<PAGE>
As filed with the Securities and Exchange Commission on January 8, 2001
Registration No. 333-45958
-------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
RIVERSTONE NETWORKS, INC.
(Exact name of Registrant as specified in its charter)
---------------
<TABLE>
<S> <C> <C>
Delaware 3576 95-4596178
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
5200 Great America Parkway
Santa Clara, California 95054
(408) 878-6500
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
Mr. Romulus Pereira
President and Chief Executive Officer
Riverstone Networks, Inc.
5200 Great America Parkway
Santa Clara, California 95054
(408) 878-6500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
The Commission is requested to mail copies of all orders, notices and
communications to:
<TABLE>
<S> <C>
David A. Fine, Esq. Jeffrey D. Saper, Esq.
Michael J. Stick, Esq. Kurt J. Berney, Esq.
Ropes & Gray Jack Helfand, Esq.
One International Place Wilson Sonsini Goodrich & Rosati
Boston, Massachusetts 02110 Professional Corporation
(617) 951-7000 650 Page Mill Road
Palo Alto, California 94604-1050
(650) 493-9300
</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 registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration 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
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<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Title of each Class of Maximum Aggregate Amount of
Securities to be Amount to be Offering Price Offering Registration
Registered Registered (1) Per Unit Price(2) Fee (3)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value per share....... 11,500,000 $14 $161,000,000 $40,250
--------------------------------------------------------------------------------
</TABLE>
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(1) Includes 1,500,000 shares that the underwriters have an option to
purchase from Riverstone to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act of
1933, as amended.
(3) $52,800 was previously paid based upon a maximum aggregate offering price
of $200,000,000.
---------------
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 this registration
statement shall become effective on such date as the Commission, acting
pursuant to said section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued January 8, 2001
10,000,000 Shares
[RIVERSTONE LOGO]
COMMON STOCK
-----------
Riverstone Networks, Inc. is offering shares of its common stock. This is our
initial public offering and no public market currently exists for our shares.
We anticipate that the initial public offering price will be between $12 and
$14 per share.
-----------
We have applied to list our common stock on the Nasdaq National Market under
the symbol RSTN.
-----------
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 11.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Riverstone
-------- ------------- -----------
<S> <C> <C> <C>
Per Share........................ $ $ $
Total............................ $ $ $
</TABLE>
Riverstone Networks, Inc. has granted the underwriters the right to purchase up
to an additional 1,500,000 shares of common stock to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers
on , 2001.
-----------
MORGAN STANLEY DEAN WITTER
J.P. MORGAN & CO.
LEHMAN BROTHERS
SALOMON SMITH BARNEY
, 2001
<PAGE>
INSIDE FRONT COVER
[Heading: "Converting Metro Bandwidth Into Differentiated Services" -- appears
across the top of the page.
Picture of a cityscape and road with RS32000, RS2000 and IA1100 products
appearing with city buildings. The Riverstone logo is in the bottom right corner
of the page.]
GATEFOLD
[Heading: "Riverstone Networks: Products for the New Metropolitan Area Network"
-- Centered across the top of the Gatefold.
Picture: The center of the page shows a cloud representing the Optical Metro
Backbone. Around the center cloud in a clockwise direction are the following
pictures and captions which are connected to the center cloud by a line and
represent the a metropolitan area network: a picture of the RS32000 and RS8600
Riverstone products with the following caption: "Point of Presence;" a picture
of the RS8000, RS8600 and IA1100 Riverstone products with the following caption:
"Content Hosting;" a picture of the RS8000, RS8600 and IA1100 Riverstone
products with the following caption: "Application Service Provider;" a picture
of the RS2000 Riverstone products with the following caption: "Building Local
Exchange Carrier;" a picture of the RS32000 and RS8000 Riverstone products with
the following captions: "Metropolitan Service Provider" and "Point of Presence;"
a picture of the RS2000 and RS3000 Riverstone products with the following
caption: "Building Local Exchange Carrier;" and a picture of the RS32000 and
RS8600 Riverstone products with the following captions: "Internet Service
Provider" and "Point of Presence" and two clouds connected to the picture, one
with the following caption: "Private Backbone" and the other with the following
caption: "Internet Backbone." The Riverstone logo is pictured in the bottom
right corner of the gatefold. The following text is directly above the logo: "We
are a leading provider of Internet infrastructure equipment to service providers
in the metropolitan area network. Our products contain advanced service creation
features including bandwidth management and provisioning, accounting and
billing, quality of service and content delivery capabilities."]
<PAGE>
GATEFOLD
[Heading: "Riverstone Networks: Products for the New Metropolitan Area
Network" -Centered across the top of the Gatefold.
Picture: The center of the page shows a cloud representing the Optical Metro
Backbone. Around the center cloud in a clockwise direction are the following
pictures and captions which are connected to the center cloud by a line and
represent the a metropolitan area network: a picture of the RS32000 and RS8600
Riverstone products with the following caption: "POP;" a picture of the RS8000,
RS8600 and IA1100 Riverstone products with the following caption: "Content
Hosting;" a picture of the RS8000, RS8600 and IA1100 Riverstone products with
the following caption: "Application Service Provider;" a picture of the RS2000
Riverstone products with the following caption: "Building Local Exchange
Carrier;" a picture of the RS32000 and RS8000 Riverstone products with the
following captions: "Metropolitan Service Provider" and "POP;" a picture of the
RS2000 and RS3000 Riverstone products with the following caption: "Building
Local Exchange Carrier;" and a picture of the RS32000 and RS8600 Riverstone
products with the following captions: "Internet Service Provider" and "POP and
two clouds connected to the picture, one with the following caption: "Private
Backbone" and the other with the following caption: "Internet Backbone." The
Riverstone logo is pictured in the bottom right corner of the gatefold. The
following text is directly above the logo: "We are a leading provider of
Internet infrastructure equipment to service providers in the metropolitan area
network. Our products contain advanced service creation features including
bandwidth management and provisioning, accounting and billing, quality of
service and content delivery capabilities."]
<PAGE>
TABLE OF CONTENTS
Page Page
---- ----
<TABLE>
<S> <C>
Prospectus Summary................... 5
Risk Factors......................... 11
Special Note About Forward-Looking
Statements.......................... 24
Use of Proceeds...................... 25
Dividend Policy...................... 25
Capitalization....................... 26
Dilution............................. 28
Selected Consolidated Financial
Data................................ 30
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 31
Business............................. 40
</TABLE>
<TABLE>
<S> <C>
Management........................... 52
Relationships with Cabletron and its
Affiliates and with the Strategic
Investors .......................... 61
Stock Ownership...................... 70
Description of Capital Stock......... 72
Shares Eligible for Future Sale...... 75
Underwriters......................... 76
Legal Matters........................ 79
Experts.............................. 79
Where You Can Find More Information.. 79
Index to Financial Statements........ F-1
Appendix: Meet the Management of
Riverstone Networks Presentation.... A-1
</TABLE>
----------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information that is different
from that contained in this prospectus. We are offering to sell, and seeking
offers to buy, these securities 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 the common stock.
Until , all dealers that buy, sell or trade our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. Dealers also have an obligation to deliver a prospectus when acting
as underwriters and in relation to their unsold allotments or subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary, the more detailed information about
us and the common stock being sold in this offering and our consolidated
financial statements and accompanying notes appearing elsewhere in this
prospectus.
RIVERSTONE NETWORKS, INC.
We are a leading provider of Internet infrastructure equipment to service
providers in the metropolitan area network. Our routers and switches enable
service providers to convert optical and electrical bandwidth into
differentiated services for their customers. Our products contain advanced
service creation features, including bandwidth management and provisioning,
accounting and billing, quality of service and content delivery capabilities.
The bulk of Internet traffic is now produced and consumed within
metropolitan areas. At the same time, improved technology is significantly
increasing the amount of data that can be transmitted over the network to the
end-user. These trends have led to the rise of the metropolitan area network,
which encompasses service providers, the Internet infrastructure connecting
these service providers with their customers and the Internet backbone.
Historically, end-users required only basic bandwidth and connectivity to the
Internet. Today, the Internet is an integral part of communication and
commerce, creating end-user demand for sophisticated business applications and
services. Service providers are seeking to build networks with advanced
capabilities to offer these services.
In most cases, existing infrastructure equipment has not been designed to
deliver these advanced services without significantly degrading performance and
increasing costs. We believe our products meet the needs of service providers
to create and deliver services cost-effectively to their customers in
metropolitan area networks. By implementing our advanced functionality in
hardware rather than software, we are able to deliver these services without a
degradation in performance.
We sell and market our products directly to customers and through
relationships with value-added resellers and original equipment manufacturers.
Our customers include building local exchange carriers, content hosting and
application service providers and metropolitan service providers, in addition
to traditional Internet service providers. Our top ten customers by revenue for
the period December 1, 1999 to December 2, 2000 were British Telecom, CAIS
Internet, Earthlink, Intellispace, Metricom, Telia, Telseon, Terabeam, Terayon
and Vitts Networks, each accounting for over $2.5 million in revenue for that
period. We have entered into a strategic distribution agreement with Tellabs
Operations, Inc. that allows Tellabs to resell our products worldwide on a non-
exclusive basis.
Our Strategy
We intend to become the leading provider of advanced optical and electrical
networking solutions to service providers in metropolitan area networks. The
key elements of our growth strategy are to:
. Focus exclusively on service providers in the metropolitan area network;
. Build upon our position as a leading developer of service creation
platforms;
. Develop next generation products that will support our customers'
emerging services and applications;
. Continue to expand our highly skilled engineering team, which consists
of over 200 engineers; and
. Expand our U.S. and international sales presence and our indirect sales
channels.
5
<PAGE>
CORPORATE INFORMATION
We are a wholly-owned subsidiary of Cabletron. After the completion of this
offerings, Cabletron will own approximately 86% of the outstanding shares of
our common stock, or approximately 85% if the underwriters fully exercise their
option to purchase additional shares and the strategic investors fully exercise
their rights to purchase shares of our common stock. This means that Cabletron
will control many aspects of our business. Cabletron plans to distribute all of
the shares of our common stock that it owns to the holders of Cabletron's
common stock. Cabletron anticipates that it will establish a definite date for
the distribution upon receipt of a favorable tax ruling relating to the
distribution. Cabletron is not obligated to complete the distribution, and
there can be no assurance that the distribution will occur.
Cabletron will, in its sole discretion, determine the timing, structure and
all terms of its distribution of our common stock that it owns. We do not
expect that Cabletron will complete the distribution unless it receives a
private letter ruling from the Internal Revenue Service that the distribution
of its shares of our common stock to Cabletron's stockholders will be tax-free
to Cabletron and its stockholders.
In this prospectus, the terms Riverstone and we refer to Riverstone
Networks, Inc. and our subsidiaries, except where it is clear that these terms
mean only Riverstone Networks, Inc. Cabletron refers to Cabletron Systems,
Inc., Aprisma refers to Aprisma Management Technologies, Inc., Enterasys refers
to Enterasys Networks, Inc. and GNTS refers to GlobalNetwork Technology
Services, Inc.
In this prospectus, strategic investors refers to Silver Lake Partners,
L.P., Silver Lake Investors, L.P., Silver Lake Technology Investors, L.L.C.,
Integral Capital Partners V, L.P., Integral Capital Partners V Side Fund, L.P.
and Morgan Stanley Dean Witter Equity Funding, Inc.
Unless otherwise indicated, all information in this prospectus assumes the
conversion of each outstanding share of our series A preferred stock into one
share of our common stock, no exercise of the underwriters' over-allotment
option, and no exercise of the purchase rights of the strategic investors.
Riverstone Networks, Enabling Service Provider Infrastructure, and the
Riverstone logo are trademarks that we own. All other trademarks or trade names
appearing elsewhere in this prospectus are the property of their owners.
Our executive offices are located at 5200 Great America Parkway, Santa
Clara, California 95054. Our telephone number is (408) 878-6500, and our
Internet address is http://www.riverstonenet.com. The information on our
website is not a part of this prospectus.
6
<PAGE>
OUR SEPARATION FROM CABLETRON
Effective as of June 3, 2000, Cabletron transferred a substantial portion of
Cabletron's operating assets and related liabilities to its subsidiaries,
Riverstone, Aprisma, GNTS and Enterasys. We have entered into agreements
related to the separation of our business operations from Cabletron. These
agreements generally provide for:
. the transfer from Cabletron to us of assets and the assumption by us of
liabilities relating to our business; and
. arrangements governing tax sharing and commercial arrangements among
Cabletron, Aprisma, Enterasys, GNTS and us and services that Cabletron
will provide us.
The agreements relating to the separation of our business operations from
Cabletron are described more fully in "Relationships with Cabletron and its
Affiliates and with the Strategic Investors--Arrangements Between Riverstone
and Cabletron and its Affiliates" included elsewhere in this prospectus. The
terms of these agreements with Cabletron and its affiliates were established in
the context of a parent-subsidiary relationship and may be more or less
favorable to us than if they had been negotiated with unaffiliated third
parties. The assets and liabilities to be transferred to us are described more
fully in our consolidated financial statements and notes to those statements
that are included elsewhere in this prospectus.
We believe that Riverstone will realize benefits from its separation from
Cabletron, including:
. Greater Strategic Focus. We expect that the separation will allow our
directors and management to concentrate on developing business and
strategic opportunities focused only on our products and customer base.
. Increased Speed and Responsiveness. Since we will be significantly
smaller than Cabletron, we believe that we will be able to make
decisions more quickly and assign resources more rapidly and efficiently
than we could as a part of a larger organization.
. Better Incentives for Employees and Greater Accountability. The
separation will enable us to offer our employees compensation and
incentive programs directly linked to the performance of the Riverstone
business and the market performance of our stock, which we expect to
enhance our ability to attract, retain and motivate qualified personnel.
. Direct Access to Capital Markets. As a separate company, we will be able
to directly access the capital markets to issue debt or equity
securities and to use our securities to facilitate growth through
acquisitions.
7
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by
Riverstone................... 10,000,000 shares
Common stock to be outstanding
after the offering........... 102,088,235 shares
Use of proceeds............... Working capital and general corporate purposes.
Proposed Nasdaq National
Market stock symbol.......... RSTN
</TABLE>
These shares do not include:
. up to 1,500,000 additional shares that the underwriters have the option
to purchase;
. 34,449,280 shares of common stock reserved for issuance upon the
exercise of stock options outstanding as of December 2, 2000 at a
weighted average exercise price of $4.67;
. 5,510,729 shares of common stock subject to purchase rights of the
strategic investors, as of December 2, 2000;
. shares of common stock subject to warrants to be issued to the strategic
investors if the gross price per share of common stock issued in this
offering multiplied by the number of shares of common stock outstanding
immediately after this offering on a fully diluted basis exceeds $1.672
billion;
. shares of common stock underlying warrants that we may be required to
issue upon Cabletron's distribution of our common stock for warrants to
purchase shares of Cabletron's common stock held by the strategic
investors; and
. shares of common stock underlying options that we may be required to
issue upon Cabletron's distribution of our common stock for options to
purchase Cabletron common stock.
Shares outstanding before the offering are all owned by Cabletron. Except as
expressly noted, information in this prospectus excludes the stock, option and
warrant issuances listed above.
8
<PAGE>
SUMMARY FINANCIAL DATA
The following tables present our summary consolidated financial data. The
financial data presented in these tables are from "Selected Consolidated
Financial Data" and our consolidated financial statements and accompanying
notes included elsewhere in this prospectus. You should read those sections for
a further explanation of the financial data summarized here.
Our combined financial statements have been taken from the consolidated
financial statements of Cabletron using the historical results of operations
and historical bases of the assets and liabilities of Riverstone. The
historical financial information we have included in this prospectus does not
necessarily reflect what our financial position, results of operations and cash
flows would have been had we been a separate, stand-alone entity during the
periods presented.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
--------------------------------------------------------------- ------------------------
Feb. 29, Feb. 28, Feb. 28, Feb. 28, Feb. 29, Nov. 30, Dec. 2,
1996 1997 1998 1999 2000 1999 2000
------------ ------------ ------------ ------------ ----------- ------------ -----------
(unaudited) (unaudited)
(in thousands, except share and pro forma per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Net revenues.............. $ -- $ -- $ 59 $ 3,284 $ 23,076 $ 10,315 $ 63,116
Gross profit.............. -- -- 52 275 11,100 4,432 35,045
Operating loss............ (6,521) (18,509) (16,976) (184,967) (37,404) (30,862) (60,740)
Net loss.................. (6,521) (18,509) (16,976) (184,995) (37,431) (30,882) (59,195)
Net loss per share:
Basic and diluted....... $(65.21) $(185.09) $(169.76) $(1,849.95) $ (374.31) $(308.82) $ (591.95)
Weighted average number of
common shares outstanding:
Basic and diluted....... 100 100 100 100 100 100 100
Pro forma net loss per
share:
Basic and diluted....... $ (.40) $ (.63)
Pro forma weighted average
number of common shares
outstanding:
Basic and diluted....... 93,831,720 93,831,720
</TABLE>
The shares used in computing the pro forma basic and diluted net loss per
share assume the conversion of all outstanding shares of our series A preferred
stock into 92,088,135 shares of our common stock and the exercise of 5,510,729
outstanding stock purchase rights held by the strategic investors as of
December 2, 2000. These stock purchase rights may not be exercised until 10
business days before the effectiveness of the registration statement, of which
this prospectus is a part, and the stock purchase rights terminate if shares
are not purchased on or before the date of effectiveness, as more fully
described under "Dilution" in this prospectus. The effect on pro forma basic
and diluted net loss per share of these assumed exercises has been calculated
using the treasury stock method. Proceeds received from issuance of the stock
purchase rights were assumed to be used to repurchase shares at the midpoint of
the filing range on the cover page of this prospectus.
The following items that could provide additional dilution are not included
in pro forma basic and diluted net loss per share:
As of December 2, 2000, we had outstanding options to purchase 34,449,280
shares of common stock under our 2000 equity incentive plan. These options had
a weighted average exercise price of $4.67 per share. We have also reserved
10,550,720 additional shares for issuance under our 2000 equity incentive plan.
If these options are exercised, and if we issue new options or rights under our
stock plans or issue additional shares of common stock in the future, new
investors will experience further dilution.
Also, when Cabletron distributes to its stockholders our shares that it
owns, we will grant options to acquire shares of our common stock under our
2000 equity incentive plan to those persons holding Cabletron stock options at
that time. We have agreed with Cabletron that upon any distribution by
Cabletron of shares of our common stock to its stockholders, we will issue
warrants to the strategic investors to purchase the number of shares of our
common stock
9
<PAGE>
that they would have received from Cabletron in the distribution, had they
exercised their Cabletron warrants before the distribution.
As of December 2, 2000, there were 184,830,988 shares of Cabletron's capital
stock outstanding, options outstanding to purchase 11,898,484 shares of
Cabletron common stock, and the strategic investors held warrants to purchase
450,000 shares of Cabletron common stock. Unvested Cabletron options held by
Riverstone employees at the time of the distribution would terminate because
after the distribution these employees would no longer be employed by a
subsidiary of Cabletron, and vested Cabletron options held by these employees
would continue to be exercisable for only a limited period of time, in general
only 90 days following the distribution. Cabletron's board of directors has
voted to accelerate, as of the time of the distribution, the vesting of
Cabletron options held by Riverstone employees which would vest by February 28,
2002. Not including portions of Cabletron options held by Riverstone employees
which vest after February 28, 2002, as of December 2, 2000, there were options
outstanding to purchase 11,153,006 shares of Cabletron common stock. Assuming
no change in these amounts from December 2, 2000 through the date of the
distribution and that as of the date of the distribution Cabletron owns
92,088,235 shares of our common stock, we would be required to:
. grant options to purchase 6,492,699 million shares of our common stock
to holders of Cabletron stock options; and
. issue warrants to the strategic investors to purchase 220,701 shares of
our common stock for warrants to purchase shares of Cabletron common
stock.
If the offering price per share of common stock issued in this offering
multiplied by the number of shares of common stock outstanding immediately
after this offering on a fully diluted basis exceeds $1.672 billion, we will
also be required to issue additional warrants to the strategic investors to
purchase a number of shares of our common stock equal to $1.25 million divided
by the price per share paid in this offering, at an exercise price equal to the
offering price.
We will also be required to issue additional stock purchase rights to the
strategic investors and adjust the exercise prices of the stock purchase rights
to adjust for dilution to the strategic investors if before the completion of
this offering:
. we issue equity to Cabletron in exchange for assets having a value of
over $5,000,000; or
. we grant additional stock options.
The pro forma as adjusted column in the consolidated balance sheet data
below reflects:
. the sale of shares of common stock in this offering at an assumed
initial public offering price of $13 per share, after deducting
underwriting discounts and estimated offering expenses payable by us;
and
. the receipt of approximately $48.9 million based on the exercise of
outstanding stock purchase rights held by the strategic investors to
purchase 5,510,729 shares of our common stock. These stock purchase
rights may not be exercised until 10 business days before the
effectiveness of the registration statement, of which this prospectus is
a part, and the stock purchase rights terminate if shares are not
purchased on or before the date of effectiveness, as more fully
described under "Dilution" in this prospectus.
<TABLE>
<CAPTION>
December 2, 2000
------------------------
Pro Forma
Actual As Adjusted
------------ -----------
(in thousands)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents.............................. $35,786 $202,660
Working capital (unaudited)............................ 48,792 215,666
Total assets........................................... 89,646 256,520
Accounts payable, related parties...................... 6,794 6,794
Stockholders' net investment........................... 69,361 236,235
</TABLE>
10
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. Our business, financial condition or results of
operations could be harmed by the occurrence of any of the events described in
these risks. The trading price of our common stock could decline due to the
realization of any of these risks, and you may lose all or part of your
investment.
Risks Related to Riverstone
We have a general history of losses and cannot assure you that we will
operate profitably in the future.
We have not yet achieved profitability, and we cannot be certain that we
will realize sufficient revenue to achieve profitability in the future. Our
financial data is based on Cabletron's financial statements. For the first
nine months of fiscal 2001, from March 1, 2000 to December 2, 2000, we
incurred net losses of $59.2 million. During fiscal 2000, we incurred net
losses of $37.4 million. We anticipate incurring significant and increasing
sales and marketing, product development and general and administrative
expenses, requiring us to realize significantly higher revenue to achieve and
sustain profitability.
Our exclusive focus on sales to service provider customers subjects us to
risks that may be greater than those for providers with a more diverse
customer base.
Our customers consist of Internet, application, content and metropolitan
area service providers and building local exchange carriers, whose businesses
depend on the continuing demand for differentiated services by their
customers. If this demand does not continue or the Internet does not continue
to expand as a widespread communications medium and commercial marketplace,
the demand for our products could decline. Our exposure to this risk is
greater than other vendors who sell to a more diversified customer base. We
believe that there are risks arising from doing business with service
providers in these markets that may not be faced by our competitors in their
relationships with corporate and other customers, including:
. any failure of a service provider's service to its customers that it
attributes to our products, whether or not our products actually failed,
could lead to substantial negative publicity and undermine our efforts
to increase our sales;
. the low level of brand loyalty demonstrated by service providers, which
may cause them to switch to another supplier that provides, or that they
believe provides, superior performance or cost-effectiveness;
. the introduction, or the planned introduction, of new products and
product enhancements could cause service providers to cancel, reduce or
delay existing orders; and
. service providers that are heavily dependent upon financing,
particularly from the high yield debt market, to build out their
infrastructure, may decrease their infrastructure purchases if interest
rates increase or if credit availability in these markets decreases.
The occurrence of one or more of these events is likely to harm our
operating results.
Our quarterly revenue and operating results are likely to fluctuate,
particularly as we expand and if, as expected, our expenses rise, which
could cause us to miss quarterly revenue targets and result in a decline in
our stock price.
We base our operating expenses on anticipated revenue trends. A high
percentage of our expenses remain relatively fixed despite changes in revenue,
including marketing, research and development and general administrative
expenses and expenses for employee compensation other than sales commissions.
This means that any failure to achieve anticipated revenues could cause our
quarterly operating results to fall below the expectations of public market
analysts or investors, which could cause the price of our common stock to
fall. As we expand, we expect our expenses to rise significantly, which
increases the magnitude of this risk.
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Our quarterly revenue and operating results may vary significantly in the
future due to a number of factors, including:
. fluctuations in demand for our products and services;
. unexpected product returns or the cancellation or rescheduling of
significant orders;
. our ability to develop, introduce, ship and support new products and
product enhancements and manage product transitions;
. the timing and amount of non-cash stock based compensation charges;
. our ability and our suppliers' ability to attain and maintain production
volumes and quality levels for our products; and
. the mix of products sold and the mix of distribution channels through
which they are sold.
Due to these factors, we believe that you should not rely on period-to-period
comparisons of our operating results as an indicator of our future
performance.
We generally do not have binding commitments from our customers and if
significant customers cancel, reduce or delay a large purchase, our
revenues may decline and the price of our stock may fall.
Historically, a limited number of customers have accounted for a
significant portion of our revenue. For fiscal year 1999, Adelphia
Communications accounted for 46% of our net revenues and Earthlink accounted
for 20% of our net revenue. For fiscal year 2000, British Telecom accounted
for 15% of our net revenues, Earthlink accounted for 14% of our net revenues,
Metricom accounted for 12% of our net revenues and Vitts Networks accounted
for 11% of our net revenues. Although our largest customers may vary from
period to period, we anticipate that our operating results for any given
period will continue to depend significantly on large orders from a small
number of customers. We do not have binding commitments from any of our
customers other than Tellabs. The commitments of Tellabs are subject to
conditions which may not be satisfied. If any of our large customers cancel,
reduce or delay purchases, our revenue and profitability would be harmed
because of our dependence on large customers.
Because the purchase of our products often represents a significant
decision on the part of potential customers, we may expend significant
resources on potential customers without achieving actual sales.
Purchases of our products often represent a significant strategic decision
and capital investment by our customers related to their communications
infrastructure and typically involve significant internal procedures involving
the evaluation, testing, implementation and acceptance of new technologies.
This evaluation process frequently results in a lengthy sales process, often
ranging from one month to longer than a year, and purchases of our products
are subject to a number of significant risks, including customer budgetary
constraints and internal acceptance reviews. During this time we may incur
substantial sales and marketing expenses and expend significant management
effort. The length of the sales cycle, and the magnitude of our investment in
the sales process, is more substantial for our service provider customers than
it would typically be with corporate customers. If sales forecasts from a
specific customer for a particular quarter are not realized in that quarter,
we may be unable to compensate for the shortfall, which could harm our
operating results.
We may be unable to expand our sales and direct and indirect distribution
channels, which may hinder our ability to target multiple levels of a
prospective customer's organization and increase sales and revenues.
Our products and services require a sophisticated sales and marketing
effort targeted at several levels within a prospective customer's
organization. Unless we expand our sales force and maintain high levels of
marketing activity, we will be unable to increase revenues. Although we plan
to continue to hire additional sales personnel, competition for qualified
sales personnel is intense, and we may be unable to hire the sales personnel
we require.
Our sales and distribution strategy relies on value-added resellers,
original equipment manufacturers, or OEMs, our direct and indirect
international sales efforts and our ability to package our products into a
complete
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network infrastructure solution by working with other technology vendors. We
rely on Tellabs and Terayon to act as OEMs of our products for sale to cable
operators on a non-exclusive basis, and we expect to establish additional OEM
relationships. If we are unable to establish new value-added reseller or OEM
relationships, or if Tellabs or Terayon or our other OEMs and valued-added
resellers are unsuccessful in distributing our products, our sales could
suffer. Additionally, our agreement with Tellabs provides that Tellabs may
terminate the agreement upon a change of control of us to specified parties.
We depend in part on Enterasys, a subsidiary of Cabletron, to distribute our
products internationally, and if they fail to do so or are unsuccessful in
their efforts, our operating results would suffer. Because we are not a
vertically integrated network infrastructure provider, if we fail to maintain
existing technology vendor relationships or to establish new ones, we will be
unable to satisfy our customers' need for complete, fully-integrated solutions
and our business could suffer.
Many of our customers rely on us to supply or arrange and support financing
for our products, which subjects us to credit and market risks.
Many of our customers do not have or do not wish to commit the financial
resources required to purchase our products without financing, and these
customers expect us to provide or arrange and support their financing. Many of
these financing arrangements expose us to our customers' credit risk and in
the past we have experienced customer defaults. If future customers default on
their financing payments, our recognition of deferred revenue will be harmed.
Due to recent public market volatility, a number of our current or prospective
customers may be unable to raise funding through the issuance of their equity
securities in a timely fashion. This difficulty could result in an increased
need for financing provided either by us or with our assistance and increased
customer credit risks. In the past, we have benefited from Cabletron's
resources and credit in arranging financing for our customers. After we
separate from Cabletron, we will be a much smaller, stand-alone company, which
could impair our ability to provide or arrange and support customer financing.
If third party financing were to become less available due to credit market
factors, our ability to arrange third party financing for our customers could
be significantly limited, potentially resulting in reduced revenues.
We purchase several key components for our products from single or limited
sources and could lose sales if these sources fail to fulfill our needs.
We purchase several key components used in the manufacture of our products
from single or limited sources and are dependent upon supply from these
sources to meet our needs. We have worked with NEC and Lucent to develop
several of our key proprietary application specific integrated circuits, or
ASICs. These proprietary ASICs are very complex, and NEC is and Lucent is our
sole source supplier for the specific types of ASICs that it supplies to us.
We do not have a long-term fixed price or minimum volume agreement with either
of these suppliers. Should we encounter problems with NEC or Lucent, we would
not be able to develop an alternate source in a timely manner, which could
hurt our ability to deliver our switch routers and web switches.
We also purchase other critical components from single or limited sources.
We are likely to encounter shortages and delays in obtaining these or other
components in the future which could materially harm our ability to meet
customer orders.
We base our purchasing decisions on a forecast of anticipated orders of our
products, and if we miscalculate our needs or are not able to obtain
necessary components, we could be harmed.
We use a forward-looking forecast of anticipated product orders to
determine our material requirements, and if customer orders do not match
forecasts, we may have excess or inadequate inventory of materials and
components. In the past, we have experienced shortages of some components,
resulting in delays in filling orders. For example, recent high demand in the
cellular phone industry for Tantalum capacitors, a component required to
manufacture our products, has led to shortages and price increases for these
capacitors. We have also experienced delays in the prototyping of our ASICs
during initial product development, which in turn has led to delays in product
introductions. If we cannot obtain necessary components, we may not be able to
meet customer orders and our business and results of operations could suffer.
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We depend on a single contract manufacturer for substantially all of our
manufacturing requirements, and a failure by this contract manufacturer
would impair our ability to deliver products.
We outsource all of our manufacturing to one company, Flextronics
International, Ltd., which manufactures our products in Sunnyvale, California
and Limerick, Ireland. If the demand for our products grows, we will need to
increase our material purchases and our contract manufacturing capacity with
Flextronics or add additional contract manufacturers. Our existing and future
contract manufacturers may not meet our future requirements. We have
experienced a delay in product shipments from our contract manufacturers in
the past, which in turn delayed product shipments to our customers. We may in
the future experience similar and other problems, such as insufficient
quantity of product, which could materially harm our business and operating
results. The inability of our contract manufacturer to provide us with
adequate supplies of high-quality products or the loss of our contract
manufacturer would cause a delay in our ability to fulfill orders while we
obtain a replacement manufacturer and would have a material adverse effect on
our business, operating results and financial condition.
Substantially all of our revenues come from sales of two product families,
making us dependent on widespread market acceptance of these products.
Substantially all of our revenues result from sales of our switch router
and web switch product families. Continuing market acceptance of our two
product families is critical to our future success, and we are more dependent
on the market acceptance of individual product families than competitors with
broader product offerings. Factors that may affect the market acceptance of
our products include:
. adoption of advanced routing and switching products and technologies;
. the performance, price and total cost of ownership of our products;
. the availability and price of competing products and technologies;
. brand recognition of the Riverstone name; and
. the success and development of our sales and marketing organizations and
resellers.
If we fail to achieve market acceptance for our switch router and web
switch product families, our revenues may be harmed.
The market for network equipment is subject to rapid technological change
and if we fail to accurately predict and respond to market developments or
demands, we will be unable to compete successfully.
The market for network equipment is characterized by rapid technological
change, frequent new product introductions, changes in customer requirements
and evolving industry standards. Our future performance will depend on our
successful development and introduction and the market acceptance of new and
enhanced products that address customer requirements in a cost-effective
manner. We may be unsuccessful in completing the development or introduction
of these product enhancements or new products on a timely basis or at all. The
failure of these enhancements or new products to operate as expected could
delay or prevent future sales. Developments in routers and routing software
could also significantly reduce demand for our product. Alternative
technologies and customer requirements could achieve widespread market
acceptance and displace the technologies, protocols and service requirements
on which our product lines are based. Our technological approach may not
achieve broad market acceptance, and other technologies or devices may
supplant our approach.
If we and the third parties providing services for us are unable to deliver
the high level of customer service and support demanded by our customers,
we may lose customers and our operating results will suffer.
Our customers demand a high level of customer service and support.
Historically, our customer service and support functions have been provided by
a combination of Cabletron's services organization, which is now a part of
Enterasys, and our internal product support group. We rely on Enterasys to
provide field service and support services and are now in the process of
shifting our initial call support services from Enterasys to Digital Equipment
(India). We may experience a disruption in our ability to support customers
during this transition
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period, which could significantly reduce customer satisfaction and impair our
ability to retain customers and make future sales. We may be unable to manage
effectively those third parties who provide support services for us and they
may provide inadequate levels of customer support.
Our products are very complex and undetected defects may increase our costs
and harm our reputation with our customers.
Networking products are extremely complex and must operate successfully
with equally complex products of other vendors. These products frequently
contain undetected software or hardware errors when first introduced or as new
upgrades are released. Additionally, the pressures we face to be the first to
market new products, increases the possibility that we will offer products in
which we or our customers later discover errors. We have experienced new
product and product upgrade errors in the past and expect similar problems in
the future. These problems could result in our incurring significant warranty
and repair costs, divert the attention of our engineering personnel from our
product development efforts and cause significant customer relations problems
and our stock price to fall.
We have limited ability to engage in acquisitions and other strategic
transactions using our equity because of the federal income tax
requirements for a tax-free distribution.
For the distribution of our stock by Cabletron to qualify as tax-free to
Cabletron and its stockholders, Cabletron must own at least 80% of the voting
power of our voting stock and 80% of each class of nonvoting stock at the time
of the distribution. In light of the issuance of purchase rights to the
strategic investors and this offering, we are limited in our ability to issue
additional equity as additional equity issuances could reduce Cabletron's
ownership below this 80% threshold. For any distribution of our stock by
Cabletron to qualify as tax-free to Cabletron, there must not be a change in
ownership of 50% or greater in either the voting power or value of either our
stock or Cabletron's stock that is considered to be part of a plan or series
of transactions related to the distribution. If there is a direct or indirect
acquisition of our or Cabletron's stock by one or more persons during the
four-year period beginning two years before and ending two years after the
distribution, it will be presumed to be part of a plan or series of related
transactions related to Cabletron's intended distribution of our stock. Unless
this presumption is successfully rebutted, the distribution will be taxable to
Cabletron.
We have entered into a tax sharing agreement with Cabletron, Aprisma,
Enterasys and GNTS. This agreement requires us to indemnify Cabletron,
Aprisma, Enterasys and GNTS if the distribution by Cabletron of its Riverstone
shares does not qualify as tax-free due to actions we take or that otherwise
relate to us, including any change of ownership of us. The process for
determining whether a change of ownership has occurred under the tax rules is
complex. If we do not carefully monitor our compliance with these rules, we
might inadvertently cause a change of ownership to occur, triggering our
obligation to indemnify Cabletron and the other parties to the tax sharing
agreement. Our obligation to indemnify these parties if a change of ownership
causes the distribution not to be tax-free could discourage or prevent a third
party from making a proposal to acquire us.
For the reasons described above, our ability to use our stock for
acquisitions and other similar strategic transactions or for compensation for
employees and others is restricted. Many of our competitors use their equity
to complete acquisitions, to expand their product offerings and speed the
development of new technology and to attract and retain employees and other
key personnel, giving them a potentially significant competitive advantage
over us.
We jointly own with Enterasys some of our intellectual property, and our
business could be harmed if Enterasys uses this intellectual property to
compete with us.
In the transformation agreement among Cabletron, Enterasys, Aprisma, GNTS
and us and the related contribution agreements, Cabletron contributed to us
and to Enterasys, Aprisma and GNTS intellectual property related to the
products to be sold by us and by the other subsidiaries or used in our or the
relevant subsidiary's business. Intellectual property that relates to a family
of ASICs used in both our switch router product family and Enterasys' Smart
Switch Router product family was assigned jointly to us and to Enterasys.
Enterasys is primarily a provider of local area network products for the
enterprise market. There are no contractual provisions
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that prohibit Enterasys from developing products that are competitive with our
products, including products based upon the jointly assigned intellectual
property. If Enterasys is acquired by one of our competitors, there are no
contractual provisions that would prohibit the combined company from
developing products competitive with our products.
Our limited ability to protect our intellectual property may hinder our
ability to compete.
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure of confidential information to protect our
intellectual property rights. We cannot assure you that any patents that we
hold will protect our intellectual property or will not be challenged by third
parties. Other parties may also independently develop similar or competing
products that do not infringe our patents. Although we attempt to protect our
intellectual property rights, we may be unable to prevent the misappropriation
of our intellectual property, particularly in foreign countries where the laws
may not protect our proprietary rights as fully as in the United States.
We may be subject to claims that our intellectual property infringes upon
the proprietary rights of others, and a successful claim could harm our
ability to sell and develop our products.
If other parties claim that our products infringe upon their intellectual
property we would be forced to defend ourselves or our customers,
manufacturers or suppliers against those claims. We could incur substantial
costs to prosecute or defend those claims. A successful claim of infringement
against us and our failure or inability to develop non-infringing technology
or license the infringed technology on acceptable terms and on a timely basis
could harm our business, results of operations and financial condition.
We have recently begun to expand our international sales effort, and
marketing and distributing our products outside of the United States may
require increased expenses and greater exposure to risks that we may not be
able to successfully address.
Our growth strategy depends in part on the expansion of our international
sales and operations. International sales, which were negligible in fiscal
1999, increased to 23% of our revenue in fiscal 2000. The international market
for our products is less mature than the market in the United States, and our
strategy of selling to service providers that operate in the metropolitan area
network may be unsuccessful on an international basis. Operating
internationally exposes us to risks such as longer accounts receivable
collection cycles, difficulties in staffing and managing operations across
disparate geographic areas and tariffs, export controls and other trade
barriers. We conduct our international sales in either U.S. dollars or local
currencies and a change in the value of the U.S. dollar relative to foreign
currencies could make our products less competitive in international markets.
We are also subject to fluctuations in exchange rates between the U.S. dollar
and the particular local currency. We may determine to engage in hedging
transactions to minimize the risk of fluctuations and if we are not successful
in managing hedging transactions, we could incur losses.
If we fail to address the strain on our resources caused by our growth or
if we are unable to attract and retain qualified personnel, we may not be
able to achieve our objectives and our business could be harmed.
We have experienced a period of rapid growth and expansion which has
placed, and continues to place, a significant strain on our management,
operational and financial resources. From February 28, 1999 to December 2,
2000, the number of our employees increased from 163 to 434 and is expected to
continue to increase. Our management team has only been recently formed and
has had limited experience managing rapidly growing companies. Some members of
our management team have joined us only recently. Our success depends to a
significant degree upon the continued contributions of our key management,
engineering, sales and marketing, customer support and manufacturing
personnel, many of whom would be difficult to replace. In particular, we
believe that our future success is highly dependent on Romulus Pereira, our
president and chief executive officer.
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We believe our future success also depends on our ability to attract and
retain highly skilled managerial, engineering, sales and marketing, finance,
customer support and manufacturing personnel. Competition for these personnel
is intense, especially in the San Francisco bay area, and we have had
difficulty hiring employees in the timeframe we desire, particularly software
and hardware engineers. We may be unsuccessful in attracting and retaining
personnel. Our vice president of sales position is open, and we may be unable
to fill this position with an appropriately qualified and experienced person
on a timely basis or at all. The loss of the services of any of our key
personnel, the inability to attract or retain qualified personnel in the
future or delays in hiring required personnel, particularly engineers and
sales personnel, could make it difficult for us to manage our business and
meet key objectives, such as timely product introductions.
We rely on independent service providers to supply our back-office
functions, and if they fail to deliver adequate services, our business will
suffer.
We rely on service providers to supply us with many of our operational and
back-office functions, including human resources applications, enterprise
resource management applications and customer relationship management
applications. Although these functions are critical to our business, we
neither own the software that performs these functions nor, in some cases, the
hardware on which these programs and our data reside. If there is a
significant degradation or failure in service, we may be unable to quickly and
cost-effectively transition to other service providers or provide the
necessary functionality ourselves and our business could be disrupted.
Risks Related to Our Industry
Intense competition in the market for network equipment could prevent us
from increasing revenue and sustaining profitability.
The market for network equipment is very competitive and has historically
been dominated by Cisco Systems. Other principal competitors include
established companies such as Extreme Networks, Foundry Networks, Juniper
Networks, Lucent, Nortel Networks and Siemens. We also experience competition
from a number of other smaller public and private companies. These competitors
may have developed or could in the future develop new technologies that
compete with our products or even make our products obsolete. Consolidation in
our industry is occurring and is likely to continue. Future acquisitions by,
and mergers among, our competitors and potential competitors could expand
their product offerings and accelerate their development of new technologies,
providing them with a competitive advantage.
Many of our competitors have significantly more established customer
support and professional services organizations and substantially greater
financial resources than we do. Many of our competitors also have much greater
name recognition and have a more extensive customer base and broader customer
relationships and product offerings than we do. These companies can rely on
their customer bases and broader product offerings and adopt aggressive
pricing policies to gain market share. We expect that competitive pressures
may result in price reductions, reduced margins and loss of market share,
which would materially harm our business, results of operations and financial
condition.
We expect the average selling prices of our products to decrease rapidly,
which may reduce our gross margins or revenue.
Our industry has experienced rapid erosion of average selling prices. We
anticipate that the average selling prices of our products will decrease in
the future in response to competitive pricing pressures, increased sales
discounts, new product introductions by us or our competitors and increasing
availability of relatively inexpensive standard microprocessors that can
perform some of our products' functionality. If we are unable to achieve
sufficient cost reductions and increases in sales volumes, this decline in
average selling prices will reduce our revenue and gross margins.
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If our products do not comply with complex governmental regulations and
evolving industry standards, our products may not be widely accepted, which
may prevent us from sustaining our revenues or achieving profitability.
The market for network equipment products is characterized by the need to
support industry standards as different standards emerge, evolve and achieve
acceptance. To be competitive, we must continually introduce new products and
product enhancements that meet these emerging standards. We have had to delay
the introduction of new products to comply with third party standards testing.
We may be unable to address compatibility and interoperability issues that
arise from technological changes and evolving industry standards. In the
United States, our products must comply with various governmental regulations
and industry regulations and standards, including those defined by the Federal
Communications Commission, Underwriters Laboratories and Networking Equipment
Building Standards, or NEBS. Internationally, products that we develop may be
required to comply with standards or obtain certifications established by
telecommunications authorities in various countries and with recommendations
of the International Telecommunications Union. If we do not comply with
existing or evolving industry standards or fail to obtain timely domestic or
foreign regulatory approvals or certificates, we will be unable to sell our
products where these standards or regulations apply, which may prevent us from
sustaining our revenues or achieving profitability.
Risks Related to Our Separation from Cabletron
If Cabletron does not receive a favorable tax ruling or if the receipt of a
ruling is delayed, Cabletron may not complete its distribution of our
common stock, and Cabletron would continue to control many aspects of our
business and the liquidity of our stock would be limited.
Cabletron plans to distribute to its stockholders all Riverstone common
stock that it owns after this offering. Cabletron is not obligated to make
this distribution, and it may not occur. Cabletron is unlikely to complete the
distribution unless it receives a ruling from the Internal Revenue Service
that the distribution will be tax-free to it and its stockholders for United
States federal income tax purposes. The process of obtaining a private letter
ruling is complex and can take a long time. We do not know if or when
Cabletron will receive a ruling from the Internal Revenue Service relating to
the distribution or if that ruling will be favorable. The distribution of our
stock in the context of Cabletron's previously announced intention to cause
us, GNTS, Aprisma and Enterasys to become separate publicly traded companies
increases the complexity and could result in a delay at the Internal Revenue
Service in processing the ruling request.
If the distribution is delayed or not completed, the liquidity of our
shares will be constrained unless and until Cabletron elects to sell some
portion of its equity ownership in us. Our agreements with Cabletron do not
prevent Cabletron from selling its Riverstone common stock. The sale or
potential sale by Cabletron of Riverstone common stock, even of relatively
small amounts, could result in a lower trading price of our stock. Also, if
Cabletron does not distribute its shares, we may face significant difficulty
hiring and retaining key personnel, many of whom are attracted by the
potential of operating our business as a fully independent entity.
After the completion of this offering and if the strategic investors elect
to purchase all of the shares of our common stock that they are entitled to
purchase under their purchase rights, Cabletron will own approximately 86% of
our outstanding common stock, or approximately 85% if the underwriters
exercise in full their option to purchase additional shares. As long as
Cabletron owns a majority of our outstanding common stock, subject to its
independent director obligation described below, Cabletron will continue to be
able to elect our entire board of directors and to remove any director without
calling a special meeting. Cabletron has agreed that for so long as it owns
any of our stock, it will vote its shares to elect to our board of directors
the number of independent directors required to comply with the Nasdaq
National Market listing rules. Due to Cabletron's voting control, before
Cabletron's distribution or other disposition of our common stock, investors
in this offering will be unable to affect the outcome of any stockholder vote
and Cabletron will control all matters affecting us, including:
. through its control of the composition of our board of directors, the
determination of our business direction and policies, including the
appointment and removal of officers;
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. the allocation of business opportunities that may be suitable for us and
Cabletron and its affiliates;
. any determinations relating to mergers or other business combinations;
. our acquisition or disposition of assets;
. our financing;
. changes to the agreements providing for our separation from Cabletron;
. the payment of dividends on our common stock; and
. determinations for our tax returns.
Conflicts of interest may arise between Cabletron and us in a number of
areas relating to our past and ongoing relationships, including:
. labor, tax, employee benefit, indemnification and matters arising from
our separation from Cabletron;
. employee retention and recruiting;
. sales or distributions by Cabletron of all or any portion of its
ownership interest in us;
. the nature, quality and pricing of services Cabletron has agreed to
provide us; and
. business opportunities that may be attractive to Cabletron or one of
Cabletron's affiliates, such as Enterasys, and us.
We may not be able to resolve any potential conflicts, and even if we do,
the resolution may be less favorable than if we were dealing with an
unaffiliated party. There are no contractual agreements restricting Cabletron
or its affiliates, including Enterasys with whom we share important
technologies, from competing with us. Enterasys is a provider of local area
network products that are primarily sold to large corporations or
institutions, but is not restricted from selling network products to service
provider customers. In addition, in our certificate of incorporation we have
renounced any interest in business opportunities that are presented to
Cabletron, its subsidiaries other than us, or our officers or directors who
are employees of Cabletron or its subsidiaries other than us, at the time the
opportunity is presented.
When Cabletron distributes the shares of our common stock that it owns to
its stockholders, we will issue options and warrants to purchase shares of
our common stock to holders of Cabletron options and warrants, which will
dilute our existing stockholders.
When Cabletron distributes to its stockholders the Riverstone shares that
it owns, we will grant options to acquire shares of our common stock under our
2000 equity incentive plan to those persons holding Cabletron compensatory
stock options. We are obligated under our agreement with Cabletron to ensure
that sufficient shares are available under our 2000 equity incentive plan to
make these supplemental option grants. Similarly, Cabletron has issued
warrants to purchase shares of its common stock to the strategic investors. We
have agreed with Cabletron that upon any distribution by Cabletron of shares
of our common stock to its stockholders, we will issue warrants to the
strategic investors to purchase shares of our common stock. The strategic
investors will receive warrants to purchase the number of shares of our common
stock that they would have received from Cabletron in the distribution, had
they exercised their Cabletron warrants before the distribution.
As of December 2, 2000, there were 184,830,988 shares of Cabletron's
capital stock outstanding, options outstanding to purchase 11,898,484 shares
of Cabletron common stock, and the strategic investors held warrants to
purchase 450,000 shares of Cabletron common stock. Unvested Cabletron options
held by Riverstone employees as of the time of the distribution would
terminate because these employees would no longer be employed by a subsidiary
of Cabletron as of the time of the distribution. Cabletron's board of
directors has voted to accelerate, as of the time of the distribution, the
vesting of Cabletron options held by Riverstone employees
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which would vest by February 28, 2002. Not including portions of Cabletron
options held by Riverstone employees which vest after February 28, 2002, as of
December 2, 2000, there were options outstanding to purchase 11,153,006 shares
of Cabletron common stock. Assuming no change in these amounts from
December 2, 2000 through the date of the distribution and that as of the date
of the distribution Cabletron owns 92,088,235 shares of our common stock,
would be required to:
. grant options to purchase approximately 6,492,699 million shares of our
common stock to holders of Cabletron stock options; and
. issue warrants to the strategic investors to purchase 220,701 shares of
our common stock for warrants to purchase shares of Cabletron common
stock.
Additionally, if the price per share of common stock issued in this
offering multiplied by the number of shares of common stock outstanding
immediately after this offering on a fully diluted basis exceeds $1.672
billion, we are required to issue to the strategic investors warrants to
purchase a number of shares of our common stock equal to $1.25 million divided
by the price per share paid in this offering, at an exercise price equal to
the gross price per share paid in this offering.
Our existing stockholders will suffer dilution upon the exercise of the
supplemental options and warrants that we issue. There are no restrictions on
the number of options to purchase Cabletron common stock that Cabletron may
issue before its distribution of our stock, and we cannot control the number
of supplemental options that we will be required to grant. We do not know
whether our market capitalization at the time of our initial public offering
will obligate us to issue additional warrants to the strategic investors.
Consequently, we are unable to predict the extent of the dilution that our
existing stockholders will experience when Cabletron distributes the shares of
our common stock that it owns.
Our historical financial information may not be representative of our
results as a separate company.
Our consolidated financial statements are based on the consolidated
financial statements of Cabletron, using the historical results of operations
and historical bases of the assets and liabilities of the Cabletron router and
switch business contributed to us. The historical financial information we
have included in this prospectus does not necessarily reflect what our
financial position, results of operations and cash flows would have been had
we been a separate, stand-alone entity during the periods presented. Cabletron
did not account for us as a separate, stand-alone entity before June 3, 2000.
Our costs and expenses include allocations from Cabletron for centralized
corporate services and infrastructure costs, including:
. customer service;
. sales;
. information technology;
. distribution;
. legal and accounting;
. real estate; and
. treasury.
These allocations have been determined on bases that we and Cabletron
consider to be reasonable reflections of the utilization of services provided
to or the benefit received by us. The historical financial information is not
necessarily indicative of what our results of operations, financial position
and cash flows will be in the future. We have not made adjustments to our
historical financial information to reflect many significant changes that will
occur in our cost structure, funding and operations due to our separation from
Cabletron, including increased costs from reduced economies of scale,
increased marketing expenses related to building a company brand identity
separate from Cabletron and the increased costs of being a publicly traded,
stand-alone company.
20
<PAGE>
We use Cabletron's operational and administrative infrastructure and
Cabletron provides us with numerous administrative services, and our
ability to operate our business may suffer if we do not successfully
develop our own infrastructure or if Cabletron elects not to provide these
services to us.
Under a services agreement, we use Cabletron's administrative
infrastructure and Cabletron provides us centralized corporate functions,
including legal, accounting, payroll and other services. Cabletron may not
provide these services at the same level as when we were part of Cabletron,
and we may be unable to obtain the same benefits. These services arrangements
generally have a term of less than two years following the date of our
separation from Cabletron. With sixty days prior written notice, Cabletron may
terminate the services agreement for any or all of the services provided under
the agreement. After the expiration of these various arrangements, we may be
unable to replace these services in a timely manner or on terms and
conditions, including cost, as favorable as those received from Cabletron.
Many of Cabletron's infrastructure systems used by us are proprietary to
Cabletron and are very complex. These systems have been modified, and are
being further modified, to enable us to separately track items related to our
business. These modifications, however, may result in unexpected system
failures or the loss or corruption of data. Any failure or significant
downtime in Cabletron's or our own information systems or termination of our
ability to use these systems before we have developed our own systems could
harm our business. To successfully implement and operate our own systems and
transition data from Cabletron's systems, we must be able to attract and
retain a significant number of highly skilled employees.
Our arrangements with Cabletron were made in the context of a parent-
subsidiary relationship and were established in the overall context of our
separation from Cabletron. The prices charged to us may be lower than the
prices that we may be required to pay third parties for similar services or
the costs of similar services if we undertake them ourselves.
We cannot rely on Cabletron to fund our future capital requirements, and
financing from other sources may not be available on favorable terms or at
all.
In the past, our capital needs have been satisfied by Cabletron. However,
following our separation, Cabletron is under no obligation to provide funds to
finance our working capital or other cash requirements or to support customer
financing. Financing or financial support from other sources, if needed, may
not be available on favorable terms or at all.
We believe our capital requirements will vary greatly from quarter to
quarter. Capital expenditures, fluctuations in our operating results,
financing activities, acquisitions, investments and inventory and receivables
management may contribute to these fluctuations. We believe that the proceeds
from this offering, and our future cash flow from operations, will be
sufficient to satisfy our working capital, capital expenditure and research
and development requirements for at least the next twelve months. However, we
may require or choose to obtain additional debt or equity financing to finance
acquisitions or other investments in our business. Future equity financings
may be dilutive to the existing holders of our common stock. Future debt
financings could involve restrictive covenants. We will likely not be able to
obtain debt financing with interest rates and other terms as favorable as
those that Cabletron could obtain.
The plaintiffs in Cabletron's outstanding class action suit might seek to
add us to this litigation or seek payment of any related damages.
Since December 1997, Cabletron has been party to an outstanding class
action suit alleging that during the period of March 3, 1997 through December
2, 1997, Cabletron released false and misleading information about its
operations and that Cabletron's accounting practices resulted in the
disclosure of materially misleading financial results. The plaintiffs'
complaint does not specify the amount of damages, but if the plaintiffs
prevail Cabletron could be required to pay substantial damages. The plaintiffs
in this matter might seek to involve us in this litigation or, if they prevail
in this litigation, might seek to recover damages from us, particularly if
Cabletron has insufficient assets.
21
<PAGE>
Conflicts of interest may arise because our directors and executive
officers have ownership interests in Cabletron, and our directors hold
equity interests in Aprisma, Enterasys and GNTS.
Many of our directors and executive officers have a substantial amount of
their personal financial portfolios in Cabletron common stock and options to
purchase Cabletron common stock. Our directors also hold options to purchase
stock of Aprisma, Enterasys and GNTS. Piyush Patel and Eric Jaeger serve on
our board of directors and are both executive officers of Cabletron. Mr. Patel
is also a board member of Cabletron. These factors could create, or appear to
create, potential conflicts of interest when directors and officers are faced
with decisions that could have different implications for Cabletron, its
affiliates, such as Aprisma, Enterasys and GNTS, or us.
Risks Related to this Offering
Substantial sales of our common stock may result from Cabletron's proposed
distribution of our shares of common stock that it owns, which could cause
our stock price to decline.
Cabletron plans to distribute to its stockholders the approximately 92
million shares of Riverstone common stock that it owns. Substantially all of
these shares will be eligible for immediate resale in the public market once
distributed. Significant amounts of common stock may be sold in the open
market in anticipation of, or following, this distribution, or by Cabletron if
the distribution does not occur. Additionally, a portion of Cabletron's common
stock is held by index funds tied to the Standard & Poor's 500 Index or other
stock indices. If we are not in these indices at the time of Cabletron's
distribution of our common stock but Cabletron is, these index funds will be
required to sell our stock. There may not be a sufficient number of buyers in
the market at that time. Any sales of substantial amounts of common stock in
the public market, or the perception that sales might occur, whether related
to this distribution or not, could harm the market price of our common stock.
Our securities have no prior market, and our stock price may be volatile
and subject to decline after our offering.
Before this offering there has not been a public market for our common
stock, and an active public market for our common stock may not develop or be
sustained after this offering. The market price of our common stock could be
subject to significant fluctuations after this offering. In particular, before
Cabletron distributes its Riverstone shares, relatively small trades of our
stock will have a disproportionate effect on our stock price.
The stock markets in general, and the markets for high technology stocks in
particular, have experienced extreme volatility that has often been unrelated
to the operating performance of particular companies. These broad market
fluctuations may harm the trading price of our common stock. We cannot assure
you that you will be able to resell your shares at or above the initial public
offering price, which will be determined by negotiations between the
representatives of the underwriters and us.
You should read this entire prospectus carefully and should not consider
any statement about us in press releases or Cabletron's conference calls
without carefully considering the risks and other information contained in
this prospectus.
Recent press releases and conference calls with various press and market
participants held by Cabletron have presented information about our business,
products, revenues and gross margins. For example, in a conference call with
analysts, media and stockholders on March 29, 2000, Cabletron stated, "The
singular focus on these [service provider] markets positions Riverstone to
enjoy unprecedented revenue growth in the future. On a go-forward basis, we
expect Riverstone's revenues to achieve an annual growth rate in excess of 100
percent in the fiscal year 2001, with the growth accelerating in the later
part of the year." In a conference call with analysts, media and stockholders
on June 28, 2000, Cabletron also made the following forward-looking
statements:
. "We continue to expect sustained growth [for Riverstone] in excess of
21% per quarter, or an annual growth rate in excess of 100%."
. "Based on our current projections for fiscal 2001, we expect
[Riverstone] to achieve a year-over-year growth rate in excess of 250%."
22
<PAGE>
. "We expect Riverstone's margin to improve over the next several
quarters. Over the longer term, as Riverstone achieves scale in the
business and product mix shifts towards higher end optical interfaces,
DWDM, and larger scale metro deployments, we expect Riverstone to
achieve gross margins in the range of 58 to 62 percent."
. "We presently expect that Riverstone's losses will begin to narrow by
the end of fiscal 2001, and that Riverstone will break even toward the
middle of fiscal 2002. Over the longer term, we expect Riverstone to
sustain operating margins of 20 to 25 percent."
. ""When you project out that 100 percent growth for this year [for
Riverstone], you would end up with... in excess of 250 [percent] growth
year over year... The actual year-over-year growth is going to be
amazingly strong."
Due to the inherent uncertainty of financial projections, these projected
results may be unattainable or unrealized. These forward-looking statements
are subject to the risks and uncertainties described elsewhere in this
prospectus, and were made in the context of Cabletron's larger operations and
were not prepared for use in the offering of our securities. These statements
were developed based on numerous estimates and numerous assumptions. These
estimates and assumptions reflect subjective judgments concerning future
results and may be incomplete or incorrect, and unanticipated events and
circumstances may occur. Actual results during the periods covered by these
forward-looking statements will vary, and these variations may be material and
adverse.
In the conference call Cabletron also stated, "Riverstone, being the only
vendor of a single-box solution that can provision applications across T1 and
T3 circuits, has no competition in what is now the hottest growing segment of
the metro markets--the Metro Last Mile." This statement is not accurate. We
believe that at least one other vendor has single box equipment with these
capabilities, and, as disclosed elsewhere in this prospectus, we face intense
competition in the network equipment market.
You should make your investment decision only after carefully evaluating
all of the information in this prospectus, and should not rely on other
information.
23
<PAGE>
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
Some of our statements in this prospectus, including those in the
Prospectus Summary, Risk Factors, Use of Proceeds, Management's Discussion and
Analysis of Financial Condition and Results of Operations and Business
sections, are forward-looking statements that involve risks and uncertainties.
These forward-looking statements include statements about our plans,
objectives, strategies, expectations, intentions, future financial performance
and other statements that are not historical facts. We use words like
anticipates, believes, expects, future and intends, and similar expressions to
indicate statements that are forward-looking. You should not inappropriately
rely on these forward-looking statements, which apply only as of the date of
this prospectus. Our actual results could differ materially from those
anticipated in the forward-looking statements for many reasons, including the
risks described under Risk Factors.
24
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 10 million shares of
common stock offered by us at an assumed initial public offering price of $13
per share will be $117.9 million after deducting estimated underwriting
discounts and commissions, and estimated offering expenses. If the
underwriters exercise in full their over-allotment option, we estimate that
the proceeds to us from the offering will be $136.0 million after similar
deductions. We estimate that the proceeds from the exercise of the stock
purchase rights held by the strategic investors, assuming that the strategic
investors exercise all of the purchase rights they hold, will be $48.9
million.
We intend to use the net proceeds of the offering and the exercise by the
strategic investors of their stock purchase rights for working capital and for
other general corporate purposes. We will use our working capital to fund our
operating expenses including our increased research and development costs and
the expansion of our sales and marketing force.
We may use a portion of the net proceeds to acquire complementary products,
technologies or businesses. However, we have no commitments or agreements for
any specific acquisitions and are not in negotiations for any acquisition
transactions.
Until the use of the net proceeds of this offering as described above, we
plan to invest the net proceeds in short-term, investment grade, interest
bearing obligations.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
intend to retain any future earnings for funding growth and do not expect to
pay any dividends in the near future.
25
<PAGE>
CAPITALIZATION
The following table shows our capitalization as of December 2, 2000:
. on an actual basis;
. on a pro forma basis to reflect the conversion of our series A
convertible preferred stock held by Cabletron into our common stock; and
. on a pro forma as adjusted basis to reflect:
. the sale of 10 million shares of common stock at an assumed initial
offering price of $13 per share after deducting the estimated
expenses and the underwriting discounts and commissions payable by
us; and
. the receipt of approximately $48.9 million based on the exercise of
outstanding stock purchase rights to purchase 5,510,729 shares of
our common stock held by the strategic investors. These stock
purchase rights may not be exercised until 10 business days before
the effectiveness of the registration statement related to this
offering, and the stock purchase rights terminate if shares are not
purchased on or before the date of effectiveness, as more fully
described under "Dilution" in this prospectus.
This table should be read with our financial statements and notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
December 2, 2000
--------------------------------
Pro Pro Forma
Actual Forma As Adjusted
---------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Long-term debt................................ $ -- $ -- $ --
------- ------- --------
Stockholders' equity:
Series A convertible preferred stock $.01
par value per share, 92,088,135 shares
authorized, issued and outstanding actual,
no shares issued or outstanding pro forma
and pro forma as adjusted.................. $ 921 $ -- $ --
Common stock, $.01 par value per share,
157,000,000 shares authorized;
100 shares issued and outstanding actual,
157,000,000 authorized, 92,088,235 and
107,598,964 issued and outstanding pro
forma and pro forma as adjusted,
respectively............................. -- 921 1,076
Additional paid-in capital.................. 114,051 114,051 280,770
Accumulated deficit......................... (34,907) (34,907) (34,907)
Unearned stock-based compensation........... (10,407) (10,407) (10,407)
Accumulated other comprehensive income...... (297) (297) (297)
------- ------- --------
Total stockholders' net investment...... 69,361 69,361 236,235
------- ------- --------
Total capitalization.................... $69,361 $69,361 $236,235
======= ======= ========
</TABLE>
The information in the table above does not include:
. 34,449,280 shares issuable upon exercise of outstanding options at a
weighted average exercise price of $4.67 per share as of December 2,
2000; and
. 10,550,720 additional shares available for future issuance under our
2000 equity incentive plan.
26
<PAGE>
If these options are exercised, and if we issue new options or rights under
our 2000 equity incentive plan or issue additional shares of common stock in
the future, new investors will experience further dilution.
Also, when Cabletron distributes to its stockholders our shares that it
owns, we will grant options to acquire shares of our common stock under our
2000 equity incentive plan to those persons holding Cabletron stock options at
that time. We have agreed with Cabletron that upon any distribution by
Cabletron of shares of our common stock to its stockholders, we will issue
warrants to the strategic investors to purchase the number of shares of our
common stock that they would have received from Cabletron in the distribution,
had they exercised their Cabletron warrants before the distribution.
As of December 2, 2000, there were 184,830,988 shares of Cabletron's
capital stock outstanding, options outstanding to purchase 11,898,484 shares
of Cabletron common stock, and the strategic investors held warrants to
purchase 450,000 shares of Cabletron common stock. Unvested Cabletron options
held by Riverstone employees as of the time of the distribution would
terminate because these employees would no longer be employed by a subsidiary
of Cabletron as of the time of the distribution. Cabletron's board of
directors has voted to accelerate, as of the time of the distribution, the
vesting of Cabletron options held by Riverstone employees which would vest by
February 28, 2002. Not including portions of Cabletron options held by
Riverstone employees which vest after February 28, 2002, as of December 2,
2000, there were options outstanding to purchase 11,153,006 shares of
Cabletron common stock. Assuming no change in these amounts from December 2,
2000 through the date of the distribution and that as of the date of the
distribution Cabletron owns 92,088,235 shares of our common stock, we would be
required to:
. grant options to purchase 6,492,699 shares of our common stock to
holders of Cabletron stock options; and
. issue warrants to the strategic investors to purchase approximately
220,701 shares of our common stock for warrants to purchase shares of
Cabletron common stock.
If the offering price per share of common stock issued in this offering
multiplied by the number of shares of common stock outstanding immediately
after this offering on a fully diluted basis exceeds $1.672 billion, we will
also be required to issue additional warrants to the strategic investors to
purchase a number of shares of our common stock equal to $1.25 million divided
by the price per share paid in this offering, at an exercise price equal to
the offering price.
We will also be required to issue additional stock purchase rights to the
strategic investors and adjust the exercise prices of the stock purchase
rights to adjust for dilution to the strategic investors if before the
completion of this offering:
. we issue equity to Cabletron in exchange for assets having a value of
over $5,000,000; or
. we grant additional stock options.
27
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted by the
difference between the initial offering price for each share you purchase and
the pro forma consolidated net tangible book value of all outstanding shares
after this offering. Our pro forma net tangible book value on December 2, 2000
was approximately $61.1 million, or $.66 for each outstanding share of common
stock, assuming the conversion of our series A convertible preferred stock
into 92,088,135 shares of our common stock. We calculate pro forma as adjusted
net tangible book value per share on a particular date by first determining
our total tangible assets taking into account our receipt of the net proceeds
of this offering based upon an assumed initial offering price of $13 per share
and adding the approximately $48.9 million that we would receive upon the
exercise of all the following outstanding stock purchase rights which were
held by the strategic investors as of December 2, 2000. These purchase rights
are to acquire:
. 972,482 shares of common stock at a purchase price of $8.02 per share;
. an additional 1,944,963 shares of common stock at a purchase price of
$8.02 per share;
. 1,944,963 shares of common stock at a purchase price of $9.25 per share;
and
. 648,321 shares of common stock at a purchase price of $11.72 per share.
These purchase prices will each be adjusted to 90% of the gross price paid per
share in this offering if that results in a purchase price lower than the
purchase price stated above, except for the 1,944,963 shares with an initial
purchase price of $8.02. Next, we subtract our total liabilities and then
divide the result by the number of outstanding shares of our common stock,
assuming the conversion of our series A convertible preferred stock into
92,088,135 shares of our common stock.
Our pro forma tangible net book value at December 2, 2000 would have been
$228.0 million, or approximately $2.12 for each outstanding share of our
common stock if we give effect to our receipt of the net proceeds from our
sale of the 10 million shares offered by this prospectus at an offering price
for each share of $13 and receipt of the proceeds from the exercise of the
purchase rights held by the strategic investors. This would result in an
immediate increase in net tangible book value of $1.46 for each share to our
existing stockholder and an immediate dilution of $10.88 for each share to our
new investors purchasing shares of common stock in the offering. The following
table illustrates this dilution for each share.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $13.00
Pro forma net tangible book value per share as of December 2,
2000.......................................................... $ .66
Increase per share attributable to new investors............... 1.46
-----
Pro forma as adjusted net tangible book value per share after
this offering................................................... 2.12
------
Dilution per share to new investors.............................. $10.88
======
</TABLE>
The following pro forma table summarizes, as of December 2, 2000, the
differences between the number and percentage of shares of common stock issued
to our existing stockholder, the strategic investors and new investors
purchasing shares of common stock in the offering. It also shows the
differences between the aggregate amount and the average price for each share
paid by them, assuming an initial public offering price of $13 for each share:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------- -------------------- Average Price
Number Percent Amount Percent per Share
----------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholder.... 92,088,235 86% $ 66,735,000 27% $ .72
Strategic investors..... 5,510,729 5 48,974,172 20 8.89
New investors........... 10,000,000 9 130,000,000 53 13.00
----------- --- ------------ ---
Total................. 107,598,964 100% $245,709,172 100%
=========== === ============ ===
</TABLE>
28
<PAGE>
As of December 2, 2000, we had outstanding options to purchase 34,449,280
shares of common stock under our 2000 equity incentive plan. These options had
a weighted average exercise price of $4.67 per share. We have reserved
10,550,720 additional shares for issuance under our 2000 equity incentive
plan. If these options are exercised, and if we issue new options or rights
under our stock plans or issue additional shares of common stock in the
future, new investors will experience further dilution.
Also, when Cabletron distributes to its stockholders our shares that it
owns, we will grant options to acquire shares of our common stock under our
2000 equity incentive plan to those persons holding Cabletron stock options at
that time. We have agreed with Cabletron that upon any distribution by
Cabletron of shares of our common stock to its stockholders, we will issue
warrants to the strategic investors to purchase the number of shares of our
common stock that they would have received from Cabletron in the distribution,
had they exercised their Cabletron warrants before the distribution.
As of December 2, 2000, there were 184,830,988 shares of Cabletron's
capital stock outstanding, options outstanding to purchase 11,898,484 shares
of Cabletron common stock, and the strategic investors held warrants to
purchase 450,000 shares of Cabletron common stock. Unvested Cabletron options
held by Riverstone employees as of the time of the distribution would
terminate because these employees would no longer be employed by a subsidiary
of Cabletron as of the time of the distribution. Cabletron's board of
directors has voted to accelerate, as of the time of the distribution, the
vesting of Cabletron options held by Riverstone employees which would vest by
February 28, 2002. Not including portions of Cabletron options held by
Riverstone employees which vest after February 28, 2002, as of December 2,
2000, there were options outstanding to purchase 11,153,006 shares of
Cabletron common stock. Assuming no change in these amounts from December 2,
2000 through the date of the distribution and that as of the date of the
distribution Cabletron owns 92,088,235 shares of our common stock, we would be
required to:
. grant options to purchase approximately 6,492,699 shares of our common
stock to holders of Cabletron stock options; and
. issue warrants to the strategic investors to purchase 220,701 shares of
our common stock for warrants to purchase shares of Cabletron common
stock.
If the offering price per share of common stock issued in this offering
multiplied by the number of shares of common stock outstanding immediately
after this offering on a fully diluted basis exceeds $1.672 billion, we will
also be required to issue additional warrants to the strategic investors to
purchase a number of shares of our common stock equal to $1.25 million divided
by the price per share paid in this offering, at an exercise price equal to
the offering price.
We will also be required to issue additional stock purchase rights to the
strategic investors and adjust the exercise prices of the stock purchase
rights to adjust for dilution to the strategic investors if before the
completion of this offering:
. we issue equity to Cabletron in exchange for assets having a value of
over $5,000,000; or
. we grant additional stock options.
29
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables present our selected consolidated financial data. You
should read the information below with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our historical
consolidated financial statements and the notes to those statements included
in this prospectus. Our consolidated statements of operations data for the
years ended February 28, 1998 and 1999 and February 29, 2000 and nine months
ended December 2, 2000 and the consolidated balance sheet data as of February
28, 1999, February 29, 2000 and December 2, 2000 are taken from our audited
consolidated financial statements included in this prospectus, which have been
audited by KPMG LLP, independent auditors, whose report is also included in
this prospectus.
The consolidated statements of operations data for the years ended February
29, 1996 and February 28, 1997 and the consolidated balance sheet data as of
February 29, 1996, February 28, 1997 and February 28, 1998 are taken from our
unaudited consolidated financial data that is not included in this prospectus.
The consolidated statements of operations data for the nine months ended
November 30, 1999 are taken from unaudited consolidated financial statements
included in this prospectus and, in the opinion of management, include all
adjustments, consisting only of normal recurring accruals, that are necessary
for a fair presentation of our financial position and results of operations
for these periods.
We have prepared the accompanying table to reflect our historical
consolidated financial information in a manner consistent with stand-alone
operations by reflecting transactions of Cabletron and balances attributable
to us in our financial statements for all periods presented. The historical
financial information may not be indicative of our future performance and does
not necessarily reflect what our financial position and results of operations
would have been had we operated as a separate, stand-alone entity during the
periods covered.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
--------------------------------------------------- ----------------------
Feb. 29, Feb. 28, Feb. 28, Feb. 28, Feb. 29, Nov. 30, Dec. 2,
1996 1997 1998 1999 2000 1999 2000
-------- -------- -------- --------- ---------- ----------- ----------
(unaudited) (unaudited)
(in thousands, except share and pro forma per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Net revenues............ $ -- $ -- $ 59 $ 3,284 $ 23,076 $ 10,315 $ 63,116
Cost of revenues........ -- -- 7 3,009 11,976 5,883 28,071
------- -------- -------- --------- ---------- -------- ----------
Gross profit........... -- -- 52 275 11,100 4,432 35,045
Operating Expenses:
Research and
development........... 5,559 8,606 12,013 26,647 30,691 23,286 30,566
Sales and marketing.... -- -- 1,962 3,188 9,279 5,459 24,902
General and
administrative........ 962 7,147 3,053 5,025 8,534 6,549 9,655
Stock-based
compensation.......... -- -- -- -- -- -- 30,662
Special charges........ -- 2,756 -- 150,382 -- -- --
------- -------- -------- --------- ---------- -------- ----------
Total operating
expenses............ 6,521 18,509 17,028 185,242 48,504 35,294 95,785
------- -------- -------- --------- ---------- -------- ----------
Operating loss....... (6,521) (18,509) (16,976) (184,967) (37,404) (30,862) (60,740)
Interest
expense/(income)....... -- -- -- 28 27 20 (1,545)
------- -------- -------- --------- ---------- -------- ----------
Net loss............. $(6,521) $(18,509) $(16,976) $(184,995) $ (37,431) $(30,882) $ (59,195)
======= ======== ======== ========= ========== ======== ==========
Net loss per share:
Basic and diluted...... (65.21) (185.09) (169.76) (1,849.95) (374.31) (308.82) (591.95)
Weighted average number
of common shares
outstanding:
Basic and diluted...... 100 100 100 100 100 100 100
Pro forma net loss per
share:
Basic and diluted...... $ (.40) $ (.63)
Pro forma weighted
average number of
common shares
outstanding:
Basic and diluted...... 93,831,720 93,831,720
</TABLE>
<TABLE>
<CAPTION>
-------------------------- -------------------------
Feb. 29, Feb. 28, Feb. 28, Feb. 28, Feb. 29, Dec. 2,
1996 1997 1998 1999 2000 2000
-------- -------- -------- -------- -------- -------
(--unaudited--)
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............. $ -- $ -- $ -- $ -- $ -- $35,786
Working capital
(unaudited)............. -- (639) (348) 3,762 11,425 48,792
Total assets............. 1,685 2,453 2,961 24,529 33,248 89,646
Accounts payable, related
party................... -- -- -- -- -- 6,794
Stockholder's net
investment.............. 1,685 1,340 2,337 22,919 27,028 69,361
</TABLE>
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read together the following discussion and the consolidated
financial statements and related notes of Riverstone appearing elsewhere in
this prospectus. The discussion below contains forward-looking statements that
involve risks and uncertainties, including statements relating to anticipated
costs and expenses, mix of revenues and plans for introducing new products or
services. Our actual results could differ materially from the results
discussed in these forward-looking statements.
Overview
We are a leading provider of metropolitan area Internet infrastructure
solutions that enable Internet service providers to deliver advanced products
and services to their customers. Our products consist of advanced switch
routers and web switches that enable Internet service providers to offer a
wide range of products and services that increase revenue and maintain
customer loyalty.
Riverstone was created by the combination of two businesses previously
acquired by Cabletron. These businesses are Zeitnet, which Cabletron acquired
in 1996, and Yago Systems, which Cabletron acquired in 1998. The majority of
our net revenues comes from sales of our switch routers and web switches. In
fiscal year 2000, British Telecom accounted for 15% of our net revenues,
Earthlink accounted for 14% of our net revenues, Metricom accounted for 12% of
our net revenues, and Vitts Networks accounted for 11% of our net revenues. We
began shipping products outside the United States in fiscal year 2000, and
these shipments accounted for 23% of our net revenues during fiscal year 2000
and 26% of our net revenues for the nine months ended December 2, 2000.
Our industry has experienced erosion of average selling prices. We
anticipate that the average selling prices of our products will decrease in
the future in response to competitive pricing pressures, which may reduce our
gross margins or revenues. We expect our quarterly gross margins to fluctuate
with changes in our product mix. Most of our sales within the United States
have been through direct sales channels. On November 17, 2000 we entered into
a strategic alliance agreement which allows Tellabs to resell our products on
a worldwide, non-exclusive basis. The agreement requires that Tellabs purchase
minimum quantities of products if specified conditions are met. We intend to
add and maintain a limited number of strategic distribution relationships,
including with key original equipment manufactures, or OEMs, who may offer
products or distribution channels that complement ours. International sales
are made through a combination of direct and indirect sale efforts. Enterasys
is our primary international distributor, and we have recently initiated sales
and marketing efforts internationally, focusing initially on Europe and Asia.
As part of this effort, we are negotiating separate reseller agreements with
other distributors in Europe and Asia.
Revenue Recognition. We generally recognize revenue upon shipment of
products, provided that there is no uncertainty of customer acceptance, there
is a contract or a purchase order, the sales price is fixed and determinable
and we believe collectibility is probable. If uncertainties exist, revenue is
recognized when these uncertainties are resolved. Revenues from service and
maintenance contracts are deferred and recognized ratably over the period the
services are performed, typically twelve months or less. We accrue estimated
warranty costs and sales returns and allowances at the time of shipment based
on contractual rights and historical experience. We recognize software license
revenue on our resale of Aprisma software upon the delivery of the software
provided that there are no uncertainties relating to customer acceptance, the
fee is fixed and determinable, and collection of the resulting receivable is
probable. We do not sell our RapidOS operating system software on a stand
alone basis.
Lease Financing. We enter into transactions in which customers receive
financing for the purchase of our equipment from third party leasing
organizations that in turn remit payment to us. In some transactions, we have
guaranteed a portion of our customer's lease payments to be made to the
lessor. We record these transactions consistent with Statement of Financial
Accounting Standards No. 13, Accounting for Leases and related
31
<PAGE>
interpretations. Substantially all of our leasing transactions are accounted
for by our customers as capital leases. When we provide a financing guarantee,
we record revenue at the time of shipment, but maintain a sales reserve. We
base the amount of the reserve on a percentage of the guaranteed lease
payments, consistent with industry experience.
Cost of Revenues. Cost of revenues include costs of raw materials, direct
labor, manufacturing overhead and amounts paid to third-party contract
manufacturers, and other costs related to warranty and contractual obligations
and customer service and support.
Research and Development. Research and development expenses consist
primarily of salaries and related personnel expenses, consultants and outside
service provider fees, non-recurring engineering charges and prototype costs
related to the development, testing and enhancement of our ASICs and software,
and the depreciation of property and equipment related to these activities.
Our research and development efforts can require significant expenditures, the
timing of which can cause quarterly variability in our expenses. We expense
research and development costs as incurred. We believe continued investment in
product enhancements and new product development are critical to attain our
strategic objectives, and we expect research and development expenses to
continue to increase in absolute dollars.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and related expenses for personnel engaged in marketing,
sales and customer support functions, and trade shows, advertising and
promotional expenses. We intend to expand our worldwide direct and indirect
sales organizations substantially by hiring additional sales personnel and
establishing additional sales offices. We plan to initiate additional
marketing programs to support our existing and new products and to build brand
awareness of the Riverstone name. We believe that continued investment in
sales and marketing is critical to our success and expect these expenses to
increase in absolute dollars in the future.
General and Administrative. General and administrative expenses consist
primarily of employee compensation and related expenses, professional and
contractor fees, finance, legal, facilities, human resources and provisions
for doubtful accounts. Included in general and administrative expenses are
expenses for services provided by Cabletron under our services agreement with
them. Before the effective date of the services agreement, March 1, 2000,
Cabletron allocated to us general and administrative expenses that it incurred
on our behalf, based on headcount and revenue. We expect general and
administrative expenses to increase in absolute dollars over the next year as
we begin to build our own administrative infrastructure, while continuing to
make payments to Cabletron under our services agreement.
Additional Option and Warrant Obligation. When Cabletron completes its
planned distribution of its Riverstone stock, we will be obligated to issue
additional options and warrants to acquire shares of our common stock to some
holders of Cabletron stock options and the strategic investors at the time of
the distribution.
Stock Based Compensation--Nine Months Ended December 2, 2000. In May and
August 2000, we granted some employees of Cabletron and Enterasys, including
Piyush Patel, Cabletron's president and chief executive officer and a director
of Riverstone, Eric Jaeger, Cabletron's executive vice president and a
director of Riverstone and David Kirkpatrick, Cabletron's chief financial
officer, options to purchase an aggregate of 2,658,550 shares of our common
stock. Because these individuals are not employees of Riverstone, we had
accounted for these options as variable options. These options were
accelerated to become fully vested in November 2000, and become exercisable at
the time Cabletron distributes its Riverstone common stock to its
stockholders, in connection with a sale of us or April 1, 2004, whichever
occurs first. Transfer of these options is generally restricted. The shares of
common stock underlying options granted to Mr. Patel, Mr. Jaeger and Mr.
Kirkpatrick are also nontransferable, except that these restrictions lapse for
25% of the shares on April 1, 2001 and, for the remaining shares, ratably on a
monthly basis through April 1, 2004; provided, however, that if before that
time any of these individuals is no longer employed by Cabletron, Aprisma,
GNTS, Enterasys, or us, any restriction on the transfer of shares not then
lapsed for that individual will remain in effect until April 1, 2005. The
options granted to Mr. Patel, Mr. Kirkpatrick and Mr. Jaeger also provide that
the restrictions on
32
<PAGE>
transfer of the underlying shares will lapse on an accelerated basis as to an
additional 6.25% of the shares upon a distribution by Cabletron of its
Riverstone common stock, and for accelerated release of restrictions on
underlying shares in the event of a sale of Riverstone. In specified
circumstances involving a substitution of Cabletron options for options to
acquire Riverstone common stock, the options granted to employees of Cabletron
and Enterasys would become immediately exercisable. Under applicable
accounting principles, we took a one-time compensation charge in the amount of
approximately $24.9 million in our third quarter of fiscal year 2001 because
of the acceleration of the vesting of these options. This amount represented
the fair value of the options using the Black-Scholes option pricing model
less the compensation charges previously recorded through the end of our
second quarter ended September 2, 2000.
We have also issued stock options to consultants in exchange for services
during the nine months ended December 2, 2000. We calculated the fair value of
the stock options granted using the Black-Scholes option pricing model. We
believe that the fair value of the stock options granted to consultants is
more reliably measurable than the fair value of the services received. We
incurred approximately $.3 million and $1.9 million of compensation expense
during the second and third quarters for the fair value of the options granted
to consultants. As the majority of these options have fully vested and the
related services have been performed, we do not expect any significant future
compensation expenses associated with these options granted to consultants.
We recorded approximately $11.1 million of unearned stock-based
compensation for stock option grants to employees based on the excess of the
determined fair market value over the exercise price at date of grant and for
an individual who changed employee status from Cabletron to Riverstone during
the nine month period ended December 2, 2000. This compensation expense is
being recognized over the options' vesting period of four years. We recorded
stock-based compensation expense of $.7 million for the nine month period
ended December 2, 2000. For these option grants made through December 2, 2000,
we expect to recognize stock-based compensation expenses of $1.0 million, $2.6
million, $2.6 million, $2.6 million and $1.6 million during our fiscal years
2001, 2002, 2003, 2004 and 2005.
Basis of Presentation
Our fiscal year 2000 ended on February 29, 2000, and previous fiscal years
ended on the last calendar day of February. Effective March 1, 2000, we
changed our year-end to a 52-53 week fiscal year, ending on the Saturday
closest to the last calendar day in February. This change is not expected to
have a significant impact on our consolidated financial results.
Our consolidated financial statements have been taken from the consolidated
financial statements of Cabletron using historical results of operations and
historical bases of the assets and liabilities attributable to our operations.
The consolidated financial statements also include allocations to us of
Cabletron corporate expenses, including centralized legal, accounting,
treasury, real estate, information technology, distribution, customer
services, sales, marketing, engineering and other corporate services and
infrastructure costs. All of the allocations and estimates in our financial
statements are based upon assumptions that our management and Cabletron's
management believe to be reasonable reflections of the cost of services
provided or benefit received by us.
The financial information presented in this prospectus is not indicative of
our financial position, results of operations or cash flows in the future, nor
is it necessarily indicative of what our financial position, results of
operations or cash flows would have been had we been a separate, stand-alone
company for the periods presented. The financial information presented in this
prospectus does not reflect the many significant changes that will occur in
our funding and operations due to our becoming a stand-alone company and this
offering.
33
<PAGE>
Results of Operations
The following table shows consolidated statements of operations data
expressed as a percentage of net revenues for the periods indicated:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
------------------------------ -------------------
Feb. 28, Feb. 28, Feb. 29, Nov. 30, Dec. 2,
1998 1999 2000 1999 2000
-------- -------- -------- ----------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues................ 100% 100% 100% 100% 100%
Cost of revenues............ 12 92 52 57 44
------- ------- ------ ------ ------
Gross profit.............. 88 8 48 43 56
------- ------- ------ ------ ------
Operating expenses
Research and development.. 20,361 811 133 226 48
Sales and marketing....... 3,325 97 40 53 40
General and
administrative........... 5,175 153 37 63 15
Stock-based compensation.. -- -- -- -- 49
Special charges........... -- 4,579 -- -- --
------- ------- ------ ------ ------
Total operating
expenses............... 28,861 5,640 210 342 152
------- ------- ------ ------ ------
Operating loss.......... (28,773) (5,632) (162) (299) (96)
Interest expense/(income)... -- 1 -- -- (2)
------- ------- ------ ------ ------
Net loss.................... (28,773)% (5,633)% (162)% (299)% (94)%
======= ======= ====== ====== ======
</TABLE>
Nine Months Ended December 2, 2000 and November 30, 1999
Net Revenues. Net revenues for the first nine months of fiscal year 2001
were $63.1 million, an increase of $52.8 million, or 512%, as compared to
$10.3 million for the first nine months of fiscal year 2000. The increase in
net revenues was primarily due to the addition of new service provider
customers both in the United States and internationally.
Included in net revenues for the nine months ended December 2, 2000 is $2.7
million of revenue we received in the form of referral fees from Enterasys
under the terms of our commercial agreement with Enterasys. This amount
represents Riverstone's commission revenues from Enterasys' sales of Enterasys
products to our customers.
Cost of Revenues. Cost of revenues for the first nine months of fiscal year
2001 was $28.1 million, an increase of $22.2 million, or 377%, as compared to
$5.9 million for the first nine months of fiscal year 2000. As a percentage of
net revenues, the cost of revenues decreased to 44% from 57% for the same
period. The improvements are primarily attributable to economies of scale
achieved from increased net revenues.
Research and Development. Research and development expenses for the first
nine months of fiscal year 2001 were $30.6 million, an increase of $7.3
million, or 31%, as compared to $23.3 million for the first nine months of
fiscal year 2000. As a percentage of net revenues, research and development
expenses decreased to 48% from 226% for the same period. $2.9 million of the
increase in research and development expenses related to Cabletron's transfer
to us of its research and development group based in Reading, England during
the first quarter of fiscal year 2001. Historically, these engineers worked on
Enterasys products. The remaining increase resulted from increased personnel
and related costs.
Sales and Marketing. Sales and marketing expenses for the first nine months
of fiscal year 2001 were $24.9 million, an increase of $19.4 million, or 356%,
as compared to $5.5 million for the first nine months of fiscal year 2000. As
a percentage of net revenues, sales and marketing expenses decreased to 40%
from 53% for the same periods. The increase in sales and marketing expenses
resulted primarily from the addition of sales and marketing personnel to
support increased sales and marketing activities.
34
<PAGE>
General and Administrative. General and administrative expenses for the
first nine months of fiscal year 2001 were $9.7 million, an increase of $3.1
million, or 47%, as compared to $6.6 million for the first nine months of
fiscal year 2000. As a percentage of net revenues, general and administrative
expenses decreased to 15% from 63% for the same period. The increase in
general and administrative expenses is primarily due to the expansion of our
operations.
Stock-based Compensation. We recorded total deferred compensation of $11.1
million during the nine months ended December 2, 2000, related to stock option
grants to employees and an employee change in status, of which approximately
$.7 million was expensed as stock-based compensation during that period. We
recorded approximately $27.8 million of stock-based compensation expense
during the nine months ended December 2, 2000, relating to stock option grants
to employees of Cabletron and Enterasys primarily related to the acceleration
of vesting of these options during our third quarter. We also recorded
approximately $2.2 million of compensation expense related to options granted
to consultants.
Fiscal Years Ended February 29, 2000, February 28, 1999 and February 28,
1998
Net Revenues. Net revenues for fiscal year 2000 were $23.1 million, an
increase of $19.8 million, or 603%, compared to $3.3 million for fiscal year
1999. The significant increase in net revenues was primarily due to the
addition of new service provider customers both in the United States and
internationally. Net revenues for fiscal year 1998 were negligible.
Cost of Revenues. Cost of revenues for fiscal year 2000 was $12.0 million,
an increase of $9.0 million, or 298%, compared to $3.0 million for fiscal year
1999. As a percentage of net revenues, cost of revenues decreased to 52% from
92% for the same periods. The improvement in our gross margin was primarily
attributable to economies of scale achieved from increased net revenues. Cost
of revenues for fiscal 1998 was negligible.
Research and Development. Research and development expenses for fiscal year
2000 were $30.7 million, an increase of $4.0 million, or 15%, over fiscal year
1999. Research and development expenses for fiscal year 1999 were $26.6
million, an increase of $14.6 million, or 122%, compared to $12.0 million for
fiscal year 1998. This increase was primarily due to the Yago Systems
acquisition. Research and development expenses as a percentage of net revenues
were 133% for fiscal year 2000, 811% for fiscal year 1999 and 20,361% for
fiscal year 1998. The increase in research and development expenses for these
periods was primarily due to increased personnel.
Sales and Marketing. Sales and marketing expenses for fiscal year 2000 were
$9.3 million, an increase of $6.1 million, or 191%, over fiscal year 1999.
Sales and marketing expenses for fiscal year 1999 were $3.2 million, an
increase of $1.2 million, or 62%, compared to $2.0 million for fiscal year
1998. Sales and marketing expenses as a percentage of net revenues were 40%
for fiscal year 2000, 97% for fiscal year 1999 and 3,325% for fiscal year
1998. The increase in sales and marketing expenses for these periods was
primarily due to increased personnel.
General and Administrative. General and administrative expenses for fiscal
year 2000 were $8.5 million, an increase of $3.5 million, or 70%, over fiscal
year 1999. General and administrative expenses for fiscal year 1999 were $5.0
million, an increase of $2.0 million, or 65%, compared to $3.1 million for
fiscal year 1998. General and administrative expenses as a percentage of net
revenues were 37% for fiscal year 2000, 153% for fiscal year 1999 and 5,175%
for fiscal year 1998. The increase from fiscal year 1999 to fiscal year 2000
was primarily due to a $1.9 million increase in infrastructure costs and a
$1.6 million increase in our provision for doubtful accounts. We have not
written-off significant accounts receivable balances during fiscal year 2000.
We perform specific analysis of our customer balances on a regular basis and
provide for doubtful accounts based on the identification of collections risk.
The receivable balance increased $8.9 million during fiscal year 2000. As the
accounts receivable balance increased during the fiscal year, the amount of
specific risk identified also increased, which we have appropriately provided
for in the reserve for doubtful accounts. The increase in general and
administrative expenses from fiscal year 1998 to fiscal year 1999 was
primarily due to the Yago Systems acquisition.
35
<PAGE>
Special Charges. In March 1998, Cabletron acquired Yago Systems. The
purchase accounting for this has been pushed down by Cabletron to Riverstone.
The recorded cost of the Yago Systems acquisition was approximately
$165.7 million, including direct costs of $2.6 million. Based on an
independent appraisal, approximately $150.0 million of the purchase price was
allocated to in-process research and development. We recorded special charges
of $150.0 million for this in-process research and development at the date of
acquisition. Our consolidated results of operations include the operating
results of Yago Systems from the acquisition date. The fiscal 1999 special
charges also included $0.4 million related to a write-off of manufacturing
equipment.
Income Taxes. Our operating results historically have been included in
Cabletron's consolidated United States federal and state income tax returns.
The provision for income taxes in these consolidated financial statements has
been determined on a separate return basis. We have not recognized any
deferred tax benefit for the net operating losses from the periods presented
because Cabletron used them during these consolidated tax return years and
they will not be available to us. Under the separate return method, we would
not have been able to recognize the tax benefit. We have recorded a full
valuation allowance against our deferred tax assets because our management
believes that, after considering all the available objective evidence, both
positive and negative, historical and prospective, with greater weight given
to historical evidence, it is more likely than not that these assets will be
realized.
If we establish foreign subsidiaries in the future, our mix of income
before taxes in the various tax jurisdictions could cause our effective tax
rate to fluctuate. Our tax liability after the date of our separation and
before the date of Cabletron's distribution will be determined by our tax
sharing agreement with Cabletron and its affiliates. From the date of our
separation, Cabletron is required to reimburse us for any tax losses
attributable to us that are used by Cabletron, and we are required to
reimburse Cabletron for any tax liabilities attributable to us that are paid
by Cabletron.
Quarterly Results of Operations
The following tables show our statement of operations data for our previous
eleven quarters, including these amounts expressed as a percentage of net
revenues. This unaudited quarterly information has been prepared on the same
basis as our audited financial statements and, in the opinion of our
management, reflects all adjustments, consisting only of normal recurring
entries, necessary for a fair presentation of the information for the periods
presented.
The historical financial information may not be indicative of our future
performance and does not necessarily reflect what our financial position and
results of operations would have been had we operated as a separate, stand-
alone entity during the periods presented.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------------------------
May 31, Aug. 31, Nov. 30, Feb. 28, May 31, Aug. 31, Nov. 30, Feb. 29, Jun. 3, Sept. 2,
1998 1998 1998 1999 1999 1999 1999 2000 2000 2000
--------- -------- -------- -------- ------- -------- -------- -------- -------- --------
(in thousands, unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues...... $ 110 $ 284 $ 933 $ 1,957 $ 2,480 $ 2,843 $ 4,992 $12,761 $ 15,778 $ 20,554
Cost of revenues.. 209 374 870 1,556 1,525 1,930 2,428 6,093 7,271 9,157
--------- ------- ------- ------- ------- -------- -------- ------- -------- --------
Gross profit...... (99) (90) 63 401 955 913 2,564 6,668 8,507 11,397
Operating
expenses:
Research and
development...... 6,504 7,465 6,887 5,791 6,949 8,373 7,964 7,405 10,177 10,328
Sales and
marketing........ 774 716 886 812 1,315 1,713 2,431 3,820 7,295 7,595
General and
administrative... 922 1,333 1,406 1,364 1,574 2,398 2,577 1,985 3,281 3,030
Stock-based
compensation..... -- -- -- -- -- -- -- -- 263 2,989
Special charges... 150,000 -- -- 382 -- -- -- -- -- --
--------- ------- ------- ------- ------- -------- -------- ------- -------- --------
Total operating
expenses....... 158,200 9,514 9,179 8,349 9,838 12,484 12,972 13,210 21,016 23,942
--------- ------- ------- ------- ------- -------- -------- ------- -------- --------
Operating loss.. (158,299) (9,604) (9,116) (7,948) (8,883) (11,571) (10,408) (6,542) (12,509) (12,545)
Interest
expense/(income).. 9 6 7 6 8 6 6 7 4 (770)
--------- ------- ------- ------- ------- -------- -------- ------- -------- --------
Net loss........ $(158,308) $(9,610) $(9,123) $(7,954) $(8,891) $(11,577) $(10,414) $(6,549) $(12,513) $(11,775)
========= ======= ======= ======= ======= ======== ======== ======= ======== ========
<CAPTION>
Dec 2,
2000
---------
<S> <C>
Net revenues...... $ 26,784
Cost of revenues.. 11,643
---------
Gross profit...... 15,141
Operating
expenses:
Research and
development...... 10,061
Sales and
marketing........ 10,012
General and
administrative... 3,344
Stock-based
compensation..... 27,410
Special charges... --
---------
Total operating
expenses....... 50,827
---------
Operating loss.. (35,686)
Interest
expense/(income).. (779)
---------
Net loss........ $(34,907)
=========
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------------------------------------------
May 31, Aug. 31, Nov. 30, Feb. 28, May 31, Aug. 31, Nov. 30, Feb. 29, Jun. 3, Sept. 2,
1998 1998 1998 1999 1999 1999 1999 2000 2000 2000
-------- -------- -------- -------- ------- -------- -------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Percentage of
net revenues:
Net revenues ... 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %
Cost of
revenues....... 190 132 93 80 61 68 49 48 46 45
-------- -------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit.... (90) (32) 7 20 39 32 51 52 54 55
Operating
expenses:
Research and
development.... 5,913 2,629 738 296 280 295 160 58 65 50
Sales and
marketing...... 704 252 95 41 53 60 49 30 46 37
General and
administrative.. 838 469 151 70 63 84 52 16 21 15
Stock-based
compensation... -- -- -- -- -- -- -- -- 2 15
Special
charges........ 136,364 -- -- 20 -- -- -- -- -- --
-------- -------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses....... 143,819 3,350 984 427 396 439 261 104 134 117
-------- -------- ------- ------- ------- ------- ------- ------- ------- -------
Operating loss.. (143,909) (3,382) (977) (407) (357) (407) (210) (52) (80) (62)
Interest
expense/(income).. 8 2 1 -- -- -- -- -- -- (2)
-------- -------- ------- ------- ------- ------- ------- ------- ------- -------
Net loss........ (143,917)% (3,384)% (978)% (407)% (357)% (407)% (209)% (52)% (80)% (60)%
======== ======== ======= ======= ======= ======= ======= ======= ======= =======
<CAPTION>
Dec. 2,
2000
--------
<S> <C>
Percentage of
net revenues:
Net revenues ... 100%
Cost of
revenues....... 43
--------
Gross profit.... 57
Operating
expenses:
Research and
development.... 38
Sales and
marketing...... 37
General and
administrative.. 13
Stock-based
compensation... 102
Special
charges........
--------
Total operating
expenses....... 190
--------
Operating loss.. (133)
Interest
expense/(income).. (3)
--------
Net loss........ (130)%
========
</TABLE>
While research and development expenses have increased year-over-year,
quarterly expenses have varied significantly. In the quarters ended August 31,
1998, November 30, 1998, August 31, 1999, and June 3, 2000, we incurred
increased levels of prototyping and certification expenses related to new
product introductions. In the quarter ended June 3, 2000, Cabletron
transferred to us its Reading, England research and development group
resulting in an additional $1.2, $1.1 and $.6 million in research and
development expenses at June 3, September 2, and December 2, 2000.
The significant increase in general and administrative expenses for the
quarters ended May 31, 1999, August 31, 1999 and November 30, 1999, is
primarily due to an increase in our provision for doubtful accounts from
growth in our trade receivables.
The significant increase in sales and marketing expenses for the quarter
ended December 2, 2000 is due to increases in our sales force, particularly
internationally.
Liquidity and Capital Resources
Historically, Cabletron has administered our cash. We transferred cash
receipts related to our business to Cabletron periodically, and Cabletron has
provided funds to cover our disbursements. We have reported no cash or cash
equivalents at February 29, 2000. On December 2, 2000, we reported cash of
$35.8 million in our intercompany cash account. Cabletron currently
administers this intercompany account, as provided by our services agreement
with them. We expect to manage our cash account after the completion of this
offering.
Cash used in operating activities was $25.1 million for the nine months
ended December 2, 2000. Cash used by operating activities was $40.3 million in
fiscal year 2000, $37.0 million in fiscal year 1999 and $16.1 million in
fiscal year 1998. Cash used by operating activities in these periods was
primarily attributable to general operating expenses and increases in accounts
receivable, inventories and other working capital items.
Investing activities consisted of capital expenditures of $10.2 million in
the nine months ended December 2, 2000, $4.1 million in fiscal year 2000, $3.8
million in fiscal year 1999 and $1.9 million in fiscal year 1998. Capital
expenditures during these periods include production equipment, research and
development equipment, computers, enterprise resource planning software
applications and facility-related improvements.
Cash provided by financing activities consisted primarily of net transfers
from Cabletron under our cash administration arrangements with them. We also
received approximately $7 million for the issuance of stock purchase rights to
the strategic investors.
Our principal administrative, sales, marketing and research and development
facilities are located in an approximately 129,200 square foot facility in
Santa Clara, California, under a lease that was assigned to us by a
37
<PAGE>
subsidiary of Cabletron effective August 28, 2000. The initial term of the
lease expires on February 28, 2006. We expect the cost of this lease to be
approximately $.6 million for the last quarter of fiscal year 2001. The lease
provides for annual increases in rent.
Our future capital requirements will depend on a number of factors,
including the timing and rate of the expansion of our business. We anticipate
a substantial increase in our capital expenditures to support growth in
operations and infrastructure. However, our underlying assumed levels of
revenues and expenses may prove to be inaccurate. We may need to raise
additional funds through public or private financing or other arrangements to:
. support more rapid expansion of our business than we anticipate;
. develop and introduce new or enhanced products or services;
. respond to competitive pressures;
. invest in or acquire businesses or technologies; or
. respond to unanticipated requirements or developments.
Financing may not be available to us, if needed, on favorable terms or at
all. If we raise additional funds through the issuance of equity securities,
dilution to existing stockholders may result. If sufficient funds are not
available, we may be unable to introduce new products and services, expand our
sales force and service organization or compete effectively in our markets,
any of which could materially harm our business, financial condition and
results of operations.
We intend to use the net proceeds of the offering and the exercise by the
strategic investors of their stock purchase rights for working capital and for
other general corporate purposes. We will use our working capital to fund our
operating expenses including our increased research and development costs and
the expansion of our sales and marketing force.
We believe that our existing cash and cash equivalents will be sufficient
to meet our anticipated cash needs for working capital and capital
expenditures over the next 12 months.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. Under our services agreement with Cabletron, Cabletron
provides us with a centralized treasury function. As part of this function,
Cabletron administers our cash account. Our cash account represents an amount,
which may be adjusted periodically for our receivables collected and payables
paid and for other appropriate credits and debits, which is payable on demand
by Cabletron to us in cash. The amount of cash we can demand from Cabletron is
not affected by any profit or loss Cabletron may realize from its cash
management activities, except that Cabletron does credit interest income to us
based on our weighted average cash balance at the same rate as Cabletron earns
on average on its holdings of cash, cash equivalents and other short-term
investments. As of December 2, 2000, our cash account with Cabletron totaled
$35.8 million. Based upon Cabletron's reported cash reserves, we do not
believe that there is any material risk that Cabletron would fail to pay us
upon demand.
Foreign Currency Exchange Risk. Under our services agreement with
Cabletron, Cabletron manages our treasury risk management strategy.
Cabletron's strategy has been to use foreign exchange forward and option
contracts to hedge some balance sheet exposures and intercompany balances
against future movements in foreign exchange rates. Gains and losses on the
forward and option contracts are largely offset by gains and losses on the
underlying exposure and consequently a sudden or significant change in foreign
exchange rates would not
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have a material impact on future net income or cash flows. Cabletron performed
a sensitivity analysis as of February 29, 2000, which resulted in immaterial
fair value movements based on hypothetical exchange rate movements. Consistent
with that analysis, our foreign currency exchange risk, as it relates to fair
value, is immaterial. We are evaluating our exchange rate risk management
strategy. We do not now or in the future intend to use derivative financial
instruments for trading purposes.
Recent Accounting Pronouncements
In June 1998, June 1999, and June 2000 the Financial Accounting Standards
Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS,
No. 133, Accounting for Derivative Instruments and Hedging Activities, SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of FASB Statement No. 133 and SFAS No. 138, Accounting
for Certain Derivative Instruments and Certain Hedging Activities - an
amendment of FASB Statement No. 133. These statements require companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS 133 will be effective for our
fiscal year 2002. We believe that adoption of these statements will not have a
significant impact on our financial results.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. Statement of Position 98-1
requires that entities capitalize costs related to internal-use software once
specified criteria have been met. We adopted Statement of Position 98-1 in our
first quarter of fiscal 2001. The adoption of this statement did not have a
significant impact on our financial results.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, or SAB 101, Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. We have
adopted SAB 101 and the adoption did not have a material impact on our
financial statements.
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BUSINESS
Overview
We are a leading provider of Internet infrastructure equipment to service
providers in the metropolitan area network. The metropolitan area network
encompasses service providers, the Internet infrastructure connecting these
service providers with their customers and the Internet backbone.
Historically, end-users only required basic bandwidth and connectivity to the
Internet. Today, the Internet is an integral part of communication and
commerce, creating end-user demand for sophisticated business applications and
services. Service providers are seeking to build networks with advanced
capabilities to offer these services. Our switch routers and web switches
contain bandwidth management and provisioning, accounting and billing, quality
of service and content delivery capabilities that enable service providers to
deliver advanced applications and differentiated services to their customers.
Our customers include traditional Internet service providers, content
hosting and application service providers, building local exchange carriers
and metropolitan service providers. Our top customers by revenue for the
period December 1, 1999 to December 2, 2000 were Bell Atlantic, British
Telecom, CAIS Internet, Earthlink, IntelliSpace, Interlan Communications,
Metricom, NetRail, Saritel, Telecom Italia, Telia, Telseon, Terabeam, Terayon,
and Vitts Networks. We sell and market our products primarily through our
direct sales organization and value-added resellers. We have also recently
entered into a non-exclusive strategic distribution agreement with Tellabs.
Industry Background
Demand for Advanced Internet-Based Network Services
The Internet has developed quickly into a mass medium for both
communication and commerce, with the number of households and businesses that
use the Internet expected to increase significantly over the next several
years. According to International Data Corporation, an independent research
firm, the number of world wide web users is expected to increase from 240
million in 1999 to approximately 602 million by the end of 2003.
The Internet is undergoing a fundamental transformation. Historically,
Internet content and services were centralized, forcing the vast majority of
Internet traffic to traverse the Internet backbone to reach the end-user.
Today, with advances in technologies that manage and distribute content,
Internet applications and services are being distributed to sites closer to
end-users. These sites are typically located within the metropolitan area,
where there is a high concentration of businesses and consumers. Thus, the
bulk of Internet traffic is now produced and consumed within metropolitan
areas. At the same time, improved technology is significantly increasing the
amount of data, or bandwidth, that can be transmitted between the network and
the end-user, commonly known as the last-mile. These trends have led to the
rise of the metropolitan area network, or MAN, which extends from the end-user
to the Internet backbone. The increased prominence of the MAN is transforming
the Internet into a mesh of interconnected metro networks that are linked
together by the Internet backbone.
The growth in Internet usage and the emergence of the MAN have led to a new
generation of sophisticated and data-intensive applications and services. The
delivery of these applications and services is evolving in response to end-
user demands and the need for service providers to develop new sources of
revenue. These service providers include traditional telecommunications
carriers, Internet service providers, or ISPs, content hosting and application
service providers, or ASPs, building local exchange carriers, or BLECs, and
metro service providers, or MSPs.
Emergence of Service Providers in the Metropolitan Area Network
Traditional Internet Service Providers. ISPs have traditionally provided
basic connectivity and access to the Internet. With the increasing
commoditization of bandwidth and the rise of business services in the MAN, we
believe that ISPs will need to expand their service offerings to retain their
existing customers and take advantage of higher margin revenue opportunities
in new markets.
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Content Hosting and Application Service Providers. Content and web hosting
service providers offer secure, reliable and managed access to web pages, e-
mail services, and data storage. Application service providers supply their
customers with outsourced software applications ranging from business
automation to productivity enhancing tools. Both content hosters and ASPs
house their operations in hosting centers that are typically located in the
MAN.
Building Local Exchange Carriers. BLECs provide small and medium-sized
businesses located in office buildings with local area network, or LAN,
services and connectivity to the Internet. To increase efficiency, BLECs
typically aggregate network traffic from multiple buildings. Commercial real
estate owners often give access rights to multiple BLECs which must then
compete based on the price and competitiveness of their service offerings.
Metropolitan Service Providers. MSPs provide metropolitan communication
backbones and access over fiber optic cables to connect BLECs, content hosting
and application service providers, and businesses using high bandwidth
connections. To do this, MSPs build their own networks or lease fiber optic
cables, where available, allowing them to bypass the local telephone company's
last-mile connection to end-users. This allows MSPs to provide end-users with
high-capacity, low-cost bandwidth and shorter provisioning times. Provisioning
means establishing or changing the amount of bandwidth available to a customer
or altering other characteristics of a customer's connection.
Requirements of Service Providers in the MAN
To enable the delivery of applications and services, service providers must
build networks with increasing levels of availability, reliability and
security. We believe service providers must be able to rapidly reconfigure and
adapt their networks to differentiate service offerings for their customers.
Additionally, they must be able to employ innovative pricing and billing
models. At the same time, their network infrastructure must be cost-effective
to operate, and must minimize the expense of adding new capabilities and
technologies as they become available in the future.
Network Availability, Reliability and Security. End-user customers expect
mission-critical business services delivered over the Internet to have the
same level of availability and reliability as the traditional telephone
network. Service providers are demanding that equipment installed in the
network meet carrier-class requirements for reliability and interoperability.
New equipment should be easily integrated into the existing network and should
not increase the complexity of the service providers' operational support
systems, or OSS. Service providers also need to enforce network security
measures to prevent unauthorized use of their services or access to their
customers' data. To meet this need, the network equipment used by service
providers should support industry standards for network and electronic-
commerce security and provide mechanisms to control network access.
Service Creation Model. To maintain and grow their customer base, and to
develop new sources of revenue, service providers must be able to
differentiate themselves from their competitors by offering a wide range of
advanced applications and services tailored to their customers' needs. At the
same time, their networks must support the introduction of new services as the
Internet evolves and users demand more advanced solutions.
We believe that service providers' ability to deliver these services is
generally constrained by their installed equipment:
. Limited bandwidth management. Customer and application bandwidth demands
vary rapidly, unexpectedly and over a wide range. Network equipment
today cannot adequately respond to or manage these variations;
. Minimal provisioning capabilities. Provisioning of services to customers
is time consuming and costly, resulting in slower time-to-market and
decreased revenue;
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. Basic accounting and billing. Billing and accounting mechanisms are not
sufficiently flexible to allow for time-of-day, usage-based and
customized pricing;
. Failure to give priority to delay-sensitive data. Delay-sensitive
applications, such as voice or video, do not receive adequate priority
under heavy network loads, which can lead to an unacceptable degradation
in service; and
. Inefficient data delivery. Data in an Internet packet is typically
carried in a seven layer hierarchical format. Layers 1 to 3 contain
network address information, and layers 4 to 7 carry the end-user
application information. Today's infrastructure generally does not
adequately provide the ability to actively manage data distribution and
access in a manner that ensures high availability and efficient
delivery.
Flexible Service Delivery Platform. Service providers need to design and
operate networks that adapt to the rapidly evolving demands of end-users and
changes in their business environment. They must be able to add new services
and technologies without disrupting operations, replacing existing
infrastructure or redesigning network architecture. Service providers must
also be able to provide their services across diverse network infrastructures,
accommodating a mix of existing and next generation network technologies, such
as asynchronous transfer mode, or ATM, synchronous optical network, or SONET,
and Gigabit Ethernet.
Cost-Effective Infrastructure. As service providers increase the
sophistication of their offerings to end-users, their network infrastructure
grows increasingly complex. Without careful management and planning, this
complexity can result in increases in both capital and operating costs of the
equipment used in their network. Historically, networking equipment has
primarily been designed to transmit data reliably. In most cases, existing
infrastructure equipment has not been designed to deliver these advanced
services without significantly degrading performance and increasing costs. We
believe that the need to package services with connectivity is prompting
service providers to purchase infrastructure equipment that is cost effective
and capable of delivering complex services over the Internet.
Our Solution
We design and manufacture routers and switches that enable service
providers to convert optical and electrical bandwidth into differentiated
services for their customers. Our products deliver advanced service creation
features such as bandwidth provisioning, traffic accounting, data
classification and quality of service. Our products benefit customers in
several ways:
Network Availability, Reliability and Security
Our products provide high levels of network availability and reliability,
even under heavy network traffic conditions. We achieve this by combining our
custom application specific integrated circuits, or ASICs, with our RapidOS
software in a scalable, modular architecture. Our routers and switches are
interoperable with a variety of products from other vendors. In collaboration
with our customers, we have developed a testing environment that includes real
world configurations, allowing us to deliver reliable products. Our products
meet numerous regulatory requirements and our most advanced products are
designed to be NEBS compliant. Our products also incorporate numerous security
protocols for supporting virtual private networks and secure network access.
Service Creation
We have designed our products as platforms on which service providers can
deliver sophisticated and differentiated services. The key service enablers
that are embedded in our products are:
Bandwidth Management. Our switch routers offer advanced capabilities to
manage bandwidth in real-time, without sacrificing network performance. Our
products allow our customers to remotely set bandwidth limits from one kilobit
to one gigabit and easily integrate with leading bandwidth management
software.
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Provisioning. As customer and application bandwidth needs change, commands
sent remotely to our products can instantly and inexpensively set-up, modify
or terminate connections.
Accounting and Billing. Our switch routers support hardware-based
accounting, allowing service providers to collect real-time customer billing
information without affecting network performance. This allows service
providers to create and offer advanced pricing structures tailored to their
customers' needs by usage, by time-of-day and by location.
Quality of Service. Our products separate traffic into multiple service
classes based on end-user identity, application type, time-of-day and other
attributes. Our quality of service features allow service providers to improve
service quality by assigning priority to delay-sensitive or high-priority
traffic such as voice or video.
Content Delivery. To increase the speed of content delivery, our products
offer network-wide capabilities to create the shortest and most reliable path
between the end-user and the content. This is accomplished through advanced
traffic management using a broad range of Internet routing protocols. Our
products' layer 4 to 7 capabilities allow service providers to efficiently
manage content distribution and access without compromising network
performance.
Flexible Service Delivery Platform
We design our products to operate and adapt to the rapidly evolving demands
of our customers' network infrastructure. Our open application programming
interface allows our products to be easily integrated with customers'
bandwidth management, provisioning, accounting and billing, quality of service
and content delivery tools. Our Intelligent Service Router architecture scales
with the needs of service providers. Additional line cards can be inserted
into our modular chassis to increase bandwidth capacity. If bandwidth is
exhausted in one chassis, service providers can link multiple chassis together
to obtain additional capacity. Our RapidOS operating system can scale in the
face of increasing Internet traffic while continuing to manage bandwidth,
deliver routing throughput, and provide differentiated services. New
technology interfaces and RapidOS upgrades can be added to in-service chassis
without disrupting existing operations. The modular design of our products
enables the rapid and easy addition of new services without requiring re-
design of network architecture or replacement of existing infrastructure
equipment.
Our products support optical and electrical interfaces to ensure that
services can be quickly provisioned across a broad range of media types. This
means that service providers using our switch routers can rapidly offer
services across almost any infrastructure. This broad range of support is
delivered in a single chassis, eliminating the need to purchase multiple
solutions or consume limited space.
Cost-effective Infrastructure
Our products allow service providers to start with a low initial capital
expenditure while retaining the ability to add bandwidth as demand increases.
Using our advanced provisioning capabilities, we believe service providers can
reduce their operating costs by eliminating the need to send crews out into
the field to provision service. Our products also offer high port density,
which means our chassis occupy less space in expensive hosting facilities.
Using our wide array of media interfaces, service providers have the
flexibility to choose the most appropriate telecommunications medium to
connect customers to their service.
Our Strategy
We intend to become the leading provider of advanced optical and electrical
networking solutions to service providers in metropolitan area networks. The
key elements of our growth strategy are to:
Focus Exclusively on the Service Provider Market. We will continue to
target the service provider market, keeping every aspect of our customer
relationships focused on our customers' specialized requirements. By aligning
our entire organization behind the particular needs of service providers, we
believe that we are able
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to respond more rapidly than our competitors to the swiftly evolving service
provider market. Our products are tailored for the MAN environment, avoiding
the trade-offs inherent in general purpose products designed to serve the
disparate needs of multiple markets. We believe our exclusive focus will
provide us with a competitive advantage in the MAN marketplace.
Build upon our Position as a Leading Developer of Service Creation
Platforms. We have designed our platforms to enable service providers to
deliver advanced applications and services. Over the past four years, we have
established close working relationships with our key customers. These
relationships help us to anticipate emerging business trends and deliver the
new features necessary to create next generation service offerings. We intend
to use our position as a technology innovator to sell our products to service
providers and become the vendor of choice in the MAN.
Expand Existing and Develop Next Generation Products. We will continue to
invest significantly in our existing RapidOS operating system and ASIC designs
and will build upon our existing products to develop our next generation of
product enhancements and new product offerings. We are now using our third
generation ASICs in the development of additional network interfaces that will
support our customers' applications and the anticipated growth in network size
and service requirements. For example, our RapidOS supports Multi Protocol
Label Switching, or MPLS, to statically configure information paths between
two points using data tags. We are building on this MPLS technology to develop
enhancements that will permit these information paths to be automatically
configured.
Continue to Expand our Highly Skilled Engineering Team. We have assembled a
team of over 200 engineers with extensive experience in the fields of high-
speed microprocessor design, high-speed networking equipment design, Internet
routing protocols and embedded software. The experience of our engineering
teams ranges from delivering very large, highly integrated ASICs to
implementing scalable Internet software. We divide our engineering resources
into three distinct teams. Our first two teams are focused exclusively on
expanding the breadth and improving the competitive position of our switch
router and web switch product families. This allows us to focus a third
engineering team solely on the development of our next generation products. We
will continue to add skill sets and expand our engineering teams to deliver
high quality products and services to our customers.
Expand our U.S. and International Sales Presence. We primarily use a direct
sales model in North America through which we establish relationships at
multiple levels in our customers' organizations, including with key
individuals who are responsible for infrastructure build-out and service
planning for their businesses. We intend to develop indirect sales channels,
including the equipment resale divisions of content and application service
providers. These resale divisions recommend and sell infrastructure equipment
to their customers to support the content and application servers co-located
in the service providers' facility. Internationally, we are adding to our
direct sales force and are expanding and establishing relationships with
leading distributors and vendors of telecommunications equipment in both Asia
and Europe.
Technology
Our core technology consists of our Intelligent Service Router
architecture, our RapidOS software operating system, and our ASICs. These key
elements of our technology are incorporated into all of our switch router and
web switch products. By internally developing and maintaining the critical
components for our systems, we believe the performance and features of our
systems are superior to those of systems based upon third-party general
purpose components. Our modular system architecture, coupled with our core
hardware and software, enable us to create new products and solutions by
rapidly developing new interfaces, new features and new form factors or sizes.
Intelligent Service Router Architecture. Our product architecture consists
of ASIC-based packet forwarding engines distributed on each line card and a
centrally located routing engine running our RapidOS operating system,
connected together by high-performance ASIC-based switching devices. Our
product architecture allows us to deliver the capacity, reliability and
features that we believe are necessary to build and expand our customers'
metropolitan networks.
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By distributing packet processing functions on ASICs located on each line
card, rather than on a centrally located general purpose CPU, we are able to
offer advanced functions while maintaining wirespeed performance. With this
architecture, our products can increase bandwidth by adding line cards without
degrading overall performance. Our RS32000 platform can handle up to 90
million packets per second when all of its line cards are installed.
RapidOS Operating System. RapidOS, our standards-based software, controls
the features and functionality of the switch router and web switch platforms.
We do not sell RapidOS on a stand alone basis. We have continued to improve
RapidOS since its introduction in 1998 based upon feedback from a variety of
service provider customers. RapidOS incorporates a set of service enabling
capabilities to meet the demands of service providers, such as traffic
engineering, bandwidth control, network traffic classification and network
security. RapidOS's Internet Business Intelligence Gathering, or iBIG, feature
allows service providers to collect traffic statistics and billing data in
real time. RapidOS also supports all standard Internet class routing
protocols, a complete set of industry standards-based layer 2 features and
MPLS. RapidOS provides traffic load balancing and content management of
electronic-commerce applications by using layer 4 to 7 functionality. Our
RapidOS is also capable of delivering network level redundancy at layer 2 and
layer 3.
ASIC Technology. The switching devices and forwarding engines in our
products use internally developed ASICs that are designed specifically for our
Intelligent Service Router architecture. These ASICs implement service
enabling features such as network traffic classification, accounting, security
and bandwidth management. The ASICs are designed to facilitate the rapid
implementation of various electrical and optical network interfaces that
support transmission speeds from 1.5 megabits per second for a T1 line up to
10 gigabits per second for an optical carrier 192, or OC-192, line. We believe
our control over the design and development of ASICs and the close interaction
between our hardware and software teams have enabled us to achieve enhanced
performance.
Riverstone Products
We offer a wide variety of products to effectively address the broad
metropolitan network needs for access, content delivery, aggregation and edge
routing applications.
RS32000 Intelligent Edge Router. The RS32000 is our intelligent edge router
product. Intelligent edge routers aggregate and route network traffic at
service provider facilities before it is routed to the Internet backbone.
Intelligent edge routers are also used for aggregating and routing network
traffic in co-location centers. The RS32000 is capable of aggregating traffic
from a wide variety of network access technologies. The RS32000 provides high
port density and high reliability. It can provide up to 90 million data
packets per second routing performance.
We expect to begin shipping the RS38000, our next generation intelligent
edge router, in the first quarter of calendar year 2001. We have designed the
RS38000 to provide higher port density and increased routing performance, as
well as with the capability to support our OC-192 and 10 Gigabit Ethernet
products under development.
RS8000/8600 Metro Service Routers. The RS8000 and RS8600 are our metro
service router products. Metro service routers are used as the Internet access
or network traffic aggregation platform where small form factor and low power
consumption are required. Metro service routers must support a wide variety of
interfaces and service-enabling features. These products aggregate the network
traffic and pass it on to the intelligent edge router.
The RS8000 and RS8600 are designed specifically to be service delivery
platforms across both the optical and electrical segments of the metro network
infrastructure. As an aggregation platform, the RS8000 and RS8600 offer high
port density in a small form factor. As an access platform, the RS8000 and
RS8600 are ideal for fiber optic cable connectivity in building backbones and
data center in co-location facilities. The RS8000 and RS8600 are capable of
aggregating traffic from a wide variety of access technologies. The RS8000 and
RS8600 use the same line cards, thus offering maximum flexibility for
upgrades.
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RS2000, RS2100 and RS3000 Metro Access Routers. The RS2000, RS2100 and
RS3000 are our metro access routers with hardware routing capability. Metro
access routers are used to connect end-users with metro aggregation
facilities. Metro access routers must support traditional connectivity and
advanced optical modules for Gigabit, ATM and Packet over SONET up-links.
The RS2000 and RS3000 routers support traditional connectivity and advanced
optical modules. The RS2000 and RS3000 products incorporate all the routing,
switching, traffic engineering, accounting and security features of the rest
of our switch router platform but in a smaller, lower cost platform. The
RS2000 and RS3000 share the same line cards, thus offering maximum flexibility
for upgrades. The RS2100 supports eight 1 Gigabit ports and no additional line
cards.
IA1100/1200 Web Switches. Web switching products are used for content
balancing and web switching by content and application service providers. The
IA1100 and IA1200 are our web switches that support local server load
balancing, global site load balancing and web cache redirection functions.
These web switch products support a full-featured set of layer 2, 3 and 4
switching and routing functions. They also support an extensive set of server
testing to confirm that servers are performing properly -- from low level
physical connectivity to proper content presentation and database interaction.
Wide Array of Supported Line Cards
Our products include line cards that support all of the network
technologies identified in this table. All line cards contain all of the
service enabling features of Riverstone's Intelligent Service Router
architecture.
<TABLE>
<CAPTION>
RS32000 RS8000/8600 RS2000/3000 IA1100/1200
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10 Gigabit Ethernet D
-----------------------------------------------------------------------------
Packet over SONET OC-48c/STM-
16 D
-----------------------------------------------------------------------------
Packet over SONET OC-12c/STM-4 X X
-----------------------------------------------------------------------------
Packet over SONET OC-3c/STM-1 X X
-----------------------------------------------------------------------------
4 or 8 Gigabit WDM D
-----------------------------------------------------------------------------
Gigabit GBIC-SX/LX/LLX X
-----------------------------------------------------------------------------
1000 Base-LH-70Km reach X X
-----------------------------------------------------------------------------
1000 Base-LX X X
-----------------------------------------------------------------------------
1000 Base-SX X X X
-----------------------------------------------------------------------------
1000 Base-T-copper GigE X X
-----------------------------------------------------------------------------
ATM OC-12c X
-----------------------------------------------------------------------------
ATM OC-3c/DS3 X X
-----------------------------------------------------------------------------
10/100 Base-TX X X X X
-----------------------------------------------------------------------------
100 Base-FX X X
-----------------------------------------------------------------------------
Channelized T3 with CSU/DSU X X
-----------------------------------------------------------------------------
High speed serial
interconnect-HSSI X X
-----------------------------------------------------------------------------
Channelized T1 with CSU/DSU X X
-----------------------------------------------------------------------------
Multi-rate serial WAN X X
-----------------------------------------------------------------------------
Cable modem termination
system-CMTS X D
</TABLE>
A checkmark indicates that the line card is available now for the listed
product. A "D" indicates that the line card is under development.
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Research and Development
As of December 2, 2000, we employed 210 people in our engineering and
research and development organization with the majority located in our Santa
Clara, California corporate headquarters. We believe that our future success
depends on our ability to continually to enhance our existing products and
develop new products. To achieve this goal, our research and development
department is organized into three teams that work in parallel to develop
successive generations of networking products. We have assembled a team of
skilled engineers with extensive experience in the fields of high-speed
microprocessor design, high-end computing, network system design, Internet
routing protocols and embedded software. These individuals have been drawn
from leading computer, data networking and telecommunications companies. The
engineering team's collective experience ranges from building complex hardware
and software, to delivering very large, highly integrated ASICs and scalable
Internet software.
We are using our third generation ASICs in our products. We are also
developing additional network interfaces targeted to our customer demands and
continuing to develop next generation technology to support the anticipated
growth in network size and service requirements, such as 10 Gigabit Ethernet,
OC-48 and OC-192. We continue to expand the functionality and scalability of
our RapidOS including advanced MPLS implementations.
Customers
Our customers primarily consist of Internet service providers, content
hosting and application service providers, building local exchange carriers
and metropolitan service providers. As of February 29, 2000, we had
approximately 150 customers, the majority of which were ISPs and MSPs located
in the United States and Europe. The following customers each accounted for at
least $1 million in revenue for the period December 1, 1999 to December 2,
2000:
<TABLE>
<S> <C> <C>
Bell Atlantic Interlan Communications Telia
British Telecom Metricom Telseon
CAIS Internet NetRail Terabeam
Earthlink Saritel Terayon
IntelliSpace Telecom Italia Vitts Networks
</TABLE>
For fiscal year 1999, Adelphia Communications accounted for 46% of our net
revenue and Earthlink accounted for 20% of our net revenue. For fiscal year
2000, British Telecom accounted for 15% of our net revenue, Earthlink
accounted for 14% of our net revenue, Metricom accounted for 12% of our net
revenue and Vitts Networks accounted for 11% of our net revenue. Although our
largest customers may vary from period to period, we anticipate that our
operating results for any given period will continue to depend significantly
on large orders from a small number of customers. We do not have binding
commitments from any of our customers, and if any of our large customers
cancel, reduce or delay purchases, our revenue and profitability would be
harmed.
The following examples illustrate how some of our customers use our
products.
IntelliSpace. IntelliSpace is a provider of commercial in-building,
Ethernet-based Internet access and advanced data solutions. IntelliSpace
selected us as its primary supplier of Fast Ethernet and Gigabit Ethernet
layer 2 and layer 3 switches based upon functionality, port density,
management, price and the responsiveness of our service and technical
organization. Our switch routers are used in fully redundant configurations to
efficiently and reliably manage the large traffic volumes that traverse
IntelliSpace's network. Our switch routers are used in IntelliSpace's network
to provide connectivity to over 85 million square feet of office space
throughout the United States.
Telseon. Telseon, a MSP, delivers scalable bandwidth to service providers,
data centers and businesses. Telseon wanted to build a high-speed, secure
network that could scale and be provisioned to meet the bandwidth
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needs of its customers. Telseon's customers can purchase bandwidth through a
secure web-based interface, which is then instantly provisioned across their
network. They needed our bandwidth-on-demand features to deliver 1 megabit per
second to 1 gigabit per second bandwidth to their customers. They chose our
products based on features, price and support. Their network includes our
RS8600, RS8000 and RS2000 products. Telseon also uses our advanced management
features to instantly provision security and bandwidth.
These examples are not intended to suggest that Intellispace or Telseon are
actively endorsing our products.
Sales and Marketing
We sell and market our products primarily through our direct sales
organization, value-added resellers and original equipment manufacturers. As
of December 2, 2000, we employed 149 people in our sales and marketing
organizations.
Sales
North American Sales. Our North American direct sales force, which is
divided into western and eastern regional operations, focuses on large service
providers. Account managers work as a team with account-focused systems
engineers to provide our customers with guidance and assistance on
incorporating our products into their network. Our systems engineers also help
in defining the features that are required for our products to be successful
in specific applications. Our sales team maintains contact with key
individuals who have service planning and infrastructure build-out
responsibility within our customers' organizations.
Value-added Resellers. We have complemented our direct sales effort in the
United States with several highly focused value-added resellers. Our
arrangements with value-added resellers typically have been non-exclusive and
provide the value-added reseller with discounts based upon the volume of their
orders.
Strategic Relationships. To increase penetration into the cable operator
market, we have established strategic distribution relationships with Tellabs
Operations, Inc. and Terayon Communications Systems. We believe that both
Tellabs and Terayon offer products that complement ours, and each has
established customer relationships with cable operators and multiple system
operators, or MSOs. Our agreement with Tellabs and Cabletron's agreement with
Terayon, under which we operate, contain terms relating to the distribution,
manufacture, marketing and development of products and allow Terayon and
Tellabs to resell our products on a worldwide, non-exclusive basis with
discounts tied to contractual minimum volume purchases. We intend to add and
maintain a limited number of strategic distribution relationships, including
with key original equipment manufacturers, or OEMs, who may offer products or
distribution channels that complement ours.
International Sales. Our international sales are made through a combination
of direct and indirect sales efforts. Our European operation is headquartered
in London, with sales offices in Spain, Italy and the Netherlands. Our Asia
Pacific operation is headquartered in Singapore with offices in Japan and
China. While we rely on Enterasys as our principal international reseller, we
are negotiating reseller agreements with other distributors in Europe and
Asia.
Marketing
Our marketing objectives include building market awareness and acceptance
of the Riverstone brand and our products, and creating qualified customer
leads. Our marketing activities include participation in tradeshows and
technical conferences, preparation of sales tools, business cases, competitive
analyses and other marketing collateral and sales training. Our marketing
activities also include the publication of press releases, new product
information and educational articles in industry journals, maintenance of our
website and direct marketing to prospective customers.
Service and Support
We believe that a broad range of support services is critical to the
development of long-term relationships with customers. We are committed to
providing our customers with a high level of service and support through
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<PAGE>
our internal organization and arrangements with third parties. As of December
2, 2000, we employed 15 people in our customer service and support
organization, the majority of whom are located in our Santa Clara, California
corporate headquarters.
We deliver our support services to customers using a three-tier support
model. Our first tier of support services is technical assistance through
telephone support, which was historically provided to us by Cabletron and
later Enterasys. We have recently entered into an arrangement with Digital
Equipment (India) to provide these first call support services to our
customers. The outsourcing of this support allows us to maintain a small
internal support group focused on complex customer problems. We internally
provide field support services, our second tier of support services, to our
customers when telephone support is not sufficient to address an issue. We are
considering possible third party providers to enhance these services. If the
first two tiers of our customer service and support team are unable to resolve
an issue themselves, they obtain assistance from members of our engineering
department who serve as the third level of the customer support team. We have
established problem escalation guidelines to focus appropriate technical
resources and management attention on customers' problems in a timely manner.
Manufacturing
We have out-sourced our manufacturing activities to Flextronics
International and its affiliates. Flextronics manufacturers our products in
Sunnyvale, California and Limerick, Ireland.
Under our relationship with Flextronics, we design, specify and monitor all
of the tests that are required to meet internal and external quality
standards. Flextronics obtains materials, undertakes final assembly of
prototype and production products, tests our products and ships them to our
customers. This strategic relationship allows us to concentrate on further
developing our offerings and eliminates the need to dedicate resources to
manufacturing activities. This arrangement also allows us to adjust
manufacturing volumes quickly to meet changes in demand.
We design our ASICs and printed circuit boards and work closely with our
partners on future component selection and design support. All materials used
in our products are processed through a full qualification cycle and our
sourcing is controlled by the use of an approved vendor listing. We perform
extensive examinations of all printed circuit board assemblies, full
functionality verifications, 24 hour burn-in and power-cycling at maximum and
minimum configuration levels. Our ASICs are manufactured by NEC using its 0.35
micron process and Lucent using its 0.25 micron process. NEC and Lucent are
responsible for all aspects of the production of our ASICs using our
proprietary designs. We periodically evaluate these and other ASIC vendors to
identify the best fit with our ASIC technology needs.
Competition
There is significant competition in the market for network equipment. This
market has historically been dominated by Cisco Systems. Other existing and
potential competitors are numerous and include established companies such as
Extreme Networks, Foundry Networks, Juniper Networks, Lucent, Nortel Networks
and Siemens, and other smaller public and private companies. Several of these
companies have been in business longer than us and have substantially greater
financial, marketing and development resources than we have, which we believe
may put us at a competitive disadvantage. Many of these competitors are in a
better position than us to provide customers total network infrastructure
solutions. Many of these competitors have announced plans to introduce or
develop new products that are likely to compete with our product offerings.
Future consolidation in our industry is a distinct possibility, and
acquisitions by, or mergers among, our competitors could expand their product
offerings and hasten their development of new technologies, providing them
with a competitive advantage.
Our customers include service providers in the metropolitan area network.
We believe that the principal competitive factors in this market include
product performance, reliability, security, expandability, features and cost-
effectiveness. Our products provide:
. high network reliability, security and performance;
49
<PAGE>
. the ability to allow service providers to offer differentiated services;
. easy scalability and minimal network disruption;
. interoperability with existing network designs and equipment vendors;
. versatility of interfaces; and
. cost-effective solutions for service providers.
We believe these capabilities, when combined with our exclusive focus on
service providers in the MAN, provide us with a competitive advantage.
Intellectual Property
Our ASICs are the key components in our switch router and web switch
products. One of our ASIC families is manufactured by NEC and the other by
Lucent. Each successive ASIC design has allowed faster network interfaces,
greater service provider functionality and increased port density. Both we and
Enterasys share the basic technology embedded in the ASICs manufactured by
NEC. However, we do not share with Enterasys our later ASIC family
manufactured by Lucent or our service provider specific network interfaces.
Our Intelligent Switch Router architecture requires an operating system
that takes full advantage of the features in our ASICs system. While we also
share with Enterasys some of the basic technologies of our operating system,
we do not share with Enterasys enhancements and customizations of our RapidOS
operating system to address specific needs of the service providers in the
metropolitan area.
To protect our intellectual property, we generally rely on a combination of
patent, copyright, trademark and trade secret laws and contractual
restrictions to establish and protect our technology. As of December 2, 2000,
we had ten patents in the United States and 28 patents pending in the United
States and abroad. Our RapidOS operating system is protected by United States
and other trade secret and copyright laws. These legal protections provide
only limited protection. Further, the market for Internet infrastructure
solutions is subject to rapid technological change. While we intend to
continue to protect our proprietary rights where appropriate, we believe that
our success in maintaining a technology leadership position is more dependent
on the technical expertise and innovative abilities of our personnel than on
these legal protections.
Despite our efforts to protect our proprietary technology, we cannot assure
you that the steps we take will be adequate to prevent misappropriation of our
technology or that our competitors will not independently develop technologies
that are substantially equivalent or superior to our technology. The laws of
many countries do not protect our proprietary technology to as great an extent
as do the laws of the United States. We may need to resort to litigation in
the future to enforce our intellectual property rights, to protect our trade
secrets, to determine the validity and scope of the proprietary rights of
others or to defend against claims of invalidity. We are also subject to the
risk of adverse claims and litigation alleging infringement of the
intellectual property rights of others. Any resulting litigation could result
in substantial costs and diversion of management and other resources and could
have a material adverse effect on our business and financial condition.
Legal Proceedings
A consolidated class action lawsuit raising claims against Cabletron and
some officers and directors of Cabletron was filed in the United States
district court for the district of New Hampshire and, following transfer, is
pending in the district of Rhode Island. The complaint alleges that Cabletron
and several of its officers and directors made materially false and misleading
information about Cabletron's operations and acted in violation of Section
10(b) of and Rule 10b-5 under the Securities Exchange Act of 1934 during the
period between March 3, 1997 and December 2, 1997. The complaint also alleges
that Cabletron's accounting practices resulted in the disclosure of materially
misleading financial results during the same period. More specifically, the
complaint challenged Cabletron's revenue recognition policies, accounting for
product returns, and the validity
50
<PAGE>
of some sales. The complaint does not specify the amount of damages sought on
behalf of the class. Cabletron and other defendants moved to dismiss the
complaint and, by order dated December 23, 1998, the district court expressed
its intention to grant Cabletron's motion to dismiss unless the plaintiffs
amended their complaint. The plaintiffs served a second consolidated class
action complaint, and Cabletron has filed a motion to dismiss this second
complaint. A ruling on that motion is not expected earlier than the fourth
quarter of fiscal 2001. If the plaintiffs prevail, Cabletron could be required
to pay substantial damages.
We have not assumed any liabilities from Cabletron for this litigation. We
have not been named as a defendant in this litigation and none of our officers
or directors is named as a defendant to this litigation. However, the
plaintiffs might attempt to involve us in this litigation or might seek to
have us pay damages if Cabletron has insufficient assets to cover any
resulting damages. Any involvement in this litigation could be protracted and
may result in a diversion of management and other resources. The payment of
substantial legal costs or damages, or the diversion of our management and
other resources, could have a material adverse effect on our business,
financial condition or results of operations.
We have issued options to purchase shares of our common stock to our
employees and employees of Cabletron and its affiliates and to consultants and
advisors. Due to the nature of the persons who received these options and the
exercisability provisions of these options, the issuance of these options may
not have qualified for any exemption from qualification under California
securities laws. After the completion of this offering, we intend to make a
rescission offer under a registration statement filed under the Securities Act
to repurchase all unexercised options issued to these persons. The rescission
offer will expire approximately 30 days after the effectiveness of the
rescission offer registration statement. Cabletron has agreed to indemnify us
for any expenses incurred or amounts paid in this rescission offer. As of the
date of this prospectus, we are not aware of any claims for rescission against
us.
We are not aware of any legal proceedings against us that, individually or
in the aggregate, would have a material adverse effect on our business,
operating results or financial condition. We may in the future be party to
litigation arising in the course of our business, including claims that we
allegedly infringe third-party trademarks and other intellectual property
rights. These claims, even if not meritorious, could result in the expenditure
of significant financial and managerial resources.
Employees
As of December 2, 2000, we had 434 full-time employees, 210 of whom were
engaged in engineering, research and development, 149 in sales and marketing,
28 in manufacturing, 15 in customer support and 32 in finance, administration
and operations. None of our employees is represented by a labor union. We have
not experienced any work stoppages and we consider our relations with our
employees to be good.
Facilities
Our principal administrative, sales, marketing and research and development
facilities are located in an approximately 129,200 square foot facility
located in Santa Clara, California. Cabletron Systems Sales and Service, Inc.
entered into a lease for this facility in January of 1999, and assigned this
lease to us on August 28, 2000 following our separation from Cabletron. The
initial term of the lease expires on February 28, 2006. Under our services
agreement with Cabletron, approximately 35 of our employees, including
engineers and sales personnel, occupy space at Cabletron's headquarters in
Rochester, New Hampshire. Our services agreement with Cabletron also allows us
to occupy space in Cabletron facilities in various other geographic locations,
including Andover, Massachusetts; Atlanta, Georgia; Dallas, Texas; Denver,
Colorado; New York, New York; Reading, United Kingdom and other international
locations where principally sales and service personnel and engineers are
based.
The commercial real estate market in the San Francisco bay area is volatile
and unpredictable in terms of available space, rental fees, occupancy rates
and preferred locations. We cannot be certain that additional space will be
available when we require it, or that it will be affordable or in a preferred
location.
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<PAGE>
MANAGEMENT
Directors and Executive Officers
The names, ages and positions of our directors, executive officers and key
employees as of December 2, 2000 are listed below with their business
experience during the past five years. The business address of all of our
executive officers is 5200 Great America Parkway, Santa Clara, California
95054.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Romulus Pereira......... 34 President, Chief Executive Officer and Director
Robert Stanton.......... 48 Chief Financial Officer and Executive Vice President, Finance
Sam Boyd................ 53 Executive Vice President, Operations and Quality
Suresh Gopalakrishnan... 37 Executive Vice President, Engineering
David Bradshaw.......... 42 General Manager, Europe, Middle East and Africa
Dan Harding............. 35 Vice President, Business Development
Scott McMillan.......... 49 Vice President, Supply Chain
Andrew Feldman.......... 31 Vice President, Corporate Marketing and Corporate Development
John Kern............... 33 Vice President, Worldwide Sales Operations
Michael Steigerwald..... 41 Vice President, Service and Support
Piyush Patel............ 44 Chairman of the Board
Eric Jaeger............. 38 Director and Secretary
C. Lee Cox.............. 60 Director
Jorge A. del Calvo...... 45 Director
Christopher Paisley..... 48 Director
</TABLE>
Romulus Pereira has served as our chief executive officer and as a director
since March 2000. From September 1999 to February 2000, he served as chief
operating officer at Cabletron, where he was responsible for directing
Cabletron's engineering, sales, services and marketing organizations. From
December 1998 to September 2000, he also served as general manager of
Cabletron's service provider business. From September 1996 to March 1998, Mr.
Pereira was one of three founders of Yago Systems, Inc., where he served as
chief technology officer and vice president of engineering. Before co-founding
Yago, Mr. Pereira was employed by Cisco Systems, Inc., where he served in
various capacities, including technical leader.
Robert Stanton has served as our chief financial officer since August 2000.
From May 1996 to July 2000, he held various positions at Intel Corporation,
including group controller for worldwide materials and system manufacturing,
group controller for worldwide sales and marketing and investor relations
manager. From May 1989 to April 1996, Mr. Stanton served as senior finance
director of Apple Computer, Inc.
Sam Boyd has served as our executive vice president of operations and
quality since March 2000. From December 1998 to February 2000, Mr. Boyd served
as vice president of service planning and quality for Cabletron, where he was
responsible for worldwide service and quality functions. From February 1997 to
November 1998, Mr. Boyd was vice president of quality and business operations
at Newbridge Networks Corporation. From February 1982 to February 1997, Mr.
Boyd served in various capacities at Tandem Computers, including plant
manager, Silicon Valley facilities, director of manufacturing and quality,
director of service planning and quality, and, at UB Networks, a subsidiary of
Tandem, vice president of manufacturing operations and vice president of
operations and quality.
Suresh Gopalakrishnan has served as our executive vice president of
engineering since March 2000. From July 1999 to March 2000, Mr. Gopalakrishnan
was the director of corporate strategy at Cabletron, responsible for
restructuring engineering and streamlining sales operations. Before joining
Cabletron, Mr. Gopalakrishnan was the co-founder and chief executive officer
of Ligent Inc. from February 1999 to July 1999. From June 1996 to February
1999, Mr. Gopalakrishnan worked at ZSP Corporation, holding the positions of
director of engineering and vice president of engineering. From December 1994
to June 1996, he served as an engineering manager at Sun Microsystems, Inc.
52
<PAGE>
David Bradshaw has served as our general manager for the European, Middle
East and African regions since October 2000. From 1992 to October 2000, Mr.
Bradshaw held a number of senior positions with Alcatel Networks Limited
(formerly Newbridge Networks), including director and assistant vice president
from 1994 to 1999, and vice president from 1999 to 2000.
Daniel Harding has served as our vice president of business development
since November 2000. From November 1999 to November 2000, he was vice
president of business development at Cabletron. From September 1995 to
November 1999, Mr. Harding was a corporate associate at the law firm of Ropes
& Gray.
Scott McMillan has served as our vice president of supply chain since
August 2000. From December 1997 to August 2000, Mr. McMillan worked at Compaq
Computer Corporation, where he held the positions of senior director of Alpha
supply chain operations and director of systems implementation and
reengineering at the Fremont, California location. Before joining Compaq, Mr.
McMillan held various positions at Tandem Computers Corporation from June 1981
to November 1997, including director of operations, plant general manager and
other senior management positions within supply chain management.
Andrew Feldman has served as our vice president of corporate marketing and
corporate development since March 2000. From June 1998 to March 2000, he was
senior director for worldwide product marketing at Cabletron, where his
responsibilities included corporate marketing, North America channel marketing
and worldwide product marketing. From July 1997 to June 1998, Mr. Feldman
served as senior director of marketing and business development at Yago
Systems, Inc. From September 1995 to June 1997, Mr. Feldman attended Stanford
Business School where he received a masters of business administration.
John Kern has served as our vice president of worldwide sales operations
since April 2000. From May 1996 to April 2000, Mr. Kern held the position of
North American sales manager at EXIS Inc., a representative for NEC
Electronics, Inc., where he was responsible for semiconductor sales to Cisco
Systems, Inc. and Cabletron. From October 1989 to May 1996, Mr. Kern held
various positions at Texas Instruments, Inc., including hard disk drive
worldwide sales manager. From 1989 to 1996, Mr. Kern also served as an officer
in the U.S. Army.
Michael J. Steigerwald has served as our vice president of worldwide
customer service since November 2000. From June 1998 to October 2000, he
served as vice president and general manager for the services business unit at
VTEL Corporation. From January 1997 to June 1998, Mr. Steigerwald held the
position of vice president at Newbridge Networks, where he led the global
service and support organization responsible for the company's ViVID
internetworking products business unit. Prior to joining Newbridge Networks,
from 1984 to 1997, Mr. Steigerwald held several management positions at Tandem
Computers and Ungermann-Bass Networks, with his last position being vice
president of worldwide customer care.
Piyush Patel has served as the chairman of our board of directors since
March 2000. Since June 1999, Mr. Patel has served as the chairman of the
board, president and chief executive officer of Cabletron. From October 1998
to June 1999, Mr. Patel served as senior vice president of worldwide
engineering at Cabletron. From September 1996 to October 1998, Mr. Patel
served as the chief executive officer of Yago Systems. From April 1995 to
September 1996, Mr. Patel served as senior project manager for QED.
Eric Jaeger has served as a director of Riverstone since March 2000. Mr.
Jaeger has also served as executive vice president of Cabletron since June
1999. From October 1998 to June 1999, Mr. Jaeger was general counsel and
senior vice president of Cabletron. From September 1989 to October 1998, Mr.
Jaeger was a corporate attorney with the law firm of Ropes & Gray.
C. Lee Cox has agreed to serve as a member of our board of directors upon
the completion of this offering. From 1987 to 1993, Mr. Cox served as vice-
chairman of Pacific Telesis Group and president and chief executive of its
subsidiary, PacTel Corporation. From 1993 to 1997, he was vice-chairman of
AirTouch Communications and president and chief executive of its subsidiary,
AirTouch Cellular. Mr. Cox also serves on the board of directors of PG&E
Corporation.
Jorge A. del Calvo has agreed to serve as a member of our board of
directors upon the completion of this offering. Since 1982, Mr. del Calvo has
been an attorney with the law firm of Pilsbury Madison and Sutro LLP.
53
<PAGE>
Christopher Paisley has agreed to serve as a member of our board of
directors upon the completion of this offering. From September 1985 to May
2000, Mr. Paisley served first as vice president, finance and chief financial
officer, and later as senior vice president of finance and chief financial
officer, at 3Com Corporation. Mr. Paisley serves on the board of directors of
Aspect Telecommunications Corp., WJ Communications, Inc. and Legato Systems,
Inc.
Board Composition
Our amended and restated certificate of incorporation and amended and
restated by-laws, which will be in effect upon the completion of the offering,
provide that our board of directors is divided into three classes, with each
director serving a three-year term, after the initial term. Directors are
elected to serve until they resign, are removed, are otherwise disqualified to
serve, or their successors are elected and qualified.
The directors of class I hold office until the first scheduled annual
meeting of stockholders following this offering. The directors of class II
hold office until the second scheduled annual meeting of stockholders
following this offering. The directors of class III hold office until the
third scheduled annual meeting of stockholders following this offering. Upon
the completion of this offering, Mr. del Calvo and Mr. Paisley will serve as
class I directors, Mr. Patel and Mr. Jaeger will be class II directors and Mr.
Pereira and Mr. Cox will be class III directors.
Stockholders will elect the directors of each class for three-year terms at
the appropriate succeeding annual meeting of stockholders. Executive officers
are elected by and serve at the discretion of the board of directors. No
family relationships exist among any of our directors or executive officers.
We have agreed to allow a designee of Silver Lake to observe and participate
in meetings of our board of directors in a non-voting capacity until Cabletron
distributes our capital stock to its stockholders.
Board of Directors Committees
Upon the closing of this offering, we will establish an audit committee in
accordance with the Nasdaq National Market rules which will consist of Mr.
Cox, Mr. del Calvo and Mr. Paisley. The audit committee will be responsible
for recommending our independent auditors for approval by the board of
directors and reviewing the scope, results and costs of the audits and other
services provided by our independent accountants. Upon the closing of this
offering, our compensation committee will consist of Mr. del Calvo and Mr.
Paisley and will be responsible for reviewing and approving the compensation
and benefits for our executive officers and administering our 2000 equity
incentive plan.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves as a member of the board of directors
or executive compensation committee of any entity which has one or more
executive officers serving as a member of our board of directors or
compensation committee.
Board Compensation
On May 15, 2000, we granted an option to purchase 1.5 million shares of our
common stock to Mr. Patel and an option to purchase 500,000 shares of our
common stock to Mr. Jaeger. These options became vested in November 2000 and
become exercisable at the earlier of the time Cabletron distributes its
Riverstone common stock to its stockholders or April 1, 2004. Mr. Patel and
Mr. Jaeger are generally restricted from transferring these options and the
underlying common stock. The restrictions on the transfer of the underlying
shares lapse for 25% of the securities on April 1, 2001 and, for the remaining
securities, ratably on a monthly basis through April 1, 2004. If Mr. Patel or
Mr. Jaeger ceases to be employed by Cabletron, Aprisma, GNTS, Enterasys, or
us, any restriction not then lapsed would remain until April 1, 2005. The
options granted to Mr. Patel and Mr. Jaeger also provide that the restrictions
on transfer of the underlying shares will lapse on an accelerated basis as to
an additional 6.25% of the shares upon a distribution by Cabletron of its
Riverstone common stock, and for
54
<PAGE>
accelerated release of restrictions on underlying shares in the event of a
sale of Riverstone. In specified circumstances involving a substitution of
Cabletron options for options to acquire Riverstone common stock, the options
granted to Mr. Patel and Mr. Jaeger would become immediately exercisable.
We will reimburse each member of the board of directors for reasonable
expenses incurred to attend a meeting of the board of directors or any board
committee. In addition, we intend to pay cash compensation to members of our
board of directors who are not employees of us or Cabletron in the amount of
$2,000 for each annual meeting attended.
Mr. Cox, Mr. del Calvo and Mr. Paisley will each receive, effective upon
the completion of this offering, options to purchase 60,000 shares of our
common stock at an exercise price equal to the initial public offering price.
One-third of these options will provisionally vest one year from the date of
the closing of this offering and the remainder will provisionally vest ratably
each month over the next two years. Actual vesting of these options is not
scheduled to occur earlier than at the end of three years, or if we are sold
or undergo a change in control. Vesting would be accelerated if we are sold or
undergo a change in control. Additionally, upon an earlier distribution of our
stock by Cabletron to its stockholders, options provisionally vested will
become actually vested. In addition, we intend to grant an option to purchase
20,000 shares of common stock on or about the date of each annual meeting of
stockholders, beginning with the fiscal year 2003 annual meeting which will
occur in calendar year 2002, to each individual who will continue to serve as
a member of the board of directors following that meeting and is not an
employee of us, Cabletron or our affiliates.
Stock Ownership of Directors and Executive Officers
All of our common stock is owned by Cabletron, and none of our officers,
directors or director nominees owns any of our common stock. Any of our
directors and officers who own shares of Cabletron common stock at the time of
the distribution will participate in the distribution on the same terms as
other holders of Cabletron common stock.
The following table lists the number of shares of Cabletron common stock
beneficially owned on December 2, 2000 by each director, each of the executive
officers named in the summary compensation table below, and all of our
directors and executive officers as a group. Except as otherwise noted, the
individual director or executive officer or their family members had sole
voting and investment power over the securities owned. The total number of
shares of Cabletron common stock outstanding as of December 2, 2000 was
184,830,988.
<TABLE>
<CAPTION>
Shares of Cabletron
Beneficially Owned
--------------------
Name of Beneficial Owner Number Percentage
------------------------ --------- ----------
<S> <C> <C>
Romulus Pereira(1)....................................... 931,461 *%
Sam Boyd(2).............................................. 12,690 *
Suresh Gopalakrishnan(3)................................. 8,750 *
Piyush Patel(4).......................................... 971,982 *
Eric Jaeger(5)........................................... 30,313 *
All directors, director nominees and executive officers
as a group (9 persons).................................. 1,955,196 1
</TABLE>
--------
* represents holdings of less than one percent.
(1) Includes 47,500 shares issuable upon the exercise of options exercisable
within 60 days of December 2, 2000 and 553,845 shares held in trust for
Mr. Pereira's family.
(2) Includes 12,690 shares issuable upon the exercise of options exercisable
within 60 days of December 2, 2000.
(3) Includes 8,750 shares issuable upon the exercise of options exercisable
within 60 days of December 2, 2000.
(4) Includes 107,500 shares issuable upon the exercise of options exercisable
within 60 days of December 2, 2000 and 39,890 shares held in trust for Mr.
Patel's children.
(5) Includes 32,000 shares issuable upon the exercise of options exercisable
within 60 days of December 2, 2000.
55
<PAGE>
Executive Compensation
The following table lists the compensation awarded to, earned by, or paid
to our chief executive officer, executive vice president, operations and
quality and executive vice president of engineering, by Cabletron for the
fiscal year ended February 29, 2000. None of our other executive officers
received total cash compensation from Cabletron in excess of $100,000 for the
fiscal year ended February 29, 2000. Cabletron will not compensate our
officers going forward and the compensation below is not indicative of the
compensation that we will pay in the future. Future compensation of and other
performance incentives for our executive officers are under consideration.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
---------------- -------------------
Shares of Cabletron
Name and Principal Other Annual Common Stock All Other
Position Salary Bonus Compensation Underlying Options Compensation(1)
------------------ -------- ------- ------------ ------------------- ---------------
<S> <C> <C> <C> <C> <C>
Romulus Pereira......... $221,538 $68,250 $-- 120,000 $333
Chief Executive
Officer, President and
Director
Sam Boyd................ 182,688 85,106 -- 35,000 583
Executive Vice
President of
Operations and Quality
Suresh Gopalakrishnan... 87,231 18,400 -- 20,000 583
Executive Vice
President of
Engineering
</TABLE>
--------
(1) All other compensation represents 401(k) matching payments.
Option Grants During Fiscal 2000
The following table provides the specified information concerning grants of
options to purchase Cabletron common stock made during the fiscal year ended
February 29, 2000 to the persons named in the summary compensation table.
<TABLE>
<CAPTION>
Potential Realizable
% of Total Value at Assumed
Shares of Options Annual Rates of Stock
Cabletron Granted to Price Appreciation
Common Stock Cabletron Exercise for Option Term
Underlying Employees or Base Expiration ----------------------
Name Options Granted in Fiscal Year Price Date 5% 10%
---- --------------- -------------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Romulus Pereira......... -- -- % $ -- -- $ -- $ --
Sam Boyd................ 5,000 .08477 13.50 7/12/09 42,250 107,577
10,000 .16953 22.63 12/2/09 142,287 360,584
Suresh Gopalakrishnan... 20,000 .33906 13.00 7/7/09 163,512 414,373
</TABLE>
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<PAGE>
Option Exercises During Fiscal 2000 and Fiscal Year-End Option Values
None of the persons named in the summary compensation table exercised
Cabletron options during the fiscal year ended February 29, 2000. The
following table shows information related to the value of Cabletron options
outstanding as of February 29, 2000 for each of the persons named in the
summary compenstation table. The value of in-the-money options represents the
positive spread between the exercise price of the stock options and the
closing price of Cabletron's common stock as of February 29, 2000, which was
$49 per share.
Aggregated Year-End Option Table
<TABLE>
<CAPTION>
Number of
Securities
Underlying
Unexercised Value of Unexercised
Options at In-the-Money Options
February 29, 2000 at February 29, 2000
------------------ ---------------------
Vested Unvested Vested Unvested
-------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Romulus Pereira........................ 31,250 88,750 $1,304,688 $3,705,313
Sam Boyd............................... 4,000 31,000 139,000 99,250
Suresh Gopalakrishnan.................. -- 20,000 -- 720,000
</TABLE>
2000 Equity Incentive Plan
Our board of directors and our stockholder, Cabletron, have adopted and
approved the 2000 equity incentive plan, which provides for the grant of
awards to our employees, directors, consultants or advisors and to employees
of Cabletron and its subsidiaries. Awards under the 2000 equity incentive plan
may consist of incentive and nonstatutory stock options, restricted and
unrestricted stock awards, stock appreciation rights, deferred stock awards,
performance awards, other stock-based awards, loans and supplemental grants.
We have reserved 45,000,000 shares of our common stock for issuance under
our 2000 equity incentive plan, which would be 30% of our outstanding common
stock upon the completion of the offering, assuming all of these options had
been granted and exercised, and the strategic investors had exercised their
purchase rights in full. Assuming that the underwriters had exercised their
over-allotment option in full, all of these options had been granted and
exercised, and the strategic investors had exercised their purchase rights in
full, the number of shares reserved for issuance under our 2000 equity
incentive plan would be 29% of our total outstanding common stock at the time
of the offering.
Under our 2000 equity incentive plan, no participant may be granted stock
appreciation rights or options to purchase more than 8,500,000 shares of
common stock in any calendar year. Also, no more than 5,000,000 shares may be
awarded to any participant as a stock-based performance award in any three-
year period, and no more than $5 million may be paid to any participant for
any year under a cash performance award. If a stock dividend, stock split or
combination of shares, recapitalization or other change in our capitalization
or other distribution to holders of our stock occurs, other than normal cash
dividends, adjustments will be made to the maximum number of shares that may
be delivered under the plan and to the relevant provisions of outstanding
awards.
Administration of the 2000 Equity Incentive Plan
The 2000 equity incentive plan will be administered by our board of
directors or a committee of our board. The board or committee will have the
authority to grant awards, determine award terms, amend or cancel awards
subject to the consent of the holder if the change would adversely affect his
rights, and generally to interpret, administer, and decide disputes under the
plan. The board or committee will also have authority to delegate to an
executive officer who is also a director authority to grant awards to
employees who are not executive officers. We have the right to amend or
terminate the 2000 equity incentive plan. However, under the transformation
agreement among us, Cabletron, Aprisma, Enterasys and GNTS, until our
distribution, we may not, without the prior written approval of Cabletron,
amend our 2000 plan or any awards issued under it, or issue or grant any
rights to purchase any equity or other securities other than options under our
2000 equity incentive plan.
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Terms of Stock Options
Stock options granted under the 2000 equity incentive plan may be either
incentive stock options, as defined in the Internal Revenue Code, or
nonstatutory stock options. Subject to a maximum ten-year term, the board or
committee will determine the exercise terms of stock options. Unless otherwise
permitted by the board or committee, stock options granted under the 2000
equity incentive plan may not be transferred except at death. The exercise
price of each option intended to qualify as an incentive stock option will not
be less than 100% of the fair market value of the stock upon the date of the
option grant as determined by the board or committee. Generally, if an option
holder's service relationship with us terminates, any unvested stock options
granted under our 2000 equity incentive plan that are then held by the option
holder will expire and any vested portion will remain exercisable for an
additional 90 days. The board or committee has the discretion to make a
different determination about a terminated option holder's stock options.
Additionally, there are special acceleration rules in the plan that apply to
the treatment of stock options upon the death of the option holder.
Provisions Related to the Distribution and to a Change in Control
The 2000 equity incentive plan contains special rules in anticipation of a
possible distribution of our stock by Cabletron to its stockholders.
Consistent with these rules, we have granted stock options to our employees
and others, and may grant additional stock options in the future, that provide
generally for provisional vesting of 25% of the shares after one year and for
monthly provisional vesting over the next three years for the remainder.
Actual vesting of these options is not scheduled to occur earlier than at the
end of four years, or if we are sold or undergo a change in control. If we are
sold or undergo a change in control, vesting would also accelerate by
ten months. Additionally, upon an earlier distribution of our stock by
Cabletron to its stockholders, options provisionally vested will become
actually vested.
We have agreed with Cabletron that upon a distribution of our stock by
Cabletron to its stockholders, we will grant to the then holders of Cabletron
stock options additional options under our 2000 equity incentive plan. The
same distribution ratio of our shares to Cabletron shares that applies in
Cabletron's distribution to its stockholders will be used to determine the
number of our shares that will be subject to the additional options that we
will grant to holders of Cabletron options. The exercise price of the
Cabletron options will be adjusted after the distribution, and we will
determine the exercise price of our additional options, so that:
. the aggregate amount of intrinsic value, that is, the difference between
exercise price and stock value, in the two options after the
distribution does not exceed the intrinsic value in the Cabletron
options before the distribution; and
. the ratio of the exercise price for each option to the market value for
each share is not reduced.
Our additional options will have the same vesting and exercisability
provisions as the Cabletron options to which they relate, although special
rules will apply if we are sold or involved in a merger. The same program of
additional option grants applies to Aprisma, Enterasys and GNTS if Cabletron
distributes to its stockholders its shares of stock in those companies. Our
2000 equity incentive plan also provides that if Cabletron determines not to
pursue, a distribution of our stock to its stockholders, Cabletron may provide
for stock options and awards in substitution for outstanding options and
awards under our 2000 equity incentive plan.
Change of Control Agreements and Arrangements
Under the terms of options to purchase Cabletron common stock held by our
employees, including those named in the summary compensation table, if
Cabletron completes the distribution of our common stock to its stockholders
before February 28, 2002, the portion of all Cabletron options held by our
employees that would have vested on or before February 28, 2002 will become
immediately vested and exercisable on the date of the distribution and remain
exercisable for 90 days. The same acceleration of vesting would apply to any
additional stock options that we grant relating to outstanding Cabletron
options held by our employees. The acceleration of these additional stock
options would result in compensation charges to us.
Under the terms of our employee stock options, including those granted to
persons listed in the summary compensation table, if we undergo a change in
control, the portion of our options that have become provisionally
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vested and exercisable, and the portion that would have become vested and
exercisable, or provisionally vested and exercisable, during the ten months
following the change of control, will become immediately vested and
exercisable.
Both we and Cabletron have change in control arrangements in which Mr.
Pereira is a participant. These arrangements provide severance and other
benefits if Mr. Pereira's employment is terminated following a change in
control of either Cabletron or us. If Mr. Pereira's employment is terminated
for reasons defined to be without cause or he terminates his employment for
reasons defined to be valid under the arrangement during the 18-month period
following a change in control of us or a change in control of Cabletron which
occurs before Cabletron's distribution of our common stock to its stockholders
or a sale of all or substantially all of Cabletron's stake in us by Cabletron
to an unrelated person or group, he will receive severance pay from us in an
amount equal to the sum of:
. his annual base salary at the rate in effect immediately before the date
of termination or immediately before the change in control, whichever is
higher; plus
. an amount equal to the highest actual bonus paid to Mr. Pereira in cash
in any one of the three most recent annual bonus periods or the target
bonus for the fiscal year in which the change in control occurs,
whichever is higher; plus
. a pro-rated portion of his annual target bonus for the year in which the
termination occurs, less any portion of the annual target bonus paid to
him before termination.
The Cabletron change of control arrangements also provide that if during
the 18-month period following a change in control of Cabletron, Mr. Pereira's
employment is terminated for reasons defined to be without cause or by Mr.
Pereira for reasons defined to be valid under the arrangement, the vesting of
his Cabletron options will be adjusted as follows:
. The portion of Mr. Pereira's Cabletron options that would have become
vested and exercisable, computed on a daily vesting basis, during the 18
months following his termination of employment will become immediately
vested and exercisable for a period of 90 days.
We have entered into a change of control agreement with Mr. Pereira. The
agreement provides that, if during the 18-month period following the date we
undergo a change in control, Mr. Pereira's employment is terminated for
reasons defined to be without cause or by Mr. Pereira for reasons defined to
be valid under the arrangement, the vesting of his Riverstone options will be
adjusted as follows:
. The portion of Riverstone options held by Mr. Pereira that have become
provisionally vested and exercisable on the date of termination of
employment, and the portion that would have become provisionally vested
and exercisable during the seven months following his termination of
employment, will become immediately vested and exercisable for a period
of 90 days. This accelerated vesting is separate from the ten-month
acceleration provided for under our 2000 equity incentive plan.
Our agreement with Mr. Pereira also provides that if during the 18-month
period following a change in control of Cabletron Mr. Pereira's employment is
terminated for reasons defined to be without cause or by Mr. Pereira for
reasons defined to be valid under the arrangement, the vesting of his
Riverstone options will be adjusted as follows:
. The portion of Riverstone options that have become provisionally vested
and exercisable on the date of the termination of employment, and the
portion that would have become provisionally vested and exercisable
during the 12 months following his termination of employment, will
become immediately vested and exercisable for a period of 90 days.
Under the Cabletron change in control plan and our agreement with Mr.
Pereira, for one year following a covered termination of employment, Mr.
Pereira will be entitled to continue to participate in all medical, dental and
life insurance plans provided by Cabletron or us. The Cabletron change in
control plan and our agreement with Mr. Pereira further provide for a gross-up
payment which will apply if amounts paid to Mr. Pereira would be effectively
reduced by a federal excise tax on excess parachute payments. In that
instance, we will pay Mr. Pereira additional cash so that he will have
received the amount that he would have received in the absence of any
parachute tax after he has paid the parachute taxes.
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A change in control of Cabletron under its plan generally includes:
. a person or group becoming the beneficial owner of 30% or more of the
voting power of Cabletron's securities or 30% or more of its common
stock;
. continuing directors cease to constitute a majority of the Cabletron
board;
. a consolidation, merger or other reorganization or sale or other
disposition of all or substantially all of Cabletron's assets, other
than defined transactions; or
. approval by the stockholders of a complete liquidation or dissolution of
Cabletron.
Generally, any of the four events listed above will be considered a change in
control of Cabletron for purposes of our change of control agreement with Mr.
Pereira if it occurs before:
. the distribution of our common stock by Cabletron to its stockholders;
or
. a sale by Cabletron of all or substantially all of its stake in us to an
unrelated person or group.
Under our agreement with Mr. Pereira, we will be considered to have
undergone a change in control, in general, if, before a distribution of our
stock by Cabletron to its stockholders, Cabletron sells all or substantially
all of its stake in us to an unrelated person or group. We will similarly be
considered to have undergone a change in control under that same agreement if,
after distribution of our stock by Cabletron to its stockholders:
. a person or group becomes the beneficial owner of 30% or more of the
voting power of our securities or 30% or more of our common stock;
. continuing directors cease to be a majority of our board;
. a consolidation, merger or other reorganization or sale or other
disposition of all or substantially all of our assets occurs, other than
defined transactions; or
. our stockholders approve our complete liquidation or dissolution.
Limitation of Liability and Indemnification Matters
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends, unlawful stock repurchases or
redemptions; or
. any transaction from which the director takes an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our by-laws provide that we will indemnify our directors, officers,
employees and agents to the fullest extent permitted by law. We believe that
indemnification under our by-laws covers negligence and gross negligence on
the part of indemnified parties. Our by-laws also permit us to secure
insurance on behalf of any officer, director, employee or other agent for any
liability arising out of his actions in that capacity, regardless of whether
the by-laws would permit indemnification. We have director and officer
liability insurance that covers these matters and matters arising under the
Securities Act of 1933.
We are unaware of any litigation or proceeding involving any of our
directors, officers, employees or agents in which indemnification would be
required or permitted.
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RELATIONSHIPS WITH CABLETRON AND ITS AFFILIATES AND
WITH THE STRATEGIC INVESTORS
Arrangements Between Riverstone and Cabletron and its Affiliates
Effective as of June 3, 2000, Cabletron transferred a substantial portion
of its operating assets and related liabilities to its subsidiaries,
Riverstone, Aprisma, GNTS and Enterasys. Aprisma is focused on delivering
infrastructure management software for enterprise and service provider
customers. Enterasys is a provider of network solutions for electronic-
business applications, global service and support, focused on serving
enterprise customers. GNTS provides professional networking consulting
primarily related to the design, performance, management and security of
complex networks. Before the separation, Cabletron conducted these businesses
through various divisions and subsidiaries.
We have provided below a summary of the transformation agreement, by and
among us, Cabletron, Aprisma, Enterasys and GNTS and the principal related
agreements. The following description, which summarizes the material terms of
these agreements, is not complete. You should read the full text of these
agreements, which have been filed with the Securities and Exchange Commission
as exhibits to the registration statement of which this prospectus is a part.
The Separation
Our separation from Cabletron was completed on August 28, 2000. The
transformation agreement contains provisions relating to our separation from
Cabletron and the separation of Aprisma, Enterasys and GNTS from Cabletron. An
asset contribution agreement between us and Cabletron governed the terms of
the transfer to us of assets and liabilities from Cabletron relating to our
business. Cabletron, Aprisma, Enterasys, GNTS and we have also delivered
agreements governing relationships among us following our separation date. The
ancillary agreements to which we are party include:
. commercial agreements between us and Aprisma, Enterasys and GNTS;
. a tax sharing agreement between us, Cabletron, Aprisma, Enterasys and
GNTS; and
. a services agreement between us and Cabletron.
These agreements are described more fully below.
Transformation Agreement
The transformation agreement contains key provisions relating to this
offering, the potential distribution of our shares and the potential offerings
and distribution of shares of Aprisma, Enterasys and GNTS. The transformation
agreement also contains covenants among Cabletron, Aprisma, Enterasys, GNTS
and us relating to the relationships among the parties.
The Initial Public Offering. The transformation agreement provides that we
shall not begin or complete an initial public offering without the approval of
Cabletron. All terms of our initial public offering are subject to Cabletron's
approval. Cabletron is not obligated to complete this offering. Cabletron will
only complete this offering if its board of directors continues to believe it
to be in our best interest and in the best interest of Cabletron and its
stockholders.
The Distribution. Cabletron plans, at some time following the completion of
this offering, to distribute the remaining shares of our common stock that it
holds to its stockholders on a pro rata basis. We will prepare an information
statement with Cabletron and send it to Cabletron stockholders before the
distribution becomes effective. The information statement will inform the
stockholders of the distribution and its specifics.
Cabletron has requested a private letter ruling from the Internal Revenue
Service that its distribution of our common stock will be tax-free to
Cabletron and its stockholders. The transformation agreement also provides
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that Cabletron shall, in its sole and absolute discretion, determine whether
to make a distribution of our stock and the terms and conditions of the
distribution. We do not expect that Cabletron will complete the distribution
unless it receives a favorable tax ruling.
Information Exchange. We and the other parties to the transformation
agreement have agreed to share information with each other for a variety of
purposes, unless the sharing would be commercially detrimental. We have agreed
with these parties that:
. until our distribution, we and Cabletron will provide to one another any
information requested by the other party for specified purposes,
including the need to comply with various reporting and disclosure
requirements, for use in preparing financial statements, or involving
the party's ongoing business;
. after our distribution, we will each use reasonable commercial efforts
to make available to each other party to the transformation agreement
personnel and agents who may be used as witnesses in, and documents
which may reasonably be required in legal, administrative or other
proceedings; and
. each party will use reasonable commercial efforts to retain records that
might be reasonably required by any other party to the transformation
agreement.
Auditing Practices. So long as Cabletron is required to consolidate our
results of operations and financial position, we have agreed to cooperate with
Cabletron in the preparation of audited financial statements and the clearance
of quarterly financial statements. We have agreed that, during this period, we
will not select a different independent accounting firm from that used by
Cabletron without Cabletron's consent. We have also agreed to use best efforts
to enable our auditors to date their opinion on our audited annual financial
statements on the same date as Cabletron's auditors date their opinion on
Cabletron's financial statements.
Confidentiality. The transformation agreement provides that each party
agrees not to disclose confidential information of any other party except in
specific circumstances. We have also agreed not to use this information in
violation of any use restrictions in any of the other written agreements among
us.
Employee Confidentiality Agreements. The transformation agreement provides
that any agreement relating to confidentiality, non-disclosure or non-
competition obligations of a current or former employee of Cabletron and its
affiliates transferred to us as part of our separation from Cabletron will
remain in full force. Cabletron has assigned to us a right to separately
enforce these agreements, provided that we may not begin legal action without
Cabletron's consent. We have agreed to use reasonable commercial efforts to
cause our executives to enter into new confidentiality agreements.
Covenant Not to Sue. The transformation agreement provides that we,
Enterasys, Aprisma and GNTS will not sue one another for the use in the
product segments in which we each focus of any assets, including intellectual
property assets, contributed to us by Cabletron.
Cabletron Guidelines. We have agreed that, until our distribution, we will
be subject to general Cabletron oversight and Cabletron's corporate
guidelines. We have agreed that until our distribution, without Cabletron's
approval, we will not:
. amend our by-laws, our 2000 equity incentive plan or any awards issued
under our 2000 equity incentive plan;
. issue or grant any rights to purchase any equity or other securities
other than options under our 2000 equity incentive plan;
. grant any rights to serve on our board of directors; or
. make any significant changes in our accounting or financial reporting
policies.
Expenses. We are responsible for any internal fees, costs and expenses
incurred for the separation, this offering and our distribution. We have
agreed to bear our proportionate share of any of these fees, costs and
expenses incurred by Cabletron.
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Dispute Resolution. If problems arise between us and Cabletron or any other
parties to the transformation agreement under the transformation agreement or
related agreements, we have agreed to the following procedures:
. the parties will make a good faith effort to first resolve the dispute
through negotiation by senior executives;
. if the negotiations fail, the parties agree to submit the dispute to the
chief executive officer of Cabletron for final and binding resolution of
the dispute; and
. if the negotiations fail and at least one of the parties to the dispute,
aside from Cabletron, has completed a public offering and is no longer a
majority-owned subsidiary of Cabletron, the parties shall submit the
dispute to binding arbitration. A party to the dispute may also seek
injunctive relief from a court of competent jurisdiction before
negotiation or arbitration to prevent serious and irreparable injury to
one of the parties or to others.
Non-Solicitation of Employees. We and Cabletron have each agreed not to
solicit or recruit employees of the other party directly without the other's
consent for two years after our separation date. We, Aprisma, Enterasys and
GNTS have agreed not to solicit or recruit each other's employees directly
without consent for the longer of two years after our separation date and the
date on which either we or the other party ceases to be a majority-owned
subsidiary of Cabletron. This prohibition does not apply to general
recruitment efforts carried out through public or general solicitation.
Allocation of Assets and Liabilities. We have agreed that Cabletron may, in
its sole discretion, retain, allocate or reallocate to us or to other parties
to the transformation agreement any assets and liabilities, including general
corporate liabilities, of Cabletron, or terminate the transformation agreement
or any ancillary agreement, to:
. facilitate a tax-free distribution by Cabletron of shares of the capital
stock of us or another party to the transformation agreement;
. comply with financial or regulatory reporting requirements; or
. facilitate the transactions considered by the transformation agreement.
Indemnification Matters. Cabletron has agreed to indemnify us, our
directors, officers and subsidiaries from and against all losses resulting
from:
. the failure of any of the parties to comply with bulk transfer laws
relating to our separation; and
. the conduct by Cabletron, after our separation date, that does not
relate to our business or the business of Aprisma, Enterasys or GNTS.
This indemnification does not apply to losses related to income taxes and
payroll taxes governed by the tax sharing agreement.
We have agreed to indemnify Cabletron and its directors, officers and
affiliates, and Aprisma, Enterasys and GNTS and their directors, officers and
affiliates, from and against all losses from:
. liabilities assumed by us under the asset contribution agreement or
assigned to us under the transformation agreement, and liabilities
arising out of our operations;
. the nonfulfillment of any agreement or covenant by us contained in the
transformation agreement or the asset contribution agreement and some
related instruments; and
. the conduct of our business after our separation date.
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Asset Contribution Agreement
The asset contribution agreement identifies the assets that Cabletron has
transferred to us and the liabilities that we have assumed in the separation.
As consideration for these assets and liabilities transferred to us, we issued
to Cabletron 92,088,135 shares of convertible preferred stock. Upon the
completion of this offering, these shares of convertible preferred stock will
convert into 92,088,135 shares of our common stock.
Asset Transfer. The asset contribution agreement provides that Cabletron
will transfer to us, and cause all of its direct and indirect subsidiaries
other than subsidiaries that will be transferred to us, to transfer to us
specified assets not already held by us. These assets include:
. all tangible personal property used primarily by our business at our
separation date;
. all inventory relating to the products of our business at our separation
date;
. all capital stock of specified subsidiaries of Cabletron;
. all accounts receivable, including receivables from Cabletron and its
affiliates, and prepaid expenses relating primarily to our business at
our separation date;
. an intercompany cash account to be maintained and administered by
Cabletron;
. rights under permits;
. rights relating to third party computer applications, programs, other
software and design tools used by our business at our separation date;
. all rights relating to intellectual property, other than registered
intellectual property and applications;
. all rights to specified registered intellectual property and
applications;
. all rights to an undivided, joint ownership interest in specified
intellectual property relating to ASICs manufactured by NEC that are
common to us and Enterasys;
. all rights, excluding intellectual property rights and real property
rights, under contracts used primarily by our business at the separation
date;
. claims and rights of recovery, set-off and recoupment that relate
primarily to our business;
. all customer lists and supplier lists used primarily by our business at
the separation date;
. all accounting and other books, records and files used primarily by our
business at the separation date;
. tax attributes for property taxes, sales and use taxes and franchise
taxes that relate primarily to our business and, to the extent provided
in the tax sharing agreement, tax attributes relating to income and
payroll taxes that relate to our business or are otherwise allocated to
us; and
. other assets allocated to us under the transformation agreement.
Excluded Assets. The asset contribution agreement excludes some assets from
those transferred to us. These assets include the assets transferred to
Aprisma, Enterasys or GNTS under their asset contribution agreements with
Cabletron.
Assumption of Liabilities. Effective on our separation date, we agreed to
assume all liabilities of Cabletron and its direct and indirect subsidiaries
that related primarily to our business or the assets contributed to us under
the asset contribution agreement, except as otherwise expressly provided in
the asset contribution agreement. These liabilities include:
. all liabilities as of our separation date for intercompany payables and
accrued expenses, including legal and accounting expenses that relate
primarily to our business;
. all liabilities as of our separation date for unpaid taxes that relate
primarily to our business or are otherwise allocated to us under the tax
sharing agreement;
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. all liabilities relating to or arising out of contracts assigned to us
by Cabletron;
. all liabilities relating to or arising out of services performed or
products manufactured or sold in the conduct of our business;
. all liabilities relating primarily to our business arising from any
action or threatened action;
. all liabilities relating primarily to our business for noncompliance
with any legal requirements;
. all employee-related liabilities that relate primarily to our business;
and
. liabilities allocated to us under the transformation agreement.
Excluded Liabilities. The asset contribution agreement also provides that
we shall not assume liabilities for accounts payable to third parties, other
than Cabletron and its affiliates, or for deposits held by Cabletron or its
affiliates for the account of third parties as of our separation date that
arise out of our business.
No Warranties. The asset contribution agreement provides that any assets
contributed to us by Cabletron are without any warranties.
Delayed Transfers. If it is not practicable to transfer specified assets
and liabilities on our separation date, the asset contribution agreement
provides that these assets and liabilities will be transferred after our
separation date.
Mistaken Assignments and Assumptions. The asset contribution agreement
provides that if we or Cabletron discover that assets or liabilities were
mistakenly transferred to us or retained by Cabletron, we will cooperate in
good faith to fix the mistake.
Intercompany Account. We maintain an intercompany account with Cabletron,
which Cabletron administers under our services agreement. Cabletron
contributed cash to the balance of this intercompany account so that our net
working capital as of June 3, 2000, assuming our separation occurred on that
date, was $60,000,000.
Commercial Agreements with Other Subsidiaries
We have entered into individual commercial agreements with Enterasys,
Aprisma and GNTS. These agreements establish the prices and other terms and
conditions under which we will provide and obtain products and services to and
from these parties. These agreements terminate in three years or, if earlier,
when a new agreement is entered into between the parties.
Our agreement with Enterasys, dated June 3, 2000, includes:
. cross-manufacturing licenses to allow each company to manufacture some
products of the other;
. cross-marketing and sales arrangements under which Enterasys and we may
purchase products of the other for resale to our customers, with
Enterasys acting as our sales agent in international markets and with us
receiving a referral fee on sales of some Enterasys products;
. arrangements under which Enterasys will provide services on Enterasys
and Riverstone products sold by us;
. arrangements under which we will provide services on some smart switch
router products sold by Enterasys; and
. an arrangement under which Enterasys will pay us a referral fee for
sales of Enterasys training services to our customers.
Our agreement with Aprisma, dated June 3, 2000, provides terms and
conditions relating to:
. Aprisma's purchase of our products for its product development and other
internal uses;
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. Aprisma's sale of products, services and support and third party
products for our internal use and resale to our customers; and
. Aprisma's provision of sales and technical training for Aprisma products
sold to and by us.
Our agreement with GNTS, dated June 3, 2000, provides that we will:
. receive fees for referring customers to GNTS; and
. have the ability to purchase custom GNTS services for internal use and
to resell packages of particular GNTS services to our customers directly
and through our resellers.
Tax Sharing Agreement
We have entered into a tax sharing agreement with Cabletron, Aprisma,
Enterasys and GNTS that allocates responsibilities for tax matters among us.
The tax sharing agreement provides that, for periods through and including the
distribution by Cabletron of our capital stock held by Cabletron to its
stockholders, Cabletron will file all consolidated, combined or unitary income
tax returns required to be filed by Cabletron relating to us. For all periods
beginning before our distribution, we agreed to file all other income tax
returns required to be filed by us and to be responsible for all taxes due
under these returns.
Each member of a consolidated group is, for United States federal income
tax purposes, both individually and jointly liable for the group's federal
income tax liability. We could be required to pay a deficiency in the group's
federal income tax liability for a period during which we were a member of the
group even if the tax sharing agreement allocates that liability to Cabletron
or another group member.
The agreement requires Cabletron to pay all taxes due on the returns filed
by Cabletron. We are required to pay Cabletron an amount equal to our tax
liability for periods covered by these returns, determined on a separate
return basis, as determined by Cabletron in its sole discretion. The agreement
also requires Cabletron to pay us for any benefits realized by Cabletron or
other affiliates from the use of our tax attributes.
The agreement also provides that Cabletron is required to pay any taxes due
and will receive all refunds arising from adjustments relating to its filed
returns and that we must reimburse Cabletron for these taxes if they are
attributable to us or our business. The tax sharing agreement also requires
each party to indemnify each other party against any taxes, including interest
and penalties, that the party is liable to bear under the agreement.
If our distribution does not qualify as a tax-free transaction, and the
failure is our sole responsibility or results from our stock being acquired by
one or more persons so that it is no longer treated as qualified property
under section 355(c)(2) of the Internal Revenue Code, we will indemnify any
other party to the agreement against any resulting taxes or other damages. If
the failure is the responsibility both of us and of Cabletron, we and
Cabletron will indemnify each other party against any resulting taxes or other
damages, each in proportion to its market value. For these purposes, the
market valuation of Cabletron does not include us, Aprisma, Enterasys or GNTS
if Cabletron has distributed the shares of that entity. If the failure to
qualify is the sole responsibility of Cabletron or results from the stock of
Cabletron being acquired by one or more persons so that the stock being
distributed is no longer treated as qualified property under section 355(c)(2)
of the Internal Revenue Code, Cabletron will indemnify each other party to the
agreement against any resulting taxes or other damages.
Aprisma, Enterasys and GNTS have each also agreed to analogous provisions
in the tax sharing agreement, including those relating to the potential
distributions of their capital stock by Cabletron. The tax sharing agreement
also assigns responsibilities for administrative matters such as the filing of
returns, payment of taxes due, retention of records and conduct of audits,
examinations or similar proceedings.
Services Agreement
Cabletron has been providing corporate, human resource, information
technology, financial, and other services to us or our predecessor division
since March 1, 2000. We and Cabletron have entered into a services
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agreement dated August 28, 2000, which formalizes the terms and conditions of
those services. The services provided by Cabletron include information
technology support and general corporate services, including legal,
accounting, treasury, tax, insurance, payroll, and other administrative
functions.
Cabletron administers an intercompany account for us as part of the
treasury services provided under the services agreement. The services
agreement also provides that all of our deposits and disbursements flow
through the intercompany account, and we rely on the intercompany account as a
source of liquidity. Upon our distribution, the balance in the account will be
transferred to us.
The services agreement also allows our eligible employees to continue to
participate in Cabletron's benefits plans on comparable terms and conditions
as existed before the contribution date until the distribution date, until we
establish benefit plans for our employees or until we elect not to establish
comparable plans. The services agreement also describes the manner in which
Cabletron will share with us its owned and leased properties and office space.
The services agreement permits Cabletron to engage subcontractors to
perform all or any portion of the services described in it. The agreement also
allows us and Cabletron to adjust periodically the nature and level of
services provided by Cabletron to us. The services agreement specifies charges
for the services provided by Cabletron to us. The initial term of the services
agreement expires two years after our separation from Cabletron. We may
terminate the services agreement for any or all of the services provided under
the agreement by providing written notice of at least a full fiscal quarter
before the termination, provided that we do not terminate basic administrative
services, including insurance, tax, accounting and treasury services, for so
long as we are a majority owned subsidiary of Cabletron. We are responsible
for any additional costs imposed by third parties against Cabletron that
result from a termination. Cabletron may terminate the services agreement for
all of the services provided under the agreement by providing us at least 60
days' prior written notice.
Supplemental Options
We have entered into an agreement with Cabletron dated August 28, 2000 that
provides if Cabletron distributes to its stockholders the shares of our
capital stock held by Cabletron, we will be obligated to grant supplemental
options under our 2000 equity incentive plan to acquire shares of our common
stock to those persons who hold compensatory Cabletron stock options. See
"Management--2000 Equity Incentive Plan--Provisions Related to the
Distribution and to Change in Control."
Transactions with Silver Lake and the Other Strategic Investors
Rights to Purchase Our Common Stock
Stock Purchase Rights Issued. On August 29, 2000, Cabletron entered into an
amended securities purchase agreement with Silver Lake Partners, L.P. and
granted to the strategic investors rights to purchase shares of our common
stock. In the transformation agreement, we agreed with Cabletron to perform
our obligations under the securities purchase agreement. As of December 2,
2000, the strategic investors held rights to purchase:
. up to 972,482 shares of common stock at a purchase price of $8.02 per
share;
. up to an additional 1,944,963 shares of common stock at a purchase price
of $8.02 per share;
. up to 1,944,963 shares of common stock at a purchase price of $9.25 per
share; and
. up to 648,321 shares of common stock at a purchase price of $11.72 per
share.
These purchase prices will each be adjusted to 90% of the gross price paid
per share in this offering if that results in a purchase price lower than the
purchase price stated above, except for the 1,944,963 shares with an initial
purchase price of $8.02. If the strategic investors do not elect to exercise
their right to purchase the 972,482 shares with an initial purchase price of
$8.02 per share, Cabletron can require them to exercise this right.
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<PAGE>
The shares subject to the stock purchase right may not be purchased until 10
business days before the effectiveness of the registration statement, of which
this prospectus forms a part, and the stock purchase rights terminate if the
shares are not purchased on or before the date of effectiveness.
As of December 2, 2000, the stock purchase rights represented ownership of
4.17% of our outstanding fully-diluted common stock. The stock purchase rights
provide for an adjustment so that if we issue additional stock options to
directors, officers, employees or consultants, shares subject to the stock
purchase right will be issuable at the same aggregate purchase price for a
number of shares sufficient to maintain approximately the same fully-diluted
percentage ownership level of our common stock as if the additional stock
options had not been issued.
IPO Valuation Warrants. If the gross price per share of common stock issued
in this offering multiplied by the number of shares of common stock
outstanding immediately after this offering on a fully diluted basis exceeds
$1.672 billion, we are required to issue to the strategic investors warrants
to purchase a number of shares of our common stock equal to $1.25 million
divided by the gross price per share paid in this offering. The exercise price
for these warrants will equal the gross price per share paid in this offering
and these warrants will expire on the third anniversary of the date of
issuance.
Spin-Off Warrants. Concurrently with a distribution by Cabletron of our
capital stock to its stockholders, we are required to issue to the strategic
investors warrants to purchase a number of shares equal to the number of
shares that the investors would have received in the distribution if the
investors had exercised the Cabletron warrants they hold immediately before
the record date for the distribution. Subject to the adjustments provided for
in the Cabletron warrants, the warrants represent the right to buy 250,000
shares of Cabletron common stock at an exercise price of $45 per share and the
right to buy an additional 200,000 shares of Cabletron common stock at an
exercise price of $35 per share. Based upon Cabletron's current ownership of
us, the strategic investors' current holding of Cabletron warrants, and
assuming no change in the number of outstanding shares of Cabletron capital
stock outstanding from the 184,830,988 shares outstanding at December 2, 2000,
the total number of shares subject to the new warrants that we would issue to
the investors relating to a distribution by Cabletron of our capital stock to
its stockholders would be approximately 220,701. These new warrants will have
an aggregate exercise price that bears the same relationship to the aggregate
exercise price for the Cabletron warrants as the equity value of Riverstone
bears to the equity value of Cabletron at the time we issue the new warrants.
The warrants expire on the later of August 30, 2007 and the third anniversary
of the distribution by Cabletron of our capital stock to its stockholders.
Right to designate an observer to our board of directors
We have agreed to allow a designee of Silver Lake to observe and
participate in meetings of our board of directors in a non-voting capacity
until our capital stock is distributed to Cabletron stockholders. This
designee is entitled to receive the same notices and materials that we provide
to board members and is entitled to be informed about, and to comment on,
significant decisions made by the board.
Registration Rights
We have granted the strategic investors rights to demand the registration
of the shares of our common stock acquired upon exercise of the stock purchase
rights, IPO valuation warrants and spin-off warrants described above for
public sale under an effective registration statement under the Securities Act
of 1933 and other rights to include the shares in registrations for our
account or the account of other stockholders. The strategic investors may
exercise the demand registration rights on only two occasions, and the
exercise of their registration rights is subject to other limitations,
including the lock-up agreements described below.
Standstill Arrangement
Until August 30, 2004, the strategic investors, other than Morgan Stanley
Dean Witter Equity Funding, Inc., have agreed that they and their controlled
affiliates will generally not take specified actions, including:
. acquiring us;
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<PAGE>
. soliciting proxies to vote in opposition to any matter that has been
recommended by our board of directors or in favor of any matter that has
not been approved by our board of directors; and
. soliciting, or making any public statement about, a merger or
acquisition of us, sale of all or substantially all of our assets, or
purchase of our equity securities or Cabletron's.
These restrictions will be suspended upon the occurrence of some events,
including an announcement by us that we are for sale or the execution of a
definitive agreement which, if completed, would result in a change of control
of us. The terms of this standstill arrangement may make some change of
control or other extraordinary transactions less likely to occur while this
arrangement is in effect and may reduce the possibility that our stockholders
will receive a premium or other benefits which could sometimes accompany these
types of transactions.
Lock-up Agreement
The strategic investors have agreed not to offer or sell any shares of our
common stock, subject to exceptions, for a lock-up period, without the prior
written consent of Morgan Stanley & Co. Incorporated, or Lehman Brothers Inc.
for the lock-up for Morgan Stanley Dean Witter Equity Funding, Inc., on behalf
of the underwriters. The lock-up period expires as to one-third of the total
number of shares held by the strategic investors on the 181st, 211th and 241st
days after the date of this prospectus.
Other Aspects of the Transaction with the Strategic Investors
The issuance by us of the securities and purchase rights and by Cabletron
of the warrants to the strategic investors was part of an integrated set of
transactions, including the issuance by Cabletron to the strategic investors
of 65,000 shares of its 4% series A participating convertible preferred stock
and 25,000 shares of its 4% series B participating convertible preferred stock
and the issuance of stock purchase rights by Aprisma, Enterasys and GNTS to
the strategic investors. The aggregate consideration paid by the strategic
investors at the closing of these transactions, after subtracting transaction
fees and expenses payable by Cabletron to Silver Lake, was $87.75 million.
Cabletron has agreed with Silver Lake that upon the completion of the
determination of the appropriate allocation of this aggregate consideration
among the instruments issued to the strategic investors, Cabletron will be
required to pay to us an amount of cash equal to the portion of the aggregate
consideration allocated to the purchase rights, IPO valuation warrants and
spin-off warrants issued or to be issued by us. Upon the distribution of our
common stock by Cabletron to its stockholders, the strategic investors will
acquire additional shares of our common stock based on shares of Cabletron
stock held by them that participate in the distribution.
Indebtedness of Management
On January 1, 2000, Cabletron issued a note to Romulus Pereira, our
president and chief executive officer, in the amount of $125,000. Mr. Pereira
repaid the note in full on September 13, 2000.
On April 12, 2000, Cabletron issued an additional note to Mr. Pereira in
the amount of $400,000 to be applied to the payment of taxes owed by Mr.
Pereira relating to Cabletron shares received by him as part of the
transaction involving Cabletron's acquisition of Yago Systems in 1998. The
note bears interest at an annual rate of 6.46% and is due in full on April 12,
2002.
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STOCK OWNERSHIP
This table shows information as of December 2, 2000, relating to the number
of shares of common stock beneficially owned by all persons known to us to
beneficially own more than five percent of the outstanding shares of common
stock. All shares of common stock shown in the table reflect sole voting and
investment power except as otherwise noted.
<TABLE>
<CAPTION>
Number of Percent of Class
Shares -----------------
Beneficially Before After
Name of Beneficial Owner Owned Offering Offering
------------------------ ------------ -------- --------
<S> <C> <C> <C>
Cabletron Systems, Inc.......................... 92,088,235 100% 90.20%
35 Industrial Way, Bldg 36
PO Box 5005
Rochester, NH 03867
Silver Lake Technology Associates, L.L.C........ 5,296,422 5.44 4.93
2800 Sand Hill Road
Menlo Park, CA 94025
Silver Lake Technology Management, L.L.C........ 5,296,422 5.44 4.93
2800 Sand Hill Road
Menlo Park, CA 94025
Integral Capital Management V, LLC.............. 5,296,422 5.44 4.93
2750 Sand Hill Road
Menlo Park, CA 94025
ICP Management V, LLC........................... 5,296,422 5.44 4.93
2750 Sand Hill Road
Menlo Park, CA 94025
</TABLE>
Beneficial ownership is determined by the rules of the Securities and
Exchange Commission and includes voting or investment power of the securities.
Shares of common stock subject to options or other rights to purchase which
are now exercisable or are exercisable within 60 days after December 2, 2000
are to be considered outstanding for purposes of computing the percentage
ownership of the persons holding these options or other rights, but are not to
be considered outstanding for the purpose of computing the percentage
ownership of any other person.
The shares beneficially owned by Cabletron include 92,088,135 shares of
common stock which will be issued upon the conversion of 92,088,135 shares of
series A convertible preferred stock upon the completion of this offering.
As of December 2, 2000, Silver Lake Partners, L.P. held rights to purchase
4,787,925 shares of our common stock and Silver Lake Investors, L.P. held
rights to purchase 137,748 shares of our common stock. Silver Lake Technology
Associates, L.L.C. is the sole general partner of Silver Lake Partners, L.P.
and Silver Lake Investors, L.P. and, under the limited partnership agreements
of Silver Lake Partners, L.P. and Silver Lake Investors, L.P., exercises all
voting and dispositive power relating to securities owned by Silver Lake
Partners, L.P. and Silver Lake Investors, L.P. Silver Lake Technology
Associates, L.L.C. may be considered to beneficially own the shares of our
common stock beneficially owned by Silver Lake Partners, L.P. and Silver Lake
Investors, L.P.
Integral Capital Partners SLP, LLC, Glenn H. Hutchins, James A. Davidson
and David J. Roux are the managing members of Silver Lake Technology
Associates, L.L.C., and may be considered to share beneficial ownership of the
shares of our common stock beneficially owned by Silver Lake Partners, L.P.
and Silver Lake Investors, L.P., although they disclaim this beneficial
ownership.
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As of December 2, 2000, Silver Lake Technology Investors, L.L.C. held
rights to purchase 105,928 shares of our common stock. Silver Lake Technology
Management, L.L.C. is the sole manager of Silver Lake Technology Investors,
L.L.C. and, under the limited liability company agreement of Silver Lake
Technology Investors, L.L.C., exercises all voting and dispositive power
relating to securities owned by Silver Lake Technology Investors, L.L.C.
Silver Lake Technology Management, L.L.C. may be considered to beneficially
own the shares of our common stock beneficially owned by Silver Lake
Technology Investors, L.L.C.
Integral Capital Partners SLP, LLC, Glenn H. Hutchins, James A. Davidson
and David J. Roux also are the managing members of Silver Lake Technology
Management, L.L.C. and may be considered to share beneficial ownership of the
shares of our common stock beneficially owned by Silver Lake Technology
Investors, L.L.C., although they disclaim this beneficial ownership.
As of December 2, 2000, Integral Capital Partners V, L.P. held rights to
purchase 261,675 shares of our common stock and Integral Capital Partners V
Side Fund, L.P. held rights to purchase 3,146 shares of our common stock.
Integral Capital Management V, LLC is the sole general partner of Integral
Capital Partners V, L.P. and, under the limited partnership agreement of
Integral Capital Partners V, L.P., exercises all voting and dispositive power
relating to securities owned by it. Integral Capital Management V, LLC may be
considered to beneficially own the shares of our common stock beneficially
owned by Integral Capital Partners V, L.P
ICP Management V, LLC is the sole general partner of Integral Capital
Partners V Side Fund, L.P. and, under the limited partnership agreement of
Integral Capital Partners V Side Fund, L.P., exercises all voting and
dispositive power relating to securities owned by it. ICP Management V, LLC
may be considered to beneficially own the shares of our common stock
beneficially owned by Integral Capital Partners V Side Fund, L.P.
Pamela K. Hagenah, Glen T. Kacher, Roger B. McNamee, John A. Powell and
Neil R. Strumingher are the managing members of Integral Capital Management V,
LLC and ICP Management V, LLC and may be considered to share beneficial
ownership of the shares of our common stock beneficially owned by Integral
Capital Partners V, L.P. and Integral Capital Partners V Side Fund, L.P.,
although they disclaim this beneficial ownership.
Pamela K. Hagenah, Roger B. McNamee and John A. Powell are the managing
members of Integral Capital Partners NBT, LLC, which is the managing member of
Integral Capital Partners SLP, LLC, which, as noted above, is a managing
member of Silver Lake Technology Associates, L.L.C. and Silver Lake Technology
Management, L.L.C. and may be considered to share beneficial ownership of
shares of our common stock beneficially owned by Silver Lake Partners, L.P.,
Silver Lake Investors, L.P. and Silver Lake Technology Investors, L.L.C.,
although they disclaim this beneficial ownership.
Based upon these relationships, Silver Lake Technology Associates, L.L.C.,
Silver Lake Technology Management, L.L.C., Integral Capital Management V, LLC
and ICP Management V, LLC may be considered to share beneficial ownership of
the shares of our common stock beneficially owned by each of them, although
they disclaim this beneficial ownership.
None of our directors and executive officers beneficially owns any shares
of our common stock. We have granted to our officers and directors options to
purchase an aggregate of 4.9 million shares of our common stock with a
weighted average exercise price equal to $3.80. None of these options becomes
exercisable before 60 days after December 2, 2000. Assuming the exercise of
these options, these officers and directors would beneficially own 5.1% of our
common stock, or 4.6% after the offering without reflecting any exercise of
the strategic investors' purchase rights. Options issued to our named officers
include 1,500,000 options to Mr. Pereira, 345,000 options to Mr. Boyd and
500,000 options to Mr. Gopalakrishnan.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
As of December 2, 2000, there were 92,088,235 shares of common stock issued
and outstanding after assuming the issuance of 92,088,135 shares of common
stock upon the conversion of all outstanding preferred stock immediately before
the closing of this offering, all of which were held of record by Cabletron.
Upon the completion of this offering, we will be authorized to issue
300,000,000 shares of common stock, $.01 par value per share, and 2,000,000
shares of undesignated preferred stock, $.01 par value per share. The following
description summarizes the material features of our capital stock and some
provisions of Delaware corporate law that apply to us. For greater detail about
our capital stock, please refer to our certificate of incorporation and our by-
laws, which are included as exhibits to the registration statement of which
this prospectus is a part. For more information about provisions of Delaware
corporate law that apply to us, please refer to the Delaware General
Corporation Law.
Common Stock
The holders of our common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. After preferences that may apply
to any outstanding preferred stock, the holders of our common stock are
entitled to receive dividends ratably, if any, as may be declared by our board
of directors out of funds legally available for that purpose. If we liquidate,
dissolve or wind up, the holders of our common stock are entitled to share
ratably in all assets remaining after payment of liabilities and after any
outstanding distribution rights of preferred stock are satisfied. The holders
of our common stock have no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to our common stock.
Preferred Stock
Upon completion of this offering, all outstanding shares of preferred stock
will be converted into 92,088,135 shares of common stock. Our board of
directors has the authority, without action by the stockholders, to designate
and issue preferred stock in one or more series and to designate the rights,
preferences and privileges of each series, which may be greater than the rights
of our common stock. It is not possible to state the actual impact of the
issuance of any shares of preferred stock upon the rights of holders of our
common stock until our board of directors determines the specific rights of the
holders of the preferred stock. However, the effects might include:
. restricting dividends on our common stock;
. diluting the voting power of our common stock;
. impairing the liquidation rights of our common stock; or
. delaying or preventing a change in control of us without further action
by the stockholders.
Purchase Rights
The strategic investors hold rights to purchase shares of our common stock.
These rights are described under "Transactions with Cabletron and its
Affiliates and with the Strategic Investors--Transactions with Silver Lake and
the Other Strategic Investors."
Stock Purchase Rights That We May Issue in the Future
Cabletron will cause us to issue warrants to purchase additional shares of
our common stock to the strategic investors under some circumstances. If the
gross price per share of common stock issued in this offering multiplied by the
number of shares of common stock outstanding immediately after this offering on
a fully diluted basis exceeds $1.672 billion, we are required to issue to these
investors warrants to purchase a number
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<PAGE>
of shares of our common stock equal to $1.25 million divided by the gross
price per share paid in this offering. The exercise price for these warrants
will equal the gross price per share paid in this offering. Concurrently with
a distribution by Cabletron of our capital stock to its stockholders, we are
required to issue warrants to the strategic investors to purchase a number of
shares equal to the number of shares that the strategic investors would have
received in the distribution if the strategic investors had exercised the
Cabletron warrants they held immediately before the record date related to the
distribution. These new warrants will have an aggregate exercise price that
bears the same relationship to the aggregate exercise price for the Cabletron
warrants as the equity value of Riverstone bears to the equity value of
Cabletron when we issue the new warrants.
Anti-takeover Provisions of Our Amended and Restated Certificate of
Incorporation, Amended and Restated By-laws and Delaware Law
Provisions in our certificate of incorporation and by-laws may delay or
prevent a change of control or changes in our management. These provisions
include:
Classified Board of Directors. Our board of directors will be divided into
three classes of directors, serving staggered three-year terms. Upon
expiration of the term of a class of directors, the directors in that class
will be elected for three-year terms at the annual meeting of stockholders in
the year in which the term for that class of directors expires. Our by-laws
provide that directors may be removed only for valid reasons by the
affirmative vote of the holders of eighty percent of the shares of capital
stock entitled to vote in the election of directors. Under our by-laws, a
vacancy on the board of directors may only be filled by vote of a majority of
the directors then in office. The classification of the board of directors and
the limitations on removing directors and filling vacancies could make it more
difficult for a third party to acquire control of us or discourage a third
party from acquiring control of us.
Stockholder Action; Special Meeting of Stockholders. Our certificate of
incorporation does not provide our stockholders with the ability to act by
written consent. Our by-laws further provide that special meetings of our
stockholders may be called only by the chairman of the board of directors or a
majority of the board of directors. These provisions could delay, until the
next annual meeting of stockholders, those actions that are favored by the
holders of a majority of our outstanding voting securities. These provisions
may also discourage another person from making a tender offer for our common
stock, because that person, even after acquiring a majority of our outstanding
voting securities, would only be able to take action as a stockholder, such as
electing new directors or approving a merger, at an appropriately called
meeting of stockholders and not by written consent.
Advance Notice Requirements for Stockholder Proposals and Directors'
Nominations. Our by-laws provide that stockholders seeking to bring business
before an annual meeting of stockholders or to nominate candidates for
election as directors at an annual meeting of stockholders must provide timely
notice of their intent to do so in writing. To be timely, a stockholder's
notice must be received at our principal executive offices not less than 90
days nor more than 120 days before the anniversary date of the immediately
preceding annual meeting of stockholders. If an annual meeting is called for a
date that is not within 30 days before or after the anniversary date, to be
timely, notice from the stockholder must be received no later than the tenth
day following the date on which notice of the annual meeting was mailed to
stockholders or made public, whichever occurred earlier. Our by-laws also
specify requirements for the form and content of a stockholder's notice. These
provisions may preclude stockholders from bringing matters before an annual
meeting of stockholders or from making nominations for directors at an annual
meeting of stockholders.
Authorized but Unissued Shares. Authorized but unissued shares of our
common stock and preferred stock are available for future issuance without
approval of our holders of common stock. These additional shares may be used
for a variety of corporate purposes, including future public offerings to
raise additional capital, corporate acquisitions and employee benefit plans.
The existence of authorized but unissued shares of common stock and preferred
stock could make it more difficult to or discourage an attempt to obtain
control of us through a proxy contest, tender offer, merger or in any other
manner.
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We are also subject to the provisions of section 203 of the Delaware
General Corporation Law. These provisions prohibit large stockholders, in
particular those owning 15% or more of the outstanding voting stock, from
completing a merger or combination with a corporation unless this stockholder
receives either board approval for the transaction or approval of the merger
or combination from 66 2/3% of the shares of voting stock not owned by the
stockholder seeking approval.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C.
Listing
We applied to list our common stock on the Nasdaq National Market under the
trading symbol RSTN.
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SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no public market for our common stock,
and we cannot predict the impact, if any, that the sale or availability for
sale of shares of additional common stock will have on the market price of the
common stock. Future sales of substantial amounts of common stock in the
public market, or the perception that large block sales could occur, could
unfavorably affect the market price of our common stock and could impair our
future ability to raise capital through an offering of our equity securities.
All 10,000,000 shares of our common stock sold in this offering plus any
shares issued upon the exercise of the underwriters' over-allotment option
will be freely tradable without restriction under the Securities Act, except
for any shares that may be acquired by our affiliates, as that term is defined
in Rule 144 under the Securities Act. Generally, affiliates include
individuals or entities that control, are controlled by, or are under common
control with, us and may include our directors, officers and significant
stockholders.
Cabletron may, in its sole discretion, upon conditions determined by its
board to be favorable to it and its stockholders, distribute our common stock
that it owns to its stockholders. We do not expect that Cabletron will
initiate a distribution unless it receives a private letter ruling from the
Internal Revenue Service that the distribution will be tax-free to Cabletron
and its stockholders. Shares of our common stock distributed to Cabletron
stockholders in the distribution generally will be freely transferable, except
for shares of common stock received by persons who are determined to be our
affiliates. Persons who are affiliates will be permitted to sell the shares of
common stock that are issued in this offering or that they receive in the
distribution only through registration under the Securities Act or under an
exemption from registration, such as the one provided by Rule 144.
The remaining shares of our common stock, including those held by Cabletron
and those that the strategic investors may purchase with the purchase rights
described above, are, before distribution, restricted securities, as defined
in Rule 144. Restricted securities may not be sold other than through
registration under the Securities Act or under an exemption from registration,
such as those provided by Rule 144, Rule 144(k) or Rule 701 enacted under the
Securities Act and summarized below. Cabletron, the strategic investors, and
our directors and officers have agreed not to offer or sell any shares of our
common stock, for a period of 180 days after the date of this prospectus or
the longer period described in the section of this prospectus entitled
"Underwriters", without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the underwriters, with some exceptions, including
the distribution by Cabletron of our stock to its stockholders.
We have reserved 45.0 million shares of our common stock for issuance under
our 2000 equity incentive plan. Vesting requirements apply to options granted
under this plan. Additionally, options granted under our 2000 equity incentive
plan only become exercisable upon a distribution of our stock by Cabletron to
its stockholders, or if we are sold or undergo a change in control, and then
only as to options provisionally vested. We expect to file a registration
statement under the Securities Act to register shares reserved for issuance
under our 2000 equity incentive plan. Shares issued through award grants after
the effective date of the registration statement, other than shares issued to
affiliates, generally will be freely tradable without further registration
under the Securities Act. We also expect to file a registration statement at
the time of the distribution of our stock by Cabletron to register shares of
our stock that may be issued upon exercise of options issued by us for
compensatory Cabletron options. Shares issued upon the exercise of these
options will also be freely tradable without registration under the Securities
Act after the effective date of the registration statement.
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UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Chase Securities Inc., Lehman Brothers
Inc., and Salomon Smith Barney Inc. are acting as representatives, have each
agreed to purchase, and we have agreed to sell to them, separately, the number
of shares of our common stock indicated below:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ----------
<S> <C>
Morgan Stanley & Co. Incorporated.................................
Chase Securities Inc..............................................
Lehman Brothers Inc...............................................
Salomon Smith Barney Inc..........................................
----------
Total........................................................... 10,000,000
==========
</TABLE>
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from us and subject to prior sale. The underwriting
agreement provides that the obligations of the several underwriters to pay for
and accept delivery of the shares of our common stock offered by this
prospectus are subject to the approval of legal matters by their counsel and
to conditions described in the underwriting agreement. The underwriters are
obligated to take and pay for all of the shares of our common stock offered by
this prospectus, other than those covered by the over-allotment option
described below, if any of these shares are taken. Morgan Stanley Dean Witter
Online, Inc., an affiliate of Morgan Stanley & Co. Incorporated, will be
distributing shares of common stock over the Internet to its eligible account
holders.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price shown on the cover
page of this prospectus and part to some dealers at a price that represents a
concession not in excess of $ a share under the public offering price. Any
underwriter may allow, and the dealers may re-allow, a concession not in
excess of $ a share to other underwriters or to some dealers. After the
initial offering of the shares of common stock, the offering price and other
selling terms may occasionally be varied by the representatives of the
underwriters.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of 1,500,000
additional shares of common stock at the public offering price shown on the
cover page of this prospectus, less underwriting discounts and commissions.
The underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, made by this offering of the shares of common stock
offered by us in this offering. If the option is exercised, each underwriter
will become conditionally obligated to purchase approximately the same
percentage of additional shares of common stock as the number appearing next
to that underwriter's name in the preceding table bears to the total number of
shares of common stock shown next to the names of all underwriters in the
preceding table.
The underwriters have informed us that each principal underwriter in this
offering may, subject to the approval of Morgan Stanley & Co. Incorporated,
sell to discretionary accounts over which the principal underwriter exercises
discretionary authority. The underwriters have further informed us that they
estimate that these sales will not exceed in the aggregate five percent of the
total number of shares of common stock offered by them.
We have applied for the listing of our common stock on the Nasdaq National
Market under the trading symbol RSTN.
At our request, Lehman Brothers Inc. has reserved up to 500,000 shares of
the common stock offered by this prospectus for sale under a directed share
program to our employees, directors and friends that we designate, at the
initial public offering price on the cover page of this prospectus. These
shares will also be subject to
76
<PAGE>
a 180 day lock-up period for officers and directors of Cabletron and
Riverstone and a 90 day lock-up period for other recipients of these shares,
based on the terms of the lock-up described in the next paragraph. The number
of shares available for sale to the general public will be reduced by the
number of the reserved shares these people purchase.
Riverstone, Cabletron, the directors and executive officers of Riverstone,
the chief financial officer of Cabletron and the strategic investors agreed
that, without the prior written consent of Morgan Stanley & Co. Incorporated,
or for the lock-up for Morgan Stanley Dean Witter Equity Funding, Inc., Lehman
Brothers Inc., on behalf of the underwriters, they will not, during the lock-
up period described below:
. other than for the strategic investors in relation to a credit facility
with third party lenders, offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, lend, or in any
other way transfer or dispose of, directly or indirectly, any shares of
common stock or any securities convertible into or exercisable or
exchangeable for common stock; or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock;
whether any transaction described above is to be settled by delivery of common
stock or other securities, in cash or by any other means. For us and
Cabletron, the lock-up period shall expire 180 days after the date of this
prospectus. For each strategic investor, the lock-up period shall expire as to
one-third of the total number of shares of our common stock held by it on the
181st, 211th and 241st days after the date of this prospectus. For our
directors and executive officers and the chief financial officer of Cabletron,
the lock-up period shall expire for 5% of the total number of shares,
including shares underlying vested and unvested options, of our common stock
held by the person on the 181st day after the date of this prospectus; and for
any remaining securities subject to the lock-up on the 271st day after the
date of this prospectus.
The restrictions described in the previous paragraph do not apply to:
. the sale of the shares to the underwriters;
. the issuance by us of shares of common stock upon the exercise of an
option or a warrant or the conversion of a security outstanding on the
date of this prospectus of which the underwriters have been advised in
writing;
. the granting of stock options or restricted stock units under our
existing employee benefit plans, provided that the options do not become
exercisable and the units do not vest during the 180-day period;
. the issuance by us of warrants to acquire our common stock in strategic
transactions or financing arrangements, provided that the recipient
agrees to be bound by the restrictions described above;
. transactions by any person other than us relating to shares of common
stock or other securities acquired in open market or other transactions
after the completion of this offering;
. bona fide gifts or transfers by will or intestacy, provided that the
recipient agrees in writing to be bound by the restrictions described
above;
. transfers to members, partners, affiliates or immediate family or
transfers between any of the strategic investors or transfers to a trust
for the benefit of immediate family, provided the recipient agrees in
writing to be bound by the restrictions described above;
. transactions in shares of Cabletron's common stock;
. the distribution or the substitution of Cabletron's warrants with
replacement warrants and awards with replacement awards under our
incentive plans and other transactions under our incentive plans;
77
<PAGE>
. the distribution by Cabletron of its shares of our common stock to its
shareholders; and
. other transfers and dispositions, provided that the recipient remains
subject to the lock-up restrictions for the remainder of the period.
To facilitate this offering, the underwriters may engage in transactions
that stabilize, maintain or alter the price of the common stock. Specifically,
the underwriters may over-allot this offering, creating a short position in
the common stock for their own account. To cover any over-allotments or to
stabilize the price of the common stock, the underwriters may bid for, and
purchase, shares of common stock in the open market. The underwriting
syndicate may also reclaim selling concessions allowed to an underwriter or a
dealer for distributing the common stock in this offering, including for
example if the syndicate repurchases previously distributed common stock in
transactions to cover syndicate short positions or in stabilization
transactions. Any of these activities may stabilize or maintain the market
price of the common stock above independent market levels. The underwriters
are not required to engage in these activities, and may end any of these
activities at any time.
A prospectus in electronic format, from which you can review a "Meet the
Management of Riverstone Networks" presentation through an embedded hyperlink
--click here for "Meet the Management of Riverstone Networks" presentation--
is being made available on a website maintained by Morgan Stanley Dean Witter
Online Inc., an affiliate of Morgan Stanley & Co. Incorporated. A description
of this "Meet the Management of Riverstone Networks" presentation is included
as an appendix to this prospectus.
Occasionally, some of the underwriters have provided investment banking
services to Cabletron. The underwriters may in the future provide investment
banking services to either Cabletron or Riverstone. Specifically, Morgan
Stanley & Co. Incorporated currently provides merger and acquisition banking
services to Cabletron. We have generally agreed to pay the costs and expenses
relating to this offering. The underwriters have agreed to reimburse us for
some of the expenses incurred related to this offering.
On August 29, 2000, an affiliate of Morgan Stanley & Co. Incorporated,
Morgan Stanley Dean Witter Equity Funding, Inc., acquired approximately 3.9%
of Silver Lake Partners, L.P.'s initial aggregate investment in Riverstone.
We and the underwriters have agreed to indemnify each other against some
liabilities, including liabilities under the Securities Act.
Price of the Offering
Before this offering, there has been no public market for the common stock.
The initial public offering price will be determined by negotiations between
us and the representatives. Among the factors to be considered in determining
the initial public offering price will be our record of operations, our
current financial position and future prospects, the experience of our
management, sales, earnings and our other financial and operating information
in recent periods, the price-earnings ratios, price-sales ratios, market
prices of securities and financial and operating information of companies
engaged in activities similar to ours. The changes in any of these factors or
in market conditions could cause the estimated initial public offering price
range appearing on the cover page of this prospectus to change.
78
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered by this prospectus will
be passed upon for Riverstone by Ropes & Gray, Boston, Massachusetts. Other
legal matters will be passed upon for the underwriters by Wilson Sonsini
Goodrich & Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
Our consolidated financial statements as of February 28, 1999, February 29,
2000 and December 2, 2000 and for each of the three years ended February 29,
2000 and the nine month period ending December 2, 2000, and the related
financial statement schedule included elsewhere in the registration statement,
have been included in this prospectus in reliance upon the reports of KPMG
LLP, independent certified public accountants, upon the authority of said firm
as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act for the common stock offered in
the offering. This prospectus does not contain all of the information provided
in the registration statement or the exhibits and schedules that are part of
the registration statement. For further information, we refer you to the
registration statement. For information about each document filed as an
exhibit to the registration statement, we refer you to the copy of the
document that has been filed.
Copies of the registration statement may be obtained from the Commission's
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, and the
following regional offices of the Commission: Seven World Trade Center,
13th Floor, New York, New York 10048; and the Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You may obtain copies of
these materials from the public reference section of the Securities and
Exchange Commission at its Washington, D.C. office upon payment of the
required fees. You may obtain information on the operation of the public
reference section by calling the Commission at 1-800-SEC-0330. You may also
inspect reports, proxy and information statements and other information about
registrants that file electronically with the Securities and Exchange
Commission without charge at the offices of the Commission or through the
Securities and Exchange Commission's website at http://www.sec.gov.
This offering will subject us to the full informational requirements of the
Securities Exchange Act of 1934. We will fulfill our obligations to comply
with these requirements by filing periodic reports and other information with
the SEC. We intend to furnish our stockholders with annual reports containing
consolidated financial statements. We also maintain an Internet site at
http://www.riverstonenet.com. Our website and the information contained in or
connected to it shall not be considered to be incorporated into this
prospectus or the registration statement of which it forms a part.
79
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Independent Auditors' Report.......................................... F-2
Consolidated Financial Statements
Consolidated Balance Sheets--February 28, 1999, February 29, 2000 and
December 2, 2000..................................................... F-3
Consolidated Statements of Operations--Years ended February 28, 1998,
1999 and February 29, 2000, and nine months ended November 30 , 1999
(unaudited) and December 2, 2000..................................... F-4
Consolidated Statements of Cash Flows--Years ended February 28, 1998,
1999 and February 29, 2000, and nine months ended November 30, 1999
(unaudited) and December 2, 2000..................................... F-5
Consolidated Statements of Stockholder's Net Investment--Years ended
February, 28, 1998, 1999 and February 29, 2000, and nine months ended
December 2, 2000..................................................... F-6
Notes to Consolidated Financial Statements............................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
Riverstone Networks, Inc.:
We have audited the accompanying consolidated balance sheets of Riverstone
Networks, Inc. (the "Company") as of February 28, 1999, February 29, 2000 and
December 2, 2000 and the related consolidated statements of operations, cash
flows, and stockholder's net investment for each of the years in the three-
year period ended February 29, 2000 and the nine month period ended December
2, 2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company as of February 28, 1999, February 29, 2000 and December 2, 2000 and
the results of its operations and its cash flows for the three-year period
ended February 29, 2000 and the nine month period ended December 2, 2000 in
conformity with accounting principles generally accepted in the United States
of America.
KPMG LLP
Boston, Massachusetts
December 20, 2000
F-2
<PAGE>
RIVERSTONE NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
February 28, 1999, February 29, 2000 and December 2, 2000
(in thousands, except share amounts)
<TABLE>
<CAPTION>
February 28, February 29, December 2,
1999 2000 2000
------------ ------------ -----------
<S> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents............... $ -- $ -- $ 35,786
Accounts receivable, net of allowance
for doubtful accounts ($30, $1,672 and
$1,980 at February 28, 1999, February
29, 2000 and December 2, 2000,
respectively).......................... 325 9,240 11,669
Accounts receivable, related parties.... -- -- 664
Inventories............................. 1,691 5,638 8,962
Due from employees and officers......... -- 220 390
Prepaid expenses and other current
assets................................. 3,258 2,547 11,606
--------- --------- --------
Total current assets................ 5,274 17,645 69,077
--------- --------- --------
Due from employees and officers, long
term................................... -- 216 691
Property and equipment, net............. 4,700 5,833 11,615
Goodwill, net........................... 14,555 9,554 8,263
--------- --------- --------
Total assets........................ $ 24,529 $ 33,248 $ 89,646
========= ========= ========
Liabilities and Stockholder's Net
Investment
Current Liabilities:
Notes payable, current portion.......... $ 123 $ 98 $ --
Accounts payable, related parties....... -- -- 6,794
Deferred revenue........................ 80 2,429 7,140
Accrued expenses........................ 1,309 3,693 6,351
--------- --------- --------
Total current liabilities........... 1,512 6,220 20,285
Notes payable, long term................ 98 -- --
--------- --------- --------
Total liabilities................... 1,610 6,220 20,285
--------- --------- --------
Commitments and contingencies
Stockholder's Net Investment:
Series A Convertible Preferred Stock
$.01 par value per share, 92,088,135
shares authorized, issued and
outstanding.......................... -- -- 921
Common Stock, $.01 par value per
share, 157,000,000 shares authorized,
100 shares issued and outstanding.... -- -- --
Additional paid in capital............ -- -- 114,051
Accumulated deficit................... (227,001) (264,432) (34,907)
Cabletron Systems equity.............. 249,920 291,472 --
Unearned stock-based compensation..... -- -- (10,407)
Accumulated other comprehensive
income............................... -- (12) (297)
--------- --------- --------
Total stockholder's net investment.. 22,919 27,028 69,361
--------- --------- --------
Total liabilities and stockholder's net
investment............................. $ 24,529 $ 33,248 $ 89,646
========= ========= ========
</TABLE>
See accompanying notes to the consolidated financial statements
F-3
<PAGE>
RIVERSTONE NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended February 28, 1998, 1999 and February 29, 2000 and
nine months ended November 30, 1999 and December 2, 2000
(in thousands, except share and pro forma per share amounts)
<TABLE>
<CAPTION>
Years ended Nine months ended
-------------------------------------- ------------------------
February 28, February 28, February 29, November 30, December 2,
1998 1999 2000 1999 2000
------------ ------------ ------------ ------------ -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues............ $ 59 $ 3,284 $ 23,076 $ 10,315 $ 63,116
Cost of revenues........ 7 3,009 11,976 5,883 28,071
-------- ---------- ---------- -------- ----------
Gross Profit.......... 52 275 11,100 4,432 35,045
Operating expenses:
Research and
development (excludes
stock-based
compensation of $735
for the nine months
ended December 2,
2000)................ 12,013 26,647 30,691 23,286 30,566
Sales and marketing
(excludes stock-based
compensation of
$1,223 for the nine
months ended December
2, 2000)............. 1,962 3,188 9,279 5,459 24,902
General and
administrative
(excludes stock-based
compensation of
$28,704 for the nine
months ended
December 2, 2000).... 3,053 5,025 8,534 6,549 9,655
Stock-based
compensation......... -- -- -- -- 30,662
Special charges....... -- 150,382 -- -- --
-------- ---------- ---------- -------- ----------
Total operating
expenses........... 17,028 185,242 48,504 35,294 95,785
-------- ---------- ---------- -------- ----------
Operating loss...... (16,976) (184,967) (37,404) (30,862) (60,740)
Interest
expense/(income), net.. -- 28 27 20 (1,545)
-------- ---------- ---------- -------- ----------
Net loss............ $(16,976) $ (184,995) $ (37,431) $(30,882) $ (59,195)
======== ========== ========== ======== ==========
Net loss per share:
Basic and diluted... $(169.76) $(1,849.95) $ (374.31) $(308.82) $ (591.95)
======== ========== ========== ======== ==========
Weighted average number
of shares outstanding:
Basic and diluted... 100 100 100 100 100
======== ========== ========== ======== ==========
Pro forma net loss per
share:
Basic and diluted... $ (.40) $ (.63)
========== ==========
Pro forma weighted
average number of
shares outstanding:
Basic and diluted... 93,831,720 93,831,720
========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements
F-4
<PAGE>
RIVERSTONE NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended February 28, 1998, 1999 and February 29, 2000 and
nine months ended November 30, 1999 and December 2, 2000
(in thousands)
<TABLE>
<CAPTION>
Years ended Nine months ended
-------------------------------------- -------------------------
February 28, February 28, February 29, November 30, December 2,
1998 1999 2000 1999 2000
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $(16,976) $(184,995) $(37,431) $ (30,882) $(59,195)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization........ 1,203 4,534 4,975 3,796 5,716
Provision for losses
on accounts
receivable.......... -- 30 1,642 618 308
Stock-based
compensation........ -- -- -- -- 30,662
Other non cash....... -- 150,382 -- -- --
Changes in assets and
liabilities (net of
effects of
acquisition of
business):
Accounts receivable
and accounts
receivable,
related parties... -- (355) (10,570) (2,968) (1,867)
Inventories........ -- (1,691) (3,947) (2,162) (3,324)
Prepaid expenses
and other assets.. 196 (2,461) 274 536 (11,523)
Accrued expenses
and accounts
payable, related
parties........... (523) (2,458) 2,384 445 9,452
Deferred revenue... 35 45 2,349 438 4,711
-------- --------- -------- --------- --------
Net cash used in
operating
activities...... (16,065) (36,969) (40,324) (30,179) (25,060)
-------- --------- -------- --------- --------
Cash flows from
investing activities:
Capital expenditures... (1,908) (3,790) (4,071) (3,407) (10,207)
-------- --------- -------- --------- --------
Net cash used in
investing
activities...... (1,908) (3,790) (4,071) (3,407) (10,207)
-------- --------- -------- --------- --------
Cash flows from
financing activities:
Principal payments on
note payable.......... -- (96) (123) (91) (98)
Cash used in
acquisition of
business, net of cash
received.............. -- (1,580) -- -- --
Net transfer from
Cabletron............. 17,973 42,435 44,518 33,677 63,983
Proceeds from issuance
of stock purchase
rights................ -- -- -- -- 7,168
-------- --------- -------- --------- --------
Net cash provided
by financing
activities...... 17,973 40,759 44,395 33,586 71,053
-------- --------- -------- --------- --------
Net increase in cash
and cash equivalents.. -- -- -- -- 35,786
Cash and cash
equivalents, at
beginning of period... -- -- -- -- --
-------- --------- -------- --------- --------
Cash and cash
equivalents, at end of
period................ $ -- $ -- $ -- $ -- $ 35,786
======== ========= ======== ========= ========
Other cash flow
information:
Cash paid for
interest............ $ -- $ 25 $ 24 $ 23 $ 4
======== ========= ======== ========= ========
</TABLE>
See accompanying notes to the consolidated financial statements
F-5
<PAGE>
RIVERSTONE NETWORKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S NET INVESTMENT
Years ended February 28, 1998, 1999 and February 29, 2000 and nine months ended
December 2, 2000
(in thousands)
<TABLE>
<CAPTION>
Series A Accumulated
Convertible Additional Cabletron Unearned Other
Preferred Common Paid in Accumulated Systems Stock Based Comprehensive
Stock Stock Capital Deficit Equity Compensation Loss Totals
----------- ------ ---------- ----------- --------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, March 1, 1997....... $ -- $ -- $ -- $ (25,030) $ 26,370 $ -- $ -- $ 1,340
Net loss.................... -- -- -- (16,976) -- -- -- (16,976)
Net transfers from
Cabletron.................. -- -- -- -- 17,973 -- -- 17,973
---- ---- -------- --------- --------- -------- ----- ---------
Balances, February 28, 1998... -- -- -- (42,006) 44,343 -- -- 2,337
---- ---- -------- --------- --------- -------- ----- ---------
Components of comprehensive
loss:
Net loss................... -- -- -- (184,995) -- -- -- (184,995)
---- ---- -------- --------- --------- -------- ----- ---------
Total comprehensive
loss.................... -- -- -- (184,995) -- -- -- (184,995)
Net transfers from
Cabletron.................. -- -- -- -- 205,577 -- -- 205,577
---- ---- -------- --------- --------- -------- ----- ---------
Balances, February 28, 1999... -- -- -- (227,001) 249,920 -- -- 22,919
---- ---- -------- --------- --------- -------- ----- ---------
Components of comprehensive
loss:
Net loss................... -- -- -- (37,431) -- -- -- (37,431)
Accumulated translation
adjustments............... -- -- -- -- -- (12) (12)
---- ---- -------- --------- --------- -------- ----- ---------
Total comprehensive
loss.................... -- -- -- (37,431) -- -- (12) (37,443)
Net transfers from
Cabletron.................. -- -- -- -- 41,552 -- -- 41,552
---- ---- -------- --------- --------- -------- ----- ---------
Balances, February 29, 2000... -- -- -- (264,432) 291,472 -- (12) 27,028
---- ---- -------- --------- --------- -------- ----- ---------
Components of comprehensive
loss:
Net loss................... -- -- -- (59,195) -- -- -- (59,195)
Accumulated translation
adjustments............... -- -- -- -- -- -- (285) (285)
---- ---- -------- --------- --------- -------- ----- ---------
Total comprehensive
loss.................... -- -- -- (59,195) -- -- (285) (59,480)
Issuance of stock purchase
rights to strategic
investors.................. -- -- 7,168 -- -- -- -- 7,168
Unearned stock-based
compensation related to
stock option grants........ -- -- 11,099 -- -- (11,099) -- --
Amortization of unearned
stock-based compensation... -- -- -- -- -- 692 -- 692
Compensation for stock
option grants to non-
employees.................. -- -- 27,798 -- -- -- -- 27,798
Compensation for stock
option grants to
consultants................ -- -- 2,172 -- -- -- -- 2,172
Net transfers from Cabletron.. -- -- -- -- 63,983 -- -- 63,983
Transfer to Preferred Stock
and additional paid in
capital.................... 921 -- 65,814 288,720 (355,455) -- -- --
---- ---- -------- --------- --------- -------- ----- ---------
Balances, December 2, 2000.... $921 $ -- $114,051 $ (34,907) $ -- $(10,407) $(297) $ 69,361
==== ==== ======== ========= ========= ======== ===== =========
</TABLE>
See accompanying notes to the consolidated financial statements
F-6
<PAGE>
RIVERSTONE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1999, FEBRUARY 29, 2000, AND DECEMBER 2, 2000
Note (1) Business Operations
On February 10, 2000, Cabletron Systems, Inc. ("Cabletron") announced its
plan to create an independent publicly-traded company, Riverstone Networks,
Inc. ("Riverstone" or the "Company"), comprised of Cabletron's Internet
infrastructure solutions business for Internet service providers and other
service providers. After completion of Riverstone's initial public offering,
Cabletron will own at least 80.1% of Riverstone's outstanding common stock.
Cabletron has announced that it plans, subject to the satisfactory resolution
of certain conditions, to distribute all of the shares of Riverstone's common
stock that Cabletron owns to Cabletron's stockholders at some future date
("the distribution date") after Riverstone's initial public offering.
On July 26, 1996, Zeitnet, Inc. ("Zeitnet") was acquired by Cabletron in a
transaction accounted for as a pooling of interests transaction and became a
wholly owned subsidiary of Cabletron. Cabletron issued approximately 3.3
million shares of common stock for all of the outstanding shares of Zeitnet
(as well as all shares to be issued pursuant to ZeitNet options assumed by
Cabletron).
On March 17, 1998, Yago Systems, Inc. ("Yago") was acquired by Cabletron in
a purchase transaction (discussed more fully in footnote 6) and became a
wholly owned subsidiary of Cabletron. Cabletron has renamed Yago to
Riverstone.
On June 3, 2000, Cabletron, Riverstone and certain related parties entered
into a Transformation Agreement, and Cabletron and Riverstone entered into a
Contribution Agreement. In accordance with the Transformation Agreement,
Cabletron transferred to Riverstone the Cabletron-owned assets and liabilities
which related to the Riverstone business on August 28, 2000 (the "Contribution
Date"). Zeitnet was also contributed to and then merged into Riverstone. These
accompanying financial statements reflect the historical basis of the
Cabletron-owned assets and liabilities which were transferred at the
Contribution Date. Cabletron's ownership interest consists of 100 shares of
common stock and 92,088,135 shares of convertible preferred stock.
The Company designs and manufactures routers and switches that enable
service providers to convert electrical and optical bandwidth into value-added
services for their customers.
Note (2) Summary of Significant Accounting Policies
(a) Principles of Consolidation and Basis of Presentation
The consolidated financial statements of the Company reflect the historical
results of operations and cash flows of the Riverstone business during each
respective period. The consolidated financial statements have been prepared
using Cabletron's historical basis in the assets and liabilities and the
historical results of operations of Riverstone. Changes in Cabletron Systems
equity represent Cabletron's transfer of its net investment in Riverstone,
after giving effect to the net loss of Riverstone plus net cash transfers and
other transfers to and from Riverstone.
The consolidated financial statements include allocations of certain
Cabletron expenses, including centralized legal, accounting, treasury, real
estate, information technology, distribution, customer service, advertising,
sales, marketing, engineering and other Cabletron corporate services and
infrastructure costs. All of the allocations and estimates in the financial
statements are based upon assumptions that the Company's and Cabletron's
management believe to be reasonable reflections of the cost of services
provided or benefit received by Riverstone. However, these financial
statements do not necessarily indicate the financial position or results of
operations that would have occurred if the Company were a stand-alone entity
on the dates indicated. See note 16 for detailed explanations regarding
transactions with related parties.
F-7
<PAGE>
RIVERSTONE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1999, FEBRUARY 29, 2000, AND DECEMBER 2, 2000
(b) Fiscal Year-End
Prior to March 1, 2000, the Company's fiscal year ended on the last
calendar day of February. Effective March 1, 2000 the Company has changed its
year end to a 52-53 week fiscal year ending on the Saturday closest to the
last calendar day in February. This change is not expected to have a
significant effect on consolidated financial results.
(c) Cash and Cash Equivalents
Historically, Cabletron has managed cash and cash equivalents on a
centralized basis. Cash receipts associated with Riverstone's business have
been recorded by Cabletron on Riverstone's behalf and Cabletron has funded
Riverstone's disbursements.
(d) Inventories
Inventories are stated at the lower of cost or market. Costs are determined
at standard cost which approximates the first-in, first-out (FIFO) method.
(e) Revenue Recognition
The Company generally recognizes revenue upon shipment of products provided
that there are no uncertainties regarding customer acceptance, persuasive
evidence of an arrangement exists, the sales price is fixed and determinable
and collectibility is deemed probable. If uncertainties exist, revenue is
recognized when such uncertainties are resolved. Revenues from service and
maintenance contracts are deferred and recognized ratably over the period the
services are performed, typically twelve months or less. During the fiscal
years ending February 28, 1998, February 28, 1999, February 29, 2000 and the
nine months ended November 30, 1999 (unaudited) and December 2, 2000, service
and maintenance revenue was $19,045, $83,917, $962,337, $449,896 and
$4,531,889, respectively. The Company does not currently offer a right of
return to its customers and through December 2, 2000 has not recognized any
related accruals. Estimated costs to repair or replace products that may be
returned under warranty are accrued at the time of shipment. The Company's
warranty period typically extends 12 months from the date of shipment.
Lease Financing. The Company enters into transactions in which customers
receive financing for the purchase of Company equipment from third party
leasing organizations, which in turn remit payment to the Company. In certain
transactions, the Company has guaranteed a portion of the customer's lease
payments to be made to the lessor. The Company records these transactions
consistent with Statement of Financial Accounting Standards No. 13, Accounting
for Leases and related interpretations. Substantially all of the Company's
customer leasing transactions involve capital leases. When the Company
provides a financing guarantee, it records revenue at the time of shipment,
subject to a sales reserve. The Company bases the amount of the reserve on a
percentage of the guaranteed lease payments, consistent with industry
experience. Accordingly, the Company has deferred revenue subject to this
reserve that will be recognized by the end of the respective lease terms if
all lease payments are made by end users. As of February 28, 1999, February
29, 2000 and December 2, 2000, the Company had guaranteed payments associated
with lease transactions of approximately $0, $3,076,897, and $16,143,953,
respectively.
Beginning in the quarter ended June 3, 2000, the Company began reselling
software licenses through its commercial agreement with Aprisma Management
Technologies, Inc., a wholly owned subsidiary of Cabletron. Software license
revenues, which related to sales of Aprisma's Spectrum licenses and other
third party software
F-8
<PAGE>
RIVERSTONE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1999, FEBRUARY 29, 2000, AND DECEMBER 2, 2000
licenses, amounted to $4,629,485 during the nine month period ended December
2, 2000, and were recognized in accordance with American Institute of
Certified Public Accountants' ("AICPA") Statement of Position No. 97-2,
Software Revenue Recognition ("SOP 97-2"), as modified by Statement of
Position No. 98-9, Modification of SOP 97-2, Software Revenue Recognition
("SOP 98-9"). Accordingly the Company recognizes license revenue upon the
delivery of the software provided that there are no uncertainties regarding
customer acceptance, the fee is fixed and determinable and collection of the
resulting receivable is probable.
(f) Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on a
straight-line method over the estimated useful lives of the assets. The
Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company compares the carrying value of long-lived assets
to undiscounted expected future cash flows. When the comparison indicates that
the carrying value of those assets is greater than the respective undiscounted
cash flows an impairment loss is recognized equal to an amount by which the
carrying value exceeds the fair value of the assets.
(g) Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired in a business combination, is recorded at cost less
accumulated amortization. Purchased in-process research and development
without alternative future use is expensed when acquired. Amortization of
goodwill is provided on a straight-line method over the estimated useful life
of the asset. The Company assesses the recoverability of goodwill quarterly or
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. The Company will determine whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted future cash flows of the acquired business. If the
goodwill amortization cannot be fully recovered, the amount of goodwill
impairment is based on projected discounted future cash flows or appraised
values, depending on the nature of the asset. In addition, the Company
continually evaluates the periods of amortization associated with goodwill not
identified with an impaired asset to determine whether events and
circumstances warrant revised estimates of useful lives.
(h) Advertising Costs
The Company expenses advertising costs as incurred.
(i) Research and Development Costs
The Company expenses research and development costs as incurred.
(j) Stock Based Compensation Plans
As permitted by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"), the Company measures
compensation cost in accordance with Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB No. 25"), and related
interpretations. Accordingly, no accounting recognition is given to stock
options granted to employees of the Company at fair market value until they
are exercised. Upon exercise, net proceeds, including income tax benefits
realized, are credited to equity. The pro forma impact on earnings has been
disclosed in the notes to the Consolidated Financial Statements as required by
SFAS 123. Equity instruments issued to non-employees are accounted for in
accordance
F-9
<PAGE>
RIVERSTONE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1999, FEBRUARY 29, 2000, AND DECEMBER 2, 2000
with the provisions of SFAS No. 123 and Emerging Issues Task Force Abstract
No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring or in Conjunction with Selling Goods or Services
("EITF 96-18").
In March 2000, the Financial Accounting Standards Board ("FASB") issued
Financial Interpretation No. 44, Accounting for Certain Transactions Involving
Stock Compensation--an Interpretation of APB Opinion No. 25 ("FIN 44"), which
must be applied prospectively to new stock option awards, exchanges of awards
in a business combination, modifications to outstanding awards and changes in
grantee status that occur on or after July 1, 2000. The Company adopted FIN 44
effective July 1, 2000 with no impact on its historical consolidated
statements and related disclosures.
(k) Income Taxes
Riverstone's operating results historically have been included in
Cabletron's consolidated U.S. and state income tax returns and in the tax
returns of certain Cabletron foreign subsidiaries. The provision for income
taxes in Riverstone's consolidated financial statements has been determined
using the separate company return method. Deferred tax assets and liabilities
are recognized for the expected tax consequences of temporary differences
between the tax bases of assets and liabilities and their reported amounts.
(l) Historical Net Loss Per Share
Basic net loss per common share and diluted net loss per common share are
presented in conformity with Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings Per Share" for all periods presented. In accordance
with SFAS No. 128, basic net loss per common share has been calculated using
the weighted-average number of shares of common stock outstanding during the
period, which consists of Cabletron's 100 shares of common ownership. For the
nine month period ended December 2, 2000, Riverstone has excluded all
outstanding stock options as well as stock purchase rights held by private
investors from the calculation of diluted net loss per common share because
all such securities are anti-dilutive for that period.
(m) Unaudited Pro Forma Basic and Diluted Net Loss Per Share
At December 2, 2000, options to purchase 34,449,280 shares of common stock
of the Company at an average exercise price of $4.67 per share have not been
included in the computation of diluted net loss per share as their effect
would have been anti-dilutive. In addition, at December 2, 2000, there were
11,898,484 options outstanding to purchase shares of Cabletron stock, of which
2,861,628 were held by Riverstone employees. At the distribution date, all
holders of Cabletron stock options that have not been exercised will receive
additional Riverstone options. The actual number of Riverstone stock options
to be issued with respect to outstanding Cabletron stock options will not be
determined until the distribution date. See note 13.
As described in note 16, the Series A Convertible Preferred Stock will
automatically convert into common stock at the then applicable conversion rate
upon the closing of an underwritten firm commitment public offering of shares
of the common stock of the Company. The unaudited pro forma basic and diluted
net loss per share information included in the accompanying statements of
operations for the year ended February 29, 2000 and the nine months ended
December 2, 2000 reflects the impact on unaudited pro forma basic and diluted
net loss per share of such conversion as of the beginning of each period using
the if-converted method. Also included in the pro forma calculations is the
assumed exercise of stock purchase rights to purchase 5,510,729 shares of
common stock, using the treasury stock method, held by private investors, that
are exercisable 10 days prior to the effective date of the Company's
registration statement.
F-10
<PAGE>
RIVERSTONE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1999, FEBRUARY 29, 2000, AND DECEMBER 2, 2000
The reconciliation of the numerators and denominators of the unaudited pro
forma basic and diluted loss per share computation for the Company's reported
net loss is as follows:
Pro Forma Basic and Diluted Loss Per Share
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
February 29, 2000 December 2, 2000
----------------- -----------------
(in thousands, except share and per
share amounts)
<S> <C> <C>
Numerator:
Net loss.............................. $ (37,431) $ (59,195)
---------- ----------
Denominator
Common stock, $0.01 par value per
share, 157,000,000 shares authorized;
100 shares issued and outstanding.... 100 100
Assumed conversion of preferred stock
and exercise of Silver Lake stock
purchase rights...................... 93,831,620 93,831,620
---------- ----------
Weighted average number of diluted
shares outstanding................... 93,831,720 93,831,720
---------- ----------
Basic and diluted loss per share........ $ (.40) $ (.63)
========== ==========
</TABLE>
(n) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. See also
note 16.
(o) Foreign Currency Translation and Transaction Gains and Losses
The Company's international revenues are denominated in either U.S. dollars
or local currencies. For those international subsidiaries which use their
local currency as their functional currency, assets and liabilities are
translated at exchange rates in effect at the balance sheet date and income
and expense accounts at average exchange rates during the reporting period.
Resulting translation adjustments are reported in accumulated other
comprehensive income, a component of stockholder's net investment. Where the
U.S. dollar is the functional currency, amounts are recorded at the exchange
rates in effect at the time of the transaction, and any resulting translation
adjustments, which were not material, are recorded in the Statement of
Operations.
(p) Software Development Costs
Costs for the development of new software and substantial enhancements to
existing software are expensed as incurred until technological feasibility has
been established, at which time any additional development costs would be
capitalized in accordance with Financial Accounting Standards Board Statement
No. 86, Computer Software To Be Sold, Leased, or Otherwise Marketed ("SFAS
86"). The Company believes its current process for developing software is
essentially completed concurrently with the establishment of technological
feasibility; accordingly, no costs have been capitalized to date.
F-11
<PAGE>
RIVERSTONE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1999, FEBRUARY 29, 2000, AND DECEMBER 2, 2000
(q) New Accounting Pronouncements
In June 1998, the FASB issued Financial Accounting Standards Board
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133"), that establishes accounting and reporting
requirements for derivative instruments and for hedging activities. FAS 133
requires companies to recognize all derivatives as either assets or
liabilities in the statement of financial position at fair value.
In June 1999, the FASB issued Financial Accounting Standards Board
Statement No. 137, Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133 ("SFAS
137") which delayed the effective date of SFAS 133 by one year to fiscal years
beginning after June 15, 2000. In June 2000, the FASB issued Financial
Accounting Standards Board Statement No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities--an amendment of FASB
Statement No. 133. ("SFAS 138"), which will be adopted concurrently with SFAS
133. SFAS 138 amends the accounting and reporting standards of SFAS 133 for
certain derivative instruments and hedging activities and incorporates
decisions made by the FASB related to the Derivatives Implementation Group
process. The Company is currently evaluating the effect of SFAS 133 and SFAS
138 on its results of operations and financial position.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements, ("SAB 101"). SAB 101 summarizes the SEC's views of applying
generally accepted accounting principles to revenue recognition. The adoption
of SAB 101 had no significant impact on our revenue recognition policy or
results of operations.
(r) Unaudited Financial information
The consolidated financial statements for the nine months ended November
30, 1999 are unaudited; however, in the opinion of management, all adjustments
consisting of normal recurring adjustments necessary for the presentation of
the financial statements for the nine month period have been included. Results
of operations for this nine month period presented is not necessarily
indicative of the results that may be expected for the full fiscal year of an
other future period.
Note (3) Inventories
Inventories consist of the following at February 28, 1999, February 29,
2000 and December 2, 2000 (in thousands):
<TABLE>
<CAPTION>
February 28, February 29, December 2,
1999 2000 2000
------------ ------------ -----------
<S> <C> <C> <C>
Raw materials.......................... $1,543 $2,764 $2,513
Finished goods......................... 148 2,874 6,449
------ ------ ------
Total inventories.................... $1,691 $5,638 $8,962
====== ====== ======
</TABLE>
F-12
<PAGE>
RIVERSTONE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1999, FEBRUARY 29, 2000, AND DECEMBER 2, 2000
Note (4) Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist of the following at February 28,
1999, February 29, 2000 and December 2, 2000 (in thousands):
<TABLE>
<CAPTION>
February 28, February 29, December 2,
1999 2000 2000
------------ ------------ -----------
<S> <C> <C> <C>
Receivable from vendor................. $2,717 $2,159 $ 5,746
Due from customers..................... -- -- 3,374
Deferred offering costs................ -- -- 1,093
Other.................................. 541 388 1,393
------ ------ -------
Total................................ $3,258 $2,547 $11,606
====== ====== =======
</TABLE>
The receivable from vendor represents amounts due from the Company's
contract manufacturer for inventory that the Company has purchased from third
parties and transferred to its contract manufacturer.
Due from customers represents amounts due from the Company's customers
related to Enterasys sales to those customers as explained in more detail in
Footnote 16.
Note (5) Property and Equipment
Property and equipment consist of the following at February 28, 1999,
February 29, 2000 and December 2, 2000 (in thousands):
<TABLE>
<CAPTION>
February 28, February 29, December 2, Estimated
1999 2000 2000 useful lives
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Equipment.................. $ 9,081 $13,270 $ 22,550 3-5 years
Furniture and fixtures..... 354 238 1,098 5-7 years
Construction in progress... -- -- 67
------- ------- --------
$ 9,435 $13,508 $ 23,715
Less accumulated
depreciation and
amortization.............. (4,735) (7,675) (12,100)
------- ------- --------
$ 4,700 $ 5,833 $ 11,615
======= ======= ========
</TABLE>
In the fourth quarter of the year ended February 28, 1999, Cabletron
performed a physical inventory of manufacturing equipment and fixtures in
preparation for the planned outsourcing of its manufacturing operations. As a
result of this inventory, Cabletron wrote off approximately $17.6 million of
assets. The write-off consisted of equipment and fixtures ($14.2 million) that
could not be located and equipment that was idled and of no future use. The
amount of the write-off attributable to the Company, recorded in special
charges, was $382,000.
Note (6) Business Combinations
Intangible assets consist of the following at February 28, 1999, February
29, 2000 and December 2, 2000 (in thousands):
<TABLE>
<CAPTION>
February 28, February 29, December 2, Estimated
1999 2000 2000 useful life
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Goodwill.................... $16,504 $13,568 $13,568 8 years
Less accumulated
amortization............... (1,949) (4,014) (5,305)
------- ------- -------
$14,555 $ 9,554 $ 8,263
======= ======= =======
</TABLE>
F-13
<PAGE>
RIVERSTONE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1999, FEBRUARY 29, 2000, AND DECEMBER 2, 2000
On March 17, 1998, Cabletron acquired Yago, a privately held manufacturer
of wire speed routing and layer-4 switching products and solutions. Under the
terms of the agreement, Cabletron issued 6.0 million shares of Cabletron
common stock to the shareholders of Yago in exchange for all of the
outstanding shares of Yago not then owned by Cabletron. Prior to the closing
of the acquisition, Cabletron held approximately 25% of Yago's capital stock,
calculated on a fully diluted basis. Cabletron also agreed, pursuant to the
terms of the agreement, to issue up to 5.5 million shares of Cabletron common
stock to the former shareholders of Yago in the event the shares originally
issued in the transaction did not attain a market value of $35 per share
eighteen months after the closing of the transaction. However, the agreement
did not guarantee a minimum value to be received by Yago shareholders. On
September 8, 1999, Cabletron issued approximately 5.2 million shares of
Cabletron common stock to the former shareholders of Yago, pursuant to the
terms of the merger agreement.
Cabletron renamed Yago to Riverstone. The purchase accounting for the
acquisition of Yago has been pushed down by Cabletron to Riverstone.
Riverstone recorded the cost of the acquisition of Yago at approximately
$165.7 million, including direct costs of $2.6 million, based on the market
value as of the acquisition date of shares issued and the maximum number of
shares that could be issued. This acquisition has been accounted for under the
purchase method of accounting. Riverstone's consolidated results of operations
include the operating results of Yago from the acquisition date. Based on an
independent appraisal, approximately $150.0 million of the purchase price was
allocated to in-process research and development. Accordingly, Riverstone
recorded special charges of $150.0 million for this in-process research and
development at the date of acquisition. The value assigned to in process
research and development was determined by identifying significant research
projects for which technological feasibility had not been established,
including development, engineering and testing activities associated with the
introduction of Yago's next-generation switching router family of products and
technologies. This allocation represents the estimated fair value based on
risk-adjusted cash flows related to the incomplete products. At the date of
acquisition, the development of these projects had not yet reached
technological feasibility and the research and development in progress had no
alternative future uses. Accordingly, Cabletron expensed these costs as of the
acquisition date.
The excess of cost over the estimated fair value of net assets acquired of
$16.3 million was allocated to goodwill and is being amortized on a straight-
line basis over a period of eight years. The amount allocated to goodwill was
decreased during the year ended February 29, 2000 due to the recognition of
Yago pre-acquisition net operating losses as a result of a change in the
federal separate return limitation year rule.
At the time of its acquisition, Yago was a development stage company that
had spent approximately $5.6 million on research and development focused on
the development of advanced gigabit switching technology. All of Yago's
efforts since its inception had been directed towards the introduction of an
advanced gigabit Layer-2, Layer-3, and Layer-4 switching and router product
family. Yago had no developed products or technology and had not generated any
revenues as of its acquisition date. At the time, Yago was testing the
technology related to the MSR8000, its first product to be released, and was
developing its MSR16000/8600 family of products. These two primary development
efforts were made up of six significant research and development components,
which were ongoing at the acquisition date. These component efforts included
continued MSR8000 development and testing, research and development of the
MSR2000 (a desktop version of the MSR8000), development of the MSR8600,
development of Wide Area Network interfaces for its switching products,
routing software research and development, and device management software
research and development.
The nature of the efforts to develop the acquired in-process technology
into commercially viable products principally related to the completion of all
planning, designing, prototyping, high-volume verification, and testing
F-14
<PAGE>
RIVERSTONE NETWORKS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1999, FEBRUARY 29, 2000, AND DECEMBER 2, 2000
activities that were necessary to establish that the proposed technologies met
their design specifications including functional, technical, and economic
performance requirements. Anticipated completion dates for the projects in
progress were expected to occur over the two years following the acquisition
and Cabletron expected to begin generating the economic benefits from the
technologies in the second half of fiscal 1999. Expenditures to complete the
MSR technology were expected to total approximately $10.0 million two years
following the acquisition.
At the time of the acquisition, Cabletron anticipated generating
significant increases in revenues and undiscounted cash flows from the
acquisition of Yago with a projected peak in 2003 and then a decline as other
new products and technologies were projected to enter the market. To date, the
results generated from Yago-based projects have not differed materially from
the original forecast assumptions. As noted in Footnote 1, the Company makes
up Cabletron's Internet infrastructure solutions business for Internet service
providers and other service providers. Cabletron also maintains a significant
enterprise market business. The Yago-based products began generating
significant revenue for the enterprise markets during Cabletron's fiscal year
ended February 28, 1999. This began with the release of a fully featured
MSR8000 in July 1998 and continued with the release of the MSR16000 product.
Cabletron continued to increase sales of products based on the Yago in-process
projects in the enterprise market during the fiscal year ended February 29,
2000 based on additional, successful product introductions including the
MSR8600, MSR2000 and Wide Area Network interfaces. Based on Riverstone's
markets the Company began to experience significant revenue growth from the
Yago products beginning in the third and fourth quarters of the fiscal year
ended February 29, 2000. This reflected the growth of the service provider
marketplace and acceptance of the underlying Yago technology as it pertained
to the service provider market.
The value assigned to purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from the
projects and discounting the net cash flows to their present value. The
revenue projection used to value the in-process research and development was
based on estimates of relevant market sizes and growth factors, expected
trends in technology and the nature and expected timing of new product
introductions by the Company and its competitors. As of the valuation date,
Yago had no existing products and accordingly all revenue growth in the first
several years was related to the in-process technologies.
The estimated revenues for the in-process projects were projected to peak
in 2003 and then decline as other new products and technologies were projected
to enter the market. Cost of sales was estimated based on Yago's internally
generated projections and discussions with management regarding anticipated
gross margin improvements. Selling, general and administrative expenses were
projected to remain constant. Research and development expenses were projected
to decrease as a percentage of sales as the in-process projects were
completed.
The rates utilized to discount the net cash flows to their present value
were based on venture capital rates of return. Due to the nature of the
forecast and the risks associated with the projected growth, profitability and
developmental projects, discount rates of 45% to 50% were used for the
business enterprise and for the in-process research and development. Cabletron
believed these rates were appropriate because they were commensurate with
Yago's stage of development; the uncertainties in the economic estimates
described above; the inherent uncertainty surrounding the successful
development of the purchased in-process technology; the useful life of such
technology; the profitability levels of such technology; and the uncertainty
of technological advances that were unknown at that time.
The projected and actual results to date have been materially consistent.
The majority of the projects in-process at the time of the acquisition have
been completed reasonably consistently with the planned schedule
F-15
<PAGE>
RIVERSTONE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1999, FEBRUARY 29, 2000, AND DECEMBER 2, 2000
and the initial products have been brought to market. The Company continued to
work toward the completion of some of the projects underway at Yago at the
time of the acquisition as well as the follow-on projects based on the
underlying technology associated with the acquired in-process projects.
Research and development expenditures since the acquisition have not differed
materially from expectations. The risks associated with these continued
efforts, including the follow-on projects, are still considered significant,
and no assurance can be made that the Company's upcoming products will meet
market expectations. The Company expects to continue their support of these
efforts and believes the Company has a reasonable chance of successfully
completing the research and development programs.
Such factors as efforts to achieve technical viability, uncertainty
regarding standards required for new products, the rapid pace of changing
technology inherent in the industry the Company customers operates, as well as
competitive threats contribute to the significant risks of completing the
development of these technologies. The nature of the efforts to develop the
acquired technologies into commercially viable products consist principally of
planning, designing, and testing activities necessary to determine that the
products can meet market expectations, including functionality and technical
requirements. Failure to bring these products to market in a timely manner
could result in a loss of market share or a lost opportunity to capitalize on
emerging markets and could have a material adverse impact on the Company's
business and operating results and a portion of the value of the in-process
research and development might never be realized.
The purchase price for the acquisition of Yago during the year ended
February 28, 1999 was allocated to assets acquired and liabilities assumed
based on fair market value at the date of the acquisition. The total cost of
the acquisition during the year ended February 28, 1999 is summarized as
follows (in thousands):
<TABLE>
<S> <C>
Cash paid for acquisitions......................................... $ 1,897
Less cash acquired................................................. 317
--------
Net cash paid for acquisition...................................... 1,580
Common stock issued................................................ 163,142
Assumed liabilities................................................ 933
--------
Purchase price................................................... $165,655
========
</TABLE>
The following is a supplemental disclosure of noncash transactions in
connection with the Yago acquisition for the year ended February 28, 1999 (in
thousands):
<TABLE>
<S> <C>
Fair value of asset acquired...................................... $ 17,602
In-process research and development............................... 150,000
Assumed liabilities............................................... (2,880)
Common stock issued............................................... (163,142)
---------
Cash portion of acquisition..................................... $ 1,580
=========
</TABLE>
During the year ended February 29, 2000, Cabletron realized approximately
$2.9 million in tax benefit from utilization of net loss carryforwards that it
acquired in the acquisition of Yago. Goodwill was reduced by $2.9 million at
February 29, 2000 and amortization expense decreased from approximately $510
thousand per quarter to $380 thousand per quarter as a result.
F-16
<PAGE>
RIVERSTONE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1999, FEBRUARY 29, 2000, AND DECEMBER 2, 2000
Note (7) Accrued Expenses
Accrued expenses consist of the following at February 28, 1999, February
29, 2000 and December 2, 2000 (in thousands):
<TABLE>
<CAPTION>
February 28, February 29, December 2,
1999 2000 2000
------------ ------------ -----------
<S> <C> <C> <C>
Payroll and related expenses.......... $1,081 $2,758 $4,079
Product warranty...................... 213 584 533
Deferred offering costs............... -- -- 489
Other................................. 15 351 1,250
------ ------ ------
Total............................... $1,309 $3,693 $6,351
====== ====== ======
</TABLE>
Note (8) Notes Payable
The Company maintained a note payable associated with a financing
arrangement to provide equipment financing assumed as part of the Yago
acquisition. Borrowings under this arrangement carried interest at an
effective rate of 9%, were repayable over 36 months and were secured with the
assets purchased. The note was paid in full during the nine month period ended
December 2, 2000.
Note (9) Income Taxes
No provision for federal or state income taxes has been recorded as the
Company incurred net operating losses for all periods presented. The following
is a reconciliation of the effective tax rates to the statutory federal tax
rate:
<TABLE>
<CAPTION>
February 28, February 28, February 29, December 2,
1998 1999 2000 2000
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Statutory federal income
tax (benefit) rate........ (35.0)% (35.0)% (35.0)% (35.0)%
State income tax, net of
federal tax benefit....... (4.5) (0.8) (4.2) (4.4)
Nondeductible goodwill and
intangibles............... 0.0 28.8 2.0 0.7
Other...................... (1.7) (0.1) (1.1) (1.3)
Stock based compensation... 0.0 0.0 0.0 13.3
Unbenefitted losses........ 41.2 7.1 38.3 26.7
----- ----- ----- -----
0.0% 0.0% 0.0% 0.0%
===== ===== ===== =====
</TABLE>
The Company's operating results have been included in Cabletron's
consolidated U.S. and state income tax returns and in tax returns of certain
Cabletron foreign subsidiaries. As such, Cabletron has utilized, or is
expected to utilize, all of the Company's net operating losses, and all but
$0.5 million of the Company's research credits through December 2, 2000 due to
limitations pursuant to Internal Revenue Code Section 382, which imposes an
annual limitation on the utilization of loss carryforwards following prior
ownership changes. An ownership change is generally defined as a change in
more than 50 percent of the ownership of the company. Through the
Transformation Date, no deferred tax benefit has been recognized for the net
operating losses utilized by Cabletron because they will not be available to
Riverstone, and, under the separate return method, Riverstone would not have
been able to recognize the tax benefit. Effective as of the Transformation
Date, Cabletron is required to reimburse the Company for any tax losses
attributable to the Company that are utilized by Cabletron and the Company is
required to reimburse Cabletron for any tax liabilities attributable to the
Company that is paid by Cabletron. For the period from the Transformation Date
through December 2, 2000 Riverstone has
F-17
<PAGE>
RIVERSTONE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1999, FEBRUARY 29, 2000, AND DECEMBER 2, 2000
received no reimbursement from Cabletron under this agreement. The Company has
recorded a full valuation allowance against its deferred tax assets since
management believes that, after considering all the available objective
evidence, both positive and negative, historical and prospective, with greater
weight given to historical evidence, it is not more likely than not that these
assets will be realized. No income tax benefit has been recorded for all
periods presented because of the valuation allowance.
For the year ended February 28, 1999 Riverstone recorded a special charge
of $150 million for in-process research and development relating to the
acquisition of Yago. This charge was not deductible for tax purposes which
decreased the Company's taxable loss by the $150 million.
Temporary differences between the financial statement carrying amounts and
tax bases of assets and liabilities that give rise to significant portions of
federal deferred tax assets (liabilities) are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
February 28, February 29, December 2,
1999 2000 2000
------------ ------------ -----------
<S> <C> <C> <C>
Deferred tax assets:
Accounts receivable....... $ 12 $ 832 $ 820
Accrued expenses.......... 102 404 95
Accruals and other
reserves................. 433 386 1,225
Loss and tax credit
carryforwards............ 8,747 458 13,355
Depreciation and
amortization............. -- 162 374
Inventory................. 231 1,065 2,029
Stock based compensation.. -- -- 1,988
Capitalized R&D........... 1,653 1,086 1,407
-------- ------- --------
Total gross deferred tax
assets................. 11,178 4,393 21,293
Less valuation allowance.. (11,062) (4,393) (21,293)
-------- ------- --------
Net deferred tax
assets................. 116 -- --
-------- ------- --------
Deferred tax liabilities:
Depreciation and
amortization............. (116) -- --
-------- ------- --------
Total gross deferred
liabilities............ (116) -- --
-------- ------- --------
Net deferred tax
assets................. $ -- $ -- $ --
======== ======= ========
</TABLE>
The valuation allowance increased by $3.7 million and decreased by $6.7
million for the years ended February 28, 1999, and February 29, 2000 and
increased by $16.9 million for the nine month period ended December 2, 2000.
Approximately $0.5 million of the valuation allowance as of December 2, 2000
related to acquired deferred tax assets, the tax benefits of which, when
realized, will be recorded as a decrease to goodwill and other non-current
intangible assets.
As of December 2, 2000, the Company has $30.5 million of net operating loss
carryforwards computed under the separate return method, which will expire in
fiscal year 2020. Also as of December 2, 2000, the Company has $0.5 million of
tax credit carryforwards, which is related to acquired subsidiaries. The tax
benefits related to the tax credits from acquired subsidiaries, when realized,
will be recorded as a decrease in goodwill and other non-current intangible
assets. The utilization of these tax credits are limited pursuant to Internal
Revenue Code Section 382.
Note (10) Financial Instruments and Concentration of Credit Risk
The carrying amounts of trade receivables, amounts due from employees and
officers, prepaid expenses and other assets, deferred revenue, accounts
payable and accrued expenses approximate fair value because of the
F-18
<PAGE>
RIVERSTONE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1999, FEBRUARY 29, 2000, AND DECEMBER 2, 2000
short maturity of these financial instruments. Financial instruments that
potentially subject the Company to concentration of credit risk consist
primarily of trade receivables. The Company's end-user customers, which
include traditional Internet service providers, content hosting and
application service providers, building local exchange carriers, and
metropolitan service providers, some of which can be thinly capitalized start-
up companies. The Company also guarantees certain lease payments that its
customers make to third party leasing companies. The Company performs periodic
credit evaluations of its customers' financial condition and generally does
not require collateral or other security against trade receivable balances;
however, it does maintain an allowance for potential credit losses and such
losses have been within management's expectations.
The following individual customers accounted for 10% or more of total
revenue for the periods indicated:
<TABLE>
<CAPTION>
Years Ended Nine months Ended
-------------------------------------- ------------------------
February 28, February 28, February 29, November 30, December 2,
1998 1999 2000 1999 2000
------------ ------------ ------------ ------------ -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Customer A.. --% --% 11% 13% --%
Customer B.. -- -- 15 -- --
Customer C.. -- 20 14 -- --
Customer D.. -- -- 12 -- --
Customer E.. -- 46 -- -- --
Customer F.. -- -- -- -- 10
</TABLE>
Note (11) Segment and Geographical Information
Financial Accounting Standards Board Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information ("SFAS 131") establishes
standards for reporting information regarding operating segments in annual
financial statements and requires selected information for those segments to
be presented in interim financial reports. SFAS 131 also establishes standards
for related disclosures about products and services and geographic areas.
Operating segments are identified as components of an enterprise about which
separate discrete financial information is available for evaluation by the
chief operating decision maker in making decisions how to allocate resources
and assess performance. To date, the chief operating decision maker has viewed
the Company's operations as principally one segment, Cabletron's Internet
infrastructure solutions business for Internet service providers and other
service providers. Revenue amounts are based on product shipment destination.
Revenues from unaffiliated customers by geographic region are as follows (in
thousands):
<TABLE>
<CAPTION>
Years Ended Nine months Ended
-------------------------------------- ------------------------
February 28, February 28, February 29, November 30, December 2,
1998 1999 2000 1999 2000
------------ ------------ ------------ ------------ -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers (trade):
United States......... $59 $3,284 $17,673 $ 8,385 $44,204
United Kingdom........ -- -- 3,472 952 4,204
Other................. -- -- 1,931 978 12,026
--- ------ ------- ------- -------
Total trade sales....... 59 3,284 23,076 10,315 60,434
Sales to related
parties................ -- -- -- -- 2,682
--- ------ ------- ------- -------
Total sales............. $59 $3,284 $23,076 $10,315 $63,116
=== ====== ======= ======= =======
</TABLE>
Substantially all of the Company's assets are located in the United States.
F-19
<PAGE>
RIVERSTONE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1999, FEBRUARY 29, 2000, AND DECEMBER 2, 2000
Note (12) Legal Proceedings
Legal Proceedings
A consolidated class action lawsuit raising claims against Cabletron and
some officers and directors of Cabletron was filed in the United States
district court for the district of New Hampshire and, following transfer, is
pending in the district of Rhode Island. The complaint alleges that Cabletron
and several of its officers and directors made materially false and misleading
information about Cabletron's operations and acted in violation of Section
10(b) of and Rule 10b-5 under the Securities Exchange Act of 1934 during the
period between March 3, 1997 and December 2, 1997. The complaint also alleges
that Cabletron's accounting practices resulted in the disclosure of materially
misleading financial results during the same period. More specifically, the
complaint challenged Cabletron's revenue recognition policies, accounting for
product returns, and the validity of some sales. The complaint does not
specify the amount of damages sought on behalf of the class. Cabletron and
other defendants moved to dismiss the complaint and, by order dated December
23, 1998, the District Court expressed its intention to grant Cabletron's
motion to dismiss unless the plaintiffs amended their complaint. The
plaintiffs timely served a second consolidated class action complaint, and
Cabletron has filed a motion to dismiss this second complaint. A ruling on
that motion is not expected earlier than fourth quarter of fiscal 2001. If the
plaintiffs prevail, Cabletron could be required to pay substantial damages.
The Company has not assumed any liabilities from Cabletron for this
litigation. The Company has not been named as a defendant in this litigation
and none of its officers or directors is named as a defendant to this
litigation. However, the plaintiffs might attempt to involve the Company in
this litigation or might seek to have the Company pay damages if Cabletron has
insufficient assets to cover any resulting damages. Any involvement in this
litigation could be protracted and may result in a diversion of management and
other resources. The payment of substantial legal costs or damages, or the
diversion of Company management and other resources, could have a material
adverse effect on its business, financial condition or results of operations.
The Company is involved in various other legal proceedings and claims
arising in the ordinary course of business. Management believes that the
disposition of these matters will not have a materially adverse effect on the
condition or results of operations of the Company.
Note (13) Stock Plans
(a) Riverstone 2000 Equity Incentive Plan
Riverstone's board of directors has adopted the Riverstone 2000 Equity
Incentive Plan ("2000 Plan"), which provides for the grant of awards to
employees or directors of, or consultants or advisors to, the Company as well
as to certain employees of Cabletron and its subsidiaries. Awards under the
2000 Plan may consist of stock options (incentive or non-statutory),
restricted and unrestricted stock awards, stock appreciation rights, deferred
stock awards, performance awards, other stock-based awards and loans and
supplemental grants. A total of 45,000,000 shares of common stock have been
reserved for issuance under the 2000 Plan. No participant may be granted
options or stock appreciation rights in any calendar year with respect to more
than 8,500,000 shares of common stock. Under the 2000 Plan, no more than
5,000,000 shares may be awarded to any participant as a stock based
performance award in any three-year period, and no more than $5,000,000 may be
paid to any participant for any year under a cash performance award. The 2000
Plan is administered by Riverstone's board of directors or by a committee of
the board, which determines the terms of awards subject to the terms of the
2000 Plan, subject to action by the compensation committee of the board of
directors of Cabletron in the event of certain awards to executive officers.
F-20
<PAGE>
RIVERSTONE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1999, FEBRUARY 29, 2000, AND DECEMBER 2, 2000
The Company has granted stock options under the 2000 Plan that provide for
provisional vesting as to one-quarter of the shares subject to the options
after one year (April 1, 2001 in the case of the initial grants) with monthly
provisional vesting of the remainder ratably over the next three years. Actual
vesting of these options, which have a maximum term of ten years, is not
scheduled to occur earlier than at the end of four years (April 1, 2004 in the
case of the initial grants) or, if earlier, upon a distribution by Cabletron
of its shares of stock of the Company or upon a sale or other change in
control of the Company. In the event of a sale or other change in control of
the Company, vesting would also accelerate by ten months. The exercise price
of these options has been set at the fair market value of the Company's stock
on the date of grant, as determined by the board. Upon termination of
employment, the unvested portion of these options would terminate and the
remainder would remain exercisable for up to ninety days, with special rules
applicable in the case of death. Consistent with the terms of the 2000 Plan,
the Company has also agreed that, upon the distribution by Cabletron to its
shareholders of the Company stock owned by Cabletron, the Company will grant
stock options to persons then holding options to acquire Cabletron stock, as
described in more detail below. The Company had not issued any stock options
through February 29, 2000.
The following table reflects activity and exercise prices of stock options
under this plan for the nine months ended December 2, 2000.
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
---------- --------------
<S> <C> <C>
Options outstanding, beginning of period.......... -- $ --
Granted........................................... 35,250,330 4.65
Exercised......................................... -- --
Cancelled......................................... (801,050) 3.77
---------- -----
Options Outstanding, December 2, 2000............. 34,449,280 4.67
---------- -----
Options Exercisable, December 2, 2000............. -- $ --
========== =====
</TABLE>
The following table summarizes information concerning currently outstanding
Riverstone options as of December 2, 2000. Based on the vesting schedule
discussed above, there were no options exercisable as of December 2, 2000.
<TABLE>
<CAPTION>
Weighted-average
Options remaining contractual Weighted- average
Range of exercise prices Outstanding life (years) exercise price
------------------------ ----------- --------------------- -----------------
<S> <C> <C> <C>
$0.01 - 3.50........... 27,665,200 9.5 $ 3.50
3.51 - 7.00........... 1,153,500 9.5 7.00
7.01 - 9.50........... 4,836,355 9.7 9.50
9.51 - 12.50.......... 794,225 9.9 12.50
---------- --- ------
34,449,280 9.5 $ 4.67
========== === ======
</TABLE>
In connection with certain stock option grants to employees, the Company
recorded approximately $11,099,000 of unearned stock-based compensation for
the excess of the deemed fair market value over the exercise price at date of
grant and the change in status of one individual from a Cabletron employee to
a Riverstone employee during the nine month period ended December 2, 2000. The
compensation expense is being recognized over the options' vesting period of
four years. As a result, the Company recorded stock-based compensation expense
of $692,000 for the nine month period ended December 2, 2000. For these
options the Company expects to recognize stock-based compensation expenses of
approximately $1,000,000, $2,655,000, $2,655,000, $2,655,000 and $1,559,000
during its fiscal years 2001, 2002, 2003, 2004 and 2005.
F-21
<PAGE>
RIVERSTONE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1999, FEBRUARY 29, 2000, AND DECEMBER 2, 2000
The Company granted approximately 2.8 million options to non-employees of
the Company, primarily three officers of Cabletron and other employees of
Cabletron and Enterasys. Because these individuals are not employees of the
Company, the options have been subject to variable accounting. By approval of
the Company's Board of Directors, these options were accelerated to become
fully vested in November 2000, and become exercisable at the time Cabletron
distributes its Company common stock to Cabletron stockholders, in connection
with a sale of the Company or April 1, 2004, whichever occurs first. These
individuals are generally restricted from transferring these options and in
the case of the options granted to the three officers of Cabletron noted
above, additional transfer restrictions apply to the underlying shares. Based
on this acceleration the Company recorded compensation charges of
approximately $24,937,000 which represented the fair value of the options
using the Black-Scholes option pricing model less the compensation charges
previously recorded of $2,861,000 through the end of the Company's second
quarter ended September 2, 2000 for total compensation for the nine months
ended December 2, 2000 of $27,798,000.
The Company has also issued stock options to certain consultants in
exchange for services during the nine months ended December 2, 2000. The
Company calculated the fair value of the stock options granted using the
Black-Scholes option pricing model. The Company believes that the fair value
of the stock options granted to consultants is more reliably measurable than
the fair value of the services received. The Company incurred approximately
$2,172,000 of compensation expense during the nine months ended December 2,
2000 related to those options.
(b) Cabletron Equity Incentive Plan
The Company's employees have been eligible to participate in Cabletron's
stock option plans. Under those plans Riverstone employees held approximately
3,291,813 and 2,861,628 stock options, as of February 29, 2000 and December 2,
2000, respectively, which were granted at fair market value at the date of
grant, vest over a three to five year period and expire within six to ten
years from the date of grant.
Upon the distribution by Cabletron to its shareholders of the Company stock
owned by Cabletron, the Company and Cabletron have agreed that the Company
will grant to the then-holders of Cabletron stock options, including but not
limited to Company employees holding Cabletron options, additional options
under the 2000 Plan. The same distribution ratio of Company shares that
applies in Cabletron's distribution to its shareholders will be used to
determine the number of shares of Company stock subject to the additional
Company options granted to holders of Cabletron options. The exercise price of
the Cabletron options will be adjusted after the distribution, and the
exercise price of the additional Company options will be determined, such that
(1) the aggregate amount of intrinsic value (that is, the difference between
exercise price and stock value) in the two options immediately after the
distribution does not exceed the intrinsic value in the Cabletron options
immediately before the distribution and (2) the ratio of the exercise price
per option to the market value per share is not reduced. The additional
Company options will have the same vesting and exercisability provisions as
the Cabletron options to which they relate, subject to special rules in the
event of a sale or merger of the Company. The total number of Cabletron
options outstanding at December 2, 2000 was 11,898,484.
F-22
<PAGE>
RIVERSTONE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1999, FEBRUARY 29, 2000, AND DECEMBER 2, 2000
A summary of Riverstone employee option transactions under the current
Cabletron plans are follows:
<TABLE>
<CAPTION>
Cabletron Options
----------------------------
Number of Weighted-Average
Options Exercise Price
---------- ----------------
<S> <C> <C>
Options outstanding at February 28, 1997........ 1,326,502 $24.27
Options exercisable at February 28, 1997........ 160,709 5.94
----------
Granted and assumed............................. 2,921,952 15.54
Exercised....................................... (163,050) 5.85
Cancelled....................................... (519,194) 27.80
----------
Options outstanding at February 28, 1998........ 3,566,210 15.61
----------
Options exercisable at February 28, 1998........ 290,209 18.48
----------
Granted and assumed............................. 2,861,759 7.84*
Exercised....................................... (54,390) 1.13
Cancelled....................................... (3,166,886) 15.93*
----------
Options outstanding at February 28, 1999........ 3,206,693 8.60
----------
Options exercisable at February 28, 1999........ 602,550 10.05
----------
Granted and assumed............................. 947,550 14.02
Exercised....................................... (298,660) 7.99
Cancelled....................................... (675,698) 10.15
----------
Options outstanding at February 29, 2000........ 3,179,885 9.78
----------
Options exercisable at February 29, 2000........ 619,166 8.76
----------
Granted and assumed............................. 85,158 18.69
Exercised....................................... (200,777) 7.04
Cancelled....................................... (202,638) 10.08
----------
Options outstanding at December 2, 2000......... 2,861,628 $10.18
==========
Options exercisable at December 2, 2000......... 863,122 $10.06
==========
</TABLE>
--------
* In December 1997, employees holding outstanding stock options with a value
exceeding $14.6875 per option were given the right to have their options
canceled and repriced to $14.6875 per option. The repriced options will
vest over a period of one to five years. In September 1998, employees
holding outstanding stock options with a value exceeding $7.25 per option
were given the right to have their options canceled and repriced to $7.25
per option. The repriced options will vest over a period of four to six
years.
F-23
<PAGE>
RIVERSTONE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1999, FEBRUARY 29, 2000, AND DECEMBER 2, 2000
The following table summarizes information concerning currently outstanding
and exercisable Cabletron options held by Riverstone employees as of December
2, 2000:
<TABLE>
<CAPTION>
Weighted-average
Options remaining contractual Weighted-average Options Weighted-average
Range of exercise prices Outstanding life (years) exercise price exercisable exercise price
------------------------ ----------- --------------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ .06-6.30............. 56,240 6.8 $ 0.22 32,907 $ 0.22
6.31-7.85............. 1,741,683 7.0 7.25 509,649 7.25
7.86-9.85............. 72,046 8.2 8.85 8,806 8.8
9.86-11.85............ 41,145 6.7 10.89 20,045 10.6
11.86-13.85............ 691,610 8.4 13.59 217,950 13.54
13.86-23.85............ 148,154 8.6 17.61 35,514 16.39
23.86-33.85............ 92,250 7.4 28.36 38,251 30.24
33.86-49.25............ 18,500 9.2 42.57 -- 0.0
--------- --- ------ ------- ------
2,861,628 7.5 $10.18 863,122 $10.06
========= === ====== ======= ======
</TABLE>
The weighted average estimated fair values of stock options granted and
assumed during the years ended February 28, 1998, 1999, February 29, 2000 and
the nine months ended December 2, 2000 were $9.50, $5.20 $9.81 and $6.02 per
share, respectively.
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees ("APB 25") and related interpretations in
accounting for its stock option and employee stock purchase plans and,
accordingly, no compensation expense has been recognized in the consolidated
financial statements for such plans. Had compensation cost for the Company's
stock option plans been determined based upon the fair value at the grant date
for awards under these plans consistent with the methodology prescribed under
Financial Accounting Standards Board Statement No. 123, Accounting for Stock-
based Compensation ("SFAS 123") the Company's net loss would have been
increased to the pro forma amounts indicated below (in thousands, except per
share data):
<TABLE>
<CAPTION>
February 28, February 28, February 29, December 2,
1998 1999 2000 2000
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net loss
As reported........... $(16,976) $(184,995) $(37,431) $(59,195)
Pro forma............. (22,550) (190,753) (43,117) (71,442)
Loss per share
Net loss per share
basic and diluted, as
reported............. (169.76) (1,849.95) (374.31) (591.95)
Net loss per share
basic and diluted, as
adjusted............. (225.50) (1,907.53) (431.17) (714.42)
Pro forma net loss per
share, as reported... -- -- $ (.40) $ (.63)
Pro forma net loss per
share, as adjusted... -- -- $ (.46) $ (.76)
</TABLE>
The effect of applying SFAS 123 as shown in the above pro forma disclosure
is not representative of the pro forma effect on net income in future years
because it does not take into consideration pro forma compensation expense
related to grants made prior to fiscal 1996.
F-24
<PAGE>
RIVERSTONE NETWORKS, INC., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1999, FEBRUARY 29, 2000, AND DECEMBER 2, 2000
The fair value of each option grant under the Cabletron Equity Incentive
Plan was estimated on the date of grant using the Black-Scholes option pricing
model, with the following assumptions used for grants in the years ended
February 28, 1998, 1999, February 29, 2000 and December 2, 2000:
<TABLE>
<CAPTION>
February 28, February 28, February 29, December 2,
1998 1999 2000 2000
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Risk-free interest
rates.................. 5.60% 5.11% 6.59% 5.75%
Expected option lives... 4.7 years 6.5 years 6.5 years 6.4 years
Expected volatility..... 60.4% 76.3% 70.1% 70.1%
Expected dividend
yields................. 0.0% 0.0% 0.0% 0.0%
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because Cabletron options held by Riverstone employees and
directors have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in the opinion of management, the
existing models do not necessarily provide a reliable single measure of the
fair value of these options.
The fair value of each stock option grant under the Riverstone 2000 equity
plan has been estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions for the nine
months ended December 2, 2000, volatility of 65.3%; risk-free interest rate of
5.75%; 6.5 year expected life of options for all years; and 0% dividend yield.
The weighted average fair value per share of options granted during the nine
months ended December 2, 2000 was $3.09.
(c) Employee Stock Purchase Plans
Under Cabletron's two Employee Stock Purchase Plans (ESPP), options were
granted to eligible Company employees twice yearly and are exercisable through
the accumulation of employee payroll deductions from 2% to 10% of employee
compensation as defined in the plan, for each plan. Accumulated payroll
deductions may be used to purchase stock at 85% of the fair market value of
the common stock at the beginning or end of the option period, whichever
amount is lower, to a maximum of $12,500 in value determined at the beginning
of the option period for each plan. In the years ended February 28, 1998,
1999, February 29, 2000 and the nine months ended December 2, 2000, 8,513
shares at a weighted average price of $29.28, 44,336 shares at $9.01, 97,316
shares at $7.57 and 145,046 shares at $15.01, respectively, were purchased for
Company employees.
Note (14) Employee Benefit Plan
The Company's eligible employees may participate in a plan known as the
Cabletron 401(k) Plan ("the 401(k) Plan") which provides retirement benefits
to the eligible employees of participating employers. As allowed under Section
401(k) of the Internal Revenue Code, the 401(k) Plan provides tax-deferred
salary deductions for eligible employees. Participants may elect to contribute
from 1% to 18% of their annual compensation to the 401(k) Plan each year,
limited to a maximum annual amount as set periodically by the Internal Revenue
Service. In addition, unless determined otherwise by the Cabletron board of
directors, the 401(k) plan provides for a basic matching contribution each
quarter on behalf of each eligible participant equal to the lesser of $250 or
50% of the participant's elective contributions for the quarter. The 401(k)
plan also provides for a quarterly supplemental matching contribution equal to
the lesser of $250 or 50% of the participant's elective contributions if
Cabletron's performance meets a specified threshold. A catch-up matching
F-25
<PAGE>
RIVERSTONE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1999, FEBRUARY 29, 2000, AND DECEMBER 2, 2000
contribution may be made where the participant's elective contributions are
capped during the year by Internal Revenue Service limits. Employees become
vested in the matching contributions according to a three year vesting
schedule based on initial date of hire. The Company's expense related to
matching contributions to the 401(k) Plan for the years ended February 28,
1998, February 28, 1999, February 29, 2000 and the nine months ended December
2, 2000 was $0, $0, $114,628 and $104,049, respectively.
On or about March 1, 2001, Riverstone intends to establish a separate
401(k) plan for its employees.
Note (15) Quarterly Financial Data (in thousands)
<TABLE>
<CAPTION>
Gross
Net Sales Profit Net Loss
----------- ----------- ----------
(unaudited) (unaudited) (unaudited)
----------- ----------- ----------
1999
<S> <C> <C> <C>
First Quarter............................ $ 110 $ (99) $(158,308)
Second Quarter........................... 284 (90) (9,610)
Third Quarter............................ 933 63 (9,123)
Fourth Quarter........................... 1,957 401 (7,954)
------- ------- ---------
Total Year............................. $ 3,284 $ 275 $(184,995)
======= ======= =========
<CAPTION>
2000
<S> <C> <C> <C>
First Quarter............................ $ 2,480 $ 955 $ (8,891)
Second Quarter........................... 2,843 913 (11,577)
Third Quarter............................ 4,992 2,564 (10,414)
Fourth Quarter........................... 12,761 6,668 (6,549)
------- ------- ---------
Total Year............................. $23,076 $11,100 $ (37,431)
======= ======= =========
<CAPTION>
2001
<S> <C> <C> <C>
First Quarter............................ $15,778 $ 8,507 $ (12,513)
Second Quarter........................... 20,554 11,397 (11,775)
Third Quarter............................ 26,784 15,141 (34,907)
------- ------- ---------
Year to date........................... $63,116 $35,045 $ (59,195)
======= ======= =========
</TABLE>
The first quarter of fiscal 1999 includes $150.0 million of in-process
research and development charges related to the acquisition of Yago.
F-26
<PAGE>
RIVERSTONE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1999, FEBRUARY 29, 2000, AND DECEMBER 2, 2000
Note (16) Transactions With Cabletron and Related Parties
The consolidated financial statements include allocations of certain
Cabletron expenses, including centralized legal, accounting, treasury, real
estate, information technology, distribution, customer service, advertising,
sales, marketing, engineering and other Cabletron corporate services and
infrastructure costs. All of the allocations and estimates in the financial
statements are based upon assumptions that the Company's and Cabletron's
management believe to be reasonable reflections of the cost of services
provided or benefit received by Riverstone. Allocations are based on
headcount, revenue, square footage, usage and other appropriate methods.
Allocated costs included in the accompanying consolidated statements of
operations are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended Nine months Ended
-------------------------------------- ------------------------
February 28, February 28, February 29, November 30, December 2,
1998 1999 2000 1999 2000
------------ ------------ ------------ ------------ -----------
Unaudited
<S> <C> <C> <C> <C> <C>
Cost of revenues........ $ -- $ 132 $ 464 $ 551 $ 15
Sales and marketing..... 22 120 1,167 341 120
Research and
development............ 35 539 469 369 102
General and
administrative......... 159 2,196 3,496 2,395 2,911
</TABLE>
During the years ended February 28, 1999 and February 29, 2000 and the nine
months ended November 30, 1999 (unaudited) and December 2, 2000, the Company
had sales to three customers of $236,028, three customers of $3,233,400, three
customers of $1,844,069 and eight customers of $4,489,865 respectively, in
which Cabletron maintains investments in private debt and equity securities
accounted for under the cost method of accounting. The Company recognized
revenue based on the fair value of the products sold to these companies. For
those customers from which Cabletron received equity in lieu of cash, the
Company recorded revenues equal to the cost of the product sold, as the fair
value of the equity received was not determinable within reasonable limits.
The revenues recorded by the Company relating to these transactions for the
years ended February 28, 1999 and February 29, 2000 and for the nine months
ended November 30, 1999 (unaudited) and December 2, 2000 were $21,825,
$413,156, $321,456 and $196,393 respectively.
During the nine months ended December 2, 2000, the Company began reselling
Aprisma products in accordance with the terms reflected in the commercial
agreement. The Company recorded revenues in the amount of $4,629,485 during
the period. The Company recorded costs of sales of $3,591,927 associated with
these revenues for the amount due to Aprisma related to these transactions. As
of December 2, 2000, $1,660,530 is reflected in accounts payable related
parties.
On January 1, 2000, Cabletron issued a note to Romulus Pereira, our
President and Chief Executive Officer, in the amount of $125,000. Mr. Pereira
repaid the note in full on September 13, 2000.
On April 12, 2000, Cabletron issued an additional note to Mr. Pereira in
the amount of $400,000 to be applied to the payment of certain taxes owed by
Mr. Pereira with respect to Cabletron shares that he received in connection
with Cabletron's acquisition of Yago Systems, Inc. in 1998. The note bears
interest at the rate of 6.46% per annum and is due in full on April 12, 2002.
The Company has issued additional notes to some employees of the Company.
These notes do not typically incur an interest charge and are normally for a
term of twenty four (24) months. The outstanding principal amount of the note
is payable twenty four (24) months from the commencement date, unless the
employment is cancelled by either the employee or the Company, then the amount
outstanding is immediately due.
F-27
<PAGE>
RIVERSTONE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1999, FEBRUARY 29, 2000, AND DECEMBER 2, 2000
Pursuant to the Services Agreement with Cabletron, the Company occupies
space in Cabletron facilities in; Andover, Massachusetts; Atlanta, Georgia;
Dallas, Texas; Denver, Colorado; New York, New York; Reading, United Kingdom
and other international locations where principally sales and service
personnel and engineers are based. A Cabletron subsidiary assigned to the
Company its rights under the lease relating to the Company's Santa Clara,
California facility, effective as of August 28, 2000.
In connection with the transformation, effective March 1, 2000, certain
Cabletron customers were identified and assigned to each of the other related
parties, including the Company. As a result, the Company received certain
accounts receivable balances and the related allowance for doubtful accounts
that were not necessarily reflected in the Company's receivable balances at
February 29, 2000.
In accordance with the terms reflected in the commercial agreement with
Enterasys, during the nine months ended December 2, 2000 the Company received
revenue in the form of referral fees from Enterasys of $2,682,836. This amount
reflects the Company's commission revenue from Enterasys for sales of
Enterasys products to the Company's customers. Of this amount, $664,622 is
reflected in the accounts receivable from related parties and the remaining
$2,018,214 was paid by Enterasys as of December 2, 2000.
In accordance with the commercial agreement, the accounts receivable
balance stemming from the revenue recorded by Enterasys for its sales to the
Company's customers will be collected by the Company and subsequently remitted
to Enterasys. Reflected in the Company's prepaid expenses and other current
assets at December 2, 2000 is $3,374,000 for amounts due from the Company's
customers related to Enterasys sales to those customers.
For purposes of governing certain of the ongoing relationships between
Riverstone and Cabletron and other related parties at and after the
contribution date and to provide for an orderly transition, Riverstone has
entered into or will enter into various agreements with Cabletron and other
related parties, which were reflected in the financial statements starting
March 1, 2000. A brief description of each of the agreements follows.
Transformation Agreement
The Transformation Agreement contains key provisions relating to the
separation of the Company and other related parties from Cabletron, as well as
the initial public offering and the distribution of shares of the Company and
other related parties to Cabletron stockholders. The agreement lists the
documents and items that the parties delivered in order to accomplish the
transfer of assets and liabilities from Cabletron to the Company, effective on
the contribution date. The agreement also provides that the Company will not
commence the initial public offering without the approval of Cabletron and
Cabletron shall, in its sole and absolute discretion, determine whether to
consummate the distribution. The agreement also contains covenants relating to
exchange of information, auditing practices, resolution of disputes and other
matters.
Asset Contribution Agreement
The Asset Contribution Agreement identifies the assets that Cabletron
transferred to the Company and the liabilities that the Company assumed from
Cabletron on the contribution date. The agreement also describes when and how
these transfers and assumptions were to occur.
Pursuant to the Asset Contribution Agreement, as consideration for the
contribution of assets to the Company, Cabletron received 92,088,135 shares of
Series A Convertible Preferred Stock of the Company. The Series A Convertible
Preferred Stock is senior to the common stock of the Company and has a
liquidation preference equal to $7.00 per share. The Series A Convertible
Preferred Stock is convertible into common stock
F-28
<PAGE>
RIVERSTONE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1999, FEBRUARY 29, 2000, AND DECEMBER 2, 2000
of the Company at any time at the option of the holder at a 1:1 ratio (subject
to adjustment for stock splits and other recapitalization events) and will
automatically convert into common stock of the Company upon the closing of an
underwritten firm commitment public offering of shares of the common stock of
the Company.
Pursuant to the services agreement described below, an intercompany account
will be maintained and administered by Cabletron which will track the
intercompany amount ("I/C Amount"). Pursuant to the asset contribution
agreement, Cabletron shall contribute or deduct an amount from the I/C Amount
on the contribution date such that Riverstone's net working capital, defined
as combined current assets minus combined current liabilities, as of June 3,
2000, pro forma to give effect to the separation, including the contribution
to or deduction from the I/C Amount as of that date, was $60,000,000.
In association with the transformation, beginning on June 3, 2000, the
Cabletron central treasury began to administer the cash account of each
subsidiary. The subsidiaries each receive an interest income allocation
consistent with the return on the portfolio managed by Cabletron. The interest
is based on the average cash balance attributable to each subsidiary. In
accordance with this method, for the six months ended December 2, 2000,
Riverstone received an interest allocation of approximately $1,550,000 based
on an average portfolio return of 6.1%.
Commercial Agreements with Related Parties
Riverstone has entered into commercial agreements with Aprisma, GNTS and
Enterasys (collectively known as "other related parties") to govern the
relationships between Riverstone and the other related parties. These
agreements establish the prices and other terms and conditions under which
Riverstone will provide and obtain products and services to and from the other
related parties. Each of these agreements provide that their terms will remain
operative for three years or until a more definitive inter-company operating
agreement between the parties is executed and becomes effective.
Services Agreement
The Company and Cabletron have entered into a services agreement that
formalizes the terms and conditions under which Cabletron provides services to
the Company. The services to be provided by Cabletron thereunder include
information technology support services for functions including accounting,
treasury and financial and cash account administration, tax, payroll,
stockholder and public relations, legal, human resources, and other
administrative functions.
Pursuant to the services agreement, the Company maintains an intercompany
account with Cabletron. Cabletron administers this account as part of the
treasury services provided to the Company under the services agreement.
The services agreement also allows the Company's eligible employees to
continue to participate in Cabletron's benefits plans on comparable terms and
conditions as existed prior to the contribution date until the date of the
distribution by Cabletron of the common stock of the Company it holds to its
stockholders or until the Company establishes benefit plans for its employees,
or elects not to establish comparable plans, if it is not legally or
financially practical. The services agreement also describes the manner in
which Cabletron will share with the Company its owned and leased properties
and office space.
The services agreement permits Cabletron to engage subcontractors to
perform all or any portion of the services described therein. The agreement
allows the Company and Cabletron to adjust from time to time the nature and
level of services provided by Cabletron to the Company thereunder. The
services agreement specifies
F-29
<PAGE>
RIVERSTONE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1999, FEBRUARY 29, 2000, AND DECEMBER 2, 2000
charges for the services provided by Cabletron to the Company. The initial
term of the services agreement expires on August 28, 2002. The Company may
terminate the services agreement with respect to all or any of the services
provided under the agreement by providing written notice of at least a full
fiscal quarter prior to such termination, provided that the Company may not
terminate certain basic services for so long as it is a majority owned
subsidiary of Cabletron. The Company is responsible for any additional costs
imposed by third parties against Cabletron that result from such a
termination. Cabletron may terminate the services agreement with respect to
any or all of the services provided under the agreement by providing the
Company at least sixty days' prior written notice.
Tax Sharing Agreement
The tax sharing agreement provides that for periods through and including
the distribution by Cabletron of the Company's capital stock held by Cabletron
to its stockholders, Cabletron will file all consolidated, combined or unitary
income tax returns required to be filed by Cabletron with respect to the
Company. For all periods beginning before the Company's distribution, the
Company agreed to file all other income tax returns required to be filed by
the Company and to be responsible for all taxes due in respect of such
returns. For periods through and including the Company's distribution, the
Company agreed to file all other tax returns required to be filed by it, and
to be responsible for all taxes due with respect to such returns. The
agreement also requires Cabletron to pay all taxes due on returns filed by
Cabletron. The Company is required to pay Cabletron an amount equal to its tax
liability for periods covered by such returns, determined on a separate return
basis, as determined by Cabletron in its sole discretion. The agreement also
requires Cabletron to pay the Company for any benefits realized by Cabletron
or other related parties from the use of the Company's tax attributes. The
agreement also provides that Cabletron is required to pay any tax due and will
receive all refunds arising from adjustments in respect of returns filed by
it, and the Company must reimburse Cabletron for taxes to the extent
attributable to it or its business.
The indemnity obligations of the Company and other related parties include
taxes and any interest and penalties thereon for which the Company and other
related parties are liable pursuant to the terms of the Tax Sharing Agreement.
If the distribution of the Company, or of another related party to the
agreement, to Cabletron's stockholders fails to qualify as a tax-free
transaction, and such failure is the sole responsibility of the party whose
stock is being distributed, or if such failure results from the stock of such
party being acquired by one or more persons such that it is no longer treated
as "qualified property" under section 355(c)(2) of the Internal Revenue Code,
the party whose stock is being distributed shall indemnify each other party
against any resulting taxes or other damages. If the Company's distribution,
or the distribution of another related party to the agreement, fails to
qualify as a tax-free transaction, and such failure is the responsibility both
of the party whose stock is being distributed and of Cabletron, the party
whose stock is being distributed and Cabletron shall severally indemnify each
other party against any resulting taxes or other damages, each in proportion
to its market value. If the Company's distribution, or the distribution of
another related party to the agreement, fails to qualify as a tax-free
distribution, and such failure is the sole responsibility of Cabletron, or if
such failure results from the stock of Cabletron being acquired by one or more
persons such that the stock that is being distributed is no longer treated as
"qualified property" under section 355(c)(2) of the Internal Revenue Code,
Cabletron shall indemnify each other party against any resulting taxes or
other damages.
Each member of a consolidated group for U.S. federal income tax purposes is
jointly and severally liable for the group's federal income tax liability.
Accordingly, the Company and other related parties to the agreement
F-30
<PAGE>
RIVERSTONE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1999, FEBRUARY 29, 2000, AND DECEMBER 2, 2000
could be required to pay a deficiency in the group's federal income tax
liability for a period during which the Company and other related parties were
members of the group event if the Tax Sharing Agreement allocates that
liability to Cabletron or another member.
The agreement also assigns responsibilities for certain administrative
matters such as the filing of returns, payment of taxes due, retention of
records, and the conduct of audits, examinations or similar proceedings.
On August 28, 2000, the closing of the transactions contemplated by the
transformation agreement and contribution agreement described above occurred
and the Company's separation from Cabletron became effective.
Note (17) Manufacturing and Key Suppliers
The Company does not have internal manufacturing capacity. The Company
currently outsources all manufacturing to one company, Flextronics
International, Ltd., which manufactures its RS and IA products in Sunnyvale,
California and its RS products in Limerick, Ireland.
If the demand for products grows, the Company will need to increase
material purchases and contract manufacturing capacity with Flextronics or add
additional contract manufacturers. The Company intends to regularly introduce
new products and product enhancements, which will require that the Company
rapidly achieve volume production by coordinating efforts with those of
suppliers and contract manufacturers.
The Company currently purchases several key components used in the
manufacture of products from single or limited sources and is dependent upon
supply from these sources to meet our needs. The Company has worked with two
suppliers to develop several key proprietary application specific integrated
circuits ("ASICs") which are custom designed integrated circuits built to
perform a specific function more rapidly than a general purpose
microprocessor. These proprietary ASICs are very complex and each supplier is
currently the sole source supplier for the specific types of ASICs that it
supplies to the Company. The Company does not have a long-term fixed price or
minimum volume agreement with either of these suppliers.
Note (18) The Strategic Investors
Stock Purchase Rights Issued. On August 29, 2000, Cabletron entered into an
amended securities purchase agreement with Silver Lake Partners, L.P. and
granted to the strategic investors rights to purchase shares of the Company's
common stock. In the transformation agreement, the Company agreed with
Cabletron to perform its obligations under the securities purchase agreement.
As of December 2, 2000, the strategic investors held rights to purchase:
. up to 972,482 shares of common stock at a purchase price of $8.02 per
share;
. up to an additional 1,944,963 shares of common stock at a purchase price
of $8.02 per share;
. up to 1,944,963 shares of common stock at a purchase price of $9.25 per
share; and
. up to 648,321 shares of common stock at a purchase price of $11.72 per
share.
The above purchase prices will each be adjusted to 90% of the gross price
paid per share in this offering if that results in a purchase price lower than
the purchase price stated above, except in the case of the 1,944,963 shares
with an initial purchase price of $8.02. Cabletron can require the strategic
investors to purchase the 972,842 shares with an initial purchase price of
$8.02 per share if they do not elect to purchase these shares. The
F-31
<PAGE>
RIVERSTONE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1999, FEBRUARY 29, 2000, AND DECEMBER 2, 2000
shares subject to the stock purchase right may not be purchased until 10
business days before the effectiveness of the registration statement, of which
this prospectus is a part, and the stock purchase rights terminate if shares
are not purchased on or before the date of effectiveness.
As of December 2, 2000, the stock purchase rights represented ownership of
approximately 4.17% of the Company's outstanding fully-diluted common stock.
The stock purchase rights provide for an adjustment so that if the Company
issues additional stock options to directors, officers, employees or
consultants, shares subject to the stock purchase right will be issuable at
the same aggregate purchase price for a number of shares sufficient to
maintain approximately the same fully-diluted percentage ownership level of
the Company's common stock as if such additional stock options had not been
issued.
IPO Valuation Warrants. If the gross price per share of common stock issued
in this offering multiplied by the number of shares of common stock
outstanding immediately after this offering on a fully diluted basis exceeds
$1.672 billion, the Company is required to issue to the strategic investors
warrants to purchase a number of shares of the Company's common stock equal to
$1.25 million divided by the gross price per share paid in this offering. The
exercise price for these warrants will equal the gross price per share paid in
this offering and these warrants will expire on the third anniversary of the
date of issuance.
Spin-Off Warrants. Concurrently with a distribution by Cabletron of the
Company's capital stock to its stockholders, the Company is required to issue
to the strategic investors warrants to purchase a number of shares equal to
the number of shares that the investors would have received in the
distribution if the investors had exercised the Cabletron warrants they hold
immediately prior to the record date for the distribution. Subject to the
adjustments provided in the Cabletron warrants, the warrants represent the
right to buy 250,000 shares of Cabletron common stock at an exercise price of
$45 per share and the right to buy an additional 200,000 shares of Cabletron
common stock at an exercise price of $35 per share. Based upon Cabletron's
current ownership of the Company, the strategic investors' current holding of
Cabletron warrants, and assuming no change in the number of outstanding shares
of Cabletron capital stock outstanding from the 184,830,988 shares outstanding
at December 2, 2000, the total number of shares subject to the new warrants
that the Company would issue to the investors relating to a distribution by
Cabletron of the Company's capital stock to its stockholders would be 220,701.
These new warrants will have an aggregate exercise price that bears the same
relationship to the aggregate exercise price for the Cabletron warrants as the
equity value of the Company bears to the equity value of Cabletron at the time
the Company issues the new warrants. The warrants expire on the later of
August 30, 2007 and the third anniversary of the distribution by Cabletron of
the Company's capital stock to its stockholders.
In addition, the strategic investors have purchased preferred stock and
warrants in Cabletron and rights to acquire common stock of each of Aprisma,
Enterasys and GNTS. After deducting transaction fees and expense fees payable
by Cabletron to the strategic investors, the strategic investors paid
$87,750,000 for all of the above mentioned instruments. Cabletron has agreed
with Silver Lake that upon the completion of the determination of the
appropriate allocation of this aggregate consideration among the instruments
issued to the strategic investors, Cabletron will pay to the Company an amount
of cash equal to the portion of the aggregate consideration allocated to the
purchase rights, IPO valuation warrants and spin-off warrants issued or to be
issued by the Company. When completed, the allocated purchase price will
increase the cash and additional paid in capital of the Company.
Note (19) Leases
The Company's principal administrative, sales, marketing and research and
development facilities are located in an approximately 129,200 square foot
facility located in Santa Clara, California. A subsidiary of
F-32
<PAGE>
RIVERSTONE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1999, FEBRUARY 29, 2000, AND DECEMBER 2, 2000
Cabletron entered into a lease with respect to this January of 1999, and
assigned this lease to the Company effective August 28, 2000 in connection
with the Company's separation from Cabletron. The initial term of the lease
expires on February 28, 2006.
Future minimum payments as of December 2, 2000 under the operating leases
consist of the following (in thousands):
<TABLE>
<CAPTION>
Fiscal
Year
-------
<S> <C>
2001 (three months ended)........................................... $ 639
2002................................................................ 2,713
2003................................................................ 2,822
2004................................................................ 2,935
2005................................................................ 3,052
Thereafter.......................................................... 3,174
-------
Total minimum lease payments...................................... $15,335
=======
</TABLE>
Rental expenses prior to the assignment of the lease for years ended
February 28, 1999, February 29, 2000 and nine months ended December 2, 2000
were $1,886,132, $1,390,176 and $2,013,992 respectively.
Note (20) Subsequent event (unaudited)
On December 21, 2000, the Company, with approval of its Board of Directors,
amended its Certificate of Incorporation providing for an increase in its
authorized shares including 250,000,000 shares of common stock and 92,088,135
shares of preferred stock.
F-33
<PAGE>
Appendix
FOR MORGAN STANLEY DEAN WITTER ONLINE PROSPECTUS ONLY
"MEET THE MANAGEMENT OF RIVERSTONE NETWORKS" PRESENTATION
FOR RIVERSTONE NETWORKS, INC.
Prospective investors will be able to log on to a website maintained by
Morgan Stanley Dean Witter's affiliate, Morgan Stanley Dean Witter Online,
where a prospectus is available for review. Within designated sections of the
prospectus, including the "Underwriting" section, an embedded hyperlink (click
here for "Meet the Management of Riverstone Networks" presentation) will
provide exclusive access to the "Meet the Management of Riverstone Networks"
presentation. This presentation highlights selected information contained
elsewhere in our prospectus. This presentation does not contain all of the
information that you should consider before investing in our common stock. You
should read the entire prospectus carefully, including the "Risk Factors" and
our financial statements and notes to those financial statements, before
making an investment decision.
Visual 1: Opening Slide
Imagery: Border and Riverstone logo.
Visual Text: "Riverstone Networks"
"Meet the Management of Riverstone Networks"
Script: (Brian Agnew): Hello, my name is Brian Agnew from Morgan Stanley
Dean Witter. It is my pleasure to introduce you to Riverstone Networks.
Joining us today are Romulus Pereira, the chief executive officer of
Riverstone and Robert Stanton, the chief financial officer. With that, it is
my great pleasure to turn the podium over to Romulus Pereira.
Visual 2: Disclaimer
Visual Text: "Our "Meet the Management of Riverstone Networks' presentation
is part of our prospectus. This presentation highlights selected information
contained elsewhere in our prospectus. This presentation does not contain all
of the information that you should consider before investing in our common
stock. You should be sure to read our entire prospectus carefully, including
the "Risk Factors' and our financial statements and notes to those financial
statements, before making an investment decision."
Script: (Romulus Pereira) Thank you Brian and thank you everyone for your
interest in Riverstone's IPO. I'm Rom Pereira, CEO of Riverstone, and I'm
pleased to have this opportunity to tell you about our company and our
exclusive focus on networking in the metropolitan area.
Before I get started I would like to remind you that our "Meet the
Management of Riverstone Networks" presentation is part of our prospectus.
This presentation highlights selected information contained elsewhere in our
prospectus. This presentation does not contain all of the information that you
should consider before investing in our common stock. You should be sure to
read our entire prospectus carefully, including the "Risk Factors" and our
financial statements and notes to those financial statements, before making an
investment decision.
With that, let's get started.
Visual 3: The Centralized Internet
Imagery: Map of the United States illustrating a centralized national
network.
Visual Text: "The Centralized Internet"
A-1
<PAGE>
Script (Romulus Pereira): (see "Business--Industry Background--Demand for
Advanced Internet-Based Network Services") As you are probably aware, the
Internet has developed quickly into a mass medium for both communications and
commerce. The Internet, however, is now undergoing a fundamental
transformation. Historically, Internet content and services were centralized,
forcing the vast majority of Internet traffic to traverse the Internet
backbone to reach the end-user. Today with advances in technologies that
manage and distribute content, Internet applications and services are being
distributed to sites closer to the end-user.
Visual 4: The Rise of Metro Area Networks
Imagery: Map of the United States indicating development of the
Metropolitan Area Network.
Visual Text: "The Rise of Metro Area Networks"
Script (Romulus Pereira): (see "Business--Industry Background--Demand for
Advanced Internet-Based Network Services") These sites are typically located
within the metropolitan area, where there is a high concentration of
businesses and consumers. As a result, the bulk of Internet traffic is now
produced and consumed within metropolitan areas. At the same time, improved
technology is significantly increasing the bandwidth available to transmit
data between the network and the end-user, commonly known as the last mile.
These trends have led to the rise of the metropolitan area network, or MAN,
which extends from the end-user to the Internet backbone.
Visual 5: The Metro Area Network
Imagery: A Metro Area Network showing the connection of Content Hosters and
ASPs, MSPs, BLECs and ISPs.
Visual Text: "The Metro Area Network"; "Content Hosters and ASPs"; "MSPs";
"BLECs"; "ISPs" and "Internet Backbone"
Script (Romulus Pereira): (see "Business--Industry Background--Demand for
Advanced Internet-Based Network Services") The growth in Internet usage and
the emergence of the MAN have led to a new generation of sophisticated and
data-intensive applications and services. The delivery of these applications
and services is evolving in response to end-user demands and the need for
service providers to develop new sources of revenue. These service providers
include traditional telecommunications carriers, Internet service providers,
or ISPs, content hosting and application service providers, or ASPs, building
local exchange carriers, or BLECs, and metro service providers, or MSPs.
Visual 6: Our Mission
Imagery: Statement of Riverstone's mission.
Visual Text: "Our Mission"
"Enabling service providers to convert Metro bandwidth into
differentiated services"
Script (Romulus Pereira): Our mission is to enable service providers to
convert bandwidth into differentiated services. (see "Business--Our Solution")
In most cases, existing infrastructure equipment has not been designed to
deliver these advanced services without significantly degrading performance
and increasing costs. We believe our products meet the needs of service
providers to create and deliver services to their customers in metropolitan
area networks. By implementing our advanced functionality in hardware rather
than software, we are able to deliver these services without a degradation in
performance. (see "Prospectus Summary--Riverstone Networks, Inc.")
A-2
<PAGE>
Visual 7: Our Solution
Imagery: A diagram of the Metro Area Network with images of the products
provided by Riverstone.
Visual Text: "Our Solution"; "Content Hosters and ASPs"; "MSPs"; "BLECs";
"ISPs" and "Internet Backbone"
Script (Romulus Pereira): (see "Business--Industry Background--Requirements
of Service Providers in the Man--Service Creation Model" and "--Flexible
Service Delivery Platform")To maintain and grow their customer base, and to
develop new sources of revenue, service providers must be able to distinguish
themselves from their competitors by offering a wide range of advanced
applications and services tailored to their customers' needs. At the same
time, service providers' networks must support the introduction of new
services as the Internet evolves and users demand more advanced solutions.
(See "Business--Our Solution--Business Creation") As a result, we have
designed our products as a platform on which service providers can deliver
sophisticated and differentiated services.
Our switch routers offer advanced capabilities to manage bandwidth in real-
time, without sacrificing network performance.
As customers and application bandwidth needs change, commands sent remotely
to our products can instantly and inexpensively set-up, modify or terminate
connections.
Our switch routers support hardware-based accounting, allowing service
providers to collect real-time customer billing information without
diminishing network performance.
Our products separate traffic into multiple service classes based on end-
user identity, application type, time-of-day and other attributes.
To increase the speed of content delivery, our products offer network-wide
capabilities that create the shortest and most reliable path between the end-
user and the content. This is accomplished through advanced traffic management
using a broad range of Internet routing protocols.
Visual 8: Delivering Services Over A Broad Range of Media
Imagery: Diagram of interfaces compatible with Riverstone products.
Visual Text: "Delivering Services Over a Broad Range of Media"; "Internet
Date Center"; "SONET"; "Copper"; "ATM"; "Cable"; "WDM" and "GbE"
Script (Romulus Pereira): (see "Business--Our Solution--Flexible Service
Delivery Platform") Our products support optical and electrical interfaces to
ensure that services can be quickly provisioned across a broad range of media
types. This means that service providers using our switch routers can rapidly
offer services across almost any infrastructure.
A-3
<PAGE>
Visual 9: Our Customers
Imagery: List of significant customers.
Visual Text: "Our Customers"
"The following customers each accounted for at least $1 million in revenue
for the period from December 1, 1999 to December 2, 2000:"
<TABLE>
<S> <C> <C>
"Bell Atlantic Interlan Communications Telia
British Telecom Metricom Telseon
CAIS Internet NetRail Terabeam
Earthlink Saritel Terayon
IntelliSpace Telecom Italia Vitts Networks"
</TABLE>
Script (Romulus Pereira): (see "Business--Customers") Our customers
primarily consist of Internet service providers, content hosting and
application service providers, building local exchange carriers and
metropolitan service providers. As of February 29, 2000, we had approximately
150 customers, the majority of which were Internet service providers and
metropolitan service providers located in the United States and Europe. The
customers listed here each accounted for at least $1 million in revenue for
the period December 1, 1999 to December 2, 2000.
Visual 10: Key Competitive Factors
Imagery: Bulleted list of key competitive factors.
Visual Text: "Key Competitive Factors"
"Ability to allow service providers to create, deliver and account for
differentiated services
High network reliability, security and performance
Easy scalability and minimal network disruptions
Interoperability with existing network designs and equipment vendors
Versatility of interfaces
Cost-effective solutions for service providers"
Script (Romulus Pereira): (see "Business--Competition") There is
significant competition in the market for network equipment. This market has
historically been dominated by Cisco Systems. Other existing and potential
competitors include established companies such as Extreme Networks, Foundry
Networks, Juniper Networks. Lucent, Nortel Networks and Siemens, as well as
other smaller public and private companies.
We believe that the principal competitive factors in this market include
product performance, reliability, security, expandability, features and cost-
effectiveness. Our products provide:
. the ability to allow service providers to create, deliver and account
for differentiated services;
. high network reliability, security and performance;
. easy scalability and minimal network disruptions;
. interoperability with existing network designs and equipment vendors;
. versatility of interfaces; and
. cost-effective solutions for service providers.
We believe that these capabilities, when combined with our exclusive focus
on service providers in metropolitan area networks, provide us with a
competitive advantage.
A-4
<PAGE>
Visual 11: Our Strategy
Imagery: Bulleted list of Riverstone strategy points.
Visual Text: "Our Strategy"
. Focus exclusively on service providers in the metropolitan area network
. Build upon our position as a leading developer of service creation
platforms
. Develop next generation products that will support our customers'
emerging services and applications
. Continue to expand our highly skilled engineering team, which consists
of over 200 engineers and
. Expand our U.S. and international sales presence and expand our indirect
sales channels"
Script (Romulus Pereira): (see "Prospectus Summary--Our Strategy") We
intend to become the leading provider of advanced optical and electrical
networking solutions to service providers in metropolitan area networks. The
key elements of our growth strategy are to:
. Focus exclusively on service providers in the metropolitan area network;
. Build upon our position as a leading develop of service creation
platforms;
. Develop next generation products that will support our customers'
emerging services and applications;
. Continue to expand our highly skilled engineering team, which consists
of over 200 engineers; and
. Expand our U.S. and international sales presence and expand our indirect
sales channels.
Visual 12: Our Management Team
Imagery: List of Riverstone management team with title and prior
experience.
Visual Text: "Our Management Team"
<TABLE>
<S> <C> <C> <C>
"Romulus Pereira President & CEO Cisco, YAGO, Cabletron
Robert Stanton CFO HP, Apple, Intel
Sam Boyd EVP, Operations & Quality Tandem, Newbridge
Suresh Gopalakrishnan EVP, Engineering HP, Sun, ZSP
David Bradshaw GM, EMEA Newbridge, Alcatel
Dan Harding VP, Business Development Cabletron
Scott McMillan VP, Supply Chain Tandem, Compaq
John Kern VP, Sales Cisco, EXIS, NEC
Andrew Feldman VP, Corp. Marketing & Development YAGO, Cabletron
Michael Steigerwald VP, Service & Support Newbridge, VTEL"
</TABLE>
Script (Romulus Pereira): (see "Management") I am very proud of the
management team at Riverstone. Our experience ranges from start-ups to large
enterprises and spans a breadth of disciplines. I myself was a founder of Yago
Systems and recently served as the Chief Operating Officer for Cabletron. Bob
Stanton, our CFO, joins us most recently from Intel and before that Apple
Computer.
I would now like to turn the floor over to Bob, who will take you through
our financial results.
Visual 13: Revenue
Imagery: Chart demonstrating quarterly revenue from Q1 1999 through Q3
2000.
Visual Text: "Revenue"
"Our fiscal year ends in February"
A-5
<PAGE>
Script (Bob Stanton): (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Quarterly Results of
Operation") Thank you Rom. As you can see on the slide, our quarterly revenue
has grown rapidly over the past year from about $5.0 million in the third
quarter of our fiscal year 2000 to about $26.8 million in the third quarter of
fiscal year 2001. This data, and the other financial data presented here,
should be read in conjunction with our "Management's Discussion and Analysis
of Financial Condition and Results of Operation--Quarterly Results of
Operation" and the financial statements and related notes included elsewhere
in the prospectus.
Visual 14: Statement of Operations Data
Imagery: Statement of Operations Data for the nine months ended November
30, 1999 and December 2, 2000.
Visual Text: "Statement of Operations Data"
Script (Bob Stanton): (see "Management's Discussion and Analysis of
Financial Condition and Results of Operation--Overview" and "Quarterly Results
of Operation") Net revenues for the first nine months of fiscal year 2001 were
$63.1 million, an increase of 513% compared to $10.3 million for the first
nine months of fiscal year 2000. The increase in net revenues was primarily
due to the addition of new service provider customers both in the United
States and internationally. Out of caution, we note that our industry has
experienced erosion of average selling prices. We anticipate that the average
selling prices of our products will decrease in the future in response to
competitive pricing pressures, which may reduce gross margins or revenues.
Cost of revenues for the first nine months of fiscal year 2001 was $28.0
million, an increase of 375% as compared to $5.9 million for the first six
months of fiscal year 2000. As a percentage of net revenues, the cost of
revenues decreased to 45% from 57% for the same period. The improvements are
primarily attributable to economies of scale achieved from increased net
revenues.
Research and development expenses for the first six months of fiscal year
2001 were $30.6 million, an increase of 31% as compared to $23.3 million for
the first six months of fiscal year 2000. As a percentage of net revenues,
research and development expenses decreased to 48% from 226% for the same
period. $2.9 million of the increase in research and development expenses
related to Cabletron's transfer to us of its research and development group
based in Reading, England during the first quarter of fiscal year 2001.
Historically, these engineers worked on Enterasys products. The remaining
increase resulted from increased personnel and related costs.
Sales and marketing expenses for the first nine months of fiscal year 2001
were $24.9 million, an increase of 352% as compared to $5.5 million for the
first nine months of fiscal year 2000. As a percentage of net revenues, sales
and marketing expenses decreased to 39% from 53% for the same periods. The
increase in sales and marketing expenses resulted primarily from the addition
of sales and marketing personnel to support increased sales and marketing
activities.
General and administrative expenses for the first nine months of fiscal
year 2001 were $9.7 million, an increase of 49% as compared to $6.5 million
for the first six months of fiscal year 2000. As a percentage of net revenues,
general and administrative expenses decreased to 15% from 63% for the previous
period. The increase in general and administrative expenses is primarily due
to the expansion of our operations.
With that I would like to turn it back over to Rom to wrap up.
A-6
<PAGE>
Visual 15: Conclusion
Imagery: Concluding statement.
Visual Text: "Conclusion"
"Thank you for your interest in Riverstone. We strongly encourage you to
refer back to the prospectus and in particular the Risk Factors before making
any investment decision."
Script (Romulus Pereira): Thank you Bob. I'd like to thank everyone for
your interest in Riverstone. We hope that our presentation adds to your
understanding of our company and our commitment to helping our customers
create new services. The metropolitan area network is quickly evolving, and I
believe our success to date reflects the quality of our engineering team and
our solutions.
We strongly encourage you to refer back to the prospectus and in particular
the Risk Factors before making any investment decision.
A-7
<PAGE>
INSIDE BACK COVER
[Heading: "From the Customer's Premises to the Edge of the Internet Backbone,
Riverstone Networks' Switches and Routers Convert Bandwidth into Differentiated
Services"--centered across the top of the page.
Picture of the IA1200 and IA1100 Riverstone products with the following caption:
"Web Switches." Picture of the RS3000, RS2100 and RS2000 Riverstone products
with the following caption: "Metro Access Routers." Picture of RS8600 and RS8000
Riverstone products with the following caption: "Metro Service Routers." Picture
of RS32000 Riverstone product with the following caption: "Intelligent Edge
Router."]
<PAGE>
[RIVERSTONE NETWORKS, INC. LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table lists the expenses of the issuance and distribution of
the securities being registered by this registration statement:
<TABLE>
<S> <C>
SEC Registration Fee............................................. $ 52,800
NASD Filing Fee.................................................. 20,500
Nasdaq Listing Fee............................................... 145,000
Blue Sky Fees and Expenses....................................... 10,000
Printing and Engraving Costs..................................... 350,000
Legal Fees and Expenses.......................................... 1,300,000
Accounting Fees and Expenses..................................... 1,000,000
Transfer Agent and Registrar Fees and Expenses................... 25,000
Miscellaneous.................................................... 96,700
----------
TOTAL.......................................................... $3,000,000
==========
</TABLE>
--------
* To be supplied by amendment.
The amounts listed, except for the Securities and Exchange Commission
registration fee, the National Association of Securities Dealers, Inc. fee and
the Nasdaq fee, are estimates.
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law, as amended, provides
that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal or investigative (other than an
action by or in the right of the corporation) by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him for the
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, in any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful. Section 145 further provides that a
corporation similarly may indemnify any person serving in a covered capacity
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the corporation to
procure a judgment in its favor, against expenses actually and reasonably
incurred in connection with the defense or settlement of the action or suit if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interest of the corporation and except that no
indemnification shall be made for any claim, issue or matter as to which the
person shall have been adjudged to be liable to the corporation unless and
only to the extent that the Delaware court of chancery or another court in
which the action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, the person is fairly and reasonably entitled to indemnity for
expenses which the court of chancery or other court shall deem proper.
Section 102(b)(7) of the Delaware General Corporation Law, as amended,
permits a corporation to include in its certificate of incorporation a
provision eliminating or limiting the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that the provision shall not eliminate or limit
the liability of a director (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional
II-1
<PAGE>
misconduct or a knowing violation of law, (iii) under section 174 of the
Delaware General Corporation Law (relating to unlawful payment of dividends
and unlawful stock purchase and redemption), or (iv) for any transaction from
which the director derived an improper personal benefit.
The registrant's restated certificate of incorporation, as amended,
provides that the company's directors shall not be liable to the registrant or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent that exculpation from liabilities is not
permitted under the Delaware General Corporation Law as in effect at the time
such liability is determined. The restated certificate of incorporation, as
amended, further provides that the registrant shall indemnify its directors
and officers to the full extent permitted by the law of the state of Delaware.
Item 15. Recent Sales of Unregistered Securities.
On August 28, 2000 we issued 92,088,135 shares of our Series A Preferred
Stock as consideration for the assignment to us by Cabletron of certain assets
and liabilities pursuant to an asset contribution agreement. The assets
contributed by Cabletron as consideration for the shares were valued at
$66,735,000.
On August 30, 2000 we granted to Silver Lake Partners, L.P. and its
affiliates and to an affiliate of Morgan Stanley Dean Witter rights to
purchase shares of our common stock. These rights, as of December 2, 2000, are
to purchase:
. up to 972,482 shares of common stock at an exercise price of $8.02 per
share;
. up to an additional 1,944,963 shares of common stock at an exercise
price of $8.02 per share;
. up to 1,944,963 shares of common stock at an exercise price of $9.25 per
share; and
. up to 648,321 shares of common stock at an exercise price of $11.72 per
share.
If we issue additional stock options to directors, officers, employees or
consultants, the stock purchase rights provide for an adjustment so that, for
the same aggregate exercise price, the stock purchase rights will be
exercisable for a number of shares sufficient to maintain approximately the
same fully diluted percentage ownership level of common stock as if such
additional stock options had not been issued.
Additionally, if the gross price per share of common stock issued in this
offering multiplied by the number of shares of common stock outstanding
immediately after this offering on a fully diluted basis exceeds
$1.62 billion, we are required to issue to the strategic investors warrants to
purchase a number of shares of our common stock equal to $1.25 million divided
by the gross price per share paid in this offering.
Concurrently with a distribution by Cabletron of our capital stock to its
stockholders, we are required to issue warrants to the strategic investors to
purchase a number of shares equal to the number of shares that the investors
would have received in such distribution if the investors had exercised the
Cabletron warrants they held immediately prior to the record date related to
the distribution. As of December 2, 2000 there were 184,830,988 shares of
Cabletron's capital stock outstanding and the strategic investors held
warrants to purchase 450,000 shares of Cabletron common stock. Assuming no
change in these amounts from December 2, 2000 through the date of distribution
and that as of the distribution Cabletron owns 92,088,235 shares of our common
stock, we would be required to issue warrants to the strategic investors to
purchase 220,701 shares of our common stock. These new warrants will have an
aggregate exercise price that bears the same relationship to the aggregate
exercise price for the Cabletron warrants as the equity value of Riverstone
bears to the equity value of Cabletron at the time we issue the new warrants.
The issuances described in this Item 15 were deemed to be exempt from
registration in reliance upon Section 4(2) of the Securities Act of 1933, as
amended, as a transaction by an issuer not involving any public offering.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
The following exhibits are filed with this registration statement.
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1** Form of Underwriting Agreement.
2.1#** Amended and Restated Transformation Agreement effective as of June 3,
2000 among Cabletron, Aprisma, Enterasys, GNTS and the Registrant.
2.2#** Amended and Restated Asset Contribution Agreement effective as of June
3, 2000 between Cabletron and the registrant.
2.3** Tax Sharing Agreement dated as of June 3, 2000 among Cabletron,
Aprisma, Enterasys, GNTS and the Registrant.
2.4** Memorandum of Agreement regarding Aprisma-Riverstone Inter-Company
Operations dated June 3, 2000.
2.5** Memorandum of Agreement regarding Enterasys-Riverstone Inter-Company
Operations dated June 3, 2000.
2.6** Memorandum of Agreement regarding GNTS-Riverstone Inter-Company
Operations dated June 3, 2000.
2.7** Services Agreement between Cabletron and the Registrant dated August
28, 2000.
2.8** Distribution-Related Option Agreement among Cabletron, Aprisma,
Enterasys, GNTS and the Registrant.
3.1** Form of Amended and Restated Certificate of Incorporation of the
Registrant.
3.2** Form of Amended and Restated By-Laws of the Registrant.
3.3 Amended and Restated Certificate of Incorporation of the Registrant.
3.4** By-Laws of the Registrant.
4.1** Form of the Registrant's Common Stock Certificate.
4.2** Amended and Restated Security Purchase Agreement between Cabletron and
Silver Lake, dated August 29, 2000.
4.3** Assignment Agreement among Silver Lake and the Investors named
therein, dated August 29 , 2000.
4.4** Form of Stock Purchase Right.
4.5** Form of Warrant.
4.6** Registration Rights Agreement between the strategic Investors and the
Registrant, dated August 29, 2000.
4.7** Standstill Agreement between Cabletron and Silver Lake Partners dated
August 29, 2000.
5.1 Opinion of Ropes & Gray.
10.1** Riverstone Networks, Inc. 2000 Equity Incentive Plan.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.2** Riverstone Networks, Inc. Form of Option Grant.
10.3 Agreement Regarding Change-In-Control Severance Benefit Plan for
Romulus Pereira.
10.4 [Intentionally omitted.]
10.5 [Intentionally omitted.]
10.6 [Intentionally omitted.]
10.7 [Intentionally omitted.]
10.8+** Flextronics International Manufacturing Services Contract dated as of
March 1, 2000.
10.8.1** Enterasys-Riverstone FMA Products Agreement dated as of September 29,
2000.
10.9** Promissory Note dated April 12, 2000 of Romulus Pereira.
10.10** Lease Agreement between WMP II Real Estate Limited Partnership and
Cabletron Systems Sales and Service, Inc., dated January 6, 1999,
together with Tenant Estoppel Certificate dated June 13, 2000.
10.11** Assignment of Lease effective August 28, 2000 between Cabletron
Systems Sales and Service, Inc. and the Registrant.
10.12+** Strategic Alliance Agreement between the Registrant and Tellabs
Operations, Inc. dated November 17, 2000.
21.1** Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP, Independent Auditors.
23.2* Consent of Counsel (included in Exhibit 5.1).
24.1** Power of Attorney.
27.1** Financial Data Schedule.
</TABLE>
--------
* To be filed by amendment.
** Previously filed.
# The Registrant agrees to furnish supplementally to the Commission a copy of
any omitted schedule or exhibit to the agreement upon request by the
Commission.
+ Confidential treatment requested for portions of this exhibit. An
unredacted version of this exhibit has been filed separately with the
Commission.
(b) Financial Statement Schedules
The following financial statement schedule, together with the Report of
Independent Auditors thereon, is filed as part of this Registration
Statement:
Schedule II--Valuation and Qualifying Accounts
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant as
described in the provisions above, the registrant has been advised that in the
opinion of the Securities and Exchange Commission this type of indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. If a claim for indemnification against 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 a director, officer or
controlling person relating to 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
II-4
<PAGE>
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of the
issue.
The undersigned registrant undertakes that:
(1) For purposes of determining any liability under the Act, the
information which may be omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
or prospectus filed by the registrant under 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 Act, each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new registration statement relating to the securities offered in that
registration statement, and the offering of securities at that time shall be
deemed to be the initial bona fide offering of those securities.
II-5
<PAGE>
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 Santa Clara, State of
California, on January 8, 2001.
Riverstone Networks, Inc.
/s/ Romulus S. Pereira
By: ________________________________
Romulus Pereira
Executive Vice President of
Finance and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Romulus S. Pereira President, Chief Executive January 8, 2001
______________________________________ Officer and Director
Romulus Pereira (principal executive
officer)
* Executive Vice President of January 8, 2001
______________________________________ Finance, and Chief
Robert Stanton Financial Officer
(principal financial and
accounting officer)
* Chairman of the Board January 8, 2001
______________________________________
Piyush Patel
* Director January 8, 2001
______________________________________
Eric Jaeger
*By:
/s/ Romulus S. Pereira
______________________________________
Romulus Pereira
Attorney-in-fact
</TABLE>
II-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Riverstone Networks, Inc.:
Under date of December 20, 2000, we reported on the consolidated balance
sheets of Riverstone Networks, Inc. (the "Company") as of February 28, 1999
and February 29, 2000 and December 2, 2000, and the related consolidated
statements of operations, cash flows and stockholder's net investment for each
of the years in the three-year period ended February 29, 2000 and the nine
month period ended December 2, 2000. In connection with our audit of the
aforementioned consolidated financial statements, we also audited the related
financial statement schedule listed in Item 16(b). This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audit.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG LLP
Boston, Massachusetts
December 20, 2000
S-1
<PAGE>
SCHEDULE II
RIVERSTONE NETWORKS, INC.
VALUATION AND QUALIFYING ACCOUNTS
For Years Ended February 28, 1998, 1999 and February 29, 2000 and
Nine Months Ended December 2, 2000
(in thousands)
<TABLE>
<CAPTION>
Balance at Balance
beginning Charged to Amounts at end
Description of period expense written off of period
----------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
February 28, 1998................ $ -- $ -- $ -- $ --
February 28, 1999................ -- 30 -- 30
February 29, 2000................ 30 1,727 (85) 1,672
December 2, 2000................. 1,672 459 (151) 1,980
Inventory reserves:
February 28, 1998................ $ -- $ -- $ -- $ --
February 28, 1999................ -- 473 -- 473
February 29, 2000................ 473 1,692 (243) 1,922
December 2, 2000................. 1,922 1,504 (301) 3,125
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1** Form of Underwriting Agreement.
2.1#** Amended and Restated Transformation Agreement effective as of June 3,
2000 among Cabletron, Aprisma, Enterasys, GNTS and the Registrant.
2.2#** Amended and Restated Asset Contribution Agreement effective as of June
3, 2000 between Cabletron and the registrant.
2.3** Tax Sharing Agreement dated as of June 3, 2000 among Cabletron,
Aprisma, Enterasys, GNTS and the Registrant.
2.4** Memorandum of Agreement regarding Aprisma-Riverstone Inter-Company
Operations dated June 3, 2000.
2.5** Memorandum of Agreement regarding Enterasys-Riverstone Inter-Company
Operations dated June 3, 2000.
2.6** Memorandum of Agreement regarding GNTS-Riverstone Inter-Company
Operations dated June 3, 2000.
2.7** Services Agreement between Cabletron and the Registrant dated August
28, 2000.
2.8** Distribution-Related Option Agreement among Cabletron, Aprisma,
Enterasys, GNTS and the Registrant.
3.1** Form of Amended and Restated Certificate of Incorporation of the
Registrant.
3.2** Form of Amended and Restated By-Laws of the Registrant.
3.3 Amended and Restated Certificate of Incorporation of the Registrant.
3.4** By-Laws of the Registrant.
4.1** Form of the Registrant's Common Stock Certificate.
4.2** Amended and Restated Security Purchase Agreement between Cabletron and
Silver Lake, dated August 29, 2000.
4.3** Assignment Agreement among Silver Lake and the Investors named
therein, dated August 29 , 2000.
4.4** Form of Stock Purchase Right.
4.5** Form of Warrant.
4.6** Registration Rights Agreement between the strategic Investors and the
Registrant, dated August 29, 2000.
4.7** Standstill Agreement between Cabletron and Silver Lake Partners dated
August 29, 2000.
5.1 Opinion of Ropes & Gray.
10.1** Riverstone Networks, Inc. 2000 Equity Incentive Plan.
10.2** Riverstone Networks, Inc. Form of Option Grant.
10.3 Agreement Regarding Change-In-Control Severance Benefit Plan for
Romulus Pereira.
10.4 [Intentionally omitted.]
10.5 [Intentionally omitted.]
10.6 [Intentionally omitted.]
10.7 [Intentionally omitted.]
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.8+** Flextronics International Manufacturing Services Contract dated as of
March 1, 2000.
10.8.1** Enterasys-Riverstone FMA Products Agreement dated as of September 29,
2000.
10.9** Promissory Note dated April 12, 2000 of Romulus Pereira.
10.10** Lease Agreement between WMP II Real Estate Limited Partnership and
Cabletron Systems Sales and Service, Inc., dated January 6, 1999,
together with Tenant Estoppel Certificate dated June 13, 2000.
10.11** Assignment of Lease effective August 28, 2000 between Cabletron
Systems Sales and Service, Inc. and the Registrant.
10.12+** Strategic Alliance Agreement between the Registrant and Tellabs
Operations, Inc. dated November 17, 2000.
21.1** Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP, Independent Auditors.
23.2* Consent of Counsel (included in Exhibit 5.1).
24.1** Power of Attorney.
27.1** Financial Data Schedule.
</TABLE>
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* To be filed by amendment.
** Previously filed.
# The Registrant agrees to furnish supplementally to the Commission a copy of
any omitted schedule or exhibit to the agreement upon request by the
Commission.
+ Confidential treatment requested for portions of this exhibit. An
unredacted version of this exhibit has been filed separately with the
Commission.
