<PAGE> 1
EXHIBIT 99.3
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report ..............................................F-2
Consolidated Balance Sheets at June 30, 2000 and 1999 .....................F-3
Consolidated Statements of Operations for the years ended
June 30, 2000, 1999 and 1998...............................................F-4
Consolidated Statements of Stockholders' Equity for the years ended
June 30, 2000, 1999 and 1998 ..............................................F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 2000, 1999 and 1998...............................................F-6
Notes to Consolidated Financial Statements ................................F-7
</TABLE>
F-1
<PAGE> 2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Alteon WebSystems, Inc.:
We have audited the accompanying consolidated balance sheets of Alteon
WebSystems, Inc. and subsidiaries (collectively, the "Company") as of June 30,
2000 and 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at June 30, 2000
and 1999, and the results of its operations and its cash flows for each of the
three years in the period ended June 30, 2000 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
San Jose, California
July 19, 2000
(July 28, 2000 as to Note 15)
F-2
<PAGE> 3
ALTEON WEBSYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
-------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents.................................................................. $154,125 $29,766
Short-term investments................................................................ 78,863 --
Accounts receivable (net of allowances of $3,323 in 2000 and
$1,369 in 1999)..................................................................... 28,733 3,853
Inventories........................................................................... 15,515 2,632
Prepaid expenses and other current assets............................................. 4,352 397
-------- -------
Total current assets................................................................ 281,588 36,648
Property and equipment-- net............................................................ 17,133 3,931
Investments and other assets............................................................ 8,304 42
-------- -------
Total............................................................................... $307,025 $40,621
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................................... $ 16,948 $ 3,561
Accrued compensation and benefits..................................................... 8,059 2,052
Other accrued expenses................................................................ 13,592 3,607
Current portion of note payable to bank............................................... 815 1,363
Current portion of capital lease obligations.......................................... 72 348
Deferred sales, net................................................................... 5,277 176
Income taxes payable.................................................................. 470 53
-------- -------
Total current liabilities........................................................... 45,233 11,160
Note payable to bank.................................................................... 1,427 1,798
Capital lease obligations............................................................... -- 121
Sublease deposits....................................................................... 93 93
-------- -------
Total liabilities................................................................... 46,753 13,172
-------- -------
Commitments and contingencies (Notes 7 and 11)
Stockholders' equity:
Convertible preferred stock-- $0.001 par value; authorized,
15,000,000 shares: designated, 15,000,000 shares; outstanding,
0 shares in 2000, 13,785,326 shares in 1999 (liquidation
preference $0 in 2000, and $58,272 in 1999)......................................... -- 58,294
Common stock, $0.001 par value, authorized, 300,000,000 shares;
outstanding, 41,622,464 shares in 2000, and 12,987,109 in 1999...................... 311,785 3,224
Notes receivable from stockholders.................................................... (4,643) (2,465)
Deferred stock compensation........................................................... (5,745) (196)
Accumulated deficit................................................................... (41,061) (31,408)
Accumulated other comprehensive loss.................................................. (64) --
-------- -------
Total stockholders' equity.......................................................... 260,272 27,449
-------- -------
Total............................................................................... $307,025 $40,621
======== =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 4
ALTEON WEBSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------
2000 1999 1998
-------- --------- ----------
<S> <C> <C> <C>
Net sales................................................................. $109,582 $ 26,254 $ 13,572
Cost of sales............................................................. 40,083 13,385 7,893
-------- --------- ----------
Gross profit............................................................ 69,499 12,869 5,679
Operating expenses:
Sales and marketing..................................................... 49,291 13,061 6,485
Research and development................................................ 22,792 10,004 8,816
General and administrative.............................................. 7,010 2,538 1,505
Stock compensation to consultants....................................... 7,687 -- --
-------- --------- ----------
Total operating expenses.............................................. 86,780 25,603 16,806
-------- --------- ----------
Loss from operations...................................................... (17,281) (12,734) (11,127)
Other income (expense):
Interest income......................................................... 8,396 541 493
Interest expense........................................................ (355) (277) (171)
-------- --------- ----------
Loss before income taxes.................................................. (9,240) (12,470) (10,805)
Income tax expense........................................................ 413 73 1
-------- --------- ----------
Net loss.................................................................. $ (9,653) $(12,543) $ (10,806)
======== ========= =========
Basic and diluted loss per common share................................... $ (0.32) $ (1.65) $ (2.18)
======== ========= =========
Basic and diluted common shares used in computation....................... 30,565 7,610 4,951
======== ========= =========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 5
ALTEON WEBSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOTES
CONVERTIBLE RECEIVABLE DEFERRED ACCUMULATED
PREFERRED STOCK COMMON STOCK FROM STOCK COMPRE- ACCUMU- STOCK-
--------------- ------------------- STOCK- COMPEN- HENSIVE LATED HOLDERS
SHARES AMOUNT SHARES AMOUNT HOLDERS SATION LOSS DEFICIT '92 EQUITY
------ ------ ------ ------ ---------- --------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JUNE 30, 1997....... 9,070,804 $21,721 11,329,059 $345 $(225) $-- $-- $(8,059) $13,782
Sale of Series B preferred
stock (net of issuance
cost of $2).................. 84,000 503 503
Sale of Series C preferred
stock (net of issuance
cost of $20)................ 1,093,960 7,638 7,638
Exercise of stock options..... 336,092 59 59
Issuance of common stock
for services................ 185,064 83 83
Exercise of stock options
for notes receivable........ 1,649,500 701 (701) --
Issuance of stock options
to consultants.............. 17 17
Repurchase of common stock
in exchange for notes
receivable.................. (776,223) (84) 67 (17)
Repurchase of founder's stock. (1,132,689) (42) (42)
Repayment of notes receivable. 11 11
Net loss...................... (10,806) (10,806)
---------- ------ ---------- ----- ------ ----- ---- -------- --------
BALANCES, JUNE 30, 1998...... 10,248,764 29,862 11,590,803 1,079 (848) -- -- (18,865) 11,228
Sale of Series C preferred
stock (net of issuance
cost of $20)............... 1,041,730 7,271 7,271
Sale of Series D preferred
stock (net of issuance
cost of $45)............... 2,494,832 21,161 21,161
Exercise of stock options.... 159,417 74 74
Issuance of common stock
for services................ 60,889 171 171
Exercise of stock options for
notes receivable........... 1,298,187 1,714 (1,714) -
Issuance of stock options to
consultants................ 22 22
Repurchase of common stock in
exchange for notes
receivable.................. (122,187) (45) 30 (15)
Repayment of notes receivable. 67 67
Deferred compensation......... 209 (209) --
Amortization of deferred
compensation................. 13 13
Net loss...................... (12,543) (12,543)
---------- ------ ---------- ----- ------ ----- ---- -------- --------
BALANCES, JUNE 30, 1999....... 13,785,326 58,294 12,987,109 3,224 (2,465) (196) -- (31,408) 27,449
Sale of Series D preferred
stock (net of issuance
cost of $45)................ 5,168 44 44
Conversion of preferred
stock to common stock in
conjection with initial
public offering............ (13,790,494)(58,338) 20,685,724 58,338 --
Issuance of common stock in
connection with initial
public offering (net of
issuance costs of $7,821).. 4,600,000 79,579 79,579
Issuance of common stock in
connection with follow-on
offering (net of issuance
costs of $8,740)........... 1,535,506 150,185 150,185
Common stock issued under
employee stock purchase
plans....................... 76,988 1,243 1,243
Exercise of stock.options..... 1,047,414 1,775 1,775
Issuance of common stock
for services................ 26,272 410 410
Exercise of stock.options for
notes receivable............ 772,956 3,764 (3,764) --
Issuance of stock.options
to consultants.............. 7,687 7,687
Repurchase of common stock in
exchange for notes
receivable.................. (109,505) (247) 247 --
Repayment of notes receivable. 1,339 1,339
Deferred compensation......... 5,827 (5,827) --
Amortization of deferred
compensation................ 278 278
Unrealized loss on
investments ................ (64) (64)
Net loss...................... (9,653) (9,653)
------- ------- ---------- -------- ------- ------- ---- -------- --------
BALANCES, JUNE 30, 2000....... -- $ -- 41,622,464 $311,785 $(4,643) $(5,745) $(64) $(41,061) $260,272
======= ======= ========== ======== ======= ======= ==== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 6
ALTEON WEBSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------
2000 1999 1998
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................................ $ (9,653) $(12,543) $(10,806)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization..................................... 2,865 1,688 907
Amortization of deferred compensation............................. 278 13 --
Deferred rent..................................................... (28) 240 93
Issuance of common stock for services............................. 410 171 83
Issuance of stock options to consultants.......................... 7,687 22 17
Changes in assets and liabilities:
Accounts receivables............................................ (24,880) (1,286) (2,477)
Inventories..................................................... (12,883) 2,274 (4,474)
Prepaid expenses and other current assets....................... (3,955) (131) (177)
Accounts payable................................................ 13,387 1,120 1,606
Accrued compensation and related liabilities.................... 6,007 749 665
Other accrued expenses.......................................... 15,531 2,066 1,239
--------- -------- --------
Net cash used in operating activities......................... (5,234) (5,617) (13,324)
--------- -------- --------
Cash flows from investing activities:
Maturities of short-term investments................................ 42,275 -- --
Purchases of short-term investments................................. (120,794) -- --
Purchases of property and equipment................................. (16,472) (2,926) (2,049)
Investments and other assets........................................ (8,265) 21 (24)
--------- -------- --------
Net cash used in investing activities......................... (103,256) (2,905) (2,073)
--------- -------- --------
Cash flows from financing activities:
Net proceeds from sale of preferred stock........................... 44 28,432 8,141
Borrowings under note payable....................................... -- 2,465 1,535
Repayments of note payable.......................................... (919) (749) (90)
Proceeds from issuance of common stock in public
offerings......................................................... 229,764 -- --
Proceeds from stock issued under employee benefit
plans, net of repurchases......................................... 3,018 59 42
Repurchase of founder's stock....................................... -- -- (42)
Repayments of note receivable for common stock...................... 1,339 67 11
Repayments of capital lease obligations............................. (397) (231) (197)
Borrowings under line of credit..................................... -- (802) 802
--------- -------- --------
Net cash provided by financing activities.................... 232,849 29,241 10,202
--------- -------- --------
Net increase (decrease) in cash and equivalents....................... 124,359 20,719 (5,195)
Cash and equivalents, beginning of period............................. 29,766 9,047 14,242
--------- -------- --------
Cash and equivalents, end of period................................... $ 154,125 $ 29,766 $ 9,047
========= ======== ========
Noncash investing and financing activities:
Exercise of stock options for notes receivable, net of
repurchases....................................................... $ 3,517 $ 1,714 $ 634
Additional cash flow information:
Interest paid....................................................... $ 363 $ 276 $ 167
Taxes paid.......................................................... 10 20 1
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 7
ALTEON WEBSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization. Alteon WebSystems, Inc., formerly Alteon Networks, Inc. and
Acteon Networks, Inc. (the "Company "), develops, markets and supports Web data
center products which are designed to meet the challenges of managing Web
traffic as well as providing the high performance and availability of networking
infrastructure solutions. The Company was incorporated in Delaware on March 18,
1996.
Basis of Consolidation. The consolidated financial statements include the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions are eliminated in consolidation.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk. Financial instruments that potentially expose
the Company to concentrations of credit risk consist primarily of cash and
equivalents, short-term investments, and accounts receivable. Banking with
creditworthy institutions mitigates risks associated with cash equivalents. The
Company generally invests in instruments with an investment credit rating of
A1/P1 or better. To reduce credit risk, the Company performs ongoing credit
evaluations of its customers' financial condition and limits the amount of
credit extended when considered necessary, but generally requires no collateral.
The Company maintains allowances for potential bad debt losses.
Concentration of Manufacturing and Components. The Company uses a third
party in Thailand to manufacture most of its products. In addition, the Company
purchases a critical component, a custom integrated circuit, which is available
from a single supplier. These concentrations expose the Company to the risk of
manufacturing delays and the possibility of lost sales.
Financial Instruments. The Company's financial instruments include cash and
equivalents, short-term investments, notes receivable from stockholders and
long-term obligations. At June 30, 2000 and 1999, the fair values of these
financial instruments approximated their financial statement carrying amounts.
Cash and Equivalents. The Company considers all highly liquid investments
purchased with a maturity of three months or less at the date of acquisition to
be cash equivalents. Included in cash and equivalents are interest bearing
certificates of deposit, bonds, commercial paper, municipal bonds, and
government securities, with rates from 5.5% to 7.2%, totaling $148.3 million and
$22.5 million at June 30, 2000 and 1999, respectively.
Short-term Investments. Short-term investments consist of investments
acquired with maturities exceeding three months but less than two years. While
the Company's intent is to hold debt securities to maturity, consistent with
Statement of Financial Accounting Standards
F-7
<PAGE> 8
ALTEON WEBSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
No. 115, Accounting for Certain Investments in Debt and Equity Securities, we
have classified all debt securities and all investments in equity securities
that have readily determinable fair values as available-for-sale, as the sale of
such securities may be required prior to maturity to implement management
strategies. Such securities are reported at fair value, with unrealized gains or
losses excluded from earnings and included in other comprehensive income, net of
applicable taxes. The cost of securities sold is based on the specific
identification method. Realized gains or losses and declines in value, if any,
judged to be other than temporary are reported in interest and income, net in
the consolidated statements of operations.
Inventory. Inventory is stated at the lower of standard cost (first-in,
first-out) or market.
Property and Equipment. Property and equipment is stated at cost.
Depreciation and amortization is computed using the straight-line method over
the lesser of estimated useful lives of three years, or the remaining lease
term.
Long-Lived Assets. The Company evaluates the carrying value of its
long-lived assets whenever events or changes in circumstances indicate that the
carrying value of the asset may be impaired. An impairment loss is recognized
when estimated future cash flows expected to result from the use of the asset,
including disposition, are less than the carrying value of the asset.
Revenue Recognition. Revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
price is fixed and determinable, and collectibility is reasonably assured.
Revenue is recognized upon shipment to both resellers and end users. Service
contract revenue is recognized over the life of the service contract agreement.
Revenues are recorded net of sales returns and allowances. Product warranty
costs are accrued when revenue is recognized.
Research and Development. The costs of the development of hardware products
and enhancements to existing hardware products are expensed as incurred. The
costs for the development of new software products that are included in the
hardware products and substantial enhancements to such existing software
products are expensed as incurred until technological feasibility has been
established, at which time any additional costs would be capitalized. Because
the Company believes its current process for developing software is essentially
completed concurrently with the establishment of technological feasibility, no
costs have been capitalized to date.
Advertising. Cooperative advertising obligations are expensed at the time
the related revenues are recognized. All other advertising costs are expensed as
incurred and approximated $2.4 million, $209,000 and $54,000 in fiscal 2000,
1999 and 1998, respectively.
Stock-Based Compensation. The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board (APB) No. 25, Accounting for Stock Issued to Employees.
Loss Per Common Share. Basic loss per common share is computed by dividing
loss attributable to common stockholders by the weighted-average number of
common shares
F-8
<PAGE> 9
ALTEON WEBSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outstanding for the period (excluding shares subject to repurchase). Diluted
loss per common share is computed by dividing loss attributable to common
stockholders by the weighted-average number of common shares and potentially
dilutive common securities outstanding for the period. Potentially dilutive
common shares are excluded from the computation in loss periods as their effect
would be antidilutive.
New Accounting Pronouncements. In December 1999, the staff of the
Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No.
101, Revenue Recognition in Financial Statements (SAB 101). SAB 101 summarized
certain of the SEC's views in applying generally accepted accounting principles
(GAAP) to revenue recognition in financial statements. The SEC is also
developing additional guidance for SAB 101. The Company is required to adopt SAB
101 in the fourth quarter of fiscal 2001 and the effects, if any, are required
to be recorded through a retroactive cumulative effect adjustment as of the
beginning of that fiscal year, with a restatement of all prior interim quarters
in that year. The Company has not yet determined the impact, if any, of SAB 101
on the Company's financial statements.
In June 1998, the FASB issued SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. In June 1999, the FASB issued SFAS 137,
Accounting for Derivative Instruments and Hedging Activities -- Deferral of
Effective Date of SFAS 133. These statements require companies to record
derivatives in the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the fair market values of those
derivatives instruments would be accounted for depending on the use of the
instrument and whether it qualifies for hedge accounting. SFAS No. 133 will be
effective for the Company's fiscal year ending June 30, 2001. Management is in
the process of evaluating any impact on the Company's financial condition or
results of operations resulting from these statements.
Foreign Currency Transactions. The majority of the Company's sales and
expenses are denominated in US dollars. Gains or losses from foreign currency
translation are included in other income and were insignificant for all periods
presented.
Reclassifications. Certain prior year amounts have been reclassified to
conform to the current year presentation. These reclassifications had no effect
on net loss or stockholders' equity.
F-9
<PAGE> 10
ALTEON WEBSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SHORT-TERM INVESTMENTS
Available-for-sale securities consist of the following at June 30,
2000 (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
INVESTMENT COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Commercial paper............................................ $24,649 $ -- $ (21) $24,628
Certificates of deposit..................................... 7,002 3 -- 7,005
Corporate debt securities................................... 8,016 -- (14) 8,002
Government securities....................................... 39,260 -- (32) 39,228
------- ------ ---------- -------
$78,927 $ 3 $ (67) $78,863
======= ====== ========== =======
</TABLE>
All short-term investments mature within one year and the contractual
value of available for-sale debt securities at June 30, 2000 is as follows (in
thousands):
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
<S> <C> <C>
Short-term investments............................................................ $78,927 $78,863
</TABLE>
There were no short-term investments at June 30, 1999.
3. INVENTORY
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------------
2000 1999
-------- --------
<S> <C> <C>
Raw materials.......................................................................... $ 7,647 $ 973
Work-in-process........................................................................ 1,051 394
Finished goods......................................................................... 1,181 496
Inventory at manufacturer in Thailand.................................................. 5,636 769
-------- --------
Total.............................................................................. $15,515 $ 2,632
======== ========
</TABLE>
F-10
<PAGE> 11
ALTEON WEBSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
2000 1999
-------- ------
<S> <C> <C>
Computers, equipment and software............................................ $19,954 $4,653
Furniture and fixtures....................................................... 1,371 778
Leasehold improvements....................................................... 1,922 1,347
------- ------
23,247 6,778
Accumulated depreciation and amortization.................................... (6,114) (2,847)
------- ------
$17,133 $3,931
======= ======
</TABLE>
5. INVESTMENTS AND OTHER ASSETS
Included in investments and other assets are the Company's privately held
corporate equity securities in certain technology companies totaling $8.0
million as of June 30, 2000. Investments in equity securities are carried at the
lower of cost or market. The Company's policy is to regularly review the
assumptions underlying the financial performance of these privately held
companies and, if and when the Company determines that a decline in fair value
below the cost basis is other than temporary, the related investment is written
down to its fair value.
6. OTHER ACCRUED EXPENSES
Other accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
2000 1999
------- -----
(IN THOUSANDS)
<S> <C> <C>
Accrued warranty.............................................................. $ 2,026 $ 893
Marketing and related accruals................................................ 1,149 275
Professional fees and related accruals........................................ 4,785 907
Accrued channel commission.................................................... 1,240 --
Deferred rent................................................................. 371 399
Customer prepaids............................................................. 369 535
Sales tax payable............................................................. 879 94
Other......................................................................... 2,773 504
------- -----
Total..................................................................... $13,592 $3,607
======= =====
</TABLE>
7. LINE OF CREDIT AND NOTE PAYABLE TO BANK
During fiscal 1998, the Company obtained a revolving bank line of credit,
under which the Company could borrow up to $1,500,000 subject to a $750,000
sublimit on letter of
F-11
<PAGE> 12
ALTEON WEBSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued)
credit issuances. In December 1998, the line was increased to $3,000,000. In
September 1999, the line was increased to $12 million, subject to a $1.5 million
sublimit on letter of credit issuances. The line of credit will mature in
December 2000. At June 30, 2000 and 1999, there were no borrowings outstanding
under the revolving bank line of credit. There is an outstanding irrevocable
standby letter of credit in the amount of approximately $207,000. Borrowings
under the line of credit agreement bear interest at a rate equal to three
quarters percentage point (0.75%) above the bank's prime rate (10.25% at June
30, 2000) and are collateralized by substantially all of the Company's assets.
The Company entered into a borrowing arrangement in March 1998 which was
modified in December 1998 to borrow up to $4,000,000 for the purchase of
equipment. At June 30, 2000, the borrowings bear interest at a rate equal to
three-quarters of one percentage point (0.75%) above the bank's prime rate
(10.25% at June 30, 2000) and are collateralized by a continuing security
interest in all equipment collateral, as defined in the agreement. Each draw on
the loan is payable in either 34 equal monthly installments of principal and
interest. At June 30, 2000, the Company had approximately $2.2 million
outstanding, payable through June 2002.
The line of credit also contains restrictive covenants, including a minimum
quick ratio of 1.5:1 and tangible net worth of at least $10 million. The loan
agreement has negative convenants prohibiting us from paying dividends without
prior written consent from the bank. At June 30, 2000, the Company was in
compliance with all covenants.
8. Lease Commitments
Equipment with a net book value of approximately $0 and $136,000 at June 30,
2000 and 1999, respectively (net of accumulated amortization of approximately
$1,026,000 and $890,000, respectively), was leased under capital leases. Under
the lease agreement, the Company has the option to make a balloon lease payment
equal to 20% of the equipment's original purchase price or to extend the lease
for an additional 12 months at the end of the lease period at a rate of 1.85%
per month on the equipment's original purchase price.
The Company leases its primary facility under a noncancelable operating lease
expiring through May 2003. Rent expense was approximately $1.3 million, $1.1
million, and $414,000 in the years ended June 30, 2000, 1999 and 1998,
respectively. One of the Company's facility leases is secured by a $207,000
letter of credit.
Effective September 1998, the Company subleased one of its facilities. The cash
received from this lease was $209,000 and $169,000 for the years ended June 30,
2000 and 1999, respectively. The cash to be received over the remaining lease
term is $195,000. Effective July 1999, the Company subleased a portion of
another facility for 34 months. Cash received from this lease was $414,000 for
the year ended June 30, 2000. The cash to be received over the remaining lease
term is $807,000. In connection with these subleases, the Company has deposits
of $93,000 at June 30, 2000 and 1999 from the lessees.
F-12
<PAGE> 13
ALTEON WEBSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At June 30, 2000 minimum future lease payments are as follows, excluding
sublease income discussed above (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING JUNE 30, LEASES LEASES
------- ---------
<S> <C> <C>
2001.............................................. $75 $2,260
2002.............................................. -- 1,419
2003.............................................. -- 2,734
2004.............................................. -- 146
2005.............................................. -- 110
Thereafter -- --
---- ------
Total minimum lease payments...................... 75 $6,669
==== ======
Amount representing interest...................... (3)
----
Present value of minimum lease payments........... 72
Current portion................................... 72
----
Long-term portion................................. $ 0
====
</TABLE>
9. STOCKHOLDERS' EQUITY
STOCK SPLIT
During June 1999, the Company's stockholders approved a stock split of
three shares of common stock for every two shares of outstanding common stock.
All share and per share amounts have been adjusted to give effect to these
changes.
INITIAL AND FOLLOW-UP PUBLIC OFFERINGS OF STOCK
On September 29, 1999, the Company completed the sale of 4.6 million shares
of common stock in an underwritten initial public offering at a price of $19.00
per share. Offering proceeds to the Company, net of the underwriting discount
and aggregate expenses of approximately $7.8 million, were approximately $79.6
million. Simultaneously with the closing of the initial public offering, all
13,790,494 shares of the Company's outstanding convertible preferred stock were
converted into 20,685,724 shares of common stock at a conversion rate of
1.5-to-1.
On January 31, 2000, the Company completed the sale of 5 million shares of
its common stock at a price of $103.50 per share. Of the shares that were
offered, the Company sold 1,250,000 shares and its stockholders sold 3,750,000
shares. The underwriters exercised the related overall allotment option on
February 25, 2000 at which time the Company sold an additional 285,506 shares
and its stockholders sold an additional 214,494 shares. Offering proceeds to the
Company, net of underwriting discounts and aggregate expenses of approximately
$8.7 million, were approximately $150.2 million.
F-13
<PAGE> 14
ALTEON WEBSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESTRICTED STOCK
The Company has the right to repurchase the unvested portion of restricted
common stock at the original purchase price. The Company's right to purchase
these shares expires over 48 months from the grant date. Additionally, certain
officers and employees exercised unvested stock options with full recourse
notes. The related shares of common stock are subject to repurchase by the
Company at the original purchase price per share upon the purchaser's cessation
of service prior to the vesting of such shares. The restricted stock continues
to vest in accordance with the terms of the original stock option. The related
notes bear interest at 6.5% and mature three years from the loan date. At June
30, 2000, 2,007,596 outstanding shares of such stock were subject to repurchase.
STOCK OPTIONS
Under the 1999 Equity Incentive Plan (formerly the 1996 Stock Option
Plan), incentive stock options may be granted to employees and nonstatutory
stock options may be granted to employees, non-employees and directors. The
number of common shares reserved under the Plan was increased to 21,385,069 in
June 2000. The share reserve will increase each year, from June 30, 2000 to June
30, 2009, by 5% of the outstanding shares of common stock. The number of shares
available as incentive stock options may not exceed 21,385,069. Incentive stock
options are granted at fair market value (as determined by the Board of
Directors) at the date of grant; nonstatutory options may be granted at 85% of
fair market value. Options are exercisable at any time with any unvested shares
subject to repurchase at the original exercise price. Options generally vest
over four years and expire ten years from the date of grant. Upon a change in
ownership of the Company (as defined in the Plan), 25% of the unvested shares
become vested.
Under the 2000 Nonstatutory Equity Incentive Plan, nonstatutory stock
options may be granted to employees and non-employees. The number of common
shares reserved under the Plan was increased to 4,000,000 in May 2000. The
number of shares available as nonstatutory stock options may not exceed
4,000,000. Nonstatutory stock options are granted at fair market value (as
determined by the Board of Directors) at the date of grant, and may be granted
at 85% of fair market value. Options are exercisable at any time with any
unvested shares subject to repurchase at the original exercise price. Options
generally vest over four years and expire ten years from the date of grant. Upon
a change in ownership of the Company (as defined in the Plan), 25% of the
unvested shares become vested.
F-14
<PAGE> 15
ALTEON WEBSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Option activity under the plans is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding, July 1, 1997............................................... 1,555,688 $ 0.21
Granted (weighted average fair value of $0.13 per share)................ 3,237,375 0.49
Exercised............................................................... (1,985,592) 0.38
Canceled................................................................ (440,096) 0.17
--------- ------
Outstanding, June 30, 1998.............................................. 2,367,375 0.45
Granted (weighted average fair value of $0.51 per share)................ 3,909,300 2.93
Exercised............................................................... (1,457,604) 1.23
Canceled................................................................ (480,407) 0.54
--------- ------
Outstanding, June 30, 1999.............................................. 4,338,664 2.42
Granted (weighted average fair value of $41.10 per share)............... 7,872,650 40.75
Exercised............................................................... (1,820,370) 3.04
Canceled................................................................ (440,378) 15.56
--------- ------
Outstanding, June 30, 2000.............................................. 9,950,566 $32.01
========= ======
</TABLE>
At June 30, 2000, the Company had reserved shares of common stock for
issuance under its stock option plans of 25,385,069 shares, and 5,278,050 shares
were available for future grants under the plans.
Additional information regarding options outstanding as of June 30, 2000 is as
follows:
<TABLE>
<CAPTION>
NUMBER OUTSTANDING
WEIGHTED AVERAGE
REMAINING
OPTIONS CONTRACTUAL LIFE WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE
------------------------ ----------- ----------------- ----------------
<C> <C> <C> <C>
$0.05 - 2.00 1,619,270 8.12 $ 1.31
2.83 - 11.00 1,065,343 8.65 5.59
14.00 - 14.00 1,459,776 9.18 14.00
19.00 - 43.75 1,640,571 9.61 34.01
45.19 - 54.00 1,154,000 9.92 47.83
54.31 - 54.31 2,053,147 9.63 54.31
64.00 - 85.50 882,459 9.54 68.61
87.00 - 87.00 1,500 9.51 87.00
91.69 - 91.69 7,000 9.99 91.69
91.88 - 91.88 67,500 9.99 91.88
--------- ---- ------
$0.05 - 91.88 9,950,566 9.24 $32.01
========= ==== ======
</TABLE>
STOCK AND STOCK OPTIONS GRANTED TO NON-EMPLOYEES
The Company has granted equity instruments to non-employees for consulting
and other services. During fiscal 2000 and 1999 the Company issued 26,272 and
60,889 shares of
F-15
<PAGE> 16
ALTEON WEBSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock to non-employees in exchange for services. The fair value (as
determined by the Board of Directors) of the common stock issuances totaled
$410,000 and $171,000 in 2000 and 1999, respectively, and was expensed at the
time of issuance.
The Company has also granted stock options to non-employees with vesting
periods historically ranging from six months to three years. Stock options
issued to non-employees are accounted for in accordance with the provisions of
SFAS No. 123 Accounting for Stock-Based Compensation and Emerging Issues Task
Force Issues (EITF) No. 96-18, Accounting for Equity Instruments that are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or
Services. In fiscal 2000, in connection with the changes to the vesting period
of these options, the Company expensed $7.7 million. In fiscal 1999, the Company
expensed $22,000 related to the vesting of these options.
1999 EMPLOYEE STOCK PURCHASE PLAN
In June 1999, the Board approved the 1999 Employee Stock Purchase Plan
(the "ESPP"), which allows eligible employees of the Company to purchase common
stock through payroll deductions. A total of 1,500,000 shares of the Company's
common stock have been reserved for issuance under the ESPP. The share reserve
will increase every year, starting in 2000, by the greater of 1% of outstanding
shares or the number of shares issued under the ESPP in the last twelve months,
up to a maximum of 24,000,000 shares over a ten-year period. The purchase price
is the lower of 85% of the fair market value of the common stock on the day the
employee began participating in the offering, or 85% of the fair market value of
the shares on the date of purchase.
ADDITIONAL STOCK PLAN INFORMATION
As discussed in Note 1, the Company continues to account for its employee
stock-based awards using the intrinsic value method in accordance with APB No.
25, Accounting for Stock Issued to Employees, and its related interpretations.
Accordingly, no compensation expense has been recognized in the financial
statements for employee stock arrangements, because the fair value of common
stock at the grant date is not greater than the option exercise price.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net loss as though the Company had adopted the fair
value method as of the beginning of fiscal 1996. Under SFAS 123, the fair value
of stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which differ significantly from the Company's stock option awards.
These models also require subjective assumptions, including estimated stock
price volatility and expected time to exercise, which greatly affect the
calculated values. The Company's calculations were made using the Black Scholes
pricing method with the following weighted average assumptions: expected life,
two years average risk-free interest rates, approximately 6.3% in 2000 and 4.8%
in 1999 and 5.6% in 1998 for the stock option plans, and approximately 6.1% in
2000 for the ESPP; and no dividends during the expected term; and
F-16
<PAGE> 17
ALTEON WEBSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
volatility of 85% for 2000. The Company's calculations are based on a multiple
option valuation approach, and forfeitures are recognized as they occur.
If the computed fair values of the 2000, 1999 and 1998 awards had been amortized
to expense over the vesting period of the awards, pro forma net loss for June
30, 2000, 1999 and 1998 would have been as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net loss:
As reported.......................... $ (9,653) $(12,543) $(10,806)
Pro forma............................ $(27,956) $(12,817) $(10,933)
Loss per share-- basic and diluted... $ (0.32) $ (1.65) $ (2.18)
Pro forma-- basic and diluted........ $ (0.91) $ (1.68) $ (2.21)
</TABLE>
10. INCOME TAXES
No federal income taxes were provided in 2000, 1999, and 1998 due to the
Company's net operating losses. The provision for income taxes for these periods
represents state minimum franchise taxes and foreign income taxes of $413,000,
$73,000 and $1,000 for 2000, 1999 and 1998, respectively. Deferred tax assets
have been fully reserved as the Company believes that, due to its history of
operating losses and the expiration dates of the carryforwards, it is more
likely than not that such benefits will not be realized.
The provision for income taxes differs from the amount computed by applying
the federal statutory income tax rate to the loss before income taxes as
follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Taxes computed at federal statutory rate........................................ (35.0)% (35.0)% (35.0)%
State income taxes, net of federal benefit...................................... (19.8) (8.2) (8.4)
Federal research and development credit......................................... (15.8) (3.9) (4.1)
Foreign losses benefited at rates lower than the U.S............................ 23.7 0.0 0.0
Other........................................................................... 5.1 6.7 (4.1)
Change in valuation allowance................................................... 46.3 41.0 51.6
---- ---- ----
Total provision................................................................. 4.5% 0.6% 0.0%
==== ==== ====
</TABLE>
Deferred tax assets at are comprised of the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------
2000 1999
------ ------
<S> <C> <C>
Accruals and reserves........................................................... $ 6,099 $ 2,171
Net operating loss and tax credits carried forwards............................. 24,522 9,435
Depreciation.................................................................... 613 443
Capitalized expenses............................................................ 3,346 2,128
------- -------
Total gross deferred tax asset before valuation allowance..................... 34,580 14,177
Valuation allowance............................................................. (34,580) (14,177)
------- -------
Net deferred tax assets......................................................... $ 0 $ 0
======= =======
</TABLE>
F-17
<PAGE> 18
ALTEON WEBSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in the deferred assets are approximately $16,124,000 of tax
benefit related to equity transactions which will be credited to stockholders'
equity if and when realized after the other tax deductions in the carryforwards
have been realized.
At June 30, 2000, the Company had federal and state net operating loss
carryforwards of approximately $51,992,000 and $9,641,000 available to reduce
future federal and state taxable income, respectively. The federal and state
carryforwards begin to expire in 2012 and 2005, respectively. The Company also
has research and development credit carryforwards of approximately $3,814,000
and $2,136,000 available to offset future federal and state income taxes,
respectively, as of June 30, 2000. These federal carryforwards begin to expire
in 2012. The Company also has a state investment tax credit of approximately
$981,000 as of June 30, 2000 which begins to expire in 2007. The extent to which
the loss and credit carryforwards can be used to offset future taxable income or
taxes may be limited, depending on the extent of ownership changes within any
three-year period as provided by the Internal Revenue Code and applicable
California state tax law.
11. CONTINGENCIES
The Company is involved in litigation in the normal course of business.
Management does not believe the ultimate outcome of any such matters will have a
material adverse effect on the Company's consolidated financial statements.
12. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one reportable segment.
In fiscal 2000, no individual customer accounted for 10% or more of net
sales. The Company had sales, net of sales returns, to individual customers in
excess of 10% of net sales as follows:
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30
------------------
CUSTOMER 1999 1998
---- ----
<S> <C> <C>
A (Stockholder).................................... 14% 10%
B ................................................. * 42
C (Stockholder).................................... * 14
D ................................................. 10 *
E ................................................. 10 *
</TABLE>
---------------
* less than 10%
On June 30, 2000, the Company had no accounts receivable from individual
customer in excess of 10% of gross accounts receivable. On June 30, 1999, one
customer represented 16% of gross accounts receivable. On June 30, 1998, two
customers represented 12% and 10% of gross accounts receivable, respectively.
F-18
<PAGE> 19
ALTEON WEBSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Sales to customers by geographic area are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------
2000 1999 1998
-------- ------- -------
<S> <C> <C> <C>
United States.......................... $ 64,797 $19,716 $ 9,652
United Kingdom......................... 7,237 1,221 289
Korea.................................. 7,603 721 94
Japan.................................. 10,417 1,611 2,981
Other.................................. 19,528 2,985 556
-------- ------- -------
Total................................ $109,582 $26,254 $13,572
======== ======= =======
</TABLE>
Substantially all the Company's long-lived assets are in the United States.
13. NET LOSS PER SHARE
The following is a reconciliation of the denominators used in computing
basic and diluted net loss per share (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Shares (denominator):
Weighted average common shares outstanding........................ 32,861 12,004 10,775
Less weighted average common shares outstanding
subject to Repurchase........................................... 2,296 4,394 5,824
------ ------ ------
Shares used in computation, basic and diluted................... 30,565 7,610 4,951
====== ====== ======
</TABLE>
For fiscal 2000, 1999 and 1998, the Company had securities outstanding
which could potentially dilute basic earnings per share in the future, but were
excluded in the computation of diluted net loss per share in the periods
presented as their effect would have been antidilutive. Such outstanding
securities consist of the following at June 20, 2000:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------
2000 1999 1998
--------- ---------- ----------
<S> <C> <C> <C>
Preferred stock........................ -- 20,677,972 15,373,134
Stock options.......................... 4,771,776 4,338,664 2,367,375
--------- ---------- ----------
Total................................ 4,771,776 25,016,636 17,740,509
========= ========== ==========
</TABLE>
14. RELATED PARTY TRANSACTIONS
During the years ended June 30, 2000, 1999 and 1998, the Company had net
sales to a related party shareholder of $6.0 million, $3.7 million and $1.2
million, respectively. The related amounts receivable are $1.1 million, $0.8
million, and $0.2 million, respectively.
F-19
<PAGE> 20
ALTEON WEBSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the same periods, the Company had net sales to another related
party shareholder of $7.6 million, $1.0 million, and $1.9 million, respectively.
The related amounts receivable are $2.4 million at June 30, 2000. Net prepaid
amounts from this customer were $0.4 million and $0.6 million at June 30, 1999
and 1998, respectively.
A related party has provided manufacturing services during the years ended
June 30, 2000, 1999 and 1998. The total value of inventory purchased from the
related party is $15.8 million, $8.7 million and $2.0 million, respectively. The
related amounts payable are $1.7 million, $0.8 million and $0.9 million,
respectively.
15. SUBSEQUENT EVENTS
On July 17, 2000, the Company completed the acquisition of Pharsalia
Technologies, Inc. ("Pharsalia") for approximately $221 million in a
stock-for-stock transaction. The Company issued an aggregate of approximately
1.4 million shares of common stock for all outstanding shares of Pharsalia
common stock, and assumed all outstanding options of Pharsalia. Pharsalia
develops Internet infrastructure software products that allow companies to
expand their Web presence through enhanced content delivery.
On July 28, 2000, Nortel Networks Corporation and the Company announced
the signing of a definitive agreement for Nortel Networks Corporation to acquire
the Company in an all-stock purchase transaction. Under the agreement, Nortel
Networks Corporation will issue 1.83148 shares of Nortel Networks Corporation
common stock for each share of the Company's common stock. The boards of
directors of both companies have approved the transaction. The acquisition,
which is subject to customary regulatory and the Company's stockholders'
approval, is expected to close in second quarter of the Company's fiscal 2001.
The acquisition triggers the accelerated vesting of certain employee stock
options (see Note 9).
F-20
