steingart................. 98,435 164,066 252,978 421,650
Michael Palin.................... 81,844 135,156 210,339 347,351
</TABLE>
AMENDED AND RESTATED 1996 STOCK INCENTIVE PROGRAM
Our Amended and Restated 1996 Stock Incentive Program was adopted by our
board of directors on October 19, 2000 and was approved by our stockholders on
. The stock incentive program permits us to grant incentive stock
options (within the meaning of Section 422 of the Internal Revenue Code of
1986), non-qualified stock options, restricted stock, performance share awards
and stock appreciation rights to our and our subsidiaries' officers, key
employees, directors, members of our technical advisory board, consultants,
distribution partners, advisors and service providers. The stock incentive
program currently allows for the issuance of 9,200,000 shares of common stock.
Beginning January 1, 2001, and upon each January 1st thereafter, the number of
shares issuable under the stock incentive program will automatically increase by
the lesser of 3,000,000 shares or 5% of our issued and outstanding capital stock
on a fully-diluted basis determined as of that date. However, the number of
shares reserved for issuance under the stock incentive program will not at any
time exceed 25% of our issued and outstanding capital stock on a fully-diluted
basis determined as
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<PAGE> 54
of the date of the applicable increase. As of October 31, 2000, 2,215,965 shares
have been issued upon the exercise of options or pursuant to stock grants,
options to purchase a total of 6,304,216 at a weighted average exercise price of
$2.26 per share were outstanding and 679,819 shares were available for future
option grants under the stock incentive program.
The stock incentive program is administered by our compensation committee.
Subject to the provisions of the stock incentive program, the compensation
committee may select the individuals eligible to receive awards, determine the
terms and conditions of the awards granted (including the number of shares or
options to be awarded and the purchase price or exercise price, as the case may
be), accelerate the vesting schedule of any award and generally administer and
interpret the stock incentive program.
We intend to comply with the deductibility restrictions under Section
162(m) of the Internal Revenue Code. Stock option grants to our named executive
officers after the end of the so-called reliance period for transition to public
company status under United States Treasury regulations will have an exercise
price at least equal to our common stock's then fair market value, and number of
shares that may be subject to equity awards made during any one calendar year to
a named executive officer shall not exceed 2,000,000 shares of our common stock.
Options are typically subject to vesting schedules, terminate ten years
from the date of grant (five years in the case of incentive stock options
granted to optionee holding 10% or more of the voting power of Sitara Networks,
including any parent and subsidiary corporations) and may be exercised for
specified periods after the termination of the optionee's employment or other
service relationship with us. The vesting date and requirements of each
restricted stock award are determined by the compensation committee. The
compensation committee may place conditions on the restricted stock awards such
as continued employment and/or the achievement of performance goals or
objectives in a grant document.
Upon the exercise of options, the option exercise price must be paid in
full either in cash or by check or delivery of shares of our common stock (or
certification as to the ownership of such shares), provided that paying the
exercise price by delivery (or certification as to ownership) of shares will not
result in a charge to our earnings for financial accounting purposes.
Restricted stock may not be sold, assigned, transferred or pledged except
as specifically provided in the grant document. If a restricted stock award
recipient's employment or other relationship with us or our subsidiary
terminates or other events specified in the grant document occur, we have the
right to repurchase some or all of the shares of stock subject to the award at
the purchase price of the stock.
In the event of a change in control, the vesting of any unvested shares
subject to our standard stock option agreement will accelerate so that a pro
rata portion of the unvested shares will vest every three months over the
12-month period following the change in control (unless the unvested shares
would vest faster under their original vesting schedules). Further, the holder
of any outstanding award will have the right to receive, upon the exercise of
the award, the cash, securities and/or other property received by our
stockholders in the transaction. Notwithstanding the foregoing, we may require
all outstanding awards to be exercised prior to the change in control, terminate
each outstanding award in exchange for a payment of cash and/or securities to
the extent that such awards are vested, or terminate each outstanding award for
no consideration to the extent that awards are unvested.
2000 EMPLOYEE STOCK PURCHASE PLAN
Our 2000 Employee Stock Purchase Plan was adopted by our board of directors
on October 19, 2000 and was approved by our stockholders on [ ].
Up to 2,000,000
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<PAGE> 55
shares of our common stock may be issued under the stock purchase plan, none of
which have been issued as of the effective date of this offering. The stock
purchase plan is administered by our compensation committee.
The first offering under the stock purchase plan will begin on the
effective date of this offering and end on December 31, 2002. Subsequent
offerings will commence on January 1 every other year and will have a duration
of twenty-four months. Each offering will be composed of four purchase periods
each of approximately six months duration. Generally, all of our employees who
are customarily employed for more than 20 hours per week and five months per
year as of the first day of the applicable offering period will be eligible to
participate in the stock purchase plan. Any employee who first becomes eligible
during an offering or is hired during an offering and otherwise meets the
eligibility requirements will be eligible to participate in the offering on the
first day of the purchase period after the employee satisfies the eligibility
requirements. An employee who owns or is deemed to own shares of our capital
stock representing 5% or more of the combined voting power of all classes of our
capital stock (including the stock of any parent or subsidiary corporation) will
not be eligible to participate in the stock purchase plan. The stock purchase
plan is intended to qualify under Section 423 of the Internal Revenue Code.
During each offering, eligible employees may purchase shares under the
stock purchase plan by authorizing payroll deductions of up to 15% of his or her
compensation during the offering period. Unless the employee has previously
withdrawn from the offering, his or her accumulated payroll deductions will be
used to purchase shares of our common stock on the last business day of each
purchase period at a price equal to 85% of the fair market value of our common
stock on the first day of the offering period or, if later, the date on which
the participant first begins participating in the offering or, or the last day
of the offering period, whichever is lower. For purposes of the initial offering
period, the fair market value of our common stock on the first day of the
offering period will be the public offering price set forth on the cover page of
this prospectus. Notwithstanding the foregoing, during the first purchase period
of the initial offering period, all eligible employees will automatically be
enrolled in the offering and will purchase shares of our common stock at the end
of the first purchase period by making a lump sum cash payment equal to 10% of
their compensation (unless an election is made, after the start of the initial
offering period and prior to the end of the first purchase period, to commence
payroll deductions or to withdraw from the stock purchase plan). Additionally,
if on any purchase date during an offering, the fair market value of our common
stock is less than the fair market value on the first day of the offering, then
such offering will terminate on the day immediately following the purchase date
and a new offering will commence on that date. Under applicable tax rules, an
employee may purchase no more than $25,000 worth of our common stock in any
calendar year.
In the event of a change in control, the stock purchase plan provides for
immediate acceleration of the purchase date of the then-current purchase period
to a date immediately prior to the change in control, unless the acquiring or
successor corporation assumes or replaces the purchase rights outstanding under
our stock purchase plan. In the event of a proposed dissolution or liquidation
of Sitara Networks, the current offering period will terminate immediately prior
to the consummation of that event and we may either accelerate the purchase date
of the purchase period to a date immediately prior to the event or return all
accumulated payroll deductions to each participant, without interest.
401(k) PLAN
We have established a savings plan for our employees which is designed to
be qualified under Section 401(k) of the Internal Revenue Code. Eligible
employees are permitted to contribute to the 401(k) plan through payroll
deduction within statutory and plan limits. We have made no contributions to the
401(k) plan to date.
54
<PAGE> 56
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation contains a provision permitted by Delaware
law that generally eliminates the personal liability of directors to us or our
stockholders for monetary damages for breaches of their fiduciary duty,
including breaches involving negligence or gross negligence in business
combinations, unless the director has breached his or her duty of loyalty,
failed to act in good faith, engaged in intentional misconduct or a knowing
violation of law, paid a dividend or approved a stock repurchase in violation of
the Delaware General Corporation Law or obtained an improper personal benefit.
This provision does not alter a director's liability under the federal
securities laws or to parties other than Sitara Networks or our stockholders and
does not affect the availability of equitable remedies, such as an injunction or
rescission, for breach of fiduciary duty.
Our by-laws provide that directors and officers will be, and in the
discretion of our board of directors, non-officer employees may be, indemnified
by us to the fullest extent authorized by Delaware law, as it now exists or may
in the future be amended, against all expenses and liabilities reasonably
incurred in connection with service for or on our behalf. The by-laws also
provide that the right of directors and officers to indemnification is a
contract right and is not exclusive of any other right now possessed or
hereafter acquired under any by-law, agreement, vote of stockholders or
otherwise. We are currently in the process of obtaining directors' and officers'
insurance against certain liabilities. Prior to the completion of this offering,
we will also enter into indemnification agreements with each of our directors.
The indemnification agreements will generally reflect the provisions above and
require advancement of expenses in proceedings, if the director being
indemnified had no reasonable cause to believe that his conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, officers or controlling persons as
described above, we have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is therefore unenforceable.
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<PAGE> 57
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Stock option grants to our directors and executive officers are described
in this prospectus under the captions "Management -- Director Compensation" and
"Management -- Executive Compensation."
PRIVATE PLACEMENT TRANSACTIONS
We have issued and sold preferred stock in private placement transactions
as follows:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER AGGREGATE
DATES OF ISSUANCE SERIES SHARES SHARE CONSIDERATION
----------------- ------ --------- --------- -------------
<S> <C> <C> <C> <C>
December 11, 1996..... Series A Convertible Redeemable 6,470,589 $0.85 $ 5,500,000
September 9, 1997..... Series B Convertible Redeemable 5,000,000 1.40 7,000,000
May 18, 1998.......... Series C Convertible Redeemable 1,312,336 3.81 5,000,000
December 17, 1998..... Series D Convertible Redeemable 787,402 3.81 3,000,000
July 9 through
August 9, 1999...... Series E Convertible Redeemable 5,722,903 3.85 22,033,176
January 14 through
March 31, 2000...... Series F Convertible Redeemable 1,130,000 5.00 5,650,000
June 16 through
October 13, 2000.... Series G Convertible Redeemable 3,765,739 6.51 24,515,010
</TABLE>
Each share of our preferred stock, except series G convertible redeemable
preferred stock, is convertible into 1.5 shares of our common stock. Each share
of our series G convertible redeemable preferred stock is convertible into one
share of our common stock. The shares of series D convertible redeemable
preferred stock were issued in exchange for a technology license agreement
valued at $3,000,000.
The following table summarizes the shares of our preferred stock listed
above purchased from us by our named executive officers, directors and 5%
stockholders, and persons and entities associated with them:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES E
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE
REDEEMABLE REDEEMABLE REDEEMABLE REDEEMABLE
INVESTOR PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
-------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Charles River Partnership VII,
L.P............................ 2,352,941 785,714 359,090 142,144
OneLiberty Fund III, L.P......... 2,352,941 785,714 359,090 142,144
New Enterprise Associates........ 1,000,000 1,785,715 318,710 126,159
FW Ventures IV, L.P.............. -- -- -- 2,077,922
Prism Venture Partners, I L.P.... -- 1,428,571 163,441 64,697
</TABLE>
The shares held by New Enterprise Associates referenced above represent
shares purchased by New Enterprise Associates VII, LP and NEA Presidents' Fund,
LP. Our directors are associated with the above investors as follows: David
Brown is associated with FW Ventures VI, L.P., Edwin M. Kania, Jr. is associated
with OneLiberty Fund III, L.P., Arthur J. Marks is associated with New
Enterprise Associates and Michael J. Zak is associated with Charles River
Partnership VII, L.P. See "Management -- Our Executive Officers and Directors"
and the applicable footnotes to the table set forth in "Principal Stockholders"
for more detail regarding these associations.
In addition to the preferred stock referenced above:
- On October 23, 1997, we issued 375,000 shares of our common stock to
Charles River Partnership VII, L.P. for an aggregate purchase price of
$5.00 pursuant to the exercise of a warrant, and
56
<PAGE> 58
- On December 12, 1998, we issued 375,000 shares of our common stock to
OneLiberty Fund III, L.P. for an aggregate purchase price of $5.00
pursuant to the exercise of a warrant.
The warrants were originally issued to OneLiberty Fund III, L.P. pursuant
to a note and warrant purchase agreement dated July 19, 1996. OneLiberty
transferred warrants for 375,000 shares to Charles River Partnership VII, L.P.
in connection with the closing of the sale of our series A convertible preferred
financing stock on December 11, 1996.
REGISTRATION RIGHTS AGREEMENT
In connection with the sale of our series A convertible preferred stock, we
entered into a registration rights agreement with our founder, chairman and
chief executive officer, Malik Z. Khan, and the purchasers of our series A
preferred stock. This registration rights agreement was amended and restated in
connection with the sale of our series B, C, D, E, F and G convertible
redeemable preferred stock to add the purchasers of such stock and the holders
of outstanding warrants to purchase common stock as parties to the agreement.
For a detailed description of the registration rights agreement, please see
"Description of Capital Stock -- Registration Rights."
OTHER TRANSACTIONS
Mr. Khan is non-executive chairman of the board of directors and a
stockholder of Indus River Networks, Inc. In addition, Michael Palin, our chief
financial officer, served as chief financial officer of Indus River Networks
from April 1997 to January 1998. In 1997, Indus River Networks made payments to
us of $129,276 for shared personnel, office space and facilities, based on their
fair market value.
We believe that all of the transactions set forth in this section were made
on terms no less favorable to us than could have been obtained from unaffiliated
third parties. We intend that all future transactions between us and any of our
officers, directors, principal stockholders and their affiliates will be
approved by a majority of the independent and disinterested directors on our
board of directors and will be on terms no less favorable to us than could be
obtained from unaffiliated third parties.
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<PAGE> 59
PRINCIPAL STOCKHOLDERS
This section presents information concerning the beneficial ownership of
shares of our common stock as of October 31, 2000. The table also contains
information about beneficial ownership, as adjusted to reflect the sale of
common stock in this offering assuming:
- 44,141,324 shares of our common stock outstanding as of October 31, 2000
and [ ] shares outstanding immediately following completion of this
offering,
- conversion of all outstanding shares of convertible preferred stock into
shares of our common stock, and
- no exercise of the underwriters' over-allotment option.
Specifically, the table reflects the beneficial ownership information
about:
- each person we know to be the beneficial owner of 5% or more of the
outstanding shares of our common stock,
- each of our named executive officers listed in the summary compensation
table,
- each of our directors, and
- all of our executive officers and directors as a group.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power over
securities. Except in cases where community property laws apply or as indicated
in the footnotes to this table, we believe that each stockholder identified in
the table possesses sole voting and investment power over all shares of common
stock shown as beneficially owned by the stockholder. Shares of common stock
subject to options and warrants that are currently exercisable or exercisable by
December 30, 2000 are considered outstanding and beneficially owned by the
person holding the options for the purpose of computing the percentage ownership
of that person but are not treated as outstanding for the purpose of computing
the percentage ownership of any other person.
Unless indicated, the address of each individual listed below is 52 Second
Avenue, Waltham, Massachusetts 02451.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
OUTSTANDING
--------------------------------
NUMBER OF SHARES BEFORE THE
EXECUTIVE OFFICERS AND DIRECTORS BENEFICIALLY OWNED OFFERING AFTER THE OFFERING
-------------------------------- ------------------ ---------- ------------------
<S> <C> <C> <C>
Malik Z. Khan............................ 6,555,000 (1) 14.9% %
Edwin M. Kania, Jr....................... 5,834,833 (2) 13.2
Michael J. Zak........................... 5,834,833 (3) 13.2
Arthur J. Marks.......................... 4,845,875 (4) 11.0
Nachum Sadan............................. 198,747 (5) *
Edward DeArias........................... 168,753 (6) *
Michael Palin............................ 156,844 (7) *
Robert Steingart......................... 98,435 (8) *
Menachem Abraham......................... 11,250 (9) *
Joseph Alsop............................. 5,625(10) *
David G. Brown........................... --(11) --
All directors and executive officers as a
group (14 persons)..................... 24,301,529(12) 54.5
</TABLE>
58
<PAGE> 60
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
OUTSTANDING
--------------------------------
NUMBER OF SHARES BEFORE THE
OTHER PRINCIPAL STOCKHOLDERS BENEFICIALLY OWNED OFFERING AFTER THE OFFERING
---------------------------- ------------------ ---------- ------------------
<S> <C> <C> <C>
Charles River Partnership VII, L.P....... 5,834,833 13.2%
100 Winter Street, Suite 3300
Waltham, Massachusetts 02154
OneLiberty Fund III, L.P................. 5,834,833 13.2
150 Cambridge Park Drive
Cambridge, Massachusetts 02154
New Enterprise Associates................ 4,845,875(13) 11.0
1119 St. Paul Street
Baltimore, Maryland 21202
FW Ventures IV, L.P...................... 3,116,883 7.1
201 Main Street
Fort Worth, Texas 76102
Prism Venture Partners I, L.P............ 2,485,063 5.6
100 Lowder Brook Drive, Ste. 2500
Westwood, Massachusetts 02090
</TABLE>
------------
* Represents less than 1%
(1) Includes 1,265,625 shares owned by Khan Investments, L.P. Mr. Khan is
managing general partner of Khan Investments, L.P. Mr. Khan has sole voting
power and investment power with respect to all shares beneficially owned by
Khan Investments, L.P. Mr. Khan disclaims beneficial ownership of these
shares except to the extent of his pecuniary interest therein.
(2) Represents 5,834,833 shares of common stock owned by OneLiberty Fund III,
L.P. Mr. Kania is managing general partner of OneLiberty Partners III,
L.P., the general partner of OneLiberty Fund III, L.P. Mr. Kania shares
voting power and investment power with respect to all shares beneficially
owned by OneLiberty Fund III, L.P. Mr. Kania disclaims beneficial ownership
of these shares except to the extent of his pecuniary interest therein.
(3) Represents 5,834,833 shares of common stock owned by Charles River
Partnership VII, L.P. Mr. Zak is a general partner of Charles River
Partnership VII, L.P. Mr. Zak shares voting power and investment power with
respect to all shares beneficially owned by Charles River Partnership VII,
L.P. Mr. Zak disclaims beneficial ownership of these shares except to the
extent of his pecuniary interest therein.
(4) Represents 4,778,267 shares of common stock owned by New Enterprise
Associates VII, L.P. and 67,608 shares of common stock owned by NEA
Presidents' Fund, L.P. Mr. Marks is a general partner of New Enterprise
Associates VII, L.P. and NEA Presidents' Fund, L.P. Mr. Marks shares voting
power investment power with respect to all shares beneficially owned by New
Enterprise Associates VII, L.P. and NEA Presidents' Fund, L.P. Mr. Marks
disclaims beneficial ownership of these shares except to the extent of his
pecuniary interest therein.
(5) Includes 131,247 shares of common stock subject to stock options
exercisable by December 30, 2000.
(6) Includes 63,753 shares of common stock subject to stock options exercisable
by December 30, 2000.
(7) Includes 81,844 shares of common stock subject to stock options exercisable
by December 30, 2000.
(8) Represents 98,435 shares of common stock subject to stock options
exercisable by December 30, 2000.
(9) Represents 11,250 shares common stock subject to stock options exercisable
by December 30, 2000.
(10) Represents 5,625 shares common stock subject to stock options exercisable
by December 30, 2000.
(11) Does not include 3,116,883 shares of common stock owned by FW Ventures IV,
L.P. Mr. Brown is a vice president of FW Group GP, L.L.C., the general
partner of FW Ventures IV, L.P., but does not have voting power or
investment power with respect to any of the shares beneficially owned by FW
Ventures IV, L.P.
(12) Includes 485,903 shares of common stock subject to stock options
exercisable by December 30, 2000.
(13) Represents 4,778,267 shares of common stock owned by New Enterprise
Associates VII, L.P. and 67,608 shares of common stock owned by NEA
Presidents' Fund, L.P.
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<PAGE> 61
DESCRIPTION OF CAPITAL STOCK
Set forth below is a summary of the material provisions governing our
capital. This summary is not complete and should be read together with our
certificate of incorporation, a copy of which has been filed as an exhibit to
the registration statement of which this prospectus forms a part.
Upon completion of this offering, our authorized capital stock will consist
of 355,000,000 shares, par value $0.00001 per share, including 350,000,000
shares of common stock, and 5,000,000 shares of undesignated preferred stock
issuable in one or more series to be designated by our board of directors, of
which no shares will be issued and outstanding. Except as otherwise indicated,
the following information reflects the filing, as of the closing of this
offering, of our ninth restated certificate of incorporation and the adoption of
our amended and restated by-laws. The following description of our capital stock
does not purport to be complete and is subject to and is qualified in its
entirety by our amended and restated certificate of incorporation, our amended
and restated by-laws and by the provisions of Delaware law.
COMMON STOCK
The holders of shares of common stock are entitled to one vote per share on
all matters to be voted upon by the stockholders. Holders of common stock are
not entitled to vote cumulatively for the election of directors. Generally, all
matters to be voted on by stockholders must be approved by a majority, or, in
the case of election of directors, by a plurality, subject to any voting rights
granted to holders of any outstanding preferred stock.
Holders of common stock share ratably in any dividends declared by our
board of directors, subject to the preferential rights of any preferred stock
then outstanding. Dividends consisting of shares of common stock may be paid to
holders of shares of common stock. Upon our liquidation, dissolution or winding
up, all holders of common stock are entitled to share ratably in any assets
available for distribution to the holders of shares of common stock, subject to
the prior distribution rights of any outstanding preferred stock. No shares of
common stock are subject to redemption or have preemptive rights to purchase
additional shares of common stock.
PREFERRED STOCK
Our certificate of incorporation provides that shares of preferred stock
may be issued from time to time in one or more series. Our board of directors is
authorized to establish the voting rights, if any, and the designations, powers,
preferences, qualifications, limitations, restrictions and other rights
applicable to the shares of each series of preferred stock. Our board of
directors may, without stockholder approval, issue shares of preferred stock
with voting and other rights that could adversely affect the voting power and
other rights of the holders of the common stock and could have anti-takeover
effects. The ability of our board of directors to issue shares of preferred
stock without stockholder approval could have the effect of delaying, deferring
or preventing a change of control or the removal of our existing management. We
have no present plans to issue any shares of preferred stock.
REGISTRATION RIGHTS
Assuming the conversion of all outstanding preferred stock into common
stock upon completion of this offering, the holders of 41,719,502 shares of
common stock or shares of common stock issuable upon the exercise of warrants
will be entitled to registration rights with respect to their shares under the
Securities Act of 1933. These registration rights include:
- The holders of at least 25% of these securities then outstanding may
require, on two occasions beginning 180 days after the date of this
prospectus, that we use our best
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efforts to register these securities for public sale, provided that at
least 15% of these securities are included in the public offering or the
reasonably anticipated aggregate price for a lesser number of these
securities exceeds $10,000,000, subject to the ability of the
underwriters to limit the number of shares of common stock included in
the offering.
- If we register any shares of our common stock either for our own account
or for the account of other security holders, the holders of these
securities are entitled to include their shares of common stock in that
registration, subject to the ability of the underwriters to limit the
number of shares of common stock included in the offering.
- The holders of these securities may also require us, after the completion
of this offering, to use our best efforts to register all or any portion
of these securities on Form S-3 when use of that form becomes available
to us, provided, among other limitations, that the reasonably anticipated
aggregate proceeds exceed $1,000,000.
We are generally required to bear all of the expenses of registrations
other than underwriting discounts and commissions.
AMENDMENT OF OUR CERTIFICATE OF INCORPORATION
Any amendment to our certificate of incorporation must first be approved by
a majority of the members of the board of directors and thereafter approved by a
majority of the total votes eligible to be cast by holders of voting stock
voting together and a majority of the shares of voting stock entitled to vote as
a class with respect to the amendment, except that any amendments to the
provisions relating to our board of directors, the elimination of the right of
our stockholders to act by written consent, the limitation of liability of our
directors and the amendment procedures of our by-laws requires the approval of
two-thirds of the votes eligible to be cast by holders of voting stock.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
Statutory Business Combination Provision. Following the offering, we will
be subject to Section 203 of the Delaware General Corporation Law, which
prohibits a publicly held Delaware corporation from consummating a "business
combination" with an "interested stockholder" for a period of three years after
the date that person became an "interested stockholder" unless:
- before that person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the
business combination,
- upon the closing of the transaction that resulted in the interested
stockholder's becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding shares held
by directors who are also officers of the corporation and shares issuable
under employee stock plans, or
- following the transaction in which that person became an interested
stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of stockholders
by the affirmative vote of the holders of 66 2/3% of the outstanding
voting stock of the corporation not owned by the interested stockholder.
The term "interested stockholder" generally is defined as a person who,
together with affiliates and associates, owns, or, within the prior three years,
owned, 15% or more of a corporation's outstanding voting stock. The term
"business combination" includes mergers, asset sales and other similar
transactions resulting in a financial benefit to an interested stockholder.
Section 203 makes it more difficult for an "interested stockholder" to effect
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various business combinations with a corporation for a three-year period. A
Delaware corporation may "opt out" of Section 203 with an express provision in
its original certificate of incorporation or an express provision in its
certificate of incorporation or by-laws resulting from an amendment approved by
holders of at least a majority of the outstanding voting stock. Neither our
certificate of incorporation nor our by-laws contain any such exclusion.
Classified Board of Directors. Our board of directors is divided into
three classes serving staggered three-year terms, with approximately one-third
of the board being elected each year. Further, other provisions of our
certificate of incorporation authorize the board of directors to fill vacant
directorships or increase the size of the board to fill vacancies created by an
increase with its own nominees.
Charter and By-law Provisions. Our certificate of incorporation provides
that any action required or permitted to be taken by our stockholders at an
annual or special meeting of stockholders may only be taken if it is properly
brought before the meeting and may not be taken by written action in lieu of a
meeting. Our by-laws provide that a special meeting of stockholders may be
called only by our board of directors unless otherwise required by law. Our
by-laws provide that only those matters included in the notice of the special
meeting may be considered or acted upon at that special meeting unless otherwise
provided by law. In addition, our by-laws include advance notice and
informational requirements and time limitations on any director nomination or
any new proposal that a stockholder wishes to make at an annual meeting of
stockholders.
Ability to Adopt Stockholder Rights Plan. Our board of directors may issue
shares of preferred stock or rights to acquire shares of preferred stock to
implement a stockholder rights plan. A stockholder rights plan typically creates
voting or other impediments that would discourage persons seeking to gain
control of Sitara Networks by means of a merger, tender offer, proxy contest or
otherwise if our board of directors determines that a change in control is not
in the best interests of our stockholders. Our board of directors has no present
intention of adopting a stockholder rights plan and is not aware of any attempt
to obtain control of Sitara Networks.
TRADING ON THE NASDAQ NATIONAL MARKET SYSTEM
We have applied to have the common stock approved for quotation on the
Nasdaq National Market under the symbol "SITA."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock will be EquiServe.
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SHARES ELIGIBLE FOR FUTURE SALE
Future sales of shares of our common stock in the public market could
adversely affect prevailing market prices for our common stock. Since only a
limited number of shares of our common stock will be available for sale shortly
after this offering because of contractual and legal restrictions on resale, as
described below, sales of shares of our common stock in the public market after
these restrictions lapse could adversely affect the prevailing market price for
our common stock.
After this offering, [ ] shares of our common stock will be
outstanding, assuming the issuance and sale of an aggregate of [ ]
shares of our common stock in this offering. The number of shares outstanding
after this offering is based on the number of shares outstanding as of October
31, 2000, and assumes no exercise of outstanding options. The [ ]
shares sold in this offering will be freely tradable without restriction under
the Securities Act of 1933.
The remaining 44,141,324 shares of our common stock held by existing
stockholders are restricted shares and/or are subject to the contractual
restrictions described below. Restricted shares may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rules 144, 144(k) or 701 promulgated under the Securities Act of 1933, which are
summarized below. Of these restricted shares,
- [ ] shares which are not subject to the lock-up agreement
described below may be sold immediately after this offering,
- [ ] additional shares which are not subject to the lock-up
agreement described below may be sold beginning 90 days after this
offering,
- [ ] additional shares may be sold upon expiration of the 150-day
lock-up period described below, and
- [ ] additional shares may be sold upon expiration of the 210-day
lock-up period described below.
Each of our executive officers and directors, and substantially all of our
stockholders, who own in the aggregate [ ] shares of our common stock,
have entered into lock-up agreements generally providing that, without the prior
written consent of Deutsche Bank Securities Inc., they will not offer, sell,
pledge, contract to sell, grant any option to purchase, enter into any hedging
transaction or otherwise dispose of any shares of our common stock, any options
or warrants to purchase any shares of our common stock or other securities
convertible into or exercisable or exchangeable for shares of our common stock
owned by them, for a period of 150 days after the date of the final prospectus
relating to this offering with respect to 50% of such shares and for a period of
210 days after the date of the final prospectus relating to this offering with
respect to the remaining 50% of such shares. In addition, holders of
substantially all options and warrants to purchase shares of our common stock
have entered into lock-up agreements as described above. The lock-up agreements
do not apply to any shares of common stock purchased under the directed share
program which is being administered in connection with this offering or to
purchases in the open market after the date of the final prospectus relating to
this offering.
Deutsche Bank Securities Inc. may, in its sole discretion and at any time
without notice, release all or any portion of the shares of our common stock
subject to lock-up agreements. When determining whether or not to release shares
of our common stock from the lock-up agreements, Deutsche Bank Securities Inc.
will consider, among other factors, the stockholder's reasons for requesting the
release, the number of shares for which the release is being requested and
market conditions at the time. Following the expiration of the 150-day and 210-
day lock-up periods, additional shares of common stock will be available for
sale in the public market subject to compliance with Rule 144 or Rule 701.
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In general, under Rule 144 as currently in effect, an affiliate of Sitara
Networks or a person, or persons whose shares are aggregated, who has
beneficially owned restricted securities for at least one year, including the
holding period of any prior owner except an affiliate of Sitara Networks, would
be entitled to sell within any three month period a number of shares that does
not exceed the greater of 1% of our then outstanding shares of common stock or
the average weekly trading volume of our common stock on the Nasdaq National
Market during the four calendar weeks preceding the sale. Sales under Rule 144
are also subject to manner of sale provisions, notice requirements and the
availability of current public information about Sitara Networks. Any person, or
persons whose shares are aggregated, who is not deemed to have been an affiliate
of Sitara Networks at any time during the 90 days preceding a sale, and who has
beneficially owned shares for at least two years including any period of
ownership of preceding non-affiliated holders, will be entitled to sell shares
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from us by our employees,
directors, officers, consultants or advisors prior to the date we become subject
to the reporting requirements of the Securities Exchange Act of 1934. To be
eligible for resale under Rule 701, shares must have been issued in connection
with written compensatory benefit plans or written contracts relating to the
compensation of those persons. In addition, the Securities and Exchange
Commission has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of those options, including exercises after the date of this offering.
Securities issued in reliance on Rule 701 are restricted securities and, subject
to the contractual restrictions described above, beginning 90 days after the
date of this prospectus, may be sold by persons other than affiliates, subject
only to the manner of sale provisions of Rule 144, and by affiliates, under Rule
144 without compliance with its one-year minimum holding period.
As of October 31, 2000, we had reserved an aggregate of 9,200,000 shares of
our common stock for issuance pursuant to our stock incentive program, and
options to purchase approximately 6,304,216 shares were outstanding under this
program. As of October 31, 2000, we had also reserved an aggregate of 2,000,000
shares of our common stock for issuance under our stock purchase plan. As soon
as practicable following this offering, we intend to file registration
statements under the Securities Act of 1933 to register shares of our common
stock reserved for issuance under our stock incentive program and our stock
purchase plan. This registration statement will automatically become effective
immediately upon filing. Any shares issued upon the exercise of stock options or
following purchase under our stock purchase plan will be eligible for immediate
public sale, subject to the lock-up agreements noted above. See
"Management -- Amended and Restated 1996 Stock Incentive Program" and "-- 2000
Employee Stock Purchase Plan."
We have agreed that, without the prior written consent of Deutsche Bank
Securities Inc., we will not offer, sell, sell short or otherwise dispose of any
shares of our common stock or other securities convertible into or exchangeable
or exercisable for shares of our common stock or derivative of our common stock
for a period of 180 days after the date of the underwriting agreement to be
executed in connection with this offering, except that, without such consent we
may grant options and issue shares of our common stock pursuant to our stock
incentive program and our stock purchase plan, and we may issue shares of our
common stock in connection with an acquisition of the assets or the capital
stock of another company.
Following the offering, some of our stockholders will have rights to
require us to register their shares of common stock under the Securities Act of
1933, and they will have rights to participate in any future registration of
securities by us. See "Description of Capital Stock -- Registration Rights."
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UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives, Deutsche Bank
Securities Inc., Chase Securities Inc. and Thomas Weisel Partners LLC, have
severally agreed to purchase from us the following respective number of shares
of common stock at a public offering price less the underwriting discounts and
commissions set forth on the cover page of this prospectus:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Deutsche Bank Securities Inc. ..............................
Chase Securities Inc. ......................................
Thomas Weisel Partners LLC..................................
Total............................................. [ ]
=======
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters are subject to approval of certain conditions precedent and that
the underwriters will purchase all of the shares of the common stock offered by
this prospectus, other than those covered by the over-allotment option described
below, if any of these shares are purchased. The underwriting agreement provides
that, in the event of a default by an underwriter, in certain circumstances the
purchase commitments of non-defaulting underwriters may be increased or the
underwriting agreement may be terminated.
We have been advised by the representatives of the underwriters that the
underwriters propose to offer the shares of common stock to the public at the
public offering price set forth on the cover of this prospectus and to dealers
at a price that represents a concession not in excess of $[ ] per share
under the public offering price. The underwriters may allow, and these dealers
may re-allow, a concession of not more than $[ ] per share to other dealers.
After the initial public offering, representatives of the underwriters may
change the offering price and other selling terms.
We have granted to the underwriters an option, exercisable not later than
30 days after the date of the underwriting agreement, to purchase up to
[ ] additional shares of common stock at the public offering price less
the underwriting discounts and commissions set forth on the cover page of this
prospectus. The underwriters may exercise this option only to cover
over-allotments made in connection with the sale of the common stock offered by
this prospectus. To the extent that the underwriters exercise this option, each
of the underwriters will become obligated, subject to conditions, to purchase
approximately the same percentage of these additional shares of common stock as
the number of shares of common stock to be purchased by it in the above table
bears to the total number of shares of common stock offered by this prospectus.
We will be obligated, pursuant to the option, to sell these additional shares of
common stock to the underwriters to the extent the option is exercised. If any
additional shares of common stock are purchased, the underwriters will offer the
additional shares on the same terms as those on which the [ ] shares
are being offered.
The underwriting discounts and commissions per share are equal to the
public offering price per share of common stock less the amount paid by the
underwriters to us per share of common stock. The underwriting discounts and
commissions are [ ]% of the initial public offering price. We have agreed to
pay the underwriters the following discounts and
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commissions assuming either no exercise or full exercise by the underwriters of
the underwriters' over-allotment option:
<TABLE>
<CAPTION>
TOTAL FEES
---------------------------------------------
WITHOUT EXERCISE OF WITH FULL EXERCISE OF
FEE PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
------------- --------------------- ---------------------
<S> <C> <C> <C>
Discounts and commissions paid
by us....................... $ $ $
</TABLE>
In addition, we estimate that our share of the total expenses of this
offering, excluding underwriting discounts and commissions, will be
approximately $[ ].
We have agreed to indemnify the underwriters against some specified types
of liabilities, including liabilities under the Securities Act of 1933, and to
contribute to payments the underwriters may be required to make in respect to
any of these liabilities.
Each of our officers and directors, and substantially all of our
stockholders and holders of options and warrants to purchase shares of our
common stock, have agreed that, without the prior written consent of Deutsche
Bank Securities Inc., they will not offer, sell, pledge, contract to sell
(including any short sale), grant any option to purchase, enter into any hedging
transaction or otherwise dispose of any shares of our common stock or other
securities convertible into or exchangeable or exercisable for shares of our
common stock or derivatives of our common stock owned by these persons prior to
this offering or common stock issuable upon exercise of options or warrants held
by these persons for a period of 150 days, with respect to 50% of those
securities, and for a period of 210 days, with respect to the remaining 50% of
those securities after the date of the final prospectus relating to this
offering. Deutsche Bank Securities Inc. may, in its sole discretion and at any
time without notice, release all or any portion of the shares of our common
stock to this lock-up arrangement.
Notwithstanding this lock-up arrangement, these persons may transfer any
shares of common stock by gift, will or intestacy or to any trust for the direct
or indirect benefit of the person or an immediate family member of the person.
In addition, the lock-up arrangement does not apply to any shares of common
stock purchased under the directed share program which is being administered in
connection with this offering or to purchases in the open market after the date
of the final prospectus relating to this offering.
We have also entered into an agreement with the representatives of the
underwriters pursuant to which we have agreed that, without the prior written
consent of Deutsche Bank Securities Inc., we will not offer, sell, sell short or
otherwise dispose of any shares of our common stock or other securities
convertible into or exchangeable or exercisable for shares of our common stock
or derivative of our common stock for a period of 180 days after the date of the
underwriting agreement, except that, without such consent we may grant options
and issue shares pursuant to our stock incentive program and our stock purchase
plan, and we may issue shares of our common stock in connection with an
acquisition of the assets or the capital stock of another company.
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain, or otherwise affect the
market price of our common stock. Specifically, the underwriters may over-allot
shares of our common stock in connection with this offering, thus creating a
short sales position in our common stock for their own account. A short sales
position results when an underwriter sells more shares of common stock than that
underwriter is committed to purchase. A short sales position may involve either
"covered" short sales or "naked" short sales. Covered short sales are sales made
for an amount not
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greater than the underwriters' over-allotment option to purchase additional
shares in the offering described above. The underwriters may close out any
covered short position by either exercising their over-allotment option or
purchasing shares in the open market. In determining the source of shares to
close out the covered short position, the underwriters will consider, among
other things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. Naked short sales are sales in excess of the
over-allotment option. The underwriters will have to close out any naked short
position by positioning shares in the open market. A naked short position is
more likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the shares in the open market after pricing
that could adversely affect investors who purchase in the offering.
Accordingly, to cover these short sales positions or to stabilize the
market price of our common stock, the underwriters may bid for, and purchase,
shares of our common stock in the open market. These transactions may be
effected on the Nasdaq National Market or otherwise.
Additionally, the representatives, on behalf of the underwriters, may also
reclaim selling concessions allowed to any underwriter or dealer if the
underwriting syndicate repurchases shares distributed by that underwriter or
dealer. Similar to other purchase transactions, the underwriters' purchases to
cover the syndicate short sales or to stabilize the market price of our common
stock may have the effect of raising or maintaining the market price of our
common stock or preventing or mitigating a decline in the market price of our
common stock. As a result, the price of the shares of our common stock may be
higher than the price that might otherwise existing in the open market. The
underwriters are not required to engage in these activities and, if commenced,
may end any of these activities at any time.
At our request, the underwriters have reserved for sale at the initial
public offering price up to [ ] shares of our common stock, which is
10% of the shares of our common stock being sold in this offering, for our
employees, customers, vendors and other third parties. The number of shares of
our common stock available for the sale to the general public will be reduced to
the extent these reserved shares are purchased. Any reserved shares not
purchased by these persons will be offered by the underwriters to the general
public on the same basis and the other shares in this offering.
PRICING OF THIS OFFERING
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price of our common stock will
be determined by negotiation among us and the representatives of the
underwriters. Among the primary factors that will be considered in determining
the public offering price are:
- prevailing market conditions,
- our results of operations in recent periods,
- the present stage of our development,
- the market capitalizations and stages of development of other companies
that we and the representatives of the underwriters believe to be
comparable to our business, and
- estimates of our business potential.
In connection with the sale of our series E convertible redeemable
preferred stock, BT Alex. Brown, predecessor to Deutsche Banc Alex. Brown,
earned an advisory fee of $1,174,832 and was issued a warrant to purchase
442,009 shares of common stock at a purchase price of $2.57 per share. Any
shares issued upon exercise of the warrant will be entitled to registration
rights under our registration rights agreement. In addition, in August 1999, an
employee of Deutsche Banc Alex. Brown purchased 2,600 shares of our series E
convertible redeemable
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preferred stock and ABS Employees' Venture Fund Limited Partnership purchased
148,874 shares of our series E convertible redeemable preferred stock on the
same basis as the other investors in such financing. Deutsche Banc Alex. Brown
and ABS Employees' Venture Fund Limited Partnership are associated with Deutsche
Bank Securities Inc., one of the underwriters in this offering.
In connection with the sale of our series G convertible redeemable
preferred stock, Deutsche Banc Alex. Brown earned an advisory fee of $250,000
and was issued a warrant to purchase 38,402 shares of common stock at a purchase
price of $6.51 per share. Any shares issued upon exercise of the warrant will be
entitled to registration rights under our registration rights agreement. In
addition, in June 2000, BT Investment Partners, which is associated with
Deutsche Bank Securities Inc., purchased 307,220 shares of our series G
convertible redeemable preferred stock on the same basis as the other investors
in such financing. Further, in June 2000, Tailwind Capital Partners 2000 L.P.
and TWP Sitara Networks Investors purchased an aggregate of 138,249 shares of
our series G convertible redeemable preferred stock on the same basis as the
other investors in the financing. Tailwind Capital Partners 2000 LP and TWP
Sitara Networks Investors are each associated with Thomas Weisel Partners LLC,
one of the underwriters in this offering.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by McDermott, Will & Emery, Boston, Massachusetts. Arthur I.
Anderson, the president of a professional corporation that is a partner in the
firm of McDermott, Will & Emery, serves as our corporate secretary and as of
October 31, 2000 beneficially owned shares of our preferred stock convertible
into 235,714 shares of common stock. Various legal matters related to the sale
of the common stock offered hereby will be passed upon for the underwriters by
Hale and Dorr LLP, Boston, Massachusetts.
EXPERTS
The financial statements as of December 31, 1998 and 1999 and September 30,
2000 and for the three years ended December 31, 1999 and the nine months ended
September 30, 2000, included in this prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The statements in this prospectus in the third sentence under the caption
"Risk Factors -- We may be unable to protect and enforce our intellectual
property rights from infringement" and in the third sentence under the caption
"Business -- Intellectual Property" have been reviewed by Fish & Richardson,
P.C., our patent counsel, as experts on such matters, and based upon that
review, those statements are included in this prospectus.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act and the rules and regulations
thereunder, for the registration of the common stock offered hereby. This
prospectus, which forms a part of the registration statement, does not contain
all the information included in the registration statement, parts of which have
been omitted as permitted by the Securities and Exchange Commission rules and
regulations. For further information about us and our common stock, you should
refer to the registration statement. Statements contained in this prospectus as
to any contract or other document are not necessarily complete. Where the
contract or other document is an exhibit to the registration statement, each
statement is qualified by the provisions of that exhibit.
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The registration statement can be inspected and copied at the public
reference facility maintained by the Securities and Exchange Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Securities and
Exchange Commission's regional offices at Seven World Trade Center, 13th Floor,
New York, New York 10048 and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any portion of the
registration statement can be obtained from the Public Reference Section of the
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, the registration statement is publicly
available through the Securities and Exchange Commission's Web site, located at
http://www.sec.gov.
We will also file annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange Commission. You can also
request copies of these documents, for a copying fee, by writing to the
Securities and Exchange Commission.
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SITARA NETWORKS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets as of December 31, 1998 and 1999 and
September 30, 2000........................................ F-3
Statements of Operations for the years ended December 31,
1997, 1998 and 1999 and for the nine months ended
September 30, 1999 (unaudited) and 2000................... F-4
Statements of Stockholders' Deficit for the years ended
December 31, 1997, 1998 and 1999 and for the nine months
ended September 30, 2000.................................. F-5
Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999 and for the nine months ended
September 30, 1999 (unaudited) and 2000................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 72
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Sitara Networks, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' deficit and cash
flows present fairly, in all material respects, the consolidated financial
position of Sitara Networks, Inc. and its subsidiaries ("Sitara Networks") at
December 31, 1998 and 1999 and September 30, 2000, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999 and the nine months ended September 30, 2000, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of Sitara Networks'
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 15, 2000
F-2
<PAGE> 73
SITARA NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
--------------------------- SEPTEMBER 30, SEPTEMBER 30,
1998 1999 2000 2000
------------ ------------ ------------- -------------
(NOTE B)
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 5,705,104 $ 17,354,497 $ 18,054,579 $ 18,054,579
Accounts receivable, net of allowance for doubtful accounts
of $50,000 at September 30, 2000 actual and pro forma
(unaudited).............................................. -- -- 991,383 991,383
Inventory.................................................. -- -- 346,959 346,959
Prepaid and other current assets........................... 89,999 129,870 1,445,775 1,445,775
------------ ------------ ------------ ------------
Total current assets..................................... 5,795,103 17,484,367 20,838,696 20,838,696
Restricted cash............................................. -- -- 433,641 433,641
Other assets................................................ 75,101 107,543 169,868 169,868
Property and equipment, net................................. 1,088,068 1,068,927 2,416,036 2,416,036
Licensed technology, net.................................... 2,833,333 833,329 -- --
------------ ------------ ------------ ------------
Total assets............................................. $ 9,791,605 $ 19,494,166 $ 23,858,241 $ 23,858,241
------------ ------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................... $ 379,343 $ 526,789 $ 2,363,585 2,363,585
Accrued expenses........................................... 325,230 662,929 1,794,356 1,794,356
Current portion of capital lease obligations............... 373,598 528,890 694,407 694,407
------------ ------------ ------------ ------------
Total current liabilities................................ 1,078,171 1,718,608 4,852,348 4,852,348
Long-term portion of capital lease obligations.............. 687,084 539,002 1,132,596 1,132,596
Commitments and contingencies (Note G)
Convertible redeemable preferred stock, $.00001 par value;
26,800,000 shares authorized:
Series A: 6,500,000 shares designated; 6,470,589 shares
issued and outstanding at December 31, 1998 and 1999 and
September 30, 2000 actual (liquidation value $7,592,637
at September 30, 2000) and none pro forma at September
30, 2000 (unaudited)..................................... 6,615,302 7,166,308 7,579,562 --
Series B: 5,000,000 shares designated, issued and
outstanding at December 31, 1998 and 1999 and September
30, 2000 actual (liquidation value $8,835,753 at
September 30, 2000) and none pro forma at September 30,
2000 (unaudited)......................................... 7,772,591 8,373,584 8,824,329 --
Series C: 1,350,000 shares designated; 1,312,336 shares
issued and outstanding at December 31, 1998 and 1999 and
September 30, 2000 actual (liquidation value $6,090,722
at September 30, 2000) and none pro forma at September
30, 2000 (unaudited)..................................... 5,273,726 5,734,151 6,079,469 --
Series D: 800,000 shares designated; 787,402 shares issued
and outstanding at December 31, 1998 and 1999 and
September 30, 2000 actual (liquidation value $3,493,610
at September 30, 2000) and none pro forma at September
30, 2000 (unaudited)..................................... 2,993,328 3,270,593 3,478,542 --
Series E: 6,500,000 shares designated; 5,722,903 shares
issued and outstanding at December 31, 1999 and September
30, 2000 actual (liquidation value $24,492,206 at
September 30, 2000) and none pro forma at September 30,
2000 (unaudited)......................................... -- 20,921,558 22,620,222 --
Series F: 2,000,000 shares designated; 1,130,000 shares
issued and outstanding at September 30, 2000 actual
(liquidation value $5,999,688 at September 30, 2000) and
none pro forma at September 30, 2000 (unaudited)......... -- -- 5,989,528 --
Series G: 4,650,000 shares designated; 2,868,661 shares
issued and outstanding at September 30, 2000 actual
(liquidation value $19,103,155 at September 30, 2000) and
none pro forma at September 30, 2000 (unaudited)......... -- -- 18,629,758 --
------------ ------------ ------------ ------------
Total convertible redeemable preferred stock............. 22,654,947 45,466,194 73,201,410 --
------------ ------------ ------------ ------------
Stockholders' equity (deficit):
Preferred stock, $.00001 par value; no shares authorized,
issued and outstanding actual, 5,000,000 shares
authorized pro forma, none issued and outstanding pro
forma at September 30, 2000 (unaudited).................. -- -- -- --
Common stock, $.00001 par value; 70,000,000 shares
authorized actual and 350,000,000 shares authorized pro
forma; 8,774,658, 9,128,154 and 9,737,751 issued and
outstanding at December 31, 1998 and 1999 and September
30, 2000 actual, respectively; and 43,241,246 issued and
outstanding pro forma at September 30, 2000
(unaudited).............................................. 88 91 97 432
Additional paid-in capital................................. 315,319 3,154,792 10,389,267 74,840,758
Deferred compensation...................................... (217,330) (1,455,127) (6,687,217) (6,687,217)
Cumulative dividends on convertible redeemable preferred
stock.................................................... (2,214,132) (5,038,640) (8,749,584) --
Accumulated deficit........................................ (12,512,542) (24,890,754) (50,280,676) (50,280,676)
------------ ------------ ------------ ------------
Total stockholders' equity (deficit)..................... (14,628,597) (28,229,638) (55,328,113) 17,873,297
------------ ------------ ------------ ------------
Total liabilities and stockholders' equity (deficit)..... $ 9,791,605 $ 19,494,166 $ 23,858,241 $ 23,858,241
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 74
SITARA NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue............................... $ 175,000 $ 2,352,944
Cost of revenue (excluding stock-
based compensation of $0, $0, $0, $0
and $99,957, respectively).......... 104,354 1,639,360
----------- ------------
Gross margin........................ 70,646 713,584
Operating expenses:
Selling and marketing (excluding
stock-based compensation of $0,
$0, $440,636, $96,124 and
$448,391, respectively)........... $ 1,516,799 3,784,666 $ 3,588,249 $ 2,603,037 14,962,586
General and administrative
(excluding stock-based
compensation of $164, $0, $263, $0
and $44,024, respectively)........ 988,759 1,413,343 1,485,271 1,073,558 1,880,956
Research and development (excluding
stock-based compensation of
$37,128, $40,000, $344,556,
$64,517 and $1,259,519,
respectively)..................... 2,058,381 2,959,063 6,830,762 4,342,791 8,125,037
Stock-based compensation............ 37,292 40,000 785,455 160,641 1,851,891
----------- ----------- ------------ ----------- ------------
Total operating expenses.......... 4,601,231 8,197,072 12,689,737 8,180,027 26,820,470
----------- ----------- ------------ ----------- ------------
Loss from operations.................. (4,601,231) (8,126,426) (12,689,737) (8,180,027) (26,106,886)
Interest income....................... 244,537 373,297 439,682 211,519 787,037
Interest expense...................... -- (78,939) (128,157) (83,477) (70,073)
----------- ----------- ------------ ----------- ------------
Net loss.............................. (4,356,694) (7,832,068) (12,378,212) (8,051,985) (25,389,922)
----------- ----------- ------------ ----------- ------------
Accrued dividends for preferred
stockholders........................ (735,753) (1,448,242) (2,824,508) (1,751,333) (3,710,944)
Accretion of preferred stock to
redemption value.................... (1,254) (2,645) (104,353) (63,329) (203,325)
----------- ----------- ------------ ----------- ------------
Net loss attributable to common
stockholders........................ $(5,093,701) $(9,282,955) $(15,307,073) $(9,866,647) $(29,304,191)
=========== =========== ============ =========== ============
Basic and diluted net loss per
share............................... $ (1.26) $ (1.60) $ (2.09) $ (1.41) $ (3.36)
Shares used in computing basic and
diluted net loss per share.......... 4,034,775 5,790,278 7,306,675 7,006,393 8,711,113
Unaudited pro forma basic and diluted
net loss per share.................. $ (0.39) $ (0.66)
Shares used in computing unaudited pro
forma basic and diluted net loss per
share............................... 31,619,991 38,759,163
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 75
SITARA NETWORKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL DIVIDENDS ON TOTAL
------------------ PAID-IN DEFERRED PREFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION STOCK DEFICIT DEFICIT
--------- ------ ----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996........ 6,750,000 $67 $ 23 $ (30,137) $ (323,780) $ (353,827)
Issuance of common stock.......... 1,473,693 15 2,844 2,859
Deferred compensation related to
stock issuances.................. 59,569 $ (59,569) --
Amortization of deferred
compensation..................... 37,292 37,292
Accrued dividends for preferred
stockholders..................... (735,753) (735,753)
Accretion of preferred stock to
redemption value................. (1,254) (1,254)
Net loss.......................... (4,356,694) (4,356,694)
--------- --- ----------- ----------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 1997........ 8,223,693 82 61,182 (22,277) (765,890) (4,680,474) (5,407,377)
Issuance of common stock.......... 550,965 6 14,641 14,647
Deferred compensation related to
stock options.................... 235,053 (235,053) --
Issuance of warrants for services
rendered......................... 7,088 7,088
Amortization of deferred
compensation..................... 40,000 40,000
Accrued dividends for preferred
stockholders..................... (1,448,242) (1,448,242)
Accretion of preferred stock to
redemption value................. (2,645) (2,645)
Net loss.......................... (7,832,068) (7,832,068)
--------- --- ----------- ----------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 1998........ 8,774,658 88 315,319 (217,330) (2,214,132) (12,512,542) (14,628,597)
Issuance of common stock.......... 258,349 2 278,770 278,772
Issuance of common stock for
services rendered................ 95,147 1 245,400 245,401
Issuance of stock options and
warrants for services rendered... 76,799 76,799
Issuance of warrants for common
stock related to Series E
Convertible Redeemable Preferred
Stock............................ 877,242 877,242
Deferred compensation related to
stock options.................... 1,626,325 (1,626,325) --
Amortization of deferred
compensation..................... 227,818 227,818
Stock options canceled............ (160,710) 160,710 --
Accretion of preferred stock to
redemption value................. (104,353) (104,353)
Accrued dividends for preferred
stockholders..................... (2,824,508) (2,824,508)
Net loss.......................... (12,378,212) (12,378,212)
--------- --- ----------- ----------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 1999........ 9,128,154 91 3,154,792 (1,455,127) (5,038,640) (24,890,754) (28,229,638)
Issuance of common stock.......... 433,750 4 160,231 160,235
Issuance of common stock for
services rendered................ 175,847 2 894,508 894,510
Issuance of warrants for common
stock related to Series G
Convertible Redeemable Preferred
Stock............................ 193,590 193,590
Deferred compensation related to
stock options.................... 6,472,352 (6,472,352) --
Amortization of deferred
compensation..................... 957,381 957,381
Stock options canceled............ (282,881) 282,881 --
Accretion of preferred stock to
redemption value................. (203,325) (203,325)
Accrued dividends for preferred
stockholders..................... (3,710,944) (3,710,944)
Net loss.......................... (25,389,922) (25,389,922)
--------- --- ----------- ----------- ----------- ------------ ------------
BALANCE, SEPTEMBER 30, 2000....... 9,737,751 $97 $10,389,267 $(6,687,217) $(8,749,584) $(50,280,676) $(55,328,113)
========= === =========== =========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 76
SITARA NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------------ ---------------------------
1997 1998 1999 1999 2000
----------- ----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss........................... $(4,356,694) $(7,832,068) $(12,378,212) $(8,051,985) $(25,389,922)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization.... 74,011 508,744 2,475,554 1,817,120 1,289,887
Stock-based compensation......... 37,292 40,000 785,455 160,641 1,851,891
Warrants issued for services..... -- 7,088 29,800 -- --
Provision for doubtful
accounts....................... -- -- -- -- 50,000
Changes in operating assets and
liabilities:
Accounts receivable............ -- -- -- -- (1,041,383)
Inventory...................... -- -- -- -- (346,959)
Prepaid and other current
assets....................... (33,762) (50,489) (39,871) (70,642) (1,315,905)
Other assets................... (62,584) (11,517) (32,442) (1,396) (62,325)
Accounts payable............... 376,067 (72,300) 147,446 88,283 1,836,796
Accrued expenses............... 86,122 239,108 337,699 (56,823) 1,131,427
----------- ----------- ------------ ----------- ------------
Net cash used by operating
activities......................... (3,879,548) (7,171,434) (8,674,571) (6,114,802) (21,996,493)
----------- ----------- ------------ ----------- ------------
Investing activities:
Purchase of property and
equipment........................ (1,033,280) (480,785) (456,409) (267,523) (1,494,150)
Proceeds from sale of property and
equipment........................ 53,003 -- -- -- --
Proceeds from sale and leaseback
transactions..................... 699,903 539,027 389,132 261,089 827,221
Increase in restricted cash........ -- -- -- -- (433,641)
----------- ----------- ------------ ----------- ------------
Net cash provided by (used in)
investing activities............... (280,374) 58,242 (67,277) (6,434) (1,100,570)
----------- ----------- ------------ ----------- ------------
Financing activities:
Proceeds from issuance of
convertible redeemable preferred
stock, net of issuance costs..... 6,985,597 4,986,164 20,759,628 20,759,628 24,014,537
Proceeds from issuance of common
stock............................ 2,859 14,647 13,535 6,794 160,235
Repayment of capital lease
obligations...................... -- (178,248) (381,922) (308,799) (377,627)
----------- ----------- ------------ ----------- ------------
Net cash provided by financing
activities......................... 6,988,456 4,822,563 20,391,241 20,457,623 23,797,145
----------- ----------- ------------ ----------- ------------
Net increase (decrease) in cash and
cash equivalents................... 2,828,534 (2,290,629) 11,649,393 14,336,387 700,082
----------- ----------- ------------ ----------- ------------
Cash and cash equivalents at
beginning of period................ 5,167,199 7,995,733 5,705,104 5,705,104 17,354,497
----------- ----------- ------------ ----------- ------------
Cash and cash equivalents at end of
period............................. $ 7,995,733 $ 5,705,104 $ 17,354,497 $20,041,491 $ 18,054,579
=========== =========== ============ =========== ============
Supplemental disclosures of cash
flows:
Cash paid during the year for:
Interest......................... $ -- $ 58,918 $ 98,357 $ 83,477 $ 70,072
=========== =========== ============ =========== ============
Noncash investing and financing
activities:
Issuance of Series D convertible
redeemable preferred stock in
payment for licensed
technology..................... $ -- $ 3,000,000 $ -- $ -- --
Capital leases................... $ 699,903 $ 539,027 $ 389,132 $ 261,089 $ 1,136,738
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 77
SITARA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. NATURE OF BUSINESS
Sitara Networks, Inc. ("Sitara Networks") designs, develops and markets a
suite of quality-of-service (QoS) networking products for enterprises and
communications service providers. Sitara Networks began shipping its current
product in February 2000. In 1998, Sitara Networks generated revenue from a
predecessor software product. Sitara Networks, formerly K-2 Net, Inc., was
incorporated in the State of Delaware on July 19, 1996.
Prior to the first quarter of 2000, the Company operated as a development
stage enterprise, devoting substantially all of its efforts to establishing the
new business and carrying on research and development activities. Beginning with
the three months ended March 31, 2000, the Company is no longer classified as a
development stage enterprise.
Sitara Networks is subject to risks common to companies in its industry
including, but not limited to, technological innovation, dependence on key
personnel, protection of proprietary technology, compliance with government
regulations, uncertainty of market acceptance of products, product liability and
the need to obtain financing.
Sitara Networks has also experienced substantial net losses since its
inception and, as of September 30, 2000, had an accumulated deficit of
$50,280,676. Such losses and accumulated deficit resulted from Sitara Networks'
lack of substantial revenue and significantly increased costs incurred in the
development of Sitara Networks' products and services and in the preliminary
establishment of Sitara Networks' infrastructure. Sitara Networks expects to
continue to experience significant growth in its operating expenses in order to
execute its current business plan, particularly product development and sales
and marketing expenses. As a result, Sitara Networks' business plan indicates
that additional financing would be required to support its planned expenditures
and growth. In the event that such future financing is not obtained on a timely
basis, Sitara Networks would reassess its current business plan and
significantly reduce planned operating expenditures accordingly in order to
maintain ongoing operations.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Sitara
Networks and its wholly-owned subsidiaries. All intercompany transactions and
balances have been eliminated.
Cash and Cash Equivalents
Sitara Networks considers investments in money market type mutual funds and
investments with maturities of 90 days or less at the time of acquisition to be
cash equivalents.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation.
Expenditures for repairs and maintenance are charged to expense as incurred.
When assets are retired or disposed of, the assets and related accumulated
depreciation are eliminated from accounts and any resulting gain or loss is
reflected in income. For financial reporting purposes, depreciation is
F-7
<PAGE> 78
SITARA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
calculated using the straight-line method over the estimated useful lives of the
assets, which are as follows:
<TABLE>
<S> <C>
Computer equipment and purchased software 3 years
Office equipment 5 years
Leasehold improvements and Shorter of the life of the
equipment under capital lease lease or the estimated
useful life
</TABLE>
Research and Development Costs
Costs related to research, design and development of computer hardware and
software are charged to expense when incurred. Software development costs
incurred subsequent to the establishment of technological feasibility, which
would be eligible for capitalization, have been insignificant.
Income Taxes
Sitara Networks accounts for income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are recognized
for the estimated future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted rates in effect for the year in which those temporary differences
are expected to be recovered or settled. A deferred tax asset is established for
the expected future benefit of net operating loss and credit carryforwards. A
valuation reserve against net deferred tax assets is required if, based upon
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized.
Risks and Uncertainties
Financial instruments which potentially subject Sitara Networks to
concentrations of credit risk consist principally of money market funds. Sitara
Networks invests its cash and cash equivalents primarily in deposits and money
market funds with financial institutions management believes have high credit
standings.
A potential exposure to Sitara Networks is a concentration of credit risk
in trade accounts receivable. To minimize this risk, ongoing credit evaluations
of customers' financial condition are performed, although collateral generally
is not required. As of September 30, 2000, one customer accounted for 10% of
accounts receivable and another customer accounted for 11% of total revenue for
the nine months ended September 30, 2000.
Sitara Networks contracts for the manufacture and testing of its products
with a single independent contract manufacturer. The contract manufacturer has
the right to terminate the relationship with 90 days notice.
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 contingent
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
F-8
<PAGE> 79
SITARA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Advertising Expense
Sitara Networks expenses advertising costs as they are incurred. During the
years ended December 31, 1997, 1998 and 1999, and the nine months ended
September 30, 2000, advertising expense totaled $11,333, $13,747, $0 and
$2,420,821, respectively. At September 30, 2000, prepaid expenses included
$316,817 of advertising costs relating to future advertisements.
Certain customers participate in various cooperative marketing programs.
Sitara Networks accrues for its obligations under cooperative marketing programs
at the time of sale, which is included in selling and marketing expense.
Net Loss per Share and Pro Forma Net Loss per Share
Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding. Net loss used in the calculation is
increased by the accrued dividends and accretion to redemption value for the
preferred stock outstanding in each period. Diluted net loss per share does not
differ from basic net loss per share since potential common shares from
conversion of preferred stock, stock options, unvested shares of restricted
stock and warrants are antidilutive for all periods presented and are therefore
excluded from the calculation. Potential common shares omitted from the
calculation of basic and diluted net loss per share are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------ -------------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Stock options........... 1,575,027 2,978,250 2,695,435 3,054,134 5,538,714
Warrants for common
stock................. 441,177 97,382 553,027 539,391 591,429
Unvested shares of
restricted stock...... 2,929,053 1,952,702 976,352 1,220,439 244,088
Convertible redeemable
preferred stock....... 17,205,879 20,355,484 28,939,834 28,939,834 33,503,495
---------- ---------- ---------- ---------- ----------
22,151,136 25,383,818 33,164,648 33,753,798 39,877,726
========== ========== ========== ========== ==========
</TABLE>
Pro forma basic and diluted net loss per share is calculated assuming the
conversion of all outstanding shares of preferred stock into common stock, as if
the shares had converted immediately upon their issuance. Therefore, accrued
dividends and accretion to redemption value are excluded from the calculation of
pro forma basic and diluted net loss per share.
Revenue Recognition
Sitara Networks sells products directly to customers and indirectly through
resellers. Sitara Networks also sells service and maintenance contracts which
include technical support and software upgrades. Sitara Networks recognizes
product revenue when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed and determinable, and collectibility is probable.
Revenue from service and maintenance contracts is deferred and recognized
ratably over the period of the obligation. Sitara Networks makes certain sales
to partners in distribution channels. These partners are generally given
privileges to return a limited portion of inventory and provided that all other
revenue recognition criteria have been met, Sitara Networks
F-9
<PAGE> 80
SITARA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recognizes revenue from distributors when the right of return expires. Sitara
Networks accrues for estimated warranty costs upon shipment.
Inventory
Inventory is stated at the lower of cost or net realizable value with cost
being determined using the first-in, first-out (FIFO) method. Cost includes the
costs of parts, labor and an allocation of fixed overhead.
Long-Lived Assets
Sitara Networks evaluates the net realizable value of licensed technology
and other long-lived assets on an ongoing basis, relying on a number of factors
including operating results, business plans, budgets and economic projections.
In addition, Sitara Networks' evaluation considers nonfinancial data such as
market trends, product development cycles, and changes in management's market
emphasis.
Sitara Networks assesses the potential impairment of such long-lived assets
by comparing the expected future operating cash flows of assets in relation to
its carrying value. If the carrying value is greater than the undiscounted cash
flows of the assets, then the carrying value is reduced to the net present value
of the future cash flows. There have been no impairments to date.
Foreign Currencies
The functional currency for all of the locations in which Sitara Networks
has a foreign operation is the United States dollar.
Foreign currency transaction gains and losses are reported according to the
exchange rates prevailing on the transaction date and are included in the
consolidated statements of operations.
Unaudited Pro Forma Balance Sheet
Under the terms of Sitara Networks' convertible redeemable preferred stock
(Note H), all outstanding shares of convertible redeemable preferred stock will
be converted automatically into shares of common stock upon the closing of an
initial public offering of common stock or upon the vote of the holders of 80%
of the outstanding shares of convertible redeemable preferred stock. The
unaudited pro forma balance sheet reflects the conversion of all outstanding
Series A, B, C, D, E, F, and G convertible redeemable preferred stock into
33,503,495 shares of common stock.
Comprehensive Income
Comprehensive income is the same as net income for all periods presented.
Recent Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 138. The standard, as amended, established accounting and
reporting standards requiring the recognition of all derivative instruments as
either assets or liabilities in the statement of financial position and the
measure of those instruments at fair value. In June 1999, the FASB issued SFAS
No. 137, which defers the effective date of SFAS No. 133 to fiscal years
beginning after
F-10
<PAGE> 81
SITARA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
June 15, 2000. Because Sitara Networks does not currently hold any derivative
instruments and does not currently engage in hedging activities, the adoption of
SFAS No. 133 is not expected to have a material impact on Sitara Networks'
financial position or operating results.
C. INVENTORY
Inventory consists of finished goods of $265,525 and service inventory of
$81,434 at September 30, 2000. Finished goods inventory includes $151,909 of
product at distributors on which Sitara Networks has deferred revenue due to a
contractual return right. There was no inventory balance at December 31, 1998 or
1999.
D. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1998 1999 2000
---------- ---------- -------------
<S> <C> <C> <C>
Computer equipment and purchased
software............................. $ 233,190 $ 306,650 $ 825,960
Office equipment....................... 13,188 5,652 14,671
Leasehold improvements................. 20,986 22,356 38,600
Equipment under capital lease.......... 1,239,036 1,628,151 2,764,889
---------- ---------- ----------
Total property and equipment...... 1,506,400 1,962,809 3,644,120
Less accumulated depreciation and
amortization......................... 418,332 893,882 1,228,084
---------- ---------- ----------
Property and equipment, net............ $1,088,068 $1,068,927 $2,416,036
========== ========== ==========
</TABLE>
Depreciation expense was $22,511, $23,953, $117,422 and $31,237 for the
years ended December 31, 1997, 1998 and 1999, and for the nine months ended
September 30, 2000, respectively.
Amortization expense on the equipment under capital lease was $51,500,
$318,124, $358,128 and $425,321 for the years ended December 31, 1997, 1998 and
1999, and for the nine months ended September 30, 2000, respectively.
E. ACCRUED EXPENSES
Accrued expenses consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1998 1999 2000
-------- -------- -------------
<S> <C> <C> <C>
Bonuses and other incentives............... $120,022 $209,178 $ 325,473
Vacation................................... 81,723 118,171 292,975
Professional services...................... 13,991 118,504 183,600
Marketing.................................. 85,900 104,525 295,758
Payroll.................................... -- -- 212,586
Travel and entertainment................... -- -- 257,068
Other...................................... 23,594 112,551 226,896
-------- -------- ----------
Total...................................... $325,230 $662,929 $1,794,356
======== ======== ==========
</TABLE>
F-11
<PAGE> 82
SITARA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
F. LICENSED TECHNOLOGY
During 1998, Sitara Networks acquired a license for certain technology in
exchange for 787,402 shares of Series D convertible redeemable preferred stock.
The license was recorded at $3,000,000, the estimated fair value of the stock
issued. Sitara Networks purchased the licensed technology for use in research
and development efforts. The technology was amortized over its estimated useful
life of eighteen months. Amortization expense related to licensed technology was
$166,667, $2,000,004 and $833,329 for the years ended December 31, 1998 and
1999, and for the nine months ended September 30, 2000, respectively.
G. COMMITMENTS AND CONTINGENCIES
Lease Obligations
Sitara Networks leases office facilities and equipment under operating and
capital leases. The facilities lease includes tax and operating expense
escalation clauses. In March 2000, Sitara Networks entered into a new three-year
operating lease commencing June 2000 for increased office space in Waltham,
Massachusetts. Rent is secured by a $433,641 letter of credit. In connection
with this arrangement, Sitara Networks invested in a certificate of deposit
pledged to a commercial bank. This certificate of deposit was classified as
"restricted cash" as of September 30, 2000 on the balance sheet. Rent expense
under operating leases was $149,610, $293,323, $447,471 and $605,278 for the
years ended December 31, 1997, 1998, and 1999 and for the nine months ended
September 30, 2000, respectively.
Future annual payments under capital and operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ----------
<S> <C> <C>
2000........................................... $ 201,433 $ 230,409
2001........................................... 821,270 969,242
2002........................................... 620,458 886,297
2003........................................... 416,399 515,418
2004........................................... 33,799 --
---------- ----------
2,093,359 $2,601,366
---------- ==========
Less: interest................................. 266,356
Less: current portion.......................... 694,407
----------
$1,132,596
==========
</TABLE>
Pursuant to the capitalized lease obligation agreements, Sitara Networks
granted warrants to purchase 66,177, 14,062 and 13,636 shares of common stock at
exercise prices of $.57, $1.87 and $2.57 per share in 1997, 1998 and 1999,
respectively. The warrants are immediately exercisable and have seven-year
terms. The estimated fair value of each warrant at the time of issuance using
the Black-Scholes model, was estimated to be $3,563 and $29,800 in 1998 and
1999, respectively. The fair value of the warrant issued in 1997 was not
material. The Black-Scholes calculations were based on the following
assumptions: 0% dividend yield, 100% expected volatility, 5.61% - 6.64%
risk-free interest rates, and seven-year expected lives. The fair value of each
warrant was immediately expensed as interest. No warrants were granted related
to lease obligations in 2000.
F-12
<PAGE> 83
SITARA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
H. CONVERTIBLE REDEEMABLE PREFERRED STOCK
The following is a summary of Convertible Redeemable Preferred Stock
activity:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D SERIES E SERIES F SERIES G
STOCK STOCK STOCK STOCK STOCK STOCK STOCK TOTAL
---------- ---------- ---------- ---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of 6,470,589
shares of Series A
stock................. $5,483,153 $ 5,483,153
Accrued dividends for
preferred
stockholders.......... 30,137 30,137
---------- -----------
BALANCE AT DECEMBER 31,
1996.................. 5,513,290 5,513,290
Issuance of 5,000,000
shares of Series B
stock................. $6,985,597 6,985,597
Accretion to redemption
value................. 1,006 248 1,254
Accrued dividends for
preferred
stockholders.......... 550,000 185,753 735,753
---------- ---------- -----------
BALANCE AT DECEMBER 31,
1997.................. 6,064,296 7,171,598 13,235,894
Issuance of 1,312,336
shares of Series C
stock................. $4,986,164 4,986,164
Issuance of 787,402
shares of Series D
stock................. $2,982,002 2,982,002
Accretion to redemption
value................. 1,006 993 646 2,645
Accrued dividends for
preferred
stockholders.......... 550,000 600,000 286,916 11,326 1,448,242
---------- ---------- ---------- ---------- -----------
BALANCE AT DECEMBER 31,
1998.................. 6,615,302 7,772,591 5,273,726 2,993,328 22,654,947
Issuance of 5,722,903
shares of Series E
stock................. $19,882,386 19,882,386
Accretion to redemption
value................. 1,006 993 1,107 1,674 99,573 104,353
Accrued dividends for
preferred
stockholders.......... 550,000 600,000 459,318 275,591 939,599 2,824,508
---------- ---------- ---------- ---------- ----------- -----------
BALANCE AT DECEMBER 31,
1999.................. 7,166,308 8,373,584 5,734,151 3,270,593 20,921,558 45,466,194
Issuance of 1,130,000
shares of Series F
stock................. $5,639,058 5,639,058
Issuance of 2,868,661
shares of Series G
stock................. $18,181,889 18,181,889
Accretion to redemption
value................. 754 745 830 1,256 179,233 782 19,725 203,325
Accrued dividends for
preferred
stockholders.......... 412,500 450,000 344,488 206,693 1,519,431 349,688 428,144 3,710,944
---------- ---------- ---------- ---------- ----------- ---------- ----------- -----------
BALANCE AT SEPTEMBER
30, 2000.............. $7,579,562 $8,824,329 $6,079,469 $3,478,542 $22,620,222 $5,989,528 $18,629,758 $73,201,410
========== ========== ========== ========== =========== ========== =========== ===========
</TABLE>
Sitara Networks is authorized to issue 26,800,000 shares of preferred
stock, $.00001 par value per share.
F-13
<PAGE> 84
SITARA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 1996, Sitara Networks issued 6,470,589 shares of Series A
Convertible Preferred Stock ("Series A Stock") at $0.85 per share to private
investors for a total consideration of $5,483,153 (net of offering costs of
$16,847). Of the total consideration, $256,000 was paid by one investor through
the cancellation of a convertible note payable issued by Sitara Networks in 1996
and the related interest thereon. The offering costs are being accreted over the
redemption period of the Series A Stock.
In September 1997, Sitara Networks issued 5,000,000 shares of Series B
Convertible Preferred Stock ("Series B Stock") at $1.40 per share to private
investors for a total consideration of $6,985,597 (net of offering costs of
$14,403). The offering costs are being accreted over the redemption period of
the Series B Stock.
In May 1998, Sitara Networks issued 1,312,336 shares of Series C
Convertible Preferred Stock ("Series C Stock") at $3.81 per share to private
investors for a total consideration of $4,986,164 (net of offering costs of
$13,836). The offering costs are being accreted over the redemption period of
the Series C Stock.
In December 1998, Sitara Networks issued 787,402 shares of Series D
Convertible Preferred Stock ("Series D Stock") at $3.81 per share in exchange
for a technology license (Note F). The technology license is recorded at
$3,000,000 the estimated fair value of the stock issued. Offering costs of
$17,998 are being accreted over the redemption period of the Series D Stock.
In July and August 1999, Sitara Networks issued 5,722,903 shares of Series
E Convertible Preferred Stock ("Series E Stock") at $3.85 per share to private
investors for a total consideration of $20,759,628 (net of offering costs paid
in cash of $1,273,548). In connection with the Series E financing, Sitara
Networks issued a warrant to purchase 442,009 shares of common stock at $2.57
per share to the placement agent as compensation for services rendered. Sitara
Networks recorded the fair value of the warrant of $877,242 based on the
Black-Scholes model as an additional offering cost. The Black-Scholes
calculation was based on the following assumptions: 0% dividend yield, 100%
expected volatility, 6.02% risk-free interest rate and five-year expected life.
The value of the warrant and the offering costs are being accreted over the
redemption period of the Series E Stock.
In January and March 2000, Sitara Networks issued 1,130,000 shares of
Series F Convertible Preferred Stock ("Series F Stock") at $5.00 per share of
private investors for total consideration of $5,639,058 (net of offering costs
of $10,942). The offering costs are being accreted over the redemption period of
the Series F Stock.
In June and September 2000, Sitara Networks issued 2,868,661 shares of
Series G Convertible Preferred Stock ("Series G Stock") at $6.51 per share to
private investors for total consideration of $18,375,479 (net of offering costs
paid in cash of $299,532). In connection with the Series G financing, the
Company issued a warrant to purchase 38,402 shares of common stock at $6.51 per
share to the placement agent as compensation for services rendered. The Company
recorded the fair value of the warrant of $193,590 based on the Black-Scholes
model as an additional offering cost. The Black-Scholes calculation was based on
the following assumptions: 0% dividend yield, 100% expected volatility, 6.18%
risk-free interest rate and a five-year expected life. The value of the warrant
and the offering costs are being accreted over the redemption period of the
Series G Stock.
Each share of Series A, B, C, D, E, F and G (collectively, "Preferred
Stock") Stock is convertible into common stock at the option of the holder under
a formula. Each share of Preferred Stock automatically converts into shares of
common stock, at the closing of an initial
F-14
<PAGE> 85
SITARA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
public offering with an offering price of not less than $9.77 per share and
gross proceeds of not less than $15,000,000 or upon the vote of the holders of
80% of the outstanding shares of Preferred Stock. An equivalent number of shares
of common stock is reserved for conversion.
Each holder of a share of Preferred Stock is entitled to the number of
votes equal to that number of shares of common stock into which such shares of
Preferred Stock can be converted.
Each holder of Preferred Stock is entitled to cumulative dividends whether
or not declared.
The holders of the Preferred Stock have preference as to the assets of
Sitara Networks upon liquidation, plus an amount equal to all declared but
unpaid dividends and a pro rata share of the remaining assets on an as-converted
basis.
The holders of the Preferred Stock have the option to redeem for cash a
maximum of one-third, two-thirds, and all of the outstanding shares on or after
August 1, 2002, 2003, and 2004, respectively, plus any declared and unpaid
dividends, whether or not earned or declared.
At September 30, 2000, each series of Preferred Stock had the following
features:
<TABLE>
<CAPTION>
COMMON STOCK
ANNUAL INTO WHICH
DIVIDEND LIQUIDATION REDEMPTION PREFERRED SHARES
SERIES RATE PREFERENCE PRICE CONVERT
------ -------- ----------- ---------- ----------------
<S> <C> <C> <C> <C>
A $.085 $ .85 $ .85 9,705,881
B .12 1.40 1.40 7,499,998
C .35 3.81 3.81 1,968,502
D .35 3.81 3.81 1,181,103
E .354 3.85 3.85 8,584,350
F .45 5.00 5.00 1,695,000
G .599 6.51 6.51 2,868,661
</TABLE>
I. COMMON STOCK AND COMMON STOCK WARRANTS
In March 2000, Sitara Networks effected a three-for-two stock split of its
common stock. All references to shares and per share amounts in the financial
statements and related footnotes have been adjusted to reflect the split for all
periods presented.
Sitara Networks issued 3,375,000 and 530,405 restricted shares of common
stock in 1996 and 1997, respectively, to the three founders of Sitara Networks.
There were no such shares issued in 1998, 1999 or 2000. The founders may not
sell, transfer, or dispose of the restricted shares of common stock prior to
vesting of such stock. There were 1,952,703, 2,929,053 and 3,661,317 shares
vested at December 31, 1998 and 1999 and September 30, 2000, respectively.
Sitara Networks also issued an additional 3,375,000 and 530,405 shares of common
stock in 1996 and 1997, respectively, to the founders that are not restricted.
There were no such shares issued in 1998, 1999 or 2000. The shares issued in
1997 were issued in connection with Sitara Networks' 1996 Amended and Restated
Stock Incentive Program (Note K). The fair value of the shares issued in 1997 of
$59,569 was recorded as deferred compensation and is being expensed as the
shares vest.
During 1996, Sitara Networks issued a convertible note payable in the
amount of $250,000 with 750,000 detachable warrants for common stock. One-half
of the detachable warrants were exercised for 375,000 shares of common stock in
1997. The remaining warrants were exercised during 1998 for 375,000 shares of
common stock.
F-15
<PAGE> 86
SITARA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1997, 1998 and 1999, Sitara Networks issued warrants to purchase
66,177, 14,062 and 13,636 shares of common stock in connection with capital
lease obligation agreements (Note G). The warrants have not been exercised as of
September 30, 2000.
Sitara Networks issued a warrant to purchase 17,143 shares of common stock
to a third party during 1998. The warrant has an exercise price of $0.93 per
share, was immediately exercisable and has a seven-year term. The estimated fair
value of the warrants granted, using the Black-Scholes model, was $3,525, and
was recorded as an expense. The Black-Scholes calculation was based on the
following assumptions: 0% dividend yield, 100% expected volatility, 5.69%
risk-free interest rate, and seven-year expected life. The warrant has not been
exercised as of September 30, 2000.
In September 1999, Sitara Networks issued a warrant to purchase 442,009
shares of common stock at $2.57 per share, in connection with the issuance of
the Series E Stock (Note H). The warrant was immediately exercisable, has a term
of five years and has not been exercised as of September 30, 2000.
In November 1999, Sitara Networks issued 5,747 shares of common stock to
consultants for services rendered. Sitara Networks accounted for these grants of
common stock at their estimated fair value at the time of issuance and recorded
expense of $15,345 in the year ended December 31, 1999. These shares were issued
in connection with the 1996 Amended and Restated Stock Incentive Program (Note
K).
In 2000, Sitara Networks issued 9,066 shares of common stock for services
rendered. Sitara Networks accounted for these grants of common stock at their
estimated fair value at the time of issuance and recorded expense of $54,250, in
the nine months ended September 30, 2000. These shares were issued in connection
with the 1996 Amended and Restated Stock Incentive Program (Note K).
In 1999 and 2000 Sitara Networks issued 89,400 and 166,781 shares of common
stock, respectively, to certain employees for achievement of certain engineering
and revenue milestones. Sitara Networks accounted for this grant of common stock
at its estimated fair value at the time of issuance and recorded an expense in
the amount of $230,056 and $840,260 in the year ended December 31, 1999 and the
nine months ended September 30, 2000, respectively. These shares were issued in
connection with the 1996 Amended and Restated Stock Incentive Program (Note K).
In June 2000, Sitara Networks issued a warrant to purchase 38,402 shares of
common stock at $6.51 per share, in connection with the issuance of Series G
Stock (Note H). The warrant is immediately exercisable, has a term of five years
and has not been exercised as of September 30, 2000.
J. INCOME TAXES
Income (loss) before income taxes for domestic and foreign operations is as
follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------------ SEPTEMBER 30,
1997 1998 1999 2000
----------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Domestic............. $(4,356,694) $(7,832,068) $(12,385,772) $(25,620,182)
Foreign.............. -- -- 7,560 230,260
----------- ----------- ------------ ------------
$(4,356,694) $(7,832,068) $(12,378,212) $(25,389,922)
=========== =========== ============ ============
</TABLE>
F-16
<PAGE> 87
SITARA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is the reconciliation between the U.S. federal statutory rate
and the effective tax rate:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------- SEPTEMBER 30,
1997 1998 1999 2000
----- ----- ----- -------------
<S> <C> <C> <C> <C>
U.S. federal statutory rate............. (34.0)% (34.0)% (34.0)% (34.0)%
State taxes, net of federal benefit..... (7.1) (6.8) (6.6) (6.2)
Tax credits............................. (2.2) (1.7) (1.5) (1.1)
Non deductible expenses................. 0.1 0.2 1.0 1.8
Change in valuation allowance........... 43.2 42.3 41.1 39.5
----- ----- ----- -----
0.0% 0.0% 0.0% 0.0%
===== ===== ===== =====
</TABLE>
The approximate tax effect of each type of temporary difference and
carryforward before allocation of the valuation allowance is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------- SEPTEMBER 30,
1998 1999 2000
----------- ------------ -------------
<S> <C> <C> <C>
Deferred tax assets (liabilities):
Net operating loss
carryforwards................ $ 801,456 $ 1,318,961 $11,267,123
Capitalized start-up costs...... 3,061,740 5,254,344 4,232,902
Capitalized research and
development costs............ 950,000 2,736,000 2,794,000
Tax credit carryforwards........ 349,539 619,544 1,012,641
Fixed assets.................... 78,027 97,367 (13,162)
Licensed technology............. 33,333 433,335 466,670
Accrued compensation............ 58,080 58,668 342,463
Other........................... -- -- 38,000
----------- ------------ -----------
5,332,175 10,518,219 20,140,637
Valuation allowance............... (5,332,175) (10,518,219) (20,140,637)
----------- ------------ -----------
Net deferred tax assets........... $ -- $ -- $ --
=========== ============ ===========
</TABLE>
As of September 30, 2000, Sitara Networks had federal net operating loss
("NOL") and research and experimentation credit carryforwards of approximately
$28,162,000 and $679,000, respectively, which may be available to offset future
federal taxable income and tax liabilities, respectively, and expire at various
dates through 2019. As required by Statement Financial Accounting Standards No.
109, management has evaluated the positive and negative evidence bearing upon
the realizability of its deferred tax assets. Management has determined that it
is more likely than not that Sitara Networks will not recognize the benefits of
federal and state deferred tax assets for all periods presented, and has
established a valuation allowance against net deferred tax assets.
Ownership changes, as defined in the Internal Revenue Code, may have
limited the amount of net operating loss carryforwards that can be utilized
annually to offset future taxable income. Subsequent ownership changes could
further effect the limitation in future years.
F-17
<PAGE> 88
SITARA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
K. STOCK OPTION PLAN
On December 9, 1996, the Board of Directors adopted the 1996 Amended and
Restated Stock Incentive Program (the "Program"), as subsequently amended. The
Program enables Sitara Networks to grant options to purchase common stock,
restricted stock, performance share awards and stock appreciation rights to
employees, members of the Board of Directors, and consultants of Sitara
Networks. Stock options entitle the holder to purchase common stock from Sitara
Networks, for a specified exercise price, during a period specified by the
applicable option agreement. The options expire on the date determined by the
Board of Directors, not to exceed 10 years following the date of the grant. The
total number of shares of common stock which may be issued under the Plan is
7,200,000. The Program provides the number of shares authorized for issuance
will automatically increase on the first calendar day of each year by the lesser
of: (i) 3,000,000 shares and (ii) 5% of the outstanding shares of common stock,
provided that the increase does not exceed 25% of the outstanding shares of
common stock. Substantially all options to employees granted to date vest over
four years and expire ten years from the date of the grant.
Option activity under the Program is as follows:
<TABLE>
<CAPTION>
EXERCISE PRICE EXERCISE PRICE
EQUALS GRANT DATE LESS THAN GRANT
STOCK FAIR VALUE DATE STOCK FAIR VALUE TOTAL
-------------------- ---------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at December
31, 1997.............. 1,575,027 $ 0.083 -- $ -- 1,575,027 $ 0.083
Granted............... 2,117,625 0.84 -- -- 2,117,625 0.84
Exercised............. (175,974) (0.082) -- -- (175,974) (0.082)
Canceled.............. (538,428) (0.283) -- -- (538,428) (0.283)
--------- ------- --------- ------- --------- -------
Outstanding at December
31, 1998.............. 2,978,250 0.585 -- -- 2,978,250 0.585
Granted............... 363,750 1.155 572,750 1.333 936,500 1.264
Exercised............. (284,450) (0.179) -- -- (284,450) (0.179)
Canceled.............. (934,865) (0.614) -- -- (934,865) (0.614)
--------- ------- --------- ------- --------- -------
Outstanding at December
31, 1999.............. 2,122,685 0.724 572,750 1.333 2,695,435 0.854
Granted............... -- -- 3,592,200 2.480 3,592,200 2.480
Exercised............. (432,249) (0.368) (1,500) (1.333) (433,749) (0.371)
Canceled.............. (102,172) (0.949) (213,000) (1.695) (315,172) (1.453)
--------- ------- --------- ------- --------- -------
Outstanding at September
30, 2000.............. 1,588,264 $ 0.802 3,950,450 $ 2.356 5,538,714 $ 1.911
========= ======= ========= ======= ========= =======
</TABLE>
As of September 30, 2000, no shares were available for grant under the
Program.
F-18
<PAGE> 89
SITARA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
at September 30, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------ OPTIONS EXERCISABLE
WEIGHTED- ----------------------------
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF AT SEPTEMBER 30, CONTRACTUAL EXERCISE AT SEPTEMBER 30, EXERCISE
EXERCISE PRICES 2000 LIFE PRICE 2000 PRICE
--------------- ---------------- ----------- --------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
$0.057 50,392 6.32 $0.057 19,255 $0.057
$0.093 145,500 6.81 $0.093 91,313 $0.093
$0.187 212,062 7.36 $0.187 133,219 $0.187
$0.933 - $1.00 1,039,311 7.99 $0.991 390,844 $0.993
$1.333 1,121,749 9.06 $1.333 200,749 $1.333
$2.00 1,857,750 9.60 $ 2.00 61,250 $ 2.00
$2.667 452,700 9.80 $2.667 -- $2.667
$4.67 659,250 9.93 $ 4.67 7,500 $ 4.67
-------------- --------- ---- ------ ------- ------
$0.057 - $4.67... 5,538,714 9.05 $1.911 904,130 $0.937
============== ========= ==== ====== ======= ======
</TABLE>
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), requires that companies either recognize
compensation expense for grants to employees of stock, stock options, and other
equity instruments based on fair value, or provide pro forma disclosure of net
income or loss in the notes to the financial statements. Sitara Networks has
adopted the disclosure provisions of SFAS 123 and recognizes compensation costs
using the intrinsic value method described in Accounting Principles Board No. 25
("APB 25"), "Accounting for Stock Issued to Employees." For stock options
granted to non-employees, Sitara Networks recognizes compensation costs in
accordance with the requirements of SFAS 123.
Had compensation cost for Sitara Networks' stock option plan been
determined based on the fair value at the grant date for awards in 1997, 1998,
1999 and 2000, consistent with the provisions of SFAS 123, Sitara Networks' net
loss and basic and diluted net loss per share would have been increased to pro
forma amounts indicated below:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------------ SEPTEMBER 30,
1997 1998 1999 2000
----------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Net loss -- as
reported........... $(5,093,701) $(9,282,955) $(15,307,073) $(29,304,191)
Net loss -- pro
forma.............. $(5,096,686) $(9,311,499) $(15,358,059) $(29,565,936)
Basic and diluted net
loss per share --
as reported........ $ (1.26) $ (1.60) $ (2.09) $ (3.36)
Basic and diluted net
loss per share --
pro forma.......... $ (1.26) $ (1.61) $ (2.10) $ (3.39)
</TABLE>
F-19
<PAGE> 90
SITARA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in each of the following periods:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------- SEPTEMBER 30,
1997 1998 1999 2000
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Dividend yield....................... 0% 0% 0% 0%
Expected volatility.................. 0% 0% 0% 0%
Risk-free interest rate.............. 6.2% 4.9% 5.3% 6.4%
Expected lives....................... 4 years 4 years 4 years 4 years
</TABLE>
The weighted average grant date fair values using the Black-Scholes option
pricing model were:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------- SEPTEMBER 30,
1997 1998 1999 2000
----- ----- ----- -------------
<S> <C> <C> <C> <C>
Exercise price equals grant date stock fair
value......................................... $0.01 $0.17 $0.20 --
Exercise price less than grant date stock fair
value......................................... -- -- $1.54 $2.31
</TABLE>
The effects of applying SFAS 123 in this disclosure were not indicative of
future amounts. Additional grants in future years are anticipated.
Sitara Networks records deferred compensation for options issues to
employees with exercise prices below the estimated fair value of common stock.
Deferred compensation is amortized and recorded as compensation expense over the
vesting period of the options. Compensation expense of $159,359, $67,855 and
$742,628 was recognized during the year ended December 31, 1999 and the nine
months ended September 30, 1999 and 2000, respectively.
Sitara Networks grants stock options to members of its Technical Advisory
Board ("TAB"). These individuals are not considered employees of Sitara
Networks. Options granted to the TAB members typically vest at a rate of 6.25%
of the outstanding common shares granted on the next business day immediately
following each scheduled TAB meeting that the member attends. The TAB options
expire 10 years from the date of grant. At September 30, 2000, there are options
to purchase 195,936 shares of common stock outstanding to TAB members. Option
prices are set by the Board of Directors at the estimated fair value at the date
of grant. Sitara Networks estimates the fair value of the options granted to TAB
members using the Black-Scholes model at each vesting and balance sheet date.
The fair value of the options is recorded as deferred compensation and is
expensed as the options vest. Expense of approximately $32,575, $61,034, $40,219
and $26,552 was recognized during the years ended December 31, 1998 and 1999 and
the nine months ended September 30, 1999 and 2000, respectively.
Sitara Networks also granted options to nonemployee consultants. During the
years ended December 31, 1997, 1998 and 1999 and the nine months ended September
30, 2000, Sitara Networks issued options to purchase 15,000, 0, 19,999 and
90,000 shares of common stock, respectively. The estimated fair value of the
options granted, using the Black-Scholes model, was expensed over the vesting
period of the options. In the year ended December 31, 1999 and the nine months
ended September 30, 1999 and 2000 an expense of $46,999, $46,999
F-20
<PAGE> 91
SITARA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and $182,631, respectively, was recognized related to these options. The value
of the options issued in 1997 was not material.
In 1999, Sitara Networks provided for the net exercise of certain stock
options previously issued to employees. In connection with this net exercise
Sitara Networks issued 198,929 shares of common stock and recognized
compensation expense of $265,236.
L. STOCK-BASED COMPENSATION
The following are the components of the additions to deferred compensation
in the statement of stockholders' deficit and the components of stock-based
compensation expense in the statement of operations for each period presented:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
--------------------------------- SEPTEMBER 30,
1997 1998 1999 2000
------- -------- ---------- -------------
<S> <C> <C> <C> <C>
DEFERRED COMPENSATION
Employee stock option grants........ -- -- $1,414,739 $5,533,116
Nonemployee stock option grants..... -- $235,053 211,586 939,236
Restricted stock grants to
employees......................... $59,569 -- -- --
------- -------- ---------- ----------
Total............................... $59,569 $235,053 $1,626,325 $6,472,352
======= ======== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- ---------------------
1997 1998 1999 1999 2000
------- ------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
STOCK-BASED COMPENSATION
Vesting of employee stock
options..................... -- -- $159,359 $ 67,855 $ 742,628
Cashless exercise of employee
stock options............... -- -- 265,237 -- --
Vesting of nonemployee stock
options..................... -- $32,575 61,034 40,219 209,183
Vesting of restricted stock
grants to employees......... $37,292 7,425 7,425 5,568 5,570
Fully vested nonemployee stock
options..................... -- -- 46,999 46,999 --
Fully vested stock grants to
employees................... -- -- 230,056 -- 870,097
Fully vested stock grants to
nonemployees................ -- -- 15,345 -- 24,413
------- ------- -------- -------- ----------
Total......................... $37,292 $40,000 $785,455 $160,641 $1,851,891
======= ======= ======== ======== ==========
</TABLE>
M. EMPLOYEE BENEFIT PLAN
Sitara Networks has an employee benefit plan under Section 401(k) of the
Internal Revenue Code covering substantially all employees. The plan allows
employees to make contributions up to a specified percentage of their
compensation. Sitara Networks has not made any contributions to this benefit
plan to date.
F-21
<PAGE> 92
SITARA NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
N. RELATED PARTIES
The Chairman, Chief Executive Officer, President and a director of Sitara
Networks is also the non-executive Chairman of the Board and a stockholder of
Indus River Networks, Inc. ("Indus River"). The Chief Financial Officer of
Sitara Networks also served as the Chief Financial Officer of Indus River from
April 1997 to January 1998. In 1997, Indus River made payments to Sitara
Networks of $129,276 for shared personnel, office space, and facilities.
O. SEGMENT INFORMATION
Sitara Networks operates in a single segment. Long-lived assets are
principally located in the United States. The following summarizes revenues by
the customer's geographic locations:
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEAR ENDED DECEMBER 31, MONTHS ENDED
-------------------------------- SEPTEMBER 30,
1997 1998 1999 2000
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
Asia Pacific................. $ -- $ -- $ -- $1,293,078
Europe....................... -- -- -- 369,740
North and South America...... -- 175,000 -- 690,126
-------- -------- -------- ----------
$ -- $175,000 $ -- $2,352,944
======== ======== ======== ==========
</TABLE>
P. SUBSEQUENT EVENTS
In October 2000, Sitara Networks issued 897,078 additional shares of Series
G Stock at $6.51 per share to private investors for total consideration of
approximately $5.8 million.
In October 2000, Sitara Networks adopted the 2000 Employee Stock Purchase
Plan. A total of 2,000,000 shares of common stock have been reserved for
issuance under this plan.
In October 2000, Sitara Networks amended the 1996 Amended and Restated
Stock Incentive Program, to increase the number of shares of common stock
issuable under the Program from 7,200,000 to 9,200,000.
On November 14, 2000, Sitara Networks sold warrants to purchase 104,000
shares of common stock at prices ranging from $.67 to $1.00 per share for
aggregate proceeds of $95,915 to certain of its value-added resellers. The
warrants have exercise prices ranging from $2.67 to $5.00 per share, are
immediately exercisable and have two-year terms. The estimated fair value of the
warrants granted, using the Black-Scholes model was $622,602. The Black-Scholes
calculation was based on the following assumptions: 0% dividend yield, 100%
expected volatility, 6.5% risk-free interest rate, and a two-year expected rate.
Sitara Networks will recognize selling and marketing expense of $526,687 related
to these warrants.
F-22
<PAGE> 93
[INSIDE BACK COVER]
In the upper left-hand corner, the words "Sitara Networks" appear. At the
bottom of the page appears the words "Delivering Scalable, Flexible and
Manageable QoS for the Converged IP Network." In the middle of the page appears
a triangle divided into three sections, which triangle is surrounded by three
circles of varying sizes. The bottom portion of the triangle contains the words
"Bandwidth Management" in bold letters, and above that the words "L2-7
Classification, Switching, Shaping, Queuing, Statistics, Bridging" appear. The
middle portion of the triangle contains the words "Application Traffic
Management" in bold letters, and above that the words "Proxy, Signaling,
Caching, Redirection" appear. The top portion of the triangle contains the words
"Policy Management" in bold letters, and above that, the words "Analysis,
Enforcement, Decision" appear.
<PAGE> 94
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN
THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF
COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS
PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE
OF OUR COMMON STOCK.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 8
Special Note Regarding Forward-Looking
Statements............................ 20
Use of Proceeds......................... 20
Dividend Policy......................... 20
Capitalization.......................... 21
Dilution................................ 23
Selected Financial Data................. 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 26
Business................................ 33
Management.............................. 48
Certain Relationships and Related
Transactions.......................... 56
Principal Stockholders.................. 58
Description of Capital Stock............ 60
Shares Eligible for Future Sale......... 63
Underwriting............................ 65
Legal Matters........................... 68
Experts................................. 68
Where You Can Find More Information..... 68
Index to Financial Statements........... F-1
</TABLE>
UNTIL , 2001 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
---------------------------------------------------------
[LOGO]
[ ] SHARES
COMMON STOCK
DEUTSCHE BANC ALEX. BROWN
CHASE H&Q
THOMAS WEISEL PARTNERS LLC
PROSPECTUS
, 2001
<PAGE> 95
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses payable by us in
connection with the offering (excluding underwriting discounts and commissions):
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
----------------- -------
<S> <C>
SEC Registration Fee........................................ $21,252
NASD Filing Fee............................................. 8,550
Nasdaq National Market Listing Fee.......................... *
Accounting Fees and Expenses................................ *
Legal Fees and Expenses..................................... *
Printing Expenses........................................... *
Transfer Agent's Fee........................................ *
Miscellaneous............................................... *
-------
Total....................................................... *
</TABLE>
------------
* To be completed by amendment.
The amounts set forth above, except for the Securities and Exchange
Commission, National Association of Securities Dealers, Inc. and Nasdaq National
Market fees, are in each case estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with Section 145 of the Delaware General Corporation Law,
Article VII of our Amended and Restated Certificate of Incorporation provides
that no director of Sitara Networks be personally liable to Sitara Networks or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (1) for any breach of the director's duty of
loyalty to Sitara Networks or its stockholders, (2) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (3) in respect of unlawful dividend payments or stock redemptions or
repurchases, or (4) for any transaction from which the director derived an
improper personal benefit. In addition, the Amended and Restated Certificate of
Incorporation provides that if the Delaware General Corporation Law is amended
to authorize the further elimination or limitation of the liability of
directors, then the liability of a director of the corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended.
Article V of our Amended and Restated By-laws provides for indemnification
by Sitara Networks of its officers and certain non-officer employees under
certain circumstances against expenses, including attorneys fees, judgments,
fines and amounts paid in settlement, reasonably incurred in connection with the
defense or settlement of any threatened, pending or completed legal proceeding
in which any such person is involved by reason of the fact that such person is
or was an officer or employee of the registrant if such person acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best interests of Sitara Networks, and, with respect to criminal actions or
proceedings, if such person had no reasonable cause to believe his or her
conduct was unlawful. Prior to the completion of this offering, we will also
enter into indemnification agreements with each of our directors. The
indemnification agreements will generally reflect the foregoing provisions and
require advancement of expenses in proceedings, if such person had no reasonable
cause to believe that his or her conduct was unlawful.
Under Section 8 of the underwriting agreement to be filed as Exhibit 1.1
hereto, the underwriters have agreed to indemnify, under certain conditions,
Sitara Networks, its directors, certain officers and persons who control Sitara
Networks within the meaning of the Securities Act of 1933 against certain
liabilities.
II-1
<PAGE> 96
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order below is information regarding the number
of shares of capital stock sold by the Registrant during the past three years.
Further included is the consideration, if any, received by the Registrant for
such shares, and information relating to the section of the Securities Act of
1933 or rule of the Securities and Exchange Commission under which exemption
from registration was claimed. In the case of issuances of common stock or
options or warrants exercisable for common stock, the numbers below reflect a
three-for-two stock split of the Registrant's common stock effected in June
2000.
(a) Certain Issuances and Sales of Securities
1. On May 18, 1998, Sitara Networks sold an aggregate of 1,312,336 shares
of series C convertible preferred stock to seven private investors for an
aggregate purchase price of $5,000,000 or $3.81 per share.
2. On February 5, 1998, Sitara Networks issued a warrant to purchase 14,062
shares of common stock at an exercise price of $1.87 per share to a company in
connection with the execution of capital leases.
3. On December 11, 1998, Sitara Networks sold 375,000 shares of common
stock to a private investor for an aggregate purchase price of $5.00 or $.00002
per share pursuant to an exercise of a warrant.
4. In April, 1998, Sitara Networks issued a warrant to purchase 17,143
shares of common stock at an exercise price of $0.93 per share to a company in
exchange for services rendered.
5. On December 17, 1998, Sitara Networks sold 787,402 shares of series D
convertible preferred stock to a private investor in exchange for a technology
license agreement valued at $3,000,000 implying a per share purchase price of
$3.81.
6. Between July 9 and August 9, 1999, Sitara Networks sold an aggregate of
5,722,903 shares of series E convertible preferred stock to 17 private investors
for an aggregate purchase price of $22,033,176 or $3.85 per share.
7. On September 30, 1999, Sitara Networks issued a warrant to purchase
442,009 shares of common stock at an exercise price of $2.57 per share to its
financial advisor in exchange for services rendered in connection with Sitara
Networks' sale of shares of series E convertible preferred stock.
8. On November 30, 1999, Sitara Networks issued a warrant to purchase
13,636 shares of common stock at an exercise price of $2.57 per share to a
company in connection with the execution of capital leases.
9. Between January 14, 2000 and March 31, 2000, Sitara Networks sold an
aggregate of 1,130,000 shares of series F convertible preferred stock to 12
private investors for an aggregate purchase price of $5,650,000 or $5.00 per
share.
10. Between June 16, 2000 and October 13, 2000, Sitara Networks sold an
aggregate of 3,765,739 shares of series G convertible preferred stock to 28
investors for an aggregate purchase price of $24,515,010 or $6.51 per share.
11. On June 18, 2000, Sitara Networks issued a warrant to purchase 38,402
shares of common stock at an exercise price of $6.51 per share to its financial
advisor in exchange for services rendered in connection with Sitara Networks'
sale of series G convertible preferred stock.
12. In November, 2000, Sitara Networks sold warrants to purchase 104,000
shares of common stock at exercise prices ranging from $2.67 to 5.00 to its
value-added resellers. The purchase prices of such warrants was from $0.67 to
$1.00 per underlying share of common stock.
II-2
<PAGE> 97
(b) Stock Option Grants and Exercises
1. Between November 1, 1997 and October 31, 2000, Sitara Networks granted
stock options to purchase an aggregate of 6,739,505 shares of common stock at
exercise prices ranging from $.093 to $5.00 per share to employees, consultants,
directors or other service providers pursuant to Sitara Networks' Amended and
Restated 1996 Stock Incentive Program. As of October 31, 2000, options to
purchase 1,958,412 shares had been exercised and options to purchase 1,441,466
shares had been cancelled.
(c) Common Stock Grants
1. Between November 1, 1997 and October 31, 2000, Sitara Networks granted
an aggregate of 257,553 shares of common stock to certain individual and
entities pursuant to Sitara Networks' Amended and Restated 1996 Stock Incentive
Program.
No underwriters were used in connection with these sales and issuances. The
sales and issuances of these securities were exempt from registration under the
Securities Act of 1933 pursuant to Rule 701 promulgated thereunder on the basis
that these securities were offered and sold either pursuant to a written
compensatory benefit plan or pursuant to written contracts relating to
compensation, as provided by Rule 701, or pursuant to Section 4(2) of the
Securities Act of 1933 and the rules and regulations thereunder on the basis
that the transactions did not involve a public offering. All of the foregoing
securities are deemed restricted securities for the purposes of the Securities
Act of 1933.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of the Registrant, as
amended.
3.2* Form of Certificate of Amendment to Restated Certificate of
Incorporation of the Registrant (to be effective upon
effectiveness of this registration statement).
3.3* Form of Amended and Restated Certificate of Incorporation of
the Registrant (to be effective upon completion of this
offering).
3.4 By-laws of the Registrant.
3.5* Form of Amended and Restated By-laws of the Registrant (to
be effective upon completion of this offering).
4.1* Specimen certificate for shares of common stock, $.00001 par
value, of the Registrant.
5.1* Opinion of McDermott, Will & Emery as to the validity of the
securities being offered.
10.1 Sixth Amended and Restated Stockholders' Agreement, dated
June 16, 2000, between the Registrant and the Stockholders
named therein, as amended.
10.2 Sixth Amended and Restated Registration Rights Agreement,
dated June 16, 2000, between the Registrant and the
Stockholders named therein, as amended.
10.3* 1996 Amended and Restated Stock Incentive Program.
10.4* 2000 Employee Stock Purchase Program.
10.5 Series E Convertible Preferred Stock Purchase Agreement,
dated July 9, 1999, by and among the Registrant and the
Purchasers named therein.
10.6 Series F Convertible Preferred Stock Purchase Agreement,
dated January 14, 2000, by and among the Registrant and the
Purchasers named therein.
10.7 Series G Convertible Preferred Stock Purchase Agreement,
dated June 16, 2000, by and among the Registrant and the
Purchasers named therein, as amended.
</TABLE>
II-3
<PAGE> 98
<TABLE>
<S> <C>
10.8 Agreement of Sublease, dated March 17, 2000, by and between
Renaissance Worldwide, Inc. and the Registrant for the
premises at 52 Second Avenue, Waltham, Massachusetts.
10.9 Plexus Comprehensive Professional Services Agreement, dated
July 19, 2000, by and between the Registrant and Plexus
Corp.
10.10** SNMP Research International License Agreement, dated July
20, 2000, by and between SNMP Research International and the
Registrant.
21.1 Schedule of Subsidiaries of the Registrant.
23.1* Consent of McDermott, Will & Emery (included in Exhibit 5.1
hereto).
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of Fish & Richardson, P.C.
24.1 Powers of Attorney (included on page II-6).
27.1 Financial Data Schedule (year ended December 31, 1999).
27.2 Financial Data Schedule (nine months ended September 30,
2000).
</TABLE>
------------
* To be filed by amendment to this Registration Statement.
** Confidential treatment has been requested as to certain portions of this
Exhibit pursuant to Rule 406 promulgated under the Securities Act of 1933.
Such portions have been omitted and filed separately with the Securities and
Exchange Commission.
(b) Financial Statement Schedules
All schedules have been omitted because they are not required or because
the required information is given in the Financial Statements or Notes to those
statements.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 99
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Waltham, Commonwealth of
Massachusetts, on November 16, 2000.
SITARA NETWORKS, INC.
By: /s/ MALIK Z. KHAN
------------------------------------
Malik Z. Khan
Chairman, Chief Executive Officer
and President
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints each of Malik Z. Khan, Michael Palin and
Arthur Anderson such person's true and lawful attorney-in-fact and agent with
full power of substitution and resubstitution, for such person and in such
person's name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement
(or to any other registration statement for the same offering that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act), and to
file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto each said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as such person might or could do
in person, hereby ratifying and confirming all that any said attorney-in-fact
and agent, or any substitute or substitutes of any of them, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MALIK Z. KHAN President, Chief Executive November 16, 2000
--------------------------------------------------- Officer and Director
Malik Z. Khan
(Principal Executive Officer)
/s/ MICHAEL PALIN Chief Financial Officer November 16, 2000
---------------------------------------------------
Michael Palin
(Principal Financial Officer and Principal
Accounting Officer)
/s/ MENACHEM ABRAHAM Director November 16, 2000
---------------------------------------------------
Menachem Abraham
/s/ JOSEPH ALSOP Director November 16, 2000
---------------------------------------------------
Joseph Alsop
/s/ DAVID G. BROWN Director November 16, 2000
---------------------------------------------------
David G. Brown
</TABLE>
II-5
<PAGE> 100
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ EDWIN M. KANIA, JR. Director November 16, 2000
---------------------------------------------------
Edwin M. Kania, Jr.
/s/ ARTHUR J. MARKS Director November 16, 2000
---------------------------------------------------
Arthur J. Marks
/s/ MICHAEL J. ZAK Director November 16, 2000
---------------------------------------------------
Michael J. Zak
</TABLE>
II-6
<PAGE> 101
EXHIBIT INDEX
<TABLE>
<S> <C> <C>
1.1 Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of the Registrant, as
amended.
3.2* Form of Certificate of Amendment to Restated Certificate of
Incorporation of the Registrant (to be effective immediately
prior to the completion of this offering).
3.3* Form of Amended and Restated Certificate of Incorporation of
the Registrant (to be effective upon completion of this
offering).
3.4 By-laws of the Registrant.
3.5* Form of Amended and Restated By-laws of the Registrant (to
be effective upon completion of this offering).
4.1* Specimen certificate for shares of common stock, $.00001 par
value, of the Registrant.
5.1* Opinion of McDermott, Will & Emery as to the validity of the
securities being offered.
10.1 Sixth Amended and Restated Stockholders' Agreement, dated
June 16, 2000, between the Registrant and the Stockholders
named therein, as amended.
10.2 Sixth Amended and Restated Registration Rights Agreement,
dated June 16, 2000, between the Registrant and the
Stockholders named therein, as amended.
10.3* 1996 Amended and Restated Stock Incentive Program.
10.4* 2000 Employee Stock Purchase Program.
10.5 Series E Convertible Preferred Stock Purchase Agreement,
dated July 9, 1999, by and among the Registrant and the
Purchasers named therein.
10.6 Series F Convertible Preferred Stock Purchase Agreement,
dated January 14, 2000, by and among the Registrant and the
Purchasers named therein.
10.7 Series G Convertible Preferred Stock Purchase Agreement,
dated June 16, 2000, by and among the Registrant and the
Purchasers named therein, as amended.
10.8 Agreement of Sublease, dated March 17, 2000, by and between
Renaissance Worldwide, Inc. and the Registrant for the
premises at 52 Second Avenue, Waltham, Massachusetts.
10.9 Plexus Comprehensive Professional Services Agreement, dated
July 19, 2000, by and between the Registrant and Plexus
Corp.
10.10** SNMP Research International License Agreement, dated July
20, 2000, by and between SNMP Research International and the
Registrant.
21.1 Schedule of Subsidiaries of the Registrant.
23.1* Consent of McDermott, Will & Emery (included in Exhibit 5.1
hereto).
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of Fish & Richardson, P.C.
24.1 Powers of Attorney (included on page II-6).
27.1 Financial Data Schedule (year ended December 31, 1999).
27.2 Financial Data Schedule (nine months ended September 30,
2000).
</TABLE>
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* To be filed by amendment to this Registration Statement.
** Confidential treatment has been requested as to certain portions of this
Exhibit pursuant to Rule 406 promulgated under the Securities Act of 1933.
Such portions have been omitted and filed separately with the Securities and
Exchange Commission.
