<PAGE>
As filed with the Securities and Exchange Commission on July 30, 1999
Registration No. 333-83857
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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E-TEK DYNAMICS, INC.
(Exact name of Registrant as specified in its charter)
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Delaware 3674 592337308
(State or other (Primary Standard (IRS Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
1865 Lundy Avenue
San Jose, California 95131
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
----------------
Michael J. Fitzpatrick
Chairman, President and Chief Executive Officer
E-TEK Dynamics, Inc.
1865 Lundy Avenue
San Jose, CA 95131
(408) 546-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Larry W. Sonsini William N. Gerson John L. Savva
Neil J. Wolff Matthew J. Lucero Sullivan & Cromwell
Aaron J. Alter E-TEK Dynamics, Inc. 1888 Century Park East
Wilson Sonsini Goodrich & 1865 Lundy Avenue Suite 2100
Rosati San Jose, California Los Angeles, California 90067
Professional Corporation 95131 (310) 712-6600
650 Page Mill Road (408) 546-5000
Palo Alto, California 94304
(650) 493-9300
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Approximate date of commencement of proposed sale to the public: As soon as
practicable on or after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, 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. [_]
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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 Securities and Exchange
Commission, acting pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell nor does it seek an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion. Dated July 29, 1999.
6,000,000 Shares
[LOGO OF E-TEK DYNAMICS APPEARS HERE]
Common Stock
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E-TEK Dynamics, Inc. is offering 4,000,000 of the shares to be sold in the
offering. The selling stockholders identified in this prospectus are offering
an additional 2,000,000 shares. E-TEK will not receive any of the proceeds from
the sale of the shares being sold by the selling stockholders.
The common stock is quoted on the Nasdaq National Market under the symbol
"ETEK". The last reported sale price of the common stock on July 29, 1999 was
$43.06 per share.
See "Risk Factors" beginning on page 6 to read about the risk factors you
should consider before buying shares of the common stock.
-----------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
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<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial price to public......................................... $ $
Underwriting discount........................................... $ $
Proceeds, before expenses, to E-TEK............................. $ $
Proceeds, before expenses, to the selling stockholders.......... $ $
</TABLE>
To the extent that the underwriters sell more than 6,000,000 shares of common
stock, the underwriters have the option to purchase up to an additional 900,000
shares from certain of the selling stockholders at the initial price to public
less the underwriting discount.
-----------
The underwriters expect to deliver the shares against payment in New York,
New York on August , 1999.
Goldman, Sachs & Co.
Morgan Stanley Dean Witter
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
Schroder & Co. Inc.
SoundView Technology Group
U.S. Bancorp Piper Jaffray
-----------
Prospectus dated August , 1999.
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and our common stock being sold in this
offering, including "Risk Factors" and our audited consolidated financial
statements and their related notes, appearing elsewhere in this prospectus.
This prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from the results
discussed in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in "Risk Factors"
and elsewhere in this prospectus. Unless otherwise indicated, the information
in this prospectus assumes no exercise of the underwriters' option to purchase
additional shares in the offering.
E-TEK Dynamics
We design, manufacture and sell high quality fiber optic components and
modules for optical networks. Optical networks are being deployed by
telecommunications service providers like AT&T and MCI WorldCom to address the
demand for applications such as Internet access, e-mail, and electronic
commerce that require high capacity, high speed data transmission. Our products
are designed into optical systems built for these service providers' networks
by telecommunications equipment manufacturers. Our products guide, route or
amplify the light signals which transmit data within the network and include:
. narrowband wavelength division multiplexers, commonly referred to as
WDMs, which allow multiple communication signals to be carried on one
fiber optic connection;
. wideband wavelength division multiplexers, which are used in optical
amplifiers to differentiate signals or enhance performance;
. isolators, which act as one-way valves for optical signals, preventing
the light from traveling in the wrong direction;
. couplers, which are used to combine or split optical signals; and
. micro-optic integrated components, which combine two or more of the above
optical component functions into a single package.
Our products are deployed in land-based and undersea long distance networks,
as well as in cable and metropolitan area networks. Our customers include many
of the leading telecommunications equipment manufacturers, including Alcatel,
CIENA, Corning, Fujitsu, Lucent, Nortel and Pirelli.
Many service providers have increased the capacity of their networks by
installing fiber optic cable for long distance routes and, more recently, for
metropolitan area networks. However, the increase in demand for high capacity,
high speed data transmission has created capacity constraints on these
networks. As service providers seek to address capacity constraints by
installing new fiber or expanding the transmission capacity of existing fiber,
we expect the demand for fiber optic components and modules to increase.
We are focused on building on our position as a leading supplier of fiber
optic components and modules in order to capture additional growth
opportunities in the marketplace. The key elements of our strategic plan
include:
. Maintaining our technology leadership through investments in internal
research and development;
. Broadening our product base to include new products and more integrated
modules;
3
<PAGE>
. Diversifying our customer base to be a key supplier to more leading
telecommunications equipment manufacturers;
. Increasing our presence in new markets such as cable and metropolitan
area networks;
. Enhancing and expanding our manufacturing capacity to be the low cost,
high volume provider of high quality components;
. Expanding our sales and marketing efforts; and
. Continuing to expand through complementary acquisitions.
We were incorporated in Florida in May 1983, reincorporated in California in
September 1987 and reincorporated in Delaware in November 1998. Our principal
executive offices are located at 1865 Lundy Avenue, San Jose, California 95131,
and our telephone number is (408) 546-5000.
----------------
E-TEK, E-TEK Dynamics, the E-TEK Dynamics logo, Enabling Next-Generation
Optical Networks, FibX, E-TEK ElectroPhotonics Solutions and Unifuse are our
trademarks. All other brand names or trademarks appearing in this prospectus
are the property of their respective owners.
Recent Events
On June 22, 1999, we completed the acquisition of ElectroPhotonics
Corporation for a total purchase price of $41 million primarily comprised of
stock and cash. ElectroPhotonics is a developer of components and modules for
optical networks, including WDM components. ElectroPhotonics has developed two
products for next-generation optical networks:
. dispersion equalization modules, which are devices that ensure an optical
signal arrives cleanly at the end of an optical fiber; and
. optical performance monitors, which are devices that watch the optical
signals passing through an optical fiber.
ElectroPhotonics has become one of our business units. This business unit
specializes in fiber Bragg grating technology, which complements our existing
technology expertise. Fiber Bragg gratings separate and filter multiple
wavelengths of light within the same fiber.
On July 6, 1999, we purchased for $12 million in cash an additional equity
interest in FibX Corporation. FibX is the Taiwanese manufacturing joint venture
we formed with Walsin Lihwa Corporation in March 1998. FibX operates a fiber
optic component manufacturing facility in Taiwan and employs approximately 175
people. We purchased the equity interest in FibX to secure low cost
manufacturing in Taiwan. We now hold approximately 96% of FibX.
On July 27, 1999, we signed a definitive agreement to acquire SMC Kaifa
(Holdings) Ltd., an independent developer of fiber optic components, including
WDM components and modules, circulators and isolators. The total purchase
price, in stock and cash, is approximately $40 million. Kaifa has engineering
and manufacturing operations in Sunnyvale, California and an interest in a
Sino-foreign cooperative joint venture engaged in the manufacture of fiber
optic components with operations in China. The closing of the transaction is
subject to several conditions, including required governmental approvals. We
cannot be certain that the acquisition will be completed.
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The Offering
<TABLE>
<S> <C>
Shares offered by E-TEK........................ 4,000,000 shares
Shares offered by the selling stockholders..... 2,000,000 shares
Shares to be outstanding after the offering.... 66,054,438 shares
Use of proceeds................................ For general corporate purposes,
including working capital and
potential acquisitions.
Nasdaq National Market symbol.................. "ETEK"
</TABLE>
The total number of shares of common stock to be outstanding after the
offering excludes 11,345,924 shares of common stock reserved for issuance under
our stock option and stock purchase plans. Under these plans, options to
purchase 5,738,778 shares at a weighted average exercise price of $11.75 were
outstanding as of June 30, 1999.
Summary Financial Information
(in thousands, except per share data)
The "as adjusted" balance sheet data below is adjusted to reflect the sale of
our common stock at an assumed initial price to public of $43.06 per share,
after deducting an assumed underwriting discount and offering expenses that we
will pay.
<TABLE>
<CAPTION>
Fiscal Year ended June 30,
-----------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Net revenues........................ $31,661 $40,382 $73,076 $106,924 $172,664
Gross profit........................ 21,209 25,670 42,477 57,861 87,541
Operating expenses:
Research and development........... 2,270 2,444 3,953 7,702 14,687
Selling, general and
administrative.................... 6,697 8,773 15,290 21,097 24,516
Purchased in-process research &
development....................... -- -- -- -- 4,207
Amortization of intangibles........ -- -- -- -- 300
Operating income.................... 12,242 14,453 23,234 29,062 43,831
Net income.......................... 7,706 9,271 15,148 17,924 27,625
Net income available to common
stockholders....................... $ 7,706 $ 9,271 $15,148 $ 8,903 $ 23,743
Net income per share:
Basic.............................. $ 0.15 $ 0.19 $ 0.30 $ 0.39 $ 0.55
Diluted............................ $ 0.15 $ 0.19 $ 0.30 $ 0.32 $ 0.45
Shares used in net income per share
calculations:
Basic.............................. 50,000 50,000 50,000 22,970 43,152
Diluted............................ 50,000 50,000 50,000 55,561 61,746
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
--------------------
Actual As Adjusted
-------- -----------
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents.................................. $ 55,090 $219,700
Working capital............................................ 66,543 231,153
Total assets............................................... 230,496 395,106
Long-term obligations, net of current portion.............. 21,513 21,513
Stockholders' equity....................................... 149,673 314,283
</TABLE>
5
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below before making an investment decision.
If one of our small number of major customers delays or reduces purchases, our
revenues will decline.
Historically, a small number of customers have accounted for a significant
portion of our revenues. In fiscal year 1999, our three largest customers and
their related entities accounted for 64.0% of our revenues. If any one of
those customers reduces or delays its purchases, our revenues will decline. We
expect that we will continue to depend on sales to a small number of large
customers for the foreseeable future. Our customers also have and will
continue to have the negotiating leverage to obtain price reductions.
The telecommunications equipment industry is dominated by a small number of
large companies and is currently consolidating. Consolidation reduces the
number of potential customers in the industry, and may increase our dependence
on a small number of customers.
If our customers are not selected for new telecommunications equipment
deployments, our shipments and revenues will be reduced.
Sales of our components depend on sales of fiber optic telecommunications
equipment, which are shipped in quantity when telecommunications service
providers add capacity. Equipment manufacturers compete for sales in each
capacity deployment. If equipment manufacturers that use our products in their
products do not win a contract, their demand for our products will decline,
reducing our future revenues. Similarly, a delay in selecting equipment
manufacturers for a deployment could delay our shipments and revenues.
We depend on sales of wavelength division multiplexing products, so a decline
in sales of these products would materially reduce our revenues.
A small number of products have historically accounted for a majority of our
net revenues. In particular, sales of wavelength division multiplexing
components and modules accounted for 38.3% of our revenues in fiscal year
1999. We expect sales of WDMs to be a majority of our fiscal 2000 revenues. If
sales of this product line decline, our overall revenues will be lower, which
could result in operating losses. We may not be successful in taking steps to
mitigate the risks associated with reduced demand for our existing products.
If we cannot obtain an adequate supply of thin film filters, our wavelength
division multiplexing product revenues may decline.
Thin film filters are a key raw material for wavelength division
multiplexers. Revenues from wavelength division multiplexer sales represented
38.3% of our total fiscal 1999 revenues and 41.7% of our total revenues in the
fourth quarter of fiscal 1999 and are expected to increase to more than 50% of
our total revenues in fiscal 2000. In the fourth quarter of fiscal 1999 we
experienced a shortage of thin film filters, which limited our ability to ship
product and generate revenues. Filter production is a complex and sensitive
process which is difficult to replicate, and we may face shortages of these
filters in the future.
We expect the price of our existing products to decline, and if we do not
reduce our manufacturing costs, our gross margins will decline and we could
incur losses.
The fiber optic component industry is very competitive and is characterized
by declining prices. We believe that since average selling prices are
declining rapidly, we must increase our manufacturing
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capacity and greatly increase unit volume sold in order to maintain our
existing revenues. If we add capacity, we increase our fixed costs, and also
further increase the level of unit sales we must achieve to maintain operating
margins. As a result, if we are unable to continuously reduce our
manufacturing costs, our net revenues and gross margins would decline. These
industry-wide price declines result from factors such as:
. increased competition for business;
. a limited number of potential customers;
. competition from companies with lower labor and production costs;
. introduction of new products by competitors; and
. greater economies of scale for higher volume manufacturers.
Our customers are not obligated to buy material amounts of our products and
may cancel or defer purchases on short notice.
Our customers typically purchase our products under individual purchase
orders and may cancel or defer purchases on short notice without significant
penalty. While we have recently announced long-term contracts with some of our
customers, these contracts do not obligate the customers to buy material
amounts of our products. Accordingly, sales in a particular period are
difficult to predict. Decreases in purchases, cancellations of purchase orders
or deferrals of purchases may have a material adverse effect on us,
particularly if we do not anticipate them.
We depend on a limited number of suppliers, and we may not be able to ship
products on time if we are unable to obtain an adequate supply of raw
materials and equipment on a timely basis.
We depend on a limited number of suppliers of raw materials and equipment
used to manufacture our products. Some of our suppliers are sole sources. We
typically do not have long-term agreements with our suppliers, and, therefore,
our suppliers generally may stop supplying materials and equipment to us at
any time. The reliance on a sole or limited number of suppliers could result
in delivery problems and reduced control over product pricing and quality.
Our quarterly operating results are subject to significant fluctuations, and
you should not rely on them as an indication of our future performance.
Our revenues and operating results have fluctuated significantly from
quarter-to-quarter in the past and may fluctuate significantly in the future
as a result of several factors, some of which are outside of our control.
These factors include:
. the size and timing of customer orders;
. our ability to manufacture and ship our products on a timely basis;
. our ability to obtain sufficient supplies to meet our product
manufacturing needs;
. our ability to meet customer product specifications and qualifications;
. our ability to sustain high levels of quality across all product lines;
. changes in our product mix;
. customers' ability to cancel and reschedule orders;
. seasonality of customer demand; and
. difficulties in collecting accounts receivable.
Because of these factors, you should not rely on quarter-to-quarter
comparisons of our results of operations as an indication of our future
performance. It is possible that, in future periods, our results
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<PAGE>
of operations may be below the expectations of public market analysts and
investors. This could adversely affect the trading price of our common stock.
Our operating results may fluctuate because our product sales cycle is long
and unpredictable.
To date, our customers have taken a long time to reach a decision to
purchase our products. This long sales cycle may cause our revenues and
operating results to vary unpredictably from period to period. The period of
time between our initial contact with a customer and the receipt of an actual
purchase order may span a year or more. In addition, customers perform, and
require us to perform, extensive product evaluation and testing of new
components before purchasing them.
The markets in which we operate are highly competitive, which could result in
lost sales and lower revenues.
The market for fiber optic components is intensely competitive, which could
result in existing customers rapidly shifting their orders to competitors.
Because many of our competitors have significantly greater financial and other
resources than we have, they may be able to more quickly:
. respond to new technologies or technical standards;
. react to changing customer requirements and expectations;
. devote greater resources to the development, production, promotion and
sale of products; and
. deliver competitive products at lower prices.
In addition, some of our customers have fiber optic component manufacturing
capabilities, which may represent further competition and lost sales
opportunities if those customers choose to manufacture and sell products that
they currently purchase from us.
As our competitors consolidate, they may offer products or pricing which we
cannot meet, which could cause our revenues to decline.
Consolidation in the fiber optic component industry could intensify the
competitive pressures that we face. For example, two of our competitors, JDS
Fitel and Uniphase have merged. The merged company has announced its intention
to offer more integrated products that could make our products less
competitive.
If we do not achieve our planned revenues, we could incur operating losses
because our expenses are fixed in the short term.
We make manufacturing and related capital expenditures in anticipation of a
level of customer orders that may vary over multiple quarters. Our
expenditures are largely based on anticipated future sales and a significant
portion of our expenses is fixed in the short term. If anticipated levels of
customer orders are not received, we may not be able to reduce our expenses
quickly enough to prevent a decline in our gross margins and operating income.
If we do not plan our manufacturing expansion accurately, we could lose sales
and customer relationships.
Expanding our manufacturing capacity requires substantial time to build out
and equip facilities and train personnel. If we receive orders substantially
in excess of our planned capacity, we might not be able to fulfill them
quickly enough to meet customer requirements. Our inability to deliver
products timely could enable competitors to win business from our customers.
Since customers often design a component into their equipment, this could
result in a permanent loss of a customer for one or more of our components.
8
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If we cannot expand our manufacturing facilities or qualify new production
lines with customers, our revenues could decline.
We are in the process of increasing our manufacturing capacity at our
existing facilities as well as pursuing the expansion of overseas
manufacturing in Taiwan and China. The development of overseas manufacturing
capabilities involves significant risks, including:
. unanticipated cost increases;
. unavailability or late delivery of equipment;
. unforeseen environmental or engineering problems;
. personnel recruitment delays; and
. political instability.
Any one of these risks could have a material adverse effect on the start up
or operation of new facilities. Once developed, many customers require
qualification of the manufacturing line before they will purchase any products
from that line. Delays in the qualification process or a customer's inability
to qualify a new manufacturing line could have a negative impact on our
revenues.
If we fail to maintain acceptable manufacturing yields, we may need to delay
product shipments and our gross margins could be impaired.
The manufacture of our products involves highly complex and labor intensive
processes, requiring production in controlled and clean environments. If we do
not meet these requirements, our manufacturing yields, which is the percentage
of our products which meet customer specifications, could decline, resulting
in product shipment delays, possible lost revenue opportunities, and impaired
gross margins. In response to changes in product specifications and customer
needs, our manufacturing process may experience changes that could
significantly reduce manufacturing yields. Our production yields could also be
lower if we receive or inadvertently use defective or contaminated materials
from our suppliers. Some of our manufacturing lines have experienced and may
continue to experience lower than expected production yields. We cannot be
sure that our manufacturing facilities will achieve or maintain acceptable
yields in the future.
Our revenues would suffer if a key sales representative or distributor were to
stop selling or reduce sales of our products.
We sell substantially all of our products through a network of independent
sales representatives and distributors, the majority of whom have exclusive
rights to sell our products in certain territories. There is a risk that our
independent sales representatives and distributors may discontinue sales of
our products in order to switch to representing one or more of our
competitors, which would result in reduced revenue for us. In addition, some
of our customers have requested to purchase our products directly from us,
which may give some of our affected independent sales representatives and
distributors less incentive to sell our products.
New technologies or industry standards could make our products noncompetitive,
decreasing our sales.
New technologies are emerging due to increased competition and customer
demand. The introduction of new products incorporating new technologies or the
emergence of new industry standards could make our existing products
noncompetitive. For example, new technologies are being developed in the
design of wavelength division multiplexers that compete with the thin film
filters that we employ. Our future results will depend on our ability to
successfully develop and introduce a variety of new products and product
enhancements.
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If our new product introductions are delayed, or if our new products have
defects, our revenues would be harmed and our costs could increase.
Our products are complex and new products may take longer to develop than
originally anticipated. These products may contain defects when first
introduced or as new versions are released. If we do not introduce new
products in a timely manner, we will not obtain incremental revenues from
these products or be able to replace more mature products with declining
revenues or gross margins. Customers that have designed our new components
into their products could instead purchase components from our competitors,
resulting in lost revenue over a longer term. We could also incur
unanticipated costs in attempting to complete delayed new products or to fix
defective products.
Acquisitions and investments may adversely affect our business.
We regularly review acquisition and investment prospects that would
complement our existing product offerings, augment our market coverage, secure
supplies of critical materials or enhance our technological capabilities.
Acquisitions or investments could result in a number of financial
consequences, including:
. potentially dilutive issuances of equity securities;
. large one-time write-offs;
. reduced cash balances and related interest income;
. higher fixed expenses which require a higher level of revenues to
maintain gross margins;
. the incurrence of debt and contingent liabilities; and
. amortization expenses related to goodwill and other intangible assets.
Furthermore, acquisitions involve numerous operational risks, including:
. difficulties in the integration of operations, personnel, technologies,
products and the information systems of the acquired companies;
. diversion of management's attention from other business concerns;
. diversion of resources from our existing businesses, products or
technologies;
. risks of entering geographic and business markets in which we have no or
limited prior experience; and
. potential loss of key employees of acquired organizations.
We may not be able to recruit and retain the personnel we need to succeed.
We heavily depend upon our ability to attract and retain highly-skilled
technical personnel, who have advanced skills and experience in the
specialized field of fiber optics. If we cannot hire or retain these technical
personnel, our product development programs may be delayed and our customer
support efforts may be less effective. In addition, most of our operations are
located in Silicon Valley, where it has become increasingly difficult to find
qualified personnel in all areas of our business. If we are unable to hire the
necessary managerial, sales and marketing personnel, we may not be able to
grow our revenues.
Our international sales could be delayed or could have costs which would lower
their contribution to our gross profit.
We generate a significant portion of our revenues from sales to companies
located outside the United States, principally in Europe. As a result, a
significant portion of our sales faces risks inherent in international
operations, including:
. government controls, which can delay sales or increase our costs;
10
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. export licensing requirements and restrictions, which can delay or
prevent sales;
. tariffs and other trade barriers, which can increase our costs and make
our products uncompetitive; and
. greater difficulty in accounts receivable collection and longer
collection periods, which can increase our need for working capital.
Currently, almost all of our international sales are U.S. dollar
denominated. As a result, our customers' orders could fluctuate significantly
based upon changes in our customers' currency exchange rates in relation to
the U.S. dollar. A large increase in the value of the U.S. dollar could make
our products more expensive to our foreign customers, resulting in cancelled
or delayed orders and decreased revenues.
Our international operations expose us to additional costs, some of which we
cannot predict.
Our recent expansion of our operations into other countries, such as Canada,
Taiwan and China, has increased both the administrative complications we must
manage and our exposure to currency fluctuations. If we cannot comply with
local regulations, we could incur unexpected costs and potential litigation.
Our international operations could cause our average tax rate to increase. We
could also incur expenses due to the exchange rate risk because many expenses
relating to our international operations are denominated in foreign
currencies, while our revenues are in U.S. dollars.
If we cannot protect or enforce our intellectual property rights, our
competitive position may be impaired.
Our success will depend, in part, on our ability to protect our intellectual
property. We rely primarily on patent, copyright, trademark and trade secret
laws, as well as nondisclosure agreements and other methods to protect our
proprietary technologies and processes. Despite our efforts to protect our
proprietary technology and processes, unauthorized parties may attempt to copy
or otherwise obtain and use our products or technology without authorization,
develop similar technology independently or design around our patents.
Policing unauthorized use of our products is expensive and difficult, and we
cannot be sure that the steps we have taken will prevent misappropriation or
infringement of our intellectual property.
Intellectual property claims against us could cause our business to suffer.
The telecommunications equipment industry is characterized by vigorous
protection and pursuit of intellectual property rights. We have entered into
indemnification obligations in favor of our customers and partners that could
be triggered upon an allegation or finding that we infringe other parties'
proprietary rights. In the past, we have received notifications alleging that
we are infringing the intellectual property rights of third parties. Whether
or not these claims are successful, we would likely incur significant costs
and diversion of our resources defending these claims, which could have a
material adverse effect on our business, financial condition and results of
operations.
We could incur costs and experience disruptions complying with environmental
regulations.
We handle small amounts of hazardous materials as part of our manufacturing
activities. Although we believe that we have complied with all applicable
environmental regulations in connection with our operations, we may be
required to incur environmental remediation costs to comply with current or
future environmental laws.
Our operations could be disrupted by natural disasters.
Our facilities are susceptible to damage from earthquakes as well as from
fire, floods, loss of power or water supply, telecommunications failures and
similar events. Any of these events could significantly disrupt our
operations.
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Our business could be disrupted by year 2000 compliance issues.
Many current installed computer systems and software products are coded to
accept only two-digit entries in the date code field and need to be upgraded
or replaced in order to correctly process dates beginning in 2000 and achieve
year 2000 compliance. Although we believe our own software is year 2000
compliant, we may be wrong. If we are wrong, we could face unexpected expenses
to fix the problems or significant disruptions of our business, which could
have a material adverse affect on our business, financial condition and
results of operations.
We also rely on external systems and software of third parties that may not
be year 2000 compliant. None of these systems are under our control.
Consequently, our business could be adversely affected by disruptions in the
operations of enterprises with which we interact. If our suppliers,
particularly our sole source suppliers, encounter year 2000 problems and are
unable to manufacture or deliver supplies to us, our ability to manufacture
and sell our products could be materially and adversely affected. Furthermore,
we have not assessed the year 2000 compliance of our customers. If our
customers encounter year 2000 problems, these customers may be forced to
devote significant resources to fixing these problems and as a result, reduce
purchases of our products. We do not currently have in place any contingency
plans for our operations if year 2000 issues are not resolved in time or go
undetected. The incomplete or untimely resolution of any of these issues could
have a material adverse affect on our business, financial condition and
results of operations.
Our stock price could fluctuate significantly.
The market price of our common stock could fluctuate significantly in
response to various factors and events, including:
. operating results below market expectations;
. announcements of technological innovations or new products by us or our
competitors;
. loss of a major customer;
. changes in, or our failure to meet, financial estimates by securities
analysts;
. industry developments;
. economic and other external factors; and
. period-to-period fluctuations in our financial results.
In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These market fluctuations may also
materially and adversely affect the market price of our common stock. Past
stock price performance is not an indication of future performance.
Future sales of shares could adversely affect our stock price.
Sales of a substantial number of shares of common stock after this offering
could adversely affect the market price of our common stock and could impair
our ability to raise capital through the sale of additional equity securities.
For a description of the shares of our common stock that are available for
future sale, see "Shares Eligible for Future Sale".
Our principal stockholders own a significant percentage of our common stock
and will be able to control the outcome of matters requiring stockholder
approval.
Our founders, officers, directors and their affiliates will, in the
aggregate, beneficially own approximately 64.6% of our outstanding shares
after this offering. Our founders, Theresa Pan and
12
<PAGE>
Jing Jong Pan, will collectively own 24.2% of our outstanding shares after
this offering, and entities related to Summit Partners, L.P. will own 32.8% of
our shares after this offering. As a result, these groups acting together will
be able to control, or acting independently will be able to substantially
influence, the outcome of all matters requiring approval by our stockholders,
including the election of directors and approval of significant corporate
transactions. This ability may have the effect of delaying or preventing a
change in control of E-TEK, or causing a change in control of E-TEK that may
not be favored by our other stockholders. See "Principal and Selling
Stockholders".
Our certificate of incorporation and bylaws and Delaware law contain
provisions that could discourage a takeover.
Certain provisions of our certificate of incorporation and bylaws could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, us. For example, our
certificate of incorporation and bylaws allow us to issue preferred stock with
rights senior to those of the common stock without any further vote or action
by the stockholders, provide for a classified board of directors, eliminate
the right of stockholders to call a special meeting of stockholders and
eliminate the right of stockholders to act by written consent. See
"Description of Capital Stock".
13
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this prospectus, all of which are
subject to risks and uncertainties. Forward-looking statements include
information concerning our possible or assumed future business success or
financial results. Such forward-looking statements include, but are not
limited to, statements as to our expectations regarding:
. our future revenue opportunities;
. the future growth of our customer base;
. our future expense levels (including research and development, selling,
general and administrative expenses and amortization of goodwill and
other intangibles);
. our future capital needs;
. the effect of the year 2000 situation;
. our dependence on sales to a small number of large customers;
. the emergence of new technologies;
. our expansion of our direct sales force and network of independent sales
representatives;
. our investment in new product development and enhancements;
. our expansion of our product lines;
. our intention to strengthen customer relationships;
. our expansion into new markets, such as cable and metropolitan area
networks;
. our acquisitions of complementary products, technologies and businesses;
. the increases in our level of manufacturing automation and expansion
into additional facilities;
. the expansion of our manufacturing capacity;
. our use of net proceeds;
. our intentions regarding retained earnings and dividends; and
. future financial pronouncements.
When we use words such as "believe," "expect," "anticipate" or similar words,
we are making forward-looking statements.
You should note that an investment in our common stock involves risks and
uncertainties that could affect our future business success or financial
results. Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including
those set forth in "Risk Factors" and elsewhere in this prospectus.
We believe that it is important to communicate our expectations to our
investors. However, there may be events in the future that we are not able to
predict accurately or over which we have no control. Before you invest in our
common stock, you should be aware that the occurrence of the events described
in the risk factors and elsewhere in this prospectus could materially and
adversely affect our business, financial condition and operating results. We
undertake no obligation to publicly update any forward-looking statements for
any reason, even if new information becomes available or other events occur in
the future.
14
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 4,000,000 shares of
common stock we are selling in the offering will be approximately $164.6
million, based on an assumed initial price to public of $43.06 per share and
after deducting an assumed underwriting discount and estimated offering
expenses. We will not receive any proceeds from the sale of shares being sold
by the selling stockholders.
We intend to use the net proceeds for working capital and general corporate
purposes, including to fund potential acquisitions. In the ordinary course of
business, we evaluate potential acquisitions of, or investments in,
complementary businesses or products. Other than the acquisition of Kaifa, we
currently have no understandings, commitments or agreements with respect to
any material acquisition of, or investment in, other businesses, products or
technologies. Until we use the net proceeds for any purpose, we will invest
the funds in short-term, interest-bearing, investment grade obligations.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market under the
symbol "ETEK" since December 2, 1998, the date of our initial public offering.
The following table shows the high and low closing sale prices for the common
stock as reported on the Nasdaq National Market for the periods indicated
below:
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal year ended June 30, 1999
Second Quarter (from December 2, 1998)........................ $27.13 $20.06
Third Quarter................................................. $36.38 $23.31
Fourth Quarter................................................ $50.50 $30.50
Fiscal year ending June 30, 2000
First Quarter (through July 29, 1999)......................... $47.84 $40.75
</TABLE>
The last reported sale price for our common stock on the Nasdaq National
Market was $43.06 per share on July 29, 1999. As of July 22, 1999, there were
approximately 297 holders of record of our common stock.
DIVIDEND POLICY
We have never paid or declared any cash dividends on our common stock. We
currently intend to retain earnings to finance the growth and development of
the business and, therefore, we do not anticipate declaring or paying cash
dividends on our common stock in the foreseeable future.
15
<PAGE>
CAPITALIZATION
The following table sets forth:
. our actual capitalization as of June 30, 1999, and
. our capitalization as adjusted to give effect to the sale of 4,000,000
shares of our common stock at an assumed initial price to public of
$43.06 per share after deducting an assumed underwriting discount and
estimated offering expenses that we will pay.
You should read this table in conjunction with our audited consolidated
financial statements and the related notes included elsewhere in this
prospectus.
The outstanding share information in the table below excludes 11,345,924
shares of common stock reserved for issuance under our stock option and
purchase plans. Under the plans, options to purchase 5,738,778 shares at a
weighted average exercise price of $11.75 were outstanding as of June 30,
1999.
<TABLE>
<CAPTION>
June 30, 1999
---------------------
Actual As Adjusted
-------- -----------
(in thousands)
<S> <C> <C>
Capital lease obligations, net of current portion........ $ 2,281 $ 2,281
-------- --------
Long-term debt, net of current portion................... 19,232 19,232
-------- --------
Stockholders' equity:
Common stock, $.001 par value, 300,000,000 shares
authorized; 62,054,438 shares issued and outstanding
(actual); 66,054,438 shares issued and outstanding (as
adjusted).............................................. 63 67
Additional paid-in capital.............................. 216,124 380,730
Notes receivable from stockholders...................... (11,454) (11,454)
Deferred compensation................................... (3,805) (3,805)
Distribution in excess of net book value................ (83,901) (83,901)
Retained earnings....................................... 32,646 32,646
-------- --------
Total stockholders' equity............................ 149,673 314,283
-------- --------
Total capitalization................................ $171,186 $335,796
======== ========
</TABLE>
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our audited consolidated financial statements and the related
notes included elsewhere in this prospectus. The consolidated statement of
operations data for the fiscal years ended June 30, 1997, 1998 and 1999, and
the consolidated balance sheet data at June 30, 1998 and 1999 are derived from
audited consolidated financial statements included in this prospectus. The
consolidated statement of operations data for the fiscal years ended June 30,
1995 and 1996 and the consolidated balance sheet data at June 30, 1995, 1996
and 1997 are derived from audited consolidated financial statements not
included in this prospectus. A description of the mandatorily redeemable
convertible preferred stock (all of which converted into our common stock in
our initial public offering in December 1998) and related accretion for fiscal
1998 and 1999 is included in Note 8 of the notes to the audited consolidated
financial statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Fiscal Year ended June 30,
---------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net revenues.................... $31,661 $40,382 $73,076 $106,924 $172,664
Cost of goods sold.............. 10,452 14,712 30,599 49,063 85,123
------- ------- ------- -------- --------
Gross profit................... 21,209 25,670 42,477 57,861 87,541
------- ------- ------- -------- --------
Operating expenses:
Research and development....... 2,270 2,444 3,953 7,702 14,687
Selling, general and
administrative................ 6,697 8,773 15,290 21,097 24,516
Purchased in-process research
and development............... -- -- -- -- 4,207
Amortization of intangibles.... -- -- -- -- 300
------- ------- ------- -------- --------
Total operating expenses...... 8,967 11,217 19,243 28,799 43,710
------- ------- ------- -------- --------
Operating income................ 12,242 14,453 23,234 29,062 43,831
Interest income................. 84 408 962 1,992 3,784
Interest expense................ (54) (66) (571) (988) (1,573)
------- ------- ------- -------- --------
Income before income taxes...... 12,272 14,795 23,625 30,066 46,042
Provision for income taxes...... 4,566 5,524 8,477 12,142 18,417
------- ------- ------- -------- --------
Net income...................... 7,706 9,271 15,148 17,924 27,625
Convertible preferred stock
accretion...................... -- -- -- 9,021 3,882
------- ------- ------- -------- --------
Net income available to common
stockholders................... $ 7,706 $ 9,271 $15,148 $ 8,903 $ 23,743
======= ======= ======= ======== ========
Net income per share:
Basic.......................... $ 0.15 $ 0.19 $ 0.30 $ 0.39 $ 0.55
Diluted........................ $ 0.15 $ 0.19 $ 0.30 $ 0.32 $ 0.45
Shares used in net income per
share calculations:
Basic.......................... 50,000 50,000 50,000 22,970 43,152
Diluted........................ 50,000 50,000 50,000 55,561 61,746
<CAPTION>
June 30,
---------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents....... $ 3,992 $ 8,026 $ 8,259 $ 21,918 $ 55,090
Working capital................. 9,464 18,342 27,706 33,582 66,543
Total assets.................... 16,665 26,709 61,760 90,378 230,496
Long-term obligations, net of
current portion................ -- -- 9,577 13,808 21,513
Mandatorily redeemable
convertible preferred stock.... -- -- -- 125,144 --
Stockholders' equity (deficit).. 11,680 20,951 36,099 (74,498) 149,673
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We design, manufacture and sell high quality fiber optic components and
modules for optical networks. Optical networks are being deployed by
telecommunications service providers like AT&T and MCI WorldCom to address the
demand for applications such as Internet access, e-mail, and electronic
commerce that require high capacity, high speed data transmission. Our
products are designed into optical systems built for these service providers'
networks by telecommunications equipment manufacturers. Our products guide,
route or amplify the light signals which transmit data within the network.
We generate revenues primarily from the sale of fiber optic components and
modules. Revenues from product sales are generally recognized at the time the
product is shipped, with provisions established for estimated product returns
and allowances. A relatively small number of telecommunications equipment
manufacturers have accounted for a significant portion of our revenues to
date, and we expect that this trend will continue for the foreseeable future.
This has historically resulted in uneven orders and fluctuating demand for our
products. In fiscal 1999 our three largest customers were Alcatel and related
entities, Corning and Pirelli. During that period, sales to Alcatel and
related entities accounted for 35.2% of our revenues, sales to Corning
accounted for 17.3%, and sales to Pirelli accounted for 11.6%.
The fiber optic component industry is characterized by rapidly declining
average selling prices, increasing unit volumes and declining margins. While
these price declines have negatively affected our margins, they have been
accompanied by increased unit sales.
In June 1999, we acquired ElectroPhotonics in Canada for a total acquisition
cost of $41.5 million, primarily comprised of 400,062 shares of our common
stock with a market value of $13.7 million and cash of $26.7 million. We
accounted for the transaction as a purchase. We allocated $4.2 million of the
purchase price to in-process research and development, which was expensed at
the time of the acquisition, and $34.9 million of goodwill and other
intangibles, which will generally be amortized over three years.
In July 1999, we increased our ownership in FibX, our joint venture in
Taiwan, from 45.3% to 95.9% for $12.0 million in cash. We estimate that we
will record $6.0 million of goodwill and other intangibles, which will be
amortized over three years.
On July 27, 1999, we signed a definitive agreement to acquire SMC Kaifa
(Holdings) Ltd., for a total purchase price of 697,000 shares of our common
stock and cash of $12.0 million. We estimate that the purchase will result in
approximately $36.0 million of goodwill and other intangible assets which will
be amortized over three years. The closing of the transaction is subject to
several conditions, including required governmental approvals. We cannot be
certain that the acquisition will be completed.
18
<PAGE>
Results of Operations
The following table sets forth, for the fiscal years indicated, the
percentage of net revenues represented by the line items reflected in our
audited consolidated statements of operations:
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net revenues................ 100.0% 100.0% 100.0%
Cost of goods sold.......... 41.9 45.9 49.3
-------- -------- --------
Gross profit.............. 58.1 54.1 50.7
-------- -------- --------
Operating expenses:
Research and
development.............. 5.4 7.2 8.5
Selling, general and
administrative........... 20.9 19.7 14.2
Purchased in-process
research and development
......................... -- -- 2.4
Amortization of
intangibles.............. -- -- 0.2
-------- -------- --------
Total operating
expenses............... 26.3 26.9 25.3
-------- -------- --------
Operating income............ 31.8 27.2 25.4
Interest income............. 1.3 1.8 2.2
Interest expense............ (0.8) (0.9) (0.9)
-------- -------- --------
Income before income taxes.. 32.3 28.1 26.7
Provision for income taxes.. 11.6 11.4 10.7
-------- -------- --------
Net income.................. 20.7% 16.7% 16.0%
======== ======== ========
</TABLE>
Comparison of fiscal years ended June 30, 1997, 1998 and 1999
Net Revenues. Net revenues increased 46.2% from $73.1 million in fiscal 1997
to $106.9 million in fiscal 1998. Net revenues increased 61.5% from $106.9
million in fiscal 1998 to $172.7 million in fiscal 1999. The primary reason
for the increase from fiscal 1997 to fiscal 1998 was increased unit shipments
of our isolators, WDMs, couplers, and micro-optic integrated components. The
primary reason for the increase from fiscal 1998 to fiscal 1999 was increased
unit shipments of WDMs, couplers, and micro-optic integrated components.
Fiscal 1998 and fiscal 1999 net revenues also increased due to growth in sales
of products for undersea applications. In the fourth quarter ended June 30,
1999, we experienced a shortage of thin film filters, which limited our
ability to ship products and generate revenues. We may face shortages of these
filters in the future.
Gross Profit. Gross profit increased 36.2% from $42.5 million in fiscal 1997
to $57.9 million in fiscal 1998. Gross profit increased 51.3% from $57.9
million in fiscal 1998 to $87.5 million in fiscal 1999. Cost of goods sold
consists of raw material costs, direct labor costs, warranty costs, royalties
and overhead related to our manufacturing operations. Gross profit margins
declined from 58.1% in fiscal 1997 to 54.1% in fiscal 1998 and to 50.7% in
fiscal 1999. The gross profit margin declines over both fiscal years were
primarily due to declining average selling prices and increased costs
associated with the expansion of our manufacturing capacity to address future
unit volume growth. In addition, we expect the purchase of a controlling
interest in FibX will have an adverse impact on our margins until we can
absorb the additional manufacturing capacity through increased revenues.
Research and Development Expenses. Research and development expenses consist
of compensation costs for personnel, depreciation of equipment, and prototype
materials. Research and development expenses were $4.0 million in fiscal 1997,
representing 5.4% of net revenues, and $7.7 million, or 7.2% of net revenues,
in fiscal 1998. Research and development expenses for fiscal 1999, excluding
purchased in-process research and development charges, were $14.7 million, or
8.5% of net revenues, a 90.7% increase over fiscal 1998. The growth in
research and development expenses in both years was primarily due to the
increase in research and development personnel and material costs. We expect
that research and development expenses will continue to increase in fiscal
2000 in absolute dollars.
19
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist of compensation costs for personnel, sales
commissions, travel expenses, marketing programs, professional services,
accounting, human resources, executive management and consulting. Selling,
general and administrative expenses were $15.3 million in fiscal 1997,
representing 20.9% of net revenues, and $21.1 million, or 19.7% of net
revenues, in fiscal 1998. Selling, general and administrative expenses for
fiscal 1999 were $24.5 million, or 14.2% of net revenues, representing a 16.2%
increase over fiscal 1998. The increase in absolute dollars of expenditures
over both periods reflected the hiring of additional sales, marketing and
administrative personnel and increased commissions paid on higher revenues. We
anticipate that our selling, general and administrative expenses will increase
in absolute dollars in fiscal 2000.
Purchased In-Process Research and Development and Goodwill Amortization. On
June 22, 1999, we completed the acquisition of ElectroPhotonics. On that date,
we recorded a one-time charge of $4.2 million representing purchased in-
process technology that had not yet reached technological feasibility and had
no alternative future use. We determined this value by estimating the costs to
develop the purchased in-process technology into commercially viable products,
estimating the resulting net cash flows from these products, and discounting
the net cash flows back to their present values. The discount rate includes a
factor that takes into account the uncertainty surrounding the successful
development of the purchased in-process technology. If we do not successfully
develop these products, our revenues and profitability may be adversely
affected in future periods. Additionally, the value of other intangible assets
acquired may become impaired. Capitalized intangible assets resulting from the
acquisition of ElectroPhotonics, including developed and core technologies and
goodwill, amounted to $34.9 million. These assets are being amortized over
their useful lives, generally three years. Such amortization amounted to $0.3
million for fiscal 1999. We estimate that as a result of the ElectroPhotonics
and FibX acquisitions and, if completed, the Kaifa acquisition, amortization
of goodwill and other intangibles will be approximately $26.0 million in each
of the next three fiscal years. We may continue to buy technology in order to
expand our product offering and bring products to the market in a timely
fashion.
Interest Income and Interest Expense. Our interest income was approximately
$1.0 million for fiscal 1997, compared to $2.0 million in fiscal 1998 and $3.8
million for fiscal 1999. We earned interest income on our cash investments. We
also recognized imputed interest income of $0.6 million in fiscal 1998 and
$1.0 million in fiscal 1999 relating to notes receivable from stockholders.
Interest expense, incurred on borrowings secured by our property and
equipment, and on capital leases, was $0.6 million for fiscal 1997, compared
to $1.0 million for fiscal 1998 and $1.6 million for fiscal 1999.
Income Taxes. Our income tax provision was 35.9% in fiscal 1997, 40.4% in
fiscal 1998 and 40.0% in fiscal 1999. The higher rate for fiscal 1998 is due
to a permanent tax difference related to our investment in FibX. The higher
rate for fiscal 1999 is due to a permanent difference related to our purchase
of ElectroPhotonics.
Net Income. Net income for fiscal 1997 was $15.1 million, or $0.30 per
diluted share, compared to net income of $17.9 million, or $0.32 per diluted
share, for fiscal 1998 and net income of $27.6 million, or $0.45 per diluted
share, for fiscal 1999. Excluding the one time charge for purchased in-process
research and development and amortization of goodwill and other intangibles
related to the acquisition of ElectroPhotonics, net income would have been
$30.3 million, or $0.49 per diluted share, for fiscal 1999.
Net income available to common stockholders was $15.1 million in fiscal
1997, $8.9 million in fiscal 1998, and $23.7 million in fiscal 1999. Net
income available to common stockholders in fiscal 1998 and fiscal 1999 reflect
accretion relating to our convertible preferred stock of $9.0 million in
fiscal 1998 and $3.9 million in fiscal 1999. All of our convertible preferred
stock was converted into common stock on December 2, 1998 and, accordingly, we
will not be recording accretion on this convertible preferred stock in future
periods.
20
<PAGE>
Quarterly Results of Operations
The following tables set forth unaudited quarterly results for the eight
fiscal quarters ended June 30, 1999, as well as such data expressed as a
percentage of our net revenues for each quarter. This information has been
presented on the same basis as our audited consolidated financial statements
appearing elsewhere in this prospectus and, in the opinion of management,
includes all adjustments, consisting only of normal recurring adjustments,
that we consider necessary to present fairly the unaudited quarterly results.
This information should be read in conjunction with our audited consolidated
financial statements and the related notes appearing elsewhere in this
prospectus. The operating results for any quarter are not necessarily
indicative of results for any future period. See "Risk Factors--Our quarterly
operating results are subject to significant fluctuations, and you should not
rely on them as an indication of future performance".
<TABLE>
<CAPTION>
Three months ended
----------------------------------------------------------------------------
Sep. 30, Dec. 31, Mar. 31, June 30, Oct. 2, Jan. 1, April 2, June 30,
1997 1997 1998 1998 1998 1999 1999 1999
-------- -------- -------- -------- ------- ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Net revenues............ $27,309 $25,311 $23,729 $30,575 $32,942 $38,708 $49,472 $51,542
Cost of goods sold...... 11,893 11,155 11,182 14,833 15,989 18,854 24,495 25,785
------- ------- ------- ------- ------- ------- ------- -------
Gross profit........... 15,416 14,156 12,547 15,742 16,953 19,854 24,977 25,757
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development........... 1,655 1,746 1,921 2,380 3,076 3,255 4,233 4,123
Selling, general and
administrative........ 5,198 5,112 5,168 5,619 5,395 5,748 7,065 6,309
Purchased in-process
research and
development........... -- -- -- -- -- -- -- 4,207
Amortization of
intangibles........... -- -- -- -- -- -- -- 300
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............. 6,853 6,858 7,089 7,999 8,471 9,003 11,298 14,939
------- ------- ------- ------- ------- ------- ------- -------
Operating income........ 8,563 7,298 5,458 7,743 8,482 10,851 13,679 10,818
------- ------- ------- ------- ------- ------- ------- -------
Interest income......... 353 428 514 697 588 822 1,185 1,189
Interest expense........ (171) (188) (112) (517) (285) (340) (417) (530)
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................. 8,745 7,538 5,860 7,923 8,785 11,333 14,447 11,477
Provision for income
taxes.................. 3,499 3,014 2,439 3,190 3,514 4,533 5,779 4,591
------- ------- ------- ------- ------- ------- ------- -------
Net income.............. 5,246 4,524 3,421 4,733 5,271 6,800 8,668 6,886
Convertible preferred
stock accretion........ 1,842 2,393 2,393 2,393 2,400 1,482 -- --
------- ------- ------- ------- ------- ------- ------- -------
Net income available to
common stockholders.... $ 3,404 $ 2,131 $ 1,028 $ 2,340 $ 2,871 $ 5,318 $ 8,668 $ 6,886
======= ======= ======= ======= ======= ======= ======= =======
Net income per share:
Basic.................. $ 0.12 $ 0.10 $ 0.05 $ 0.11 $ 0.13 $ 0.15 $ 0.15 $ 0.12
Diluted................ $ 0.10 $ 0.08 $ 0.06 $ 0.08 $ 0.09 $ 0.11 $ 0.14 $ 0.11
Shares used in net
income per share
calculations:
Basic.................. 28,073 21,205 21,258 21,308 22,037 34,777 57,720 58,307
Diluted................ 51,922 55,007 57,222 58,092 58,573 60,125 63,719 64,051
</TABLE>
<TABLE>
<CAPTION>
Three months ended
---------------------------------------------------------------------
Sep. 30, Dec. 31, Mar. 31, June 30, Oct. 2, Jan. 1, April 2, June 30,
1997 1997 1998 1998 1998 1999 1999 1999
-------- -------- -------- -------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As a Percentage of Total
Revenues:
Net revenues............ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold...... 43.5 44.1 47.1 48.5 48.5 48.7 49.5 50.0
----- ----- ----- ----- ----- ----- ----- -----
Gross profit............ 56.5 55.9 52.9 51.5 51.5 51.3 50.5 50.0
Operating expenses:
Research and
development........... 6.1 6.9 8.1 7.8 9.3 8.4 8.5 8.0
Selling, general and
administrative........ 19.0 20.2 21.8 18.4 16.4 14.9 14.3 12.2
Purchased in-process
research
and development....... -- -- -- -- -- -- -- 8.2
Amortization of
intangibles........... -- -- -- -- -- -- -- 0.6
----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses............. 25.1 27.1 29.9 26.2 25.7 23.3 22.8 29.0
----- ----- ----- ----- ----- ----- ----- -----
Operating income........ 31.4 28.8 23.0 25.3 25.8 28.0 27.7 21.0
Interest income......... 1.3 1.7 2.2 2.3 1.8 2.1 2.4 2.3
Interest expense........ (0.6) (0.7) (0.5) (1.7) (0.9) (0.8) (0.9) (1.0)
----- ----- ----- ----- ----- ----- ----- -----
Income before income
taxes.................. 32.1 29.8 24.7 25.9 26.7 29.3 29.2 22.3
Provision for income
taxes.................. 12.8 11.9 10.3 10.4 10.7 11.7 11.7 8.9
----- ----- ----- ----- ----- ----- ----- -----
Net income.............. 19.3% 17.9% 14.4% 15.5% 16.0% 17.6% 17.5% 13.4%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
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<PAGE>
Liquidity and Capital Resources
Since inception, we have financed operations and met our capital expenditure
requirements primarily through cash flows from operations and borrowings. Cash
flows from operating activities were $13.5 million for fiscal 1997, $27.7
million for fiscal 1998 and $32.2 million for fiscal 1999. Cash flows from
operating activities consisted primarily of net income, depreciation and
amortization expenses, and increases in accrued liabilities and accounts
payable, offset in part by increases in accounts receivable, inventories and
deferred tax assets. In fiscal 1999, cash flows from operating activities also
included purchased in-process research and development. At June 30, 1999, we
had cash and cash equivalents of $55.1 million and working capital of $66.5
million.
Net cash used in investing activities was $21.4 million for fiscal 1997,
compared to $12.4 million for fiscal 1998 and $63.4 million for fiscal 1999.
The cash used in fiscal 1997 and fiscal 1998 was primarily for capital
expenditures. The cash used in fiscal 1999 was primarily for the purchase of
ElectroPhotonics, which was $25.7 million, net of cash received, and capital
expenditures of $41.8 million.
On July 6, 1999, we acquired a controlling interest in FibX for cash of
$12.0 million. On July 27, 1999, we entered into an agreement to acquire SMC
Kaifa (Holdings) Ltd. for a total purchase price of 697,000 shares and cash of
$12.0 million. Although we have no material commitments for capital
expenditures, we expect to make capital expenditures in fiscal 2000 of
approximately $50.0 million.
Net cash provided in financing activities was $8.1 million in fiscal 1997,
as compared to $1.6 million used in financing activities for fiscal 1998. The
fiscal 1997 amount reflects the incurrence of $7.7 million in long-term debt.
The fiscal 1998 amount reflects the net effect of our recapitalization, which
was completed in July 1997. For a description of the recapitalization, see
"Certain Transactions--Recapitalization" and Note 1 to our audited
consolidated financial statements included elsewhere in this prospectus. Net
cash provided by financing activities for fiscal 1999 was $64.4 million and
consisted primarily of net proceeds of $43.4 million from the issuance of
common stock in our initial public offering and borrowings on long-term debt
of $20.2 million.
Based on current plans and business conditions, we believe that our existing
cash and equivalents, cash generated from operations, available equipment
financing sources and proceeds from this offering will be sufficient to
satisfy our anticipated cash requirements for at least the next twelve months.
On January 1, 1999, the participating member countries of the European Union
converted to a common currency, the euro. On that same date they established
fixed conversion rates between their existing sovereign currencies and the
euro. Even though legacy currencies are scheduled to remain legal tender in
the participating countries as denominations of the euro until January 1,
2002, the participating countries will no longer be able to direct independent
interest rates for the legacy currencies. The authority to set monetary policy
will now reside with the new European Central Bank. We do not anticipate any
material impact from the euro conversion on our financial information systems,
which currently accommodate multiple currencies. We do not believe that the
euro conversion issue will have any material impact on our pricing or market
strategies or our financial condition and results of operations.
At June 30, 1999, we had not entered into any agreements or purchased any
financial instruments that expose us to material market risk.
Year 2000 Compliance
Many computer programs use two digits rather than four to define the
applicable year. Computer programs or hardware that have date sensitive
software or chips may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in systems failures or miscalculations
causing disruptions of operations for any company using computer programs or
hardware.
22
<PAGE>
We rely on our systems, applications and control devices in operating and
monitoring all major aspects of our business. We installed new Enterprise
Resource Planning software during fiscal 1998 at a cost of approximately $1.0
million which we believe is year 2000 compliant. With respect to our own
systems, we rely on the representations of our primary software vendors that
their products are year 2000 compliant. Based in part on representations of
our software vendors and our internal review of our information technology and
non-information technology systems, software and devices, we believe our
systems, software and devices are year 2000 compliant. However, the
noncompliance of our systems, software and devices could severely disrupt our
operations and have a material adverse effect on our business, financial
condition and results of operations. Based on our assessment to date, we do
not anticipate that costs associated with remediating any of our internal
systems will be material.
We also rely, directly and indirectly, on external systems of our customers,
suppliers, creditors, financial organizations, utilities providers and
governmental entities, both domestic and international. None of these systems
is under our control. Consequently, we could be affected by disruptions in the
operations of the enterprises with which we interact. Furthermore, the
purchasing frequency and volume of customers or potential customers may be
affected by year 2000 issues as companies expend significant resources to make
their current systems year 2000 compliant. Some of our customers, including
each of our three largest customers, have requested information from us
concerning our exposure to year 2000 problems, the steps we have taken to
resolve any year 2000 problems and what level of management attention is being
focused on the issue.
Similarly, we have sent inquiries to certain of our suppliers requesting
substantially the same information from them. We have received representations
from certain of our suppliers, including each of our sole source suppliers, as
to the year 2000 compliance of their systems and products. We have not
assessed the year 2000 compliance of our customers. If our customers encounter
year 2000 problems that prevent their products from functioning properly,
these customers may be forced to devote significant resources to fixing these
problems and may reduce or suspend the manufacture of new telecommunications
equipment during that time. As a result, our sales of components to these
customers could be materially and adversely affected. In addition, if our
suppliers, particularly our sole source suppliers, are unable to manufacture
or deliver supplies to us as a result of year 2000 problems, our ability to
manufacture and sell our products would be materially and adversely affected.
We have not adopted a formal year 2000 contingency plan because, based on
the information available to us, we believe that we do not have material
exposure to significant business interruptions as a result of year 2000
compliance issues.
The foregoing is a Year 2000 Readiness Disclosure as defined by the Year
2000 Information and Readiness Disclosure Act of 1998.
Recent Financial Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities and is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. We do not expect the adoption of SFAS 133
to have a material impact on our results of operations.
23
<PAGE>
BUSINESS
Overview
We design, manufacture and sell high quality fiber optic components and
modules for optical networks. Optical networks are being deployed by
telecommunications service providers like AT&T and MCI WorldCom to address the
demand for applications such as Internet access, e-mail, and electronic
commerce that require high capacity, high speed data transmission. Our
products are designed into optical systems built for these service providers'
networks by telecommunications equipment manufacturers.Our products guide,
route or amplify the light signals which transmit data within the network and
include:
. narrowband wavelength division multiplexers, commonly referred to as
WDMs, which allow multiple communication signals to be carried on one
fiber optic connection;
. wideband wavelength division multiplexers, which are used in optical
amplifiers to differentiate signals or enhance performance;
. isolators, which act as one-way valves for optical signals, preventing
the light from traveling in the wrong direction;
. couplers, which are used to combine or split optical signals; and
. micro-optic integrated components, which combine two or more of the above
optical component functions into a single package.
Our products are deployed in land-based and undersea long distance networks,
as well as in cable and metropolitan area networks. Our customers include many
of the leading telecommunications equipment manufacturers, including Alcatel,
CIENA, Corning, Fujitsu, Lucent, Nortel and Pirelli.
Industry Background
In order to meet the increase in demand for high capacity, high speed data
transmission, networks have been evolving to optical technologies which offer
several advantages. Within optical networks, transmission signals travel in
the form of light at very high speeds. Additionally, each light signal can be
divided into different colors or wavelengths. Each data-carrying wavelength
can then be transmitted together with a large number of other wavelengths.
This technology is known as wavelength division multiplexing, which is
commonly referred to in the industry as WDM.
Another important technology is the amplification of the optical signal.
This is accomplished using optical amplifiers. Optical amplifiers create cost
savings for service providers by reducing the need for expensive equipment
that converts the optical signal to and from an electrical signal.
Our components are the building blocks for WDM and optical amplifier
systems, and, therefore, many of them are necessary to enable optical
networking.
Many service providers have increased the capacity of their networks by
installing fiber optic cable for long distance routes and, more recently, for
metropolitan area networks. However, the rapid increase in demand for high
capacity, high speed data transmission has created capacity constraints
throughout these networks. As service providers seek to address these capacity
constraints by installing new fiber or expanding the transmission capacity of
existing fiber, we expect the demand for fiber optic components and modules to
increase.
Today, service providers can address their capacity constraints by either
installing new fiber or expanding the transmission capacity of existing fiber.
The expansion of transmission capacity can be accomplished by utilizing
technologies such as time division multiplexing and, more recently, WDM. Time
division multiplexing increases the transmission speed of optical signals
whereas WDM increases
24
<PAGE>
the number of optical signals transmitted simultaneously on a single fiber.
Regardless of the method used for addressing capacity constraints, we expect
the demand for optical networking equipment, including components, modules and
systems, to increase.
This increase in demand is driven by the service providers' need to provide
subscribers with more services at lower costs. We are focused on building on
our position as a leading supplier of fiber optic components and modules in
order to capture additional growth opportunities in the marketplace.
Company Strategy
Our goal is to provide a broad range of high quality components in large
volumes for the telecommunications and cable markets. To meet this goal, we
plan to:
. Maintain and Expand Our Technology Leadership. We intend to continue to
invest in new product development and product enhancements that will
drive the growth of optical systems. As of June 30, 1999, we had over 100
U.S. patents issued and pending. We currently focus our product
development efforts on components for growth areas such as WDM, optical
amplification and optical switching. Our long-term goal is to supply the
enabling optical components that will allow networks to avoid the need
for the costly conversions between optical and electrical signals.
. Design and Build Increasingly Integrated Components and Modules. We
intend to continue expanding our product line with increasingly
integrated components and modules. Expertise that we have developed in
the design of our current components will help us to develop new and more
integrated products. Additionally, we believe that there is growing
demand from telecommunications equipment manufacturers for more
integrated components and modules. Integration provides many benefits to
our customers, including cost reductions as well as performance and
reliability improvements. In addition, these integrated components allow
telecommunications equipment manufacturers to design smaller systems.
. Strengthen Existing and Develop New Customer Relationships. We believe
that our strong customer relationships are a competitive advantage that
enable us to more effectively target our product development and
manufacturing efforts. We have established relationships with key
telecommunications equipment manufacturers by working as a partner to
solve their product needs. We intend to strengthen our existing customer
relationships by continuing to deliver a high level of service and
capitalize on our reputation for high quality products to penetrate new
key accounts.
. Increase Presence in Metropolitan Area and Cable Markets. We plan to
extend beyond our traditional long distance markets into new markets,
such as metropolitan area and cable networks. We believe that
technological advancements and cost reductions in optical components and
modules are beginning to enable the growth of optical networking into
these markets.
. Enhance and Expand Manufacturing Capabilities. Telecommunications
equipment manufacturers are increasingly demanding higher volumes of
components with shorter delivery lead times, higher quality and lower
price. To meet these demands, we have been increasing our manufacturing
capacity, investing in automated manufacturing processes and adding lower
cost, offshore manufacturing facilities.
. Expand Sales and Marketing Efforts. The target customer base for our
optical components and modules requires a focused sales and marketing
effort. We believe it is necessary to expand these efforts to improve
service to existing customers and to effectively target new customers. We
intend to selectively expand our direct sales force and network of
independent sales representatives to serve existing customers and to
pursue additional customer opportunities.
25
<PAGE>
. Pursue Complementary Acquisitions. To enhance our internal development,
we intend to actively pursue acquisitions of complementary products,
technologies and businesses. We have made two acquisitions to date and
have signed an agreement to buy a third company. We plan to pursue
opportunities that contribute new technologies and products, low cost
manufacturing capabilities, or broadened customer relationships.
Technology and Products
Fiber optic systems manufactured by our customers are used to send and
receive communications signals. This requires transmitting, amplifying,
multiplexing, isolating, routing, monitoring and receiving optical signals,
which are typically carried by individual wavelengths of light. Many of the
capabilities for these functions are enabled at the component level. We have
developed a broad range of components to address these needs within optical
networks.
Our products are divided into five main categories: wavelength division
multiplexing (WDM) components and modules, isolators, couplers, micro-optic
integrated components and other products.
WDM Components and Modules. We manufacture a number of different WDM
components and modules. Our narrowband WDM multiplexer combines light sources
of different wavelengths for simultaneous transmission along a single fiber.
We also manufacture wideband WDM components for use in optical amplifiers.
Wideband WDM components combine and separate wavelengths that are far apart,
such as a transmission signal and an amplifying signal.
Most of our WDM components use thin film filters to enable the transmission
of specific optical wavelengths and the reflection of others. Thin film
filters employ various coatings on glass to discriminate between wavelengths.
This technology offers accuracy in separating wavelengths, low signal loss,
and insensitivity to temperature change.
Isolators. We currently offer a wide range of isolator products, including a
high reliability isolator for undersea networks. An isolator prevents
reflected signals from traveling past it in the wrong direction while still
allowing the unimpeded passage of signals in the original direction. Our
isolators offer low signal loss, which means that a high percentage of light
passes through and only small amounts of light are lost.
Couplers. We offer several types of couplers, which combine or split optical
signals. Couplers are often used to tap off a small portion of a light stream
for monitoring purposes or to distribute the signal to multiple points. We
have developed a patented technology called Unifuse, which we believe produces
more robust and reliable couplers.
Micro-Optic Integrated Components. Micro-optic integrated components are
modules that integrate two or more optical component functions into a single
package. These functions include isolator, WDM and coupler functions. For
example, we have developed a product that combines coupler and isolator
functions into a single module for use in optical amplifiers. This integration
reduces the total component count in a system and provides many benefits for
our customers, including:
. decreasing the need to store multiple components;
. reducing the physical dimensions of the system;
. lowering production costs; and
. improving performance and reliability.
We design and manufacture a range of micro-optic integrated components for a
variety of applications.
26
<PAGE>
Other Products. We manufacture a variety of other components and modules
that perform various functions within an optical system. These products
include:
. attenuators, which are used to adjust the strength of optical signals;
. circulators, which are used to direct signals;
. switches, which are used to flexibly reroute signals; and
. wavelength lockers, which prevent the drifting of wavelengths at the
transmission point.
Currently, the majority of our products are designed into long distance
networks. We recently began to offer these products for metropolitan and cable
networks, which are areas that we expect will offer growth opportunities in
the future.
Through our recent acquisition of ElectroPhotonics, we have two additional
products for optical networks:
. Dispersion equalization modules, which ensure that an optical signal
arrives cleanly at the end of an optical fiber. Different colors of light
travel along an optical fiber at slightly different speeds, and light
signals that carry information always have some small variation in the
color of the light. The dispersion equalization modules cancel out those
differences in speed so that all the colors of the light signal arrive at
the same time.
. Optical performance monitors, which watch the optical signals passing
through an optical fiber. They count which wavelengths (colors) of light
signals are present. They check to see how strong each wavelength signal
is and whether it is interfering with other signals. As communication
systems move more towards optical networks, these traffic monitors become
increasingly important to prevent "optical gridlock."
Customers
We sell our products primarily to telecommunications equipment
manufacturers. Customers that purchased more than $1 million of our products
in fiscal 1999 were:
Alcatel Italia Fujitsu
Alcatel ITS Lucent
Alcatel Network Systems MCI WorldCom
Alcatel Submarine Networks NEC
Antec Nortel Networks
CIENA Pirelli
Corning Tyco International
A small number of customers have historically accounted for a substantial
portion of our net revenues. In fiscal 1999 our three largest customers were
Alcatel and related entities, Corning and Pirelli. During that period, sales
to Alcatel and related entities accounted for 35% of our revenues, sales to
Corning accounted for 17%, and sales to Pirelli accounted for 12%.
Developing strong relationships with telecommunications equipment
manufacturers is a key focus of our sales efforts. We work closely with our
customers from the initial product design through the manufacturing process to
the delivery of the final product. This ongoing level of interaction enables
us to better align our product development efforts with our customers'
evolving product needs.
Optical networking systems companies are beginning to develop next
generation optical networks that will require optical components and modules.
We are dedicating sales and marketing resources to both new and more
established telecommunications equipment manufacturers.
27
<PAGE>
Research and Development
We currently have 117 employees engaged in research and development,
including 61 engineers with advanced degrees, 29 of whom have Ph.D.s. We want
to continue to develop core technologies with applications for product
solutions in each of our target markets. Our research and development
expenses, excluding purchased in-process research and development, were $14.7
million for fiscal 1999 and $7.7 million for fiscal 1998. We plan to continue
to increase our research and development budget and staffing levels in fiscal
2000. The focus of our research and development will be to further broaden the
product base and to improve the manufacturability and performance of existing
products.
Manufacturing
We currently manufacture our products at our facilities in San Jose,
California, Ontario, Canada and Taipei, Taiwan. Our in-house manufacturing
capabilities include product design, optical assembly, integration and testing
of our components and modules. We maintain a system of optical assembly
stations located in clean rooms to manufacture custom and standard products.
Customer expectations for innovative product solutions, high volume capacity,
high quality and on-time delivery require flexible manufacturing processes.
Telecommunications equipment manufacturers require high quality and
reliability in the components incorporated into their systems. We emphasize
quality assurance through ongoing staff training and internal manufacturing
systems and procedures throughout our various manufacturing processes.
The materials that we require for the manufacture of our products are
generally available from several sources, although a number of materials are
available only from sole source suppliers. In the fourth quarter of fiscal
1999, we experienced a shortage of thin film filters from our suppliers, which
caused delays in shipments, lost orders and reduced revenues. Specifically,
the shortage was related to poor yields during the filter manufacturing
process. Such a shortage could recur in the future. However, we have been
expanding our internal thin film filter manufacturing capacity and are working
internally and with our suppliers in an effort to improve yields.
We intend to increase our level of manufacturing automation and expand into
additional facilities as required. In May 1999, we expanded the size of our
San Jose facilities from approximately 160,000 square feet to approximately
240,000 square feet. We financed this facilities expansion through a
combination of cash flows from operations and equipment financing. In addition
to our facilities in San Jose, we recently acquired or established
manufacturing facilities in Ontario, Canada and Taipei, Taiwan.
Based on the long-term growth outlook of the fiber optic component market,
we plan to continue increasing our manufacturing capacity in North America and
overseas.
Sales and Marketing
We market and sell our products through a network of nine domestic and 15
international sales representatives and distributors. Our sales
representatives and distributors are independent organizations that generally
have exclusive geographic territories and are generally compensated on a
commission basis.
We also employ 55 people in sales and marketing who manage key customer
accounts and support our sales representatives and distributors. Our customers
often have unique technical specifications and performance requirements for
components and typically require specific product designs. As a result, our
sales efforts require close cooperation between our independent sales
representatives and distributors and our in-house personnel.
28
<PAGE>
In support of our selling effort, we conduct marketing programs intended to
position and promote our products within the telecommunications industry.
Marketing personnel coordinate our participation in trade shows and design and
implement our advertising efforts. In addition, the marketing group gathers
and maintains market research and tracks industry trends and developments in
order to anticipate customer needs for new products and develop pricing
strategies.
Competition
The market for fiber optic components is intensely competitive and
characterized by rapidly changing technology. The principal competitive
factors in our business are:
. optical performance of components;
. quality and reliability;
. manufacturing capacity;
. ability to deliver on-time;
. customer relationships;
. pricing;
. comprehensiveness of product offerings;
. customization to customer specifications; and
. strength of distribution channels.
We currently experience competition from various companies, including ADC
Telecommunications, Corning, Gould Electronics, and JDS Uniphase in couplers;
FDK Corporation, JDS Uniphase, Kyocera, and Shinkosha K.K. in isolators, and
Corning, JDS Uniphase, Lucent, and Optical Coating Laboratory in WDM
components. Competitors in any portion of our business are also capable of
rapidly becoming competitors in other portions of our business. We also face
competition from numerous smaller companies. Some of our current and potential
competitors may be able to:
. respond more quickly to new or emerging technologies or standards and to
changes in customer requirements;
. devote greater resources to the development, promotion and sale of
products; and
. deliver competitive products at a lower price.
Some competitors manufacture their products in countries offering
significantly lower labor costs than in the United States.
Existing and potential customers are also current and potential competitors.
These companies may develop or acquire additional competitive products or
technologies in the future which may make them reduce or cease their purchases
from us.
In addition, we believe that the size of suppliers will be an increasingly
important part of purchasers' decision-making criteria in the future. To
address these issues, we will focus on broadening our product line through
internal development and strategic initiatives. We will also focus on
expanding our manufacturing capacity for faster time to market for our newer
products.
Patents and Intellectual Property Rights
We rely primarily on patent, copyright, trademark and trade secrets to
protect our proprietary technologies and processes. We also generally enter
into confidentiality agreements with our employees and partners, and generally
control access to and distribution of our documentation and other proprietary
information. There can be no assurance that such measures will provide
meaningful
29
<PAGE>
protection for our proprietary technologies and processes. As of June 30,
1999, we had over 100 U.S. patents issued and pending which expire on dates
ranging from 2007 and 2018.
Employees
As of June 30, 1999, we had 1,316 employees, of whom 1,074 were primarily
engaged in manufacturing, 117 were engaged in research and development, 55
were engaged in sales, marketing and technical support and 70 were engaged in
administration. Our employees are not represented by any collective bargaining
agreement, and we have not experienced a work stoppage. We believe our
employee relations are good.
Facilities
Our principal offices and facilities are located primarily in San Jose,
California. We own three buildings in San Jose totalling approximately 180,000
square feet, 20,000 square feet of which is leased to a third party through
May 2001. We lease approximately 80,000 square feet in San Jose under a lease
that expires in February 2006 and approximately 5,000 square feet in San Jose
under a lease that expires on March 31, 2000. We also own five acres of land
nearby. In addition, we lease facilities in Ontario, Canada and Taipei,
Taiwan. We believe that our existing facilities are adequate to meet our
current needs.
Legal Proceedings
We are not a party to any material legal proceedings.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information with respect to each of
our executive officers and directors as of July 29, 1999.
<TABLE>
<CAPTION>
Name Age Position(s)
- ---- --- -----------
<S> <C> <C>
Michael J. Fitzpatrick(1)....... 50 Chairman, President, and Chief Executive
Officer
Ming Shih....................... 46 Senior Vice President, Sales and Marketing
Sanjay Subhedar................. 47 Senior Vice President, Operations, Chief
Financial Officer and Secretary
Philip J. Anthony............... 47 Vice President, Engineering
Jim Northington................. 52 Vice President, Manufacturing
William H. Diamond, Jr. ........ 43 Vice President, Marketing
Walter G. Kortschak(2)(3)....... 40 Director
David W. Dorman(2).............. 45 Director
Donald J. Listwin............... 40 Director
Joseph W. Goodman(3)............ 63 Director
Peter Y. Chung(3)............... 31 Director
</TABLE>
- --------
(1) Member of the Employee Stock Option Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
Michael J. Fitzpatrick has been Chairman of the Board since April 1999 and
President and Chief Executive Officer since October 1997. From July 1994 to
October 1997, Mr. Fitzpatrick served as President and Chief Executive Officer
of Pacific Telesis Enterprises, a service provider. While at Pacific Telesis,
Mr. Fitzpatrick also served as Executive Vice President of Marketing and Sales
from January 1994 to July 1994 and Executive Vice President of Statewide
Markets with Pacific Bell, an affiliate of Pacific Telesis, from September
1993 to January 1994. From October 1991 to August 1993, Mr. Fitzpatrick was
President and Chief Executive Officer of Network Systems Corporation, an
internetworking company. Mr. Fitzpatrick also serves as a director of
NorthPoint Communications Group, Inc., a national provider of local data
network services. Mr. Fitzpatrick received a B.A. from Duke University.
Ming Shih, one of our founders, was promoted to Senior Vice President, Sales
and Marketing in July 1998. Prior to that he served as corporate vice
president as well as in various senior management roles at E-TEK, with
responsibility for engineering, manufacturing and sales and marketing. Mr.
Shih received an M.S. from the Illinois Institute of Technology and an M.S.
from the Florida Institute of Technology.
Sanjay Subhedar joined us in December 1997 as Vice President, Finance and
Chief Financial Officer and was promoted to Senior Vice President, Operations
and Chief Financial Officer in July 1998. Mr. Subhedar was also appointed as
our Secretary in March 1998. From February 1986 to July 1996, Mr. Subhedar
served as Chief Financial Officer of StrataCom, Inc., a wide area networking
company. Following StrataCom's merger with Cisco Systems, Inc., an
internetworking company, in July 1996, Mr. Subhedar served as Vice President
of Cisco's WAN Business Unit until October 1997.
Mr. Subhedar received a B.S. from the University of Bombay, India, and an
M.B.A. from Indiana University.
Philip J. Anthony joined us in June 1998 as Vice President, Engineering.
Prior to joining us, Dr. Anthony served in various capacities at Lucent
Technologies Inc., a manufacturer of communications systems, software and
products (and at its predecessors Bell Laboratories and AT&T
31
<PAGE>
Corp.), most recently as Director of Passive Devices and Integrated Optical
Modules in the Optoelectronic Business of the Lucent Microelectronics Group
from October 1997 to June 1998. From September 1987 to October 1997, he served
as the department head of various research and development departments in the
photonics laboratories of Bell Laboratories. Dr. Anthony received a B.S. from
the University of Dayton, and an M.S. and Ph.D. from the University of
Illinois. He is a fellow of the IEEE and serves as the Vice President of
Publications for the Lasers and Electro-Optics Society.
Jim Northington joined us in July 1998 as Vice President, Manufacturing.
From November 1994 to July 1998, Mr. Northington served in various capacities
at SMART Modular Technologies, Inc., a manufacturer of computer memory modules
and cards. While at SMART Modular, he served as the Vice President, Worldwide
Operations from November 1997 to July 1998, as Vice President, Quality
Assurance and Corporate Development from July 1996 to November 1997, and as
Vice President, Operations from November 1994 to July 1996. From August 1989
to November 1994, Mr. Northington was a Principal at APS Products where, as a
self-employed consultant, he provided manufacturing operations expertise to
clients with a primary focus on adapter cards, peripherals and systems
products. Mr. Northington received a B.S. from Long Beach State College.
William H. Diamond, Jr. joined us as Vice President, Marketing in October
1998. Prior to joining us, Mr. Diamond served as Director of Marketing for
Lucent Technologies Optoelectronics, a manufacturer of fiber optic components
and subsystems for communications applications, from July 1997 to October
1998. From April 1996 to July 1997, Mr. Diamond was Managing Director, Europe,
Middle East, Africa, for Best Power Technology, Inc., a unit of General
Signal, a manufacturer of various industrial and electronic goods. Prior to
joining Best Power, Mr. Diamond served as UK General Manager and European
Sales Manager for AT&T Microelectronics Europe from January 1996 to April
1996. While at AT&T Microelectronics Europe, Mr. Diamond also served as
European Marketing Director for Optoelectronics from April 1992 to January
1996 and UK General Manager from June 1994 to July 1996. Mr. Diamond received
a B.A. from Holy Cross College and an M.B.A. from Georgetown University.
Walter G. Kortschak has served as one of our directors since July 1997. He
was Chairman of the Board of Directors from July 1997 until April 1999. Mr.
Kortschak is a General Partner of Summit Partners, a private equity capital
firm in Palo Alto, California, where he has been employed since June 1989.
Summit Partners and its affiliates manage a number of venture capital funds,
including Summit Ventures IV, L.P., Summit Investors III, L.P. and Summit
Subordinated Debt Fund II, L.P. Mr. Kortschak serves as a director of several
privately held companies. Mr. Kortschak received a B.S. from Oregon State
University, an M.S. from The California Institute of Technology and an M.B.A.
from the University of California, Los Angeles.
David W. Dorman has served as one of our directors since June 1998. Mr.
Dorman is the Chief Executive Officer of the AT&T/BT Global Venture where he
has been employed since April 1999. Prior to that, Mr. Dorman was the
Chairman, President and Chief Executive Officer of PointCast Incorporated, a
company providing broadcast news through the Internet and corporate intranets.
Prior to joining PointCast in November 1997, Mr. Dorman served as the
Executive Vice President of SBC Communications from August 1997 to November
1997, following the merger of SBC and Pacific Telesis. Prior to that, Mr.
Dorman served as President and Chief Executive Officer of Pacific Bell from
July 1994 to August 1997. From 1981 to July 1994, Mr. Dorman held various
senior management positions at Sprint Corporation, a telecommunications
company. Mr. Dorman also serves as a director of 3Com Corporation, Science
Applications International Corporation, and Scientific-Atlanta, Inc.
Mr. Dorman received a B.S. from the Georgia Institute of Technology.
Donald J. Listwin has served as one of our directors since July 1998. Mr.
Listwin is an Executive Vice President at Cisco Systems, Inc., where he has
been employed since 1990. In April 1997, Mr. Listwin was named the Senior Vice
President of Cisco's Service Provider Line of Business. Prior
32
<PAGE>
to that, he was Senior Vice President of Cisco's Market Development from
August 1996 to April 1997, Vice President and General Manager of Cisco's
Access Business Unit from September 1995 to August 1996, and Vice President of
Marketing from September 1993 to September 1995. Mr. Listwin also serves as a
director of TIBCO Software Inc., a software company. Mr. Listwin received a
B.S. from the University of Saskatchewan, Canada.
Joseph W. Goodman has served as one of our directors since July 1998. Dr.
Goodman has served as Acting Dean of Engineering, Senior Associate Dean of
Engineering, and Chairman of the Department of Electrical Engineering at
Stanford University. He has been employed at Stanford University in various
capacities since 1963, and has held the William Ayer Chair of Electrical
Engineering since 1988. He received a B.A. degree from Harvard University and
M.S. and Ph.D. degrees from Stanford University.
Peter Y. Chung served as one of our directors from July 1997 until July 1998
and then rejoined our Board in December 1998. Mr. Chung is a General Partner
of Summit Partners, a private equity capital firm in Palo Alto, California,
where he has been employed since August 1994. Summit Partners and its
affiliates manage a number of venture capital funds, including Summit Ventures
IV, L.P., Summit Investors III, L.P. and Summit Subordinated Debt Fund II,
L.P. From August 1989 to July 1992, Mr. Chung worked in the Mergers and
Acquisitions Department of Goldman, Sachs & Co. Mr. Chung also serves as a
director of Splash Technology Holdings, Inc., a developer of color server
systems, and Ditech Communications Corporation, a telecommunications equipment
company, as well as several privately held companies. Mr. Chung received a
B.A. from Harvard University and an M.B.A. from Stanford University.
Our Board of Directors is divided into three classes, designated Class I,
Class II and Class III. Each class of directors currently consists of two or
more directors. At each annual meeting of stockholders, one class of directors
is elected to a three-year term to succeed the directors of the same class
whose terms are then expiring. The Class I directors, whose terms will expire
at our 1999 Annual Meeting of Stockholders, are Joseph W. Goodman and Peter Y.
Chung. The Class II directors, whose terms will expire at our 2000 Annual
Meeting of Stockholders, are David W. Dorman and Donald J. Listwin. The Class
III directors, whose terms will expire at our 2001 Annual Meeting of
Stockholders, are Walter G. Kortschak and Michael J. Fitzpatrick.
Our executive officers are elected by, and serve at the discretion of, the
Board of Directors.
There are no family relationships among our directors or officers.
Board Committees
The Audit Committee of the Board of Directors makes recommendations
concerning the engagement of independent public accountants, reviews the plans
and results of the audit engagement with our independent public accountants,
reviews the independence of our independent public accountants, considers the
range of audit and non-audit fees and reviews the adequacy of our internal
accounting controls. Current members of the Audit Committee are Peter Y.
Chung, Joseph W. Goodman and Walter G. Kortschak.
The Compensation Committee of the Board of Directors determines compensation
for our executive officers and administers our 1998 Stock Plan, 1998 Director
Option Plan and 1998 Employee Stock Purchase Plan. The Compensation Committee
currently consists of David W. Dorman and Walter G. Kortschak.
The Employee Stock Option Committee of the Board of Directors determines
stock option grants for employees below the executive officer level. Michael
J. Fitzpatrick is currently the only member of the Employee Stock Option
Committee.
33
<PAGE>
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee serves as a member of the board of
directors or compensation committee of any other entity that has one or more
executive officers serving as a member of our Board of Directors or
Compensation Committee.
Director Compensation
Except for the grants of stock options, we do not currently compensate our
directors. Directors are reimbursed for out-of-pocket expenses incurred in
connection with attendance at meetings of the Board of Directors or any
committees. The directors of our company are generally eligible to participate
in our 1998 Stock Plan and, to the extent that a director is also an employee
of our company, to participate in our 1998 Employee Stock Purchase Plan. The
directors of our company who are not employees of our company and who do not
own more than 5% of our common stock will also receive periodic stock option
grants under our 1998 Director Option Plan. No options have been granted under
our 1998 Director Option Plan. In fiscal year 1999, Messrs. Dorman and Listwin
and Dr. Goodman received options to purchase 40,000 shares at an exercise
price of $10.00 per share under the 1997 Equity Incentive Plan.
Executive Compensation
The following table sets forth information regarding the compensation of our
Chief Executive Officer and our four next most highly compensated executive
officers who earned more than $100,000 during the fiscal year ended June 30,
1999. Compensation for fiscal years ended June 30, 1999, 1998 and 1997 is
included.
Other annual compensation primarily represents imputed interest income
resulting from a 0% loan made to several of the named executive officers to
fund the exercise of options to purchase our common stock. Mr. Diamond's other
annual compensation represents reimbursement for relocation expenses. The
restricted stock awards represent shares that were purchased at fair market
value, as determined by our Board of Directors. The awards are subject to
rights of repurchase which lapse periodically over a two- to four-year period.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------------- ---------------------
Restricted Securities
Other Annual Stock Underlying
Name and Principal Positions Year Salary Bonus Compensation Awards* Options
- ---------------------------- ---- -------- --------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Fitzpatrick.. 1999 $300,000 $ 135,000 $387,317 -- 433,000
Chairman of the Board,
President & 1998 188,077 300,000 258,000 2,825,000 --
Chief Executive Officer 1997 -- -- -- -- --
Ming Shih............... 1999 204,473 50,000 135,129 -- --
Senior Vice President, 1998 233,423 215,000 159,000 555,555 500,000
Sales & Marketing 1997 190,769 1,815,577 -- -- --
Sanjay Subhedar......... 1999 196,634 45,000 231,111 -- 300,000
Senior Vice President,
Operations, 1998 86,154 -- -- 1,200,000 --
Chief Financial Officer
and Secretary 1997 -- -- -- -- --
Philip J. Anthony....... 1999 166,920 69,200 63,239 125,000 125,000
Vice President of
Engineering 1998 -- -- -- -- --
1997 -- -- -- -- --
William H. Diamond,
Jr. ................... 1999 121,154 -- 77,682 -- 250,000
Vice President of
Marketing 1998 -- -- -- -- --
1997 -- -- -- -- --
</TABLE>
- --------
* As of June 30, 1999, the value of 2,475,000 restricted shares held by Mr.
Fitzpatrick was $117,717,188; the value of 758,218 restricted shares held
by Mr. Shih was $36,062,744; and the value of 1,125,000 restricted shares
held by Mr. Subhedar was $53,507,813.
34
<PAGE>
Option Grants in Fiscal Year 1999
The following table presents additional information concerning the option
awards shown in the Summary Compensation Table for fiscal year 1999.
All options were granted at an exercise price equal to the fair market value
of our common stock as determined by our Board of Directors on the date of the
grant. Our common stock was not publicly traded at the time of the option
grants listed below.
Potential realizable values are net of exercise price, but before taxes
associated with the exercise. Amounts represent hypothetical gains that could
be achieved for the respective options if exercised at the end of the option
term. The assumed 5% and 10% rates of stock price appreciation are provided in
accordance with rules of the Securities and Exchange Commission and do not
represent our estimate or projection of the future common stock price. Actual
gains, if any, on stock option exercises are dependent on the future
performance of our common stock, overall market conditions and the option
holders' continued employment through the vesting period.
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------
Potential Realizable Value at
Number of % of Total Assumed Annual Rates of
Securities Options Exercise Stock Price Appreciation for
Underlying Granted to or Base Option Term
Options Employees in Price Per Expiration ------------------------------
Name Granted * Fiscal Year Share Date 5% 10%
- ---- ---------- ------------ --------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Fitzpatrick.. 433,000 14.1% $10.00 7/30/08 $ 2,723,114 $ 6,900,905
Philip A. Anthony....... 50,000 1.6 10.00 7/30/08 314,447 796,871
William H. Diamond...... 250,000 8.1 10.00 10/19/08 1,572,237 3,984,356
Ming Shih............... -- -- -- -- -- --
Sanjay Subhedar......... 300,000 9.8 10.00 7/30/08 1,886,684 4,781,227
</TABLE>
- --------
* With the exception of Mr. Subhedar, all of the options included above
become exercisable at a rate of 1/4 of the shares subject to the option one
year after the date of the grant and an additional 1/48 of the shares at
the end of each month thereafter, subject to continued service as an
employee. One quarter of Mr. Subhedar's options vested on December 2, 1998,
an additional one quarter will vest on July 30, 1999, and the remaining
options will vest at the rate of 2% per month for 24 months. The term of
all options shown above is ten years.
Aggregated Option Exercises and Fiscal 1999 Year-End Option Values
The following table sets forth the number of shares acquired and the value
realized upon exercise of stock options during fiscal year 1999 and the number
of shares of our common stock subject to exercisable and unexercisable options
held as of June 30, 1999 by each of the executive officers named in the
Summary Compensation Table.
The value of "in-the-money" stock options represents the positive spread
between the exercise price of options and the fair market value of the
underlying shares on June 30, 1999.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Number of Underlying Unexercised In-the-Money Options at
Shares Options at Fiscal Year End Fiscal Year End ($)
Acquired Value --------------------------- ---------------------------
Name on Exercise Realized ($) Exercisable / Unexercisable Exercisable / Unexercisable
- ---- ----------- ------------ --------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Fitzpatrick.. 0 $0.00 0 433,000 $ 0.00 $ 12,286,375
Philip J. Anthony....... 0 0.00 31,250 143,750 886,719 4,078,906
William H. Diamond...... 0 0.00 0 250,000 0.00 7,093,750
Ming Shih............... 0 0.00 300,000 200,000 10,537,500 7,025,000
Sanjay Subhedar......... 0 0.00 75,000 225,000 2,128,125 6,384,375
</TABLE>
35
<PAGE>
Employment Agreements and Change of Control Arrangements
On July 23, 1997, we entered into an employment agreement with Jing Jong
Pan. Mr. Pan agreed to serve as an "E-TEK Fellow," and as the head of one of
our research and development divisions, for a minimum three-year period. Under
the agreement, we may, however, terminate Mr. Pan's employment with us or he
may resign. During the term of the agreement, Mr. Pan will be entitled to
receive an annual base salary of at least $200,000.
On October 1, 1997, we entered into an employment agreement with Michael J.
Fitzpatrick to serve as our President and Chief Executive Officer. The
agreement provides that Mr. Fitzpatrick is an "at-will" employee, that he will
be paid a minimum base salary of $300,000 per annum, and that he will be
eligible to receive an annual bonus of up to $300,000. The agreement also
provides that if Mr. Fitzpatrick is terminated for any reason other than
"cause," if he resigns for "good reason," or upon a change of control of E-
TEK:
. he will be entitled to receive a severance payment in an amount equal to
his monthly base salary and pro rated bonus until the earlier of the
expiration of 12 months or his commencement of employment with another
firm; and
. the vesting of all of his options and restricted stock will be
accelerated by 12 months.
In addition, the agreement provides that in the event that Mr. Fitzpatrick's
employment with us is terminated by him or us within 6 months following a
"change of control" of E-TEK, the vesting of all of his options and restricted
stock will be fully accelerated and Mr. Fitzpatrick will be entitled to
receive a severance payment in an amount equal to two times his base salary
and bonus.
On December 2, 1997, we entered into an employment agreement with Sanjay
Subhedar to serve as our Vice President and Chief Financial Officer. The
agreement provides that Mr. Subhedar is an "at-will" employee, that he will be
paid a minimum base salary of $175,000 per annum, and that he will be eligible
to receive an annual bonus of up to $100,000. The agreement also provides that
if Mr. Subhedar is terminated for any reason other than "cause," or if he
resigns for "good reason":
. he will be entitled to receive a severance payment in an amount equal to
his monthly base salary until the earlier of the expiration of 12 months
or his commencement of employment with another firm; and
. the vesting of all of his options and restricted stock will be
accelerated by 12 months.
In addition, the agreement provides that upon a "change of control" of E-
TEK, the vesting of all of his options and restricted stock will be
accelerated by 12 months (but will not be further accelerated beyond the
acceleration described in the foregoing sentence upon any subsequent
termination of his employment with us following a change of control).
On May 26, 1998, we entered into an employment agreement with Philip J.
Anthony to serve as our Vice President of Engineering. The agreement provides
that Mr. Anthony will be an "at-will" employee, that he will be paid a base
salary of $160,000 per annum (subject to annual review), and that he will be
entitled to receive a bonus of up to 30% of his then current base salary. The
agreement also provides that in the event that Mr. Anthony is terminated for
any reason other than "cause," or if he resigns for "good reason":
. he will be entitled to receive a severance payment in an amount equal to
his monthly base salary until the earlier of the expiration of 12 months
or his commencement of employment with another firm; and
. the vesting of all of his options and restricted stock will be
accelerated by 12 months.
36
<PAGE>
On July 21, 1998, we entered into an employment agreement with Jim
Northington to serve as our Vice President of Manufacturing. The agreement
provides that Mr. Northington will be an "at-will" employee, that he will be
paid a base salary of $160,000 per annum (subject to annual review), and that
he will be entitled to receive a bonus of up to 30% of his then current base
salary.
On September 21, 1998, we entered into an employment agreement with William
H. Diamond, Jr. to serve as our Vice President of Marketing. The agreement
provides that Mr. Diamond will be an "at-will" employee, that he will be paid
a base salary of $180,000 per annum (subject to annual review), and that he
will be entitled to receive a bonus of up to 30% of his then current base
salary. The agreement also provides that in the event that Mr. Diamond is
terminated for any reason other than "cause," or if he resigns for "good
reason":
. he will be entitled to receive a severance payment in an amount equal to
his monthly base salary until the earlier of the expiration of 12 months
or his commencement of employment with another firm; and
. the vesting of all of his options and restricted stock will be
accelerated by 12 months.
Stock Plans
1998 Employee Stock Purchase Plan
On August 14, 1998, our Board of Directors adopted the 1998 Employee Stock
Purchase Plan. Under the 1998 Purchase Plan, eligible employees may purchase
common stock at a price equal to 85% of the lower of the fair market value of
our common stock at the beginning or end of each six-month offering period.
Participation is limited to 10% of an employee's compensation (not to exceed
amounts allowed by the Internal Revenue Code). A total of 1,500,000 shares of
our common stock has been reserved for issuance under the 1998 Purchase Plan,
plus annual increases equal to the lesser of:
. 750,000 shares;
. 1% of the outstanding shares on such date; or
. such lesser amount as may be determined by the Board of Directors.
To date, 120,127 shares have been issued under the 1998 Purchase Plan.
1998 Stock Plan
At June 30, 1999, approximately 4,727,273 shares of common stock were
authorized for issuance under our 1998 Stock Plan, which serves as the
successor equity incentive program to our 1997 Equity Incentive Plan and 1997
Executive Equity Incentive Plan. The 1998 Stock Plan provides for the grant of
incentive stock options to employees (including officers and employee
directors) and for the grant of non-statutory stock options and stock purchase
rights to employees, directors and consultants. The following shares are
currently reserved for issuance under the 1998 Stock Plan:
. 3,000,000 shares of our common stock (plus shares which have been
reserved but unissued under our 1997 Plan);
. any shares returned to the 1997 Equity Incentive Plan and the 1997
Executive Equity Incentive Plan as a result of termination of options or
repurchase of shares by E-TEK; plus
. annual increases equal to the lesser of 3,000,000 shares, or 4% of the
outstanding shares.
Unless terminated sooner, the 1998 Stock Plan will terminate automatically
in September 2008. In fiscal year 1999, 1,139,151 options were granted under
this plan.
37
<PAGE>
1998 Director Option Plan
On August 14, 1998, our Board of Directors adopted the 1998 Director Option
Plan. A total of 250,000 shares of our common stock, plus an annual increase
equal to the optioned stock underlying options granted in the immediately
preceding year, have been reserved for issuance under the Director Plan. As of
June 30, 1999, 250,000 shares were available for grant under this plan.
Limitation of Liability and Indemnification
Our certificate of incorporation provides that a director of E-TEK will not
be personally liable for monetary damages to us or our stockholders for a
breach of fiduciary duty as a director, except for liability as a result of:
. a breach of the director's duty of loyalty to us or our stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. an act related to the unlawful stock repurchase or payment of a dividend
under Section 174 of the Delaware General Corporation Law; or
. transactions from which the director derived an improper personal
benefit.
This limitation of liability does not affect the availability of equitable
remedies, such as injunctive relief or rescission.
Our certificate of incorporation also authorizes us to indemnify our
officers, directors and other agents to the full extent permitted under the
Delaware General Corporation Law. We have entered into separate
indemnification agreements with our directors and executive officers that
provide broader indemnification protection than the indemnification provisions
contained in the Delaware General Corporation Law. The indemnification
agreements require us, among other things, to indemnify our officers and
directors against certain liabilities that may arise by reason of their status
or service as officers or directors (other than liabilities arising from
willful misconduct of a culpable nature), and to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified. These agreements extend similar indemnification arrangements to
stockholders whose representatives serve as our directors.
At present, there is no pending litigation or proceeding involving our
directors, officers, employees or agents where indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding which may result in a claim for indemnification.
38
<PAGE>
CERTAIN TRANSACTIONS
Recapitalization
Until July 23, 1997, E-TEK was owned by two founders. In July 1997, we
underwent a recapitalization in which we issued 30 million shares of
mandatorily redeemable class A convertible preferred stock representing a
controlling stake in E-TEK for $120 million. This convertible preferred stock
had significant rights and preferences over the common stock, including rights
to elect a majority of our directors, cumulative dividends and a liquidation
preference. In connection with the recapitalization, we also repurchased $120
million in common stock from the founders.
Following the completion of our initial public offering, all shares of
convertible preferred stock converted into an aggregate of 30,000,000 shares
of common stock.
In connection with the recapitalization, E-TEK, the purchasers of
convertible preferred stock and the founders entered into a registration
agreement pursuant to which these shareholders acquired registration rights in
respect of the shares of our capital stock acquired in connection with the
recapitalization. See "Description of Capital Stock--Registration Rights".
Pursuant to the recapitalization, we entered into agreements with the
founders and with other executives of E-TEK pursuant to which these persons
purchased shares of common stock with the proceeds of a loan from us.
The purchasers of convertible preferred stock and common stock in connection
with the recapitalization included, among others, the following directors,
executive officers and holders of more than 5% of the outstanding common
stock, and certain of their family members:
<TABLE>
<CAPTION>
No. of Purchase Type of
Name Title Shares Price Stock
- ---- ----- ---------- ------------ ---------------------
<S> <C> <C> <C> <C>
Summit/E-TEK Holdings, 27,000,000 $108,000,000 Convertible Preferred
L.L.C. (1)............. --
Ming Shih............... Senior Vice President, 1,111,111(2) 2,555,555 Common
Sales and Marketing
Kung Shih............... President of FibX 1,111,110(2) 2,555,553 Common
</TABLE>
- --------
(1) Walter G. Kortschak and Peter Y. Chung, members of our Board of Directors,
were affiliated with Summit/E-TEK Holdings, L.L.C. Certain of these shares
are currently held directly by Summit Subordinated Debt Funds II, L.P. and
Summit Investors III, L.P. See "Management" and "Principal and Selling
Stockholders".
(2) Includes 555,555 shares that are subject to a right of repurchase by E-
TEK, which lapses periodically over a three-year period which commenced in
July 1997. Ming Shih and Kung Shih are brothers.
Indemnification Agreements
We have entered into indemnification agreements with each of our directors
and executive officers. The provisions of these agreements are described under
"Management--Limitation of Liability and Indemnification".
Loans to Officers
From time to time we have made interest-free loans to certain of our
executive officers to fund the exercise of stock options held by these
executive officers. These loans are evidenced by promissory notes which mature
on the dates set forth below, subject to certain acceleration events. These
39
<PAGE>
promissory notes are secured by the shares of common stock purchased with the
proceeds of these loans, and are either full recourse or substantial recourse
against the assets of the borrower. The following table sets forth the name
and position of the relevant officers, certain information with respect to the
promissory notes issued to evidence such loans, and the number of shares of
our common stock purchased with the proceeds of these loans.
<TABLE>
<CAPTION>
Principal Shares Issuance Maturity
Name and Position(s) Amount Purchased Date Date
- -------------------- ---------- --------- -------- ----------
<S> <C> <C> <C> <C>
Michael J. Fitzpatrick............... $5,198,000 2,260,000 11/13/97 11/13/2002
Chairman, President and Chief
Executive Officer 1,299,500 565,000 11/13/97 11/13/2002
Sanjay Subhedar...................... 3,900,000 1,200,000 12/11/97 12/11/2002
Senior Vice President, Operations,
Chief Financial Officer and Secre-
tary
Ming Shih............................ 1,277,776 555,555 07/23/97 07/23/2006
Senior Vice President, Sales and
Marketing 1,277,778 555,556 07/23/97 07/23/2006
Philip J. Anthony.................... 1,250,000 125,000 06/25/98 06/25/2003
Vice President, Engineering
</TABLE>
During fiscal 1999, Mr. Fitzpatrick paid $805,000, Mr. Subhedar paid
$243,750, and Mr. Shih paid $2,094,133 against their loans.
We believe that all transactions with affiliates described above, other than
the interest-free loans made to executive officers, were made on terms no less
favorable to us than could have been obtained from unaffiliated third parties.
All future transactions, including loans, between us and our officers,
directors, principal stockholders and their affiliates will be approved by a
majority of the Board of Directors, including a majority of the independent
and disinterested members of the Board of Directors, and will be on terms no
less favorable to us than could be obtained from unaffiliated third parties.
40
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of June 30, 1999, and as adjusted
to reflect the sale of the shares offered hereby, by:
. each of our stockholders who is known to be the beneficial owner of more
than 5% of our common stock;
. each of our directors;
. each of our executive officers listed in the Summary Compensation Table;
. all of our directors and executive officers as a group; and
. all other selling stockholders.
Except as indicated herein, and as provided by applicable community property
laws, the persons named in the table have sole voting and investment power
with respect to all shares of common stock.
The applicable percentage of ownership prior to completion of the offering
is based on 62,054,438 shares of common stock outstanding as of June 30, 1999.
The applicable percentage ownership after completion of the offering gives
effect to the sale of 6,000,000 shares of common stock in the offering.
Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission. For purposes of calculating beneficial
ownership, common stock subject to options currently exercisable or
exercisable on or prior to 60 days after June 30, 1999 are deemed outstanding
for computing the percentage ownership of the person holding such options, but
are not deemed outstanding for computing the percentage ownership of any other
person.
<TABLE>
<CAPTION>
Shares Shares
Beneficially Owned Beneficially Owned
Before Offering Number After Offering
Name and Address of ------------------ of Shares ------------------
Beneficial Owners(1) Number Percent Being Offered Number Percent
-------------------- ---------- ------- ------------- ---------- -------
<S> <C> <C> <C> <C> <C>
Summit Ventures IV, L.P.
Summit Subordinated Debt
Fund II, L.P.
Summit Investors III,
L.P.(2)
c/o Summit Partners
499 Hamilton Avenue,
Suite 200
Palo Alto, California
94301.................. 22,199,305 35.8% 504,988 21,694,317 32.8%
Jing Jong Pan(3).......... 8,891,000 14.3 562,708 8,328,292 12.6
Theresa Pan(4)............ 8,139,500 13.1 515,146 7,624,354 11.5
Peter Y. Chung(5)......... 2,108,934 3.4 47,973 2,060,961 3.1
Walter G. Kortschak(6).... 22,199,305 35.8 504,988 21,694,317 32.8
Michael J.
Fitzpatrick(7)........... 2,584,382 4.2 183,188 2,401,194 3.6
David W. Dorman(8)........ 40,000 * -- 40,000 *
Joseph W. Goodman(8)...... 40,000 * -- 40,000 *
Donald J. Listwin(8)...... 40,000 * -- 40,000 *
Ming Shih(9).............. 1,070,718 1.7 -- 1,070,718 1.6
Sanjay Subhedar(10)....... 1,276,195 2.1 71,200 1,204,995 1.8
Philip J. Anthony (11).... 174,787 * -- 174,787 *
Jim Northington(12)....... 56,891 * -- 56,891 *
William H. Diamond, Jr.... 339 * -- 339 *
All directors and
executive officers as a
Group (11 persons)(13)... 27,482,617 43.8 759,376 26,723,241 40.4
Other Selling Stockholders
as a group............... 2,571,832 4.1 162,770 2,409,062 3.6
</TABLE>
- --------
* Represents beneficial ownership of less than 1% of the outstanding shares
of our common stock.
41
<PAGE>
(1) Except as otherwise noted, the address of each person listed in the table
is c/o E-TEK Dynamics, Inc., 1865 Lundy Avenue, San Jose, California
95131.
(2) Represents 19,868,378 shares held by Summit Ventures IV, L.P., 2,108,934
shares held by Summit Subordinated Debt Fund II, L.P. and 221,993 shares
held by Summit Investors III, L.P. The 504,988 shares to be sold
represents 451,964 shares to be sold by Summit Ventures IV, L.P., 47,974
shares to be sold by Summit Subordinated Debt Fund II, L.P. and 5,050
shares to be sold by Summit Investors III, L.P. If the underwriters'
option to purchase additional shares in the offering is exercised in
full, an additional 805,500 shares will be sold by Summit Ventures IV,
L.P., an additional 85,500 shares will be sold by Summit Subordinated
Debt Fund II, L.P., and an additional 9,000 shares will be sold by Summit
Investors III, L.P.
(3) Mr. Pan is the spouse of Theresa Pan.
(4) Ms. Pan is the spouse of Jing Jong Pan and the sister of Ming Shih. All
such shares are the separate property of Ms. Pan.
(5) Represents 2,108,934 shares held by Summit Subordinated Debt Fund II,
L.P. Mr. Chung is a member of Summit Partners SD II, L.L.C., which is the
general partner of Summit Subordinated Debt Fund II, L.P. Mr. Chung
disclaims beneficial ownership of such shares except to the extent of his
pecuniary interest therein.
(6) Represents 19,868,378 shares held by Summit Ventures IV, L.P., 2,108,934
shares held by Summit Subordinated Debt Fund II, L.P. and 221,993 shares
held by Summit Investors III, L.P. Mr. Kortschak, a director of E-TEK, is
(i) a general partner of Stamps, Woodsum & Co. IV, which is the general
partner of Summit Ventures IV, L.P. and (ii) a member of Summit Partners
SD II, L.L.C., which is the general partner of Summit Subordinated Debt
Fund II, L.P. Mr. Kortschak is also a general partner of Summit Investors
III, L.P. Mr. Kortschak disclaims beneficial ownership of such shares
except to the extent of his pecuniary interest therein.
(7) Includes 108,251 shares of common stock issuable upon the exercise of
options.
(8) Represents shares of common stock issuable upon the exercise of options.
(9) Ming Shih is the brother of Theresa Pan. Includes 312,500 shares of
common stock issuable upon the exercise of options.
(10) Includes 150,000 shares of common stock issuable upon the exercise of
options.
(11) Includes 48,958 shares of common stock issuable upon the exercise of
options.
(12) Includes 54,166 shares of common stock issuable upon the exercise of
options.
(13) Includes shares of common stock of E-TEK issuable upon the exercise of
stock options and shares beneficially owned by Summit Ventures IV, L.P.,
Summit Subordinated Debt Fund II, L.P. and Summit Investors III, L.P.,
with which Messrs. Chung and Kortschak are associated, as to which shares
they disclaim beneficial ownership, except to the extent of their
pecuniary interest therein. See Notes (5)-(12).
42
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of 300,000,000 shares of common stock,
$.001 par value, and 25,000,000 shares of undesignated preferred stock, $.01
par value. The following is a summary of the material terms of our capital
stock. You should refer to our certificate of incorporation and our bylaws for
more detailed information. Copies of our certificate of incorporation and our
bylaws have been filed with the Securities and Exchange Commission as exhibits
to our registration statement of which this prospectus forms a part.
Common Stock
As of June 30, 1999, there were 62,054,438 shares of our common stock
outstanding. As of July 22, 1999 we had approximately 297 holders of record of
our common stock. Assuming no exercise of the underwriters' option to purchase
additional shares and no exercise of options to purchase common stock after
June 30, 1999, there will be 66,054,438 shares of our common stock outstanding
after giving effect to the sale of all the shares of our common stock to be
sold in connection with the offering.
Holders of our common stock are entitled to one vote per share on all
matters to be voted upon by our stockholders. Holders of common stock do not
have cumulative voting rights under our certificate of incorporation or
bylaws. Therefore, holders of a majority of the shares voting for the election
of directors can elect all of our directors, subject to the classified board
provisions set forth in our certificate of incorporation. If this happens, the
holders of the remaining shares will not be able to elect any directors.
The shares of common stock offered in this offering, when issued, will be
fully paid and nonassessable and will not be subject to any redemption or
sinking fund provisions. Holders of common stock do not have any preemptive,
subscription or conversion rights. Holders of common stock are entitled to
receive such dividends as may be declared from time to time by the Board of
Directors out of funds legally available for that purpose, subject to the
rights of preferred stockholders and the terms of any existing or future
agreements between us and our debt holders. Since January 1, 1995, we have not
declared or paid any cash dividends on our common stock. We presently intend
to retain future earnings, if any, for use in the operation and expansion of
our business and do not anticipate paying cash dividends in the foreseeable
future. See "Dividend Policy".
In the event of the liquidation, dissolution or winding up of E-TEK, the
holders of our common stock are entitled to share ratably in all assets
legally available for distribution after payment of all debts and other
liabilities and subject to the prior rights of any holders of preferred stock
then outstanding.
Preferred Stock
We are authorized to issue 25,000,000 shares of preferred stock. The Board
of Directors has the authority to issue preferred stock in one or more series
and to fix the price, rights, preferences, privileges and restrictions of the
shares, including:
. dividend rights;
. dividend rates;
. conversion rights;
. voting rights;
. terms of redemption;
43
<PAGE>
. redemption prices;
. liquidation preferences; and
. the number of shares constituting a series or the designation of a
series.
Our Board can issue preferred stock without any further vote or action by
our stockholders. The issuance of preferred stock could have the effect of
delaying, deferring or preventing a change in control of E-TEK without further
action by the stockholders and may adversely affect the market price, and the
voting and other rights, of the holders of common stock. The issuance of
preferred stock with voting and conversion rights may adversely affect the
voting power of the holders of common stock, including the loss of voting
control to others. We have no current plans to issue any shares of preferred
stock.
Anti-Takeover Effects of the Certificate of Incorporation, Bylaws and Delaware
Law
Certificate of Incorporation and Bylaws
Our certificate of incorporation provides that the Board of Directors is
divided into three classes of directors with each class serving a staggered
three-year term. Our classified board may tend to discourage a third party
from making a tender offer or otherwise attempting to obtain control of E-TEK.
Our classified board may also maintain the incumbency of our Board of
Directors, as it generally makes it more difficult for stockholders to replace
a majority of the directors. Our certificate of incorporation also eliminates
the right of stockholders to act without a meeting. This and other provisions
may have the effect of deterring hostile takeovers or delaying changes in
control or management of E-TEK. The amendment of any of these provisions would
require approval by holders of at least two thirds of the combined voting
power of all of our outstanding common stock and preferred stock entitled to
vote. Amendment of these provisions would not require approval if an amendment
is approved by a majority of our directors not affiliated with or associated
with any person or entity holding 20% or more of the voting power of our
outstanding capital stock.
Delaware Takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law,
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder, unless:
. prior to that date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (x) by persons who are
directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
. on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
44
<PAGE>
Section 203 defines business combination to include:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
. subject to specified exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of any class or series of stock of the
corporation beneficially owned by the interested stockholder; or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Registration Rights
The holders of a majority of the shares held by certain investors in E-TEK
at the time of the recapitalization may demand registration by us of all or
any portion of their shares of our common stock in connection with the sale of
shares by these investors. There is no limit to the number of these demand
registrations, but we are not obligated to pay the expenses of more than three
demand registrations on Form S-1. These investors are also entitled to notice
of, and to participate in, any registration proposed by us other than
registrations related to acquisitions or employee stock plans. These investors
have agreed not to sell any of our securities during (1) the seven days before
an offering starts and (2) the 90 days after the effectiveness of the
registration statement for this offering, and for any underwritten
registration (demand or piggyback) of shares of our common stock that includes
shares registered pursuant to the rights granted under the registration
agreement.
In connection with our acquisition of ElectroPhotonics, we granted
registration rights with respect to the 400,062 shares of our common stock we
issued to the former ElectroPhotonics shareholders. We are required to file a
registration statement on Form S-3 in early 2000 to register their resales of
these shares. Subject to certain limitations, we are required to keep the
registration statement effective for three years and one month. Prior to the
effectiveness of this registration statement, these shareholders are also
entitled to notice of, and to participate in, any other registered offering by
us other than registrations related to acquisitions, employee stock plans or
the conversion of debt securities. We are required to pay the expenses of
these registrations.
In connection with our proposed acquisition of Kaifa, we intend to grant
registration rights with respect to the shares of our common stock we issue to
the Kaifa shareholders. These shareholders are entitled to notice of, and to
participate in, any registered offering by us other than this offering and
registrations related to acquisitions, employee stock plans or the conversion
of debt securities. We are required to pay the expenses of these
registrations. These registration rights expire one year after the closing
date of the acquisition.
Listing
Our common stock is quoted on the Nasdaq National Market under the symbol
"ETEK."
Transfer Agent and Registrar
The Transfer Agent and Registrar for the common stock is EquiServe, and
their telephone number is (781) 575-3400.
45
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding an aggregate of
66,054,438 shares of common stock, assuming no exercise of the underwriters'
option to purchase additional shares or stock options after June 30, 1999. All
of the 6,000,000 shares sold in the offering (6,900,000 shares if the
underwriters' option to purchase additional shares is exercised in full) will
be freely tradable without restriction or further registration under the
Securities Act, except for any shares purchased by "affiliates" of E-TEK as
that term is defined in Rule 144 under the Securities Act. Sales by affiliates
will be subject to certain limitations and restrictions described below. Of
the remaining 60,054,438 shares, approximately 44,411,074 shares are subject
to lock-up agreements in which the holders of the shares have agreed not to
sell any shares for a period of 90 days after the date of this prospectus.
8,719,500 shares are freely tradable without restriction or further
registration under the Securities Act. The remaining shares not subject to
lock-up agreements may be sold without registration under the Securities Act
to the extent permitted by Rule 144 or another exemption under the Securities
Act, which rules are summarized below. Of these shares, 6,368,259 shares are
subject to volume limitations contained in Rule 144 and 555,605 shares may be
resold without regard to those volume limitations.
Rule 144
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares of our common stock for at least one year would be
entitled to sell within any three-month period a number of shares that does
not exceed the greater of either of the following:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately 660,000 shares immediately after this offering, or
. the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to that sale.
Sales under Rule 144 are subject to specific manner of sale provisions and
notice requirements and to the availability of current public information
about E-TEK.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
"affiliates" at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an "affiliate," is
entitled to sell its shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering. The sale of these shares, or the perception that
sales will be made, could adversely affect the price of our common stock after
the offering because a greater supply of shares would be, or would be
perceived to be, available for sale in the public market.
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect, any
of our employees, consultants or advisors who purchases shares from us in
connection with a compensatory stock plan or other written agreement is
eligible to resell those shares in reliance on Rule 144, but without
compliance with various restrictions, including the holding period, contained
in Rule 144.
On February 5, 1999, we filed a Registration Statement on Form S-8
registering 11,568,769 shares of our common stock subject to outstanding
options or reserved for future issuance under our 1997 Equity Incentive Plan,
1997 Executive Equity Incentive Plan, 1998 Stock Plan, 1998 Director Option
Plan and 1998 Employee Stock Purchase Plan.
46
<PAGE>
On March 26, 1999, we filed a Registration Statement on Form S-8 registering
5,816,666 shares of our common stock subject to outstanding options or
reserved for future issuance under our 1997 Equity Incentive Plan and 1997
Executive Equity Incentive Plan.
As of June 30, 1999, there were a total of 13,618,392 shares of common stock
subject to outstanding options granted under all of our stock option plans
including the 1998 Stock Plan, the 1998 Employee Stock Purchase Plan and the
1998 Director Option Plan. Of those, 5,710,835 shares were vested as of June
30, 1999, and an additional 529,033 will become vested within 90 days of the
effective date of this offering.
Registration Rights
Upon completion of this offering, the holders of 43,821,082 shares of our
common stock or their transferees, will be entitled to various rights with
respect to the registration of such shares under the Securities Act. See
"Description of Capital Stock--Registration Rights".
47
<PAGE>
VALIDITY OF COMMON STOCK
The validity of the shares of common stock offered hereby will be passed
upon for E-TEK by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California and for the underwriters by Sullivan & Cromwell, Los
Angeles, California.
EXPERTS
The consolidated financial statements as of June 30, 1998 and 1999, and for
each of the three years in the period ended June 30, 1999, included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on their authority
as experts in auditing and accounting.
The financial statements of ElectroPhotonics as of April 30, 1999 and July
31, 1998 and for the nine-month period ended, April 30, 1999 and the year
ended July 31, 1998 included in this prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, chartered accountants,
given on their authority as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to the shares of common stock offered in
this offering. This prospectus does not contain all of the information set
forth in the registration statement and the exhibits and schedules to the
registration statement. For further information with respect to E-TEK and the
shares of common stock offered in the offering, reference is made to the
registration statement and the exhibits and schedules to the registration
statement. Statements contained in this prospectus as to the contents of any
contract or any other document are not necessarily complete, and reference is
made to the copy of the contract or other document filed as an exhibit to the
registration statement.
We file annual, quarterly and special reports, proxy statements and other
information with the Commission. Our filings with the Commission are available
to the public over the Internet at the Commission's website at
http://www.sec.gov. This site contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission. You may also read and copy any document we
file with the Commission at its public reference room at 450 Fifth Street,
N.W., Washington, D.C. 20549. You may obtain information on the operation of
the public reference room by calling the Commission at 1-800-SEC-0330.
We intend to furnish to our stockholders annual reports containing our
audited financial statements and quarterly reports containing unaudited
interim financial information for the first three fiscal quarters of each
fiscal year.
48
<PAGE>
E-TEK DYNAMICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
E-TEK Dynamics ----
<S> <C>
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheet................................................. F-3
Consolidated Statement of Operations....................................... F-4
Consolidated Statement of Stockholders' Equity ............................ F-5
Consolidated Statement of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements................................. F-7
ElectroPhotonics Corporation
Auditors' Report........................................................... F-22
Balance Sheets............................................................. F-23
Statements of Operations and Deficit....................................... F-24
Statements of Cash Flows................................................... F-25
Notes to Financial Statements.............................................. F-26
Unaudited Pro Forma Consolidated Statement of Operations................... F-37
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
E-TEK Dynamics, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of E-
TEK Dynamics, Inc. and its subsidiaries at June 30, 1998 and 1999 and the
results of their operations and their cash flows for each of the three years
in the period ended June 30, 1999, in conformity with generally accepted
accounting principles. These 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 of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
July 20, 1999, except as to
Note 14, which is as of July 27, 1999
F-2
<PAGE>
E-TEK DYNAMICS, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
June 30,
------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 21,918 $ 55,090
Accounts receivable...................................... 15,463 29,831
Advance to joint venture................................. 7,000 --
Inventories.............................................. 6,909 20,367
Deferred tax assets...................................... 7,873 13,542
Other current assets..................................... 343 3,542
-------- --------
Total current assets................................... 59,506 122,372
Property and equipment, net................................ 30,872 61,874
Long-term investments...................................... -- 11,665
Goodwill and other intangibles, net........................ -- 34,585
-------- --------
Total assets........................................... $ 90,378 $230,496
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 8,281 $ 17,762
Accrued liabilities...................................... 16,187 26,352
Income taxes payable..................................... -- 4,337
Current portion of capital lease obligations............. 1,240 1,277
Current portion of long-term debt........................ 216 6,101
-------- --------
Total current liabilities.............................. 25,924 55,829
Capital lease obligations, net of current portion.......... 3,557 2,281
Long-term debt, net of current portion..................... 10,251 19,232
Deferred income taxes...................................... -- 3,481
-------- --------
Total liabilities...................................... 39,732 80,823
-------- --------
Commitments and contingencies (Note 13)
Mandatorily Redeemable Convertible Preferred Stock, no par
value, 30,000 shares authorized, issued and outstanding;
none authorized, issued or outstanding ................... 125,144 --
-------- --------
Stockholders' equity:
Preferred Stock, none authorized, issued or outstanding;
$0.01
par value, 25,000 shares authorized, none issued and
outstanding............................................. -- --
Common Stock, no par value, 65,000 shares authorized,
27,299 shares issued and outstanding; $0.001 par value,
300,000 shares authorized, 62,054 shares issued and
outstanding............................................. 19,468 63
Additional paid-in capital............................... -- 216,124
Notes receivable from stockholders....................... (14,215) (11,454)
Deferred compensation.................................... (4,753) (3,805)
Distribution in excess of net book value................. (83,901) (83,901)
Retained earnings........................................ 8,903 32,646
-------- --------
Total stockholders' equity............................. (74,498) 149,673
-------- --------
Total liabilities and stockholders' equity............. $ 90,378 $230,496
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
E-TEK DYNAMICS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal
Year Ended June 30,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Net revenues...................................... $73,076 $106,924 $172,664
Cost of goods sold................................ 30,599 49,063 85,123
------- -------- --------
Gross profit.................................... 42,477 57,861 87,541
------- -------- --------
Operating expenses:
Research and development........................ 3,953 7,702 14,687
Selling, general and administrative............. 15,290 21,097 24,516
Purchased in-process research and development... -- -- 4,207
Amortization of intangibles..................... -- -- 300
------- -------- --------
Total operating expenses...................... 19,243 28,799 43,710
------- -------- --------
Operating income.................................. 23,234 29,062 43,831
Interest income................................... 962 1,992 3,784
Interest expense.................................. (571) (988) (1,573)
------- -------- --------
Income before income taxes........................ 23,625 30,066 46,042
Provision for income taxes........................ 8,477 12,142 18,417
------- -------- --------
Net income........................................ 15,148 17,924 27,625
Convertible Preferred Stock accretion............. -- 9,021 3,882
------- -------- --------
Net income available to Common Stockholders....... $15,148 $ 8,903 $ 23,743
======= ======== ========
Net income per share:
Basic........................................... $ 0.30 $ 0.39 $ 0.55
Diluted......................................... $ 0.30 $ 0.32 $ 0.45
Shares used in net income per share calculations:
Basic........................................... 50,000 22,970 43,152
Diluted......................................... 50,000 55,561 61,746
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
E-TEK DYNAMICS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Stock
-----------------
Notes Distribution
Additional Receivable in Excess of Total
Paid-in from Deferred Net Book Retained Stockholders'
Shares Amount Capital Stockholders Compensation Value Earnings Equity
------- -------- ---------- ------------ ------------ ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1996................... 50,000 $ 1,963 $ -- $ -- $ -- $ -- $ 18,988 $ 20,951
Net income.............. -- -- -- -- -- -- 15,148 15,148
------- -------- -------- -------- ------- -------- -------- ---------
Balance at June 30,
1997................... 50,000 1,963 -- -- -- -- 34,136 36,099
Repurchase of Common
Stock.................. (30,000) (1,963) -- -- (83,901) (34,136) (120,000)
Exercise of Common Stock
options for cash....... 88 210 -- -- -- -- -- 210
Exercise of Common Stock
options for Notes
Receivable from
stockholders........... 7,211 18,215 -- (13,615) (4,600) -- -- --
Deferred compensation
related to Common Stock
options................ -- 1,043 -- -- (1,043) -- -- --
Amortization of deferred
compensation related to
Common Stock options... -- -- -- -- 290 -- -- 290
Imputed interest and
compensation expense
related to Notes
Receivable............. -- -- -- (600) 600 -- -- --
Convertible Preferred
Stock accretion........ -- -- -- -- -- -- (9,021) (9,021)
Net income.............. -- -- -- -- -- -- 17,924 17,924
------- -------- -------- -------- ------- -------- -------- ---------
Balance at June 30,
1998................... 27,299 19,468 -- (14,215) (4,753) (83,901) 8,903 (74,498)
Effect of Delaware
re-incorporation....... -- (19,441) 19,441 -- -- -- -- --
Exercise of Common Stock
options for cash....... 158 -- 460 -- -- -- -- 460
Issuance of Common Stock
under Employee Stock
Purchase Plan.......... 120 -- 1,225 -- -- -- -- 1,225
Exercise of Common Stock
options for Notes
Receivable from
Shareholders........... 125 1 1,249 (934) (316) -- -- --
Repurchase of Common
Stock.................. (48) -- (131) 93 38 -- -- --
Deferred Compensation
related to Common Stock
options................ -- -- 1,413 -- (1,413) -- -- --
Amortization of deferred
compensation related to
Common Stock options... -- -- -- -- 540 -- -- 540
Imputed interest and
compensation expense
related to Notes
Receivable............. -- -- -- (960) 960 -- -- --
Repayment of Notes
Receivable from
Stockholders........... -- -- -- 4,562 1,139 -- -- 5,701
Issuance of Common Stock
in conjunction with
initial public
offering, net of
issuance costs......... 4,000 4 43,386 -- -- -- -- 43,390
Convertible Preferred
Stock accretion........ -- -- -- -- -- -- (3,882) (3,882)
Conversion of
Convertible Preferred
Stock to Common Stock.. 30,000 30 128,996 -- -- -- -- 129,026
Issuance of Common Stock
in conjunction with the
purchase of
ElectroPhotonics....... 400 1 13,708 -- -- -- -- 13,709
Increase in investment
carrying value in ADVA
(Note 5)............... -- -- 5,222 -- -- -- -- 5,222
Tax benefit from stock
options................ -- -- 1,155 -- -- -- -- 1,155
Net income.............. -- -- -- -- -- -- 27,625 27,625
------- -------- -------- -------- ------- -------- -------- ---------
Balance at June 30,
1999................... 62,054 $ 63 $216,124 $(11,454) $(3,805) $(83,901) $ 32,646 $ 149,673
======= ======== ======== ======== ======= ======== ======== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
E-TEK DYNAMICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Fiscal Years ended
June 30,
-----------------------------
1997 1998 1999
-------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income..................................... $ 15,148 $ 17,924 $ 27,625
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 3,086 6,148 11,805
Stock compensation expense.................... -- 890 1,500
Imputed interest income....................... -- (600) (960)
Tax benefits from employee stock options...... -- -- 1,155
Purchased in-process research and
development.................................. -- -- 4,207
Changes in assets and liabilities (net of the
effect of the acquisition of
ElectroPhotonics):
Accounts receivable.......................... (9,977) 586 (14,238)
Inventories.................................. (2,519) (2,808) (13,458)
Deferred income taxes........................ (2,478) (4,017) (5,668)
Other current assets......................... 160 342 (2,729)
Accounts payable............................. 3,273 3,567 8,924
Accrued liabilities.......................... 5,909 6,875 9,681
Income taxes payable......................... 854 (1,215) 4,337
-------- --------- --------
Net cash provided by operating activities... 13,456 27,692 32,181
-------- --------- --------
Cash flows from investing activities:
Additions to property and equipment............ (15,284) (16,267) (41,792)
Payment from (advance to) joint venture........ -- (7,000) 7,000
Long-term investments.......................... -- -- (2,964)
Acquisition of ElectroPhotonics, net of cash
received...................................... -- -- (25,654)
Maturities and sale of short-term investments.. 354 14,983 --
Purchase of short-term investments............. (6,426) (4,143) --
-------- --------- --------
Net cash used in investing activities....... (21,356) (12,427) (63,410)
-------- --------- --------
Cash flows from financing activities:
Repurchase of Common Stock..................... (120,000) --
Proceeds from issuance of Mandatorily
Redeemable Convertible Preferred Stock........ -- 116,123 --
Payment to stockholder for note................ (200) -- --
Proceeds from exercise of Common Stock
options....................................... -- 210 460
Proceeds from issuance of Common Stock, net.... -- -- 43,390
Proceeds from Employee Stock Purchase Plan..... -- -- 1,225
Principal repayments by stockholders on note
receivable.................................... 1,384 -- 5,701
Principal payments on capital lease
obligations................................... (700) (757) (1,240)
Borrowings on long-term debt................... 7,700 3,000 20,175
Payments on long-term debt..................... (51) (182) (5,310)
-------- --------- --------
Net cash provided by (used in) financing
activities................................. 8,133 (1,606) 64,401
-------- --------- --------
Net increase in cash and cash equivalents....... 233 13,659 33,172
Cash and cash equivalents at beginning of
period......................................... 8,026 8,259 21,918
-------- --------- --------
Cash and cash equivalents at end of period...... $ 8,259 $ 21,918 $ 55,090
======== ========= ========
Supplemental disclosure of cash flow
information:
Interest paid.................................. $ 514 $ 1,036 $ 1,525
Income taxes paid.............................. $ 10,103 $ 17,549 $ 17,243
Non-cash investing and financing activities:
Common Stock issued for the acquisition of
ElectroPhotonics.............................. $ -- $ -- $ 13,709
Acquisition of property and equipment through
capital leases................................ $ 2,918 $ 2,783 $ --
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The company and description of business
E-TEK Dynamics, Inc. ("E-TEK" or "the Company") is a leader in the design
and manufacture of components and modules for fiber optic networks. The
product range includes WDM components and modules, isolators, couplers and
micro-optic integrated components. These products are designed into Optical
Amplifiers and WDM systems for communication networks. Applications include
land and undersea, as well as emerging metropolitan and access, networks. E-
TEK's customers are telecommunications equipment manufacturers that build
optical networks for service providers. E-TEK operates in one business
segment.
Until July 23, 1997, the Company was owned by two founders ("the Founders").
In July 1997, the Company underwent a recapitalization in which it sold a
controlling stake for $120 million in Mandatorily Redeemable Class A
Convertible Preferred Stock ("Convertible Preferred Stock") which had
significant rights and preferences over the Common Stock, including rights to
elect a majority of E-TEK's directors, cumulative dividends and a liquidation
preference. In connection with the recapitalization, the Company also
repurchased $120 million in Common Stock from the Founders. The redemption was
accounted for as a recapitalization and, accordingly, no change in the
accounting basis of E-TEK's net assets has been made in the accompanying
consolidated financial statements. The amount of cash paid to the stockholders
exceeded the net assets of the Company at the time of the redemption by
$83,901,000. This amount has been recorded in the equity section as
distribution in excess of net book value.
Pursuant to the recapitalization, the Company amended its articles of
incorporation to change the authorized number of shares to 90,000,000, of
which 30,000,000 were designated as Convertible Preferred Stock and 60,000,000
were designated as Common Stock. Also as of that date, there was a stock split
in which each outstanding share of Common Stock was converted into 493.72476
shares of Common Stock. All shares and per share amounts were restated to
reflect the stock split.
In June and November 1998, the Company amended its articles of incorporation
again to increase authorized shares of Common Stock to 65,000,000 shares and
300,000,000 shares, respectively. The Company is also authorized to issue
25,000,000 shares of Preferred Stock.
The Company completed its initial public offering on December 2, 1998.
Following the completion of the initial public offering, all shares of
Convertible Preferred Stock converted into an aggregate of 30,000,000 shares
of Common Stock.
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.
Principles of consolidation
All intercompany transactions and accounts have been eliminated.
F-7
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Equity method of accounting
The Company accounts for its investment in foreign joint ventures using the
equity method of accounting. The Company accounts for the increase or decrease
of its proportionate share of net book value in equity basis investees from
the investees' issuance of stock at a price above or below the net book value
per share as a change to additional paid-in capital.
Revenue recognition
Revenue from product sales is recognized at the time the product is shipped,
with provisions established for estimated product returns and allowances.
Revenue is deferred on shipments of new products as to which customer
acceptance is considered to be uncertain.
Warranty expense
At the time of product shipment, the Company provides for the estimated
costs that may be incurred under warranties for the product shipped.
Research and development
Research and development costs are expensed as incurred.
Stock-based compensation
The Company accounts for its stock-based awards using the intrinsic value
method in accordance with Accounting Principles Board No. 25, "Accounting for
Stock Issued to Employees". The Company provides additional pro forma
disclosures as required under Statement of Financial Accounting Standard No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123").
Cash and cash equivalents
E-TEK considers all liquid investments purchased with an original maturity
of three months or less to be cash equivalents.
Inventories
Inventories are valued at the lower of cost or market, cost being determined
using the first-in, first-out basis.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based upon the estimated useful lives of the assets,
which is fifteen years for buildings and range from three to five years for
other property and equipment.
Goodwill and other intangible assets
Goodwill and other intangible assets are being amortized using the straight-
line method over two to three years.
F-8
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Impairment of long-lived assets
Pursuant to Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-lived Assets to be
Disposed of" ("SFAS 121"), the Company reviews long-lived assets based upon a
gross cash flow basis and will reserve for impairment whenever events or
changes in circumstances indicate the carrying amount of the assets may not be
fully recoverable. Based on its most recent analysis, the Company believes
that there was no impairment of the long-lived assets as of June 30, 1999.
Income taxes
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax basis of assets and
liabilities and the amounts reported for financial reporting purposes.
Deferred income taxes are provided on unremitted earnings from the foreign
joint ventures to the extent they are not considered permanently reinvested.
Fair value of financial instruments
For certain of the Company's financial instruments, including cash, cash
equivalents, accounts receivable, accounts payable and other accrued
liabilities, the carrying amount approximates fair value due to their short
maturities. The estimated fair value of fixed rate long-term debt is primarily
based on the borrowing rates currently available to the Company for bank loans
with similar terms and maturities. This fair value approximated the carrying
amount of long-term debt at June 30, 1999.
Comprehensive income
During fiscal 1999, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". Comprehensive income is defined as the change in equity
of a company during a period from transactions and other events and
circumstances excluding transactions resulting from investments from owners
and distributions to owners. The comprehensive income did not differ from the
net income for the years presented.
Recently issued accounting standards
In June 1998, the Financial Accounting Standards Board issued SFAS 133
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities and is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. The Company does not expect the adoption
of SFAS 133 to have a material impact on its results of operations.
NOTE 2--ACQUISITION OF ELECTROPHOTONICS:
The Company completed the acquisition of ElectroPhotonics Corporation in
Canada on June 22, 1999. ElectroPhotonics develops optical networks components
and modules including WDM components, dispersion equalization modules and
optical network performance monitoring subsystems. The Company accounted for
the transaction as a purchase and has included the operating results of
ElectroPhotonics since the acquisition date in the accompanying consolidated
financial statements. The Company issued approximately 400,000 shares of
Common Stock with a market value of $13,709,000 and paid $26,728,000 in cash
in exchange for all of the equity of ElectroPhotonics. Including acquisition
costs of $460,000 and assumed liabilities of $582,000, the total
F-9
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
purchase price was $41,479,000. The purchase price was allocated to
identifiable tangible and intangible assets and to goodwill as follows (in
thousands):
<TABLE>
<S> <C>
Cash and marketable securities.................................... $ 1,074
Property & equipment.............................................. 712
Developed technology.............................................. 933
Core technology................................................... 2,335
In-process research and development............................... 4,207
Acquired workforce................................................ 230
Trade names....................................................... 238
Other assets...................................................... 601
Residual goodwill................................................. 31,149
-------
$41,479
=======
</TABLE>
The valuations of the intangible assets, including developed technology,
core technology, in-process research and development, acquired workforce and
trade names, were based on an independent appraisal. In the appraisal,
projected incremental cash flows of projects were discounted using discount
rates ranging from 14% for developed technology to 24% for in-process research
and development. The discount rates used reflect difficulties and risks
regarding technological feasibility, market acceptance and other matters.
Goodwill is being amortized over three years. Developed technology and core
technology are being amortized over two to three years. In-process research
and development was expensed at the time of the acquisition in accordance with
generally accepted accounting principles.
The following unaudited pro forma summary presents the consolidated results
of operations of the Company, excluding acquired in-process research and
development, as if the acquisition of ElectroPhotonics had occurred at the
beginning of fiscal 1998. The unaudited pro forma summary is not necessarily
indicative of what would have occurred had the acquisition been made as of the
beginning of fiscal 1998 or of results which may occur in the future.
<TABLE>
<CAPTION>
June 30,
-----------------
1998 1999
-------- --------
<S> <C> <C>
Net revenues............................................ $107,407 $173,094
Net income.............................................. 8,202 19,706
Diluted net income per share............................ $ 0.14 $ 0.32
</TABLE>
F-10
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 3--BALANCE SHEET DETAIL:
<TABLE>
<CAPTION>
June 30,
------------------
1998 1999
-------- --------
<S> <C> <C>
Accounts receivable:
Trade receivables.................................... $ 20,358 $ 39,980
Less: Allowances for doubtful accounts and sales
returns............................................. (4,895) (10,149)
-------- --------
$ 15,463 $ 29,831
======== ========
Inventories:
Raw materials........................................ $ 3,459 $ 10,613
Work in process...................................... 1,566 7,577
Finished goods....................................... 1,884 2,177
-------- --------
$ 6,909 $ 20,367
======== ========
Property and equipment:
Machinery and equipment.............................. $ 22,429 $ 49,237
Computers and software............................... 2,008 3,078
Furniture and fixtures............................... 470 2,163
Automobiles.......................................... 138 27
Building improvements................................ 4,734 16,669
Land and buildings................................... 11,610 11,610
-------- --------
41,389 82,784
Less: Accumulated depreciation....................... (10,517) (20,910)
-------- --------
$ 30,872 $ 61,874
======== ========
Goodwill and other intangible assets:
Goodwill............................................. -- $ 31,149
Purchased technologies............................... -- 3,268
Other intangible assets.............................. -- 468
-------- --------
-- 34,885
Less: Accumulated amortization....................... -- (300)
-------- --------
$ -- $ 34,585
======== ========
Accrued liabilities:
Accrued compensation................................. $ 7,408 $ 10,887
Accrued warranty..................................... 3,735 4,620
Accrued commissions.................................. 2,151 3,120
Accrued professional services........................ 839 1,221
Accrued marketing expenses........................... 270 1,185
Deferred revenues.................................... 1,000 915
Accrued sales and property taxes..................... 127 504
Other................................................ 657 3,900
-------- --------
$ 16,187 $ 26,352
======== ========
</TABLE>
NOTE 4--NET INCOME PER SHARE:
Basic net income per share is computed by dividing net income available to
Common Stockholders by the weighted average number of common shares
outstanding during the period.
F-11
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Diluted net income per share is calculated using the weighted average number
of outstanding shares of Common Stock plus dilutive Common Stock equivalents.
For all periods presented, Common Stock equivalents consist of Convertible
Preferred Stock, unvested Common Stock subject to repurchase and Common Stock
options using the treasury stock method based on the average stock price for
the period.
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Fiscal Year ended June 30,
--------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Numerator:
Net income........................................ $15,148 $17,924 $ 27,625
Convertible Preferred Stock accretion............. -- 9,021 3,882
-------- -------- --------
Net income available to Common Stockholders
(Basic).......................................... 15,148 8,903 23,743
Convertible Preferred Stock accretion............. -- 9,021 3,882
-------- -------- --------
Net income available to Common Stockholders and
assumed conversions (Diluted).................... $ 15,148 $ 17,924 $ 27,625
-------- -------- --------
Denominator:
Denominator for basic earnings per share--weighted
average common shares............................ 50,000 22,970 43,152
Effect of dilutive securities
Common Stock options............................ -- 296 1,998
Unvested Common Stock subject to repurchase..... -- 4,104 4,166
Convertible Preferred Stock..................... -- 28,191 12,430
-------- -------- --------
Denominator for dilutive earnings per share--
adjusted weighted average common shares and
assumed conversions.............................. 50,000 55,561 61,746
-------- -------- --------
Basic earnings per share.......................... $ 0.30 $ 0.39 $ 0.55
======== ======== ========
Diluted earnings per share........................ $ 0.30 $ 0.32 $ 0.45
======== ======== ========
</TABLE>
NOTE 5--JOINT VENTURES:
FibX
During fiscal 1998, the Company entered into an agreement with a Taiwanese
company to form a joint venture in Taiwan to develop, manufacture and
distribute fiber optic components and products. The Company and the other
investor each contributed $7,000,000 in cash for a 50% interest in the joint
venture. Under the joint venture agreement and a related license agreement,
the Company received $7,000,000 from the joint venture for certain technology
of the Company that was licensed to the joint venture.
The $7,000,000 cash contributed by the Company and the $7,000,000 receivable
from the joint venture offset so that, in substance, the Company received a
50% interest in the joint venture in exchange for a technology license that
had no carrying value in the Company's financial statements. In accordance
with Emerging Issues Task Force Consensus No. 89-7, the Company did not record
any gain on the exchange and, therefore, the carrying value of the Company's
investment in FibX as of June 30, 1998 was nil. The Company's equity interest
in FibX was subsequently diluted to 45% through the issuance of equity to
other parties.
F-12
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During fiscal 1999, FibX began to manufacture certain products for the
Company. The Company sells certain components to and buys finished goods from
FibX. The transactions between the Company and FibX during fiscal 1999 were
immaterial. The Company's share of the equity loss in FibX was immaterial for
fiscal 1999 and, therefore, the carrying value of the Company's investment in
FibX was still nil as of June 30, 1999.
On July 6, 1999, the Company purchased an additional interest in FibX from
other investors for $12,000,000 in cash. After the purchase, the Company's
interest in FibX was increased to approximately 96%. The purchase resulted in
goodwill and other intangible assets of approximately $6,000,000 (unaudited),
which will be amortized in accordance with the Company's accounting policy.
The pro forma combined results of operations for fiscal 1998 and 1999 were not
materially different than the actual results.
ADVA
During fiscal 1995, the Company contributed $250,000 for a 40% ownership
interest in a German company ("ADVA") that develops and manufactures fiber
optic components and products. The other 60% interest was held by the
Company's German distributor, AMS Opto Tech GmbH ("AMS"). During the quarter
ended April 1, 1999, the Company contributed an additional $2,500,000 to
maintain its 40% interest in ADVA. On March 30, 1999, ADVA completed its
initial public offering and began trading on the Neuer Markt of the Frankfurt
Stock Exchange. The Company's ownership interest in ADVA was reduced to 33%
after ADVA's initial public offering. The Company increased the carrying value
of its investment to reflect the increase in the Company's share of ADVA's net
book value. The Company recorded the increase, net of the deferred tax
liability, as a credit to additional paid-in capital. At June 30, 1999, the
carrying value of the Company's investment in ADVA was $10,665,000. The market
value of the investment at June 30, 1999 was $121,803,000.
NOTE 6--DEBT:
In November 1996, the Company obtained a $7,700,000 term loan from a
financial institution, which bears interest at a rate of 7.85% per annum.
Monthly principal and interest payments are $59,000, with a final payment of
all remaining unpaid principal and interest on December 1, 2001. This loan is
secured by the Company's land and buildings with a net book value of
$11,610,000 at June 30, 1999. The outstanding balance of this note as of June
30, 1999 was $7,426,000.
In September 1997, the Company obtained a $3,000,000 term loan from a bank,
which bore interest at a rate of LIBOR plus 1.7% per annum. Monthly principal
and interest payments amounted to $27,000, with a final payment of all
remaining unpaid principal and interest on September 30, 2000. This note was
paid off fully during fiscal 1999.
In November 1998, the Company obtained a $5,440,000 term loan from a
financial institution, which bears interest at a rate of 6.46% per annum.
Monthly principal and interest payments amount to $129,000 with a final
payment of all remaining unpaid principal and interest in October 2002. Should
the Company elect to prepay any remaining balance of this note, they are
subject to a penalty not to exceed 3% of the original principal balance. This
note is secured by certain equipment owned by the Company. At June 30, 1999,
the outstanding balance of this note was $4,525,000.
In January 1999, the Company obtained a $7,890,000 term loan from a
financial institution, which bears interest at a rate of 6.38% per annum.
Monthly principal and interest payments amount to $241,000 with a final
payment of all remaining unpaid principal and interest in January 2002. Should
the Company elect to prepay any remaining balance of this note, it would pay a
penalty not to
F-13
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
exceed 3% of the original principal balance. This note is secured by certain
equipment owned by the Company. At June 30, 1999, the outstanding balance of
this note was $6,882,000.
In April 1999, the Company obtained a $6,845,000 term loan from a financial
institution, which bears interest at a rate of 6.89% per annum. Monthly
principal and interest payments amount to $211,000 with a final payment of all
remaining unpaid principal and interest in April 2002. Should the Company
elect to prepay any remaining balance of this note, it would pay a penalty not
to exceed 3% of the original principal balance. This note is secured by
certain equipment owned by the Company. At June 30, 1999, the outstanding
balance of this note was $6,501,000.
Future principal payments under long-term debt are as follows (in
thousands):
<TABLE>
<CAPTION>
Fiscal Year ending June 30,
---------------------------
<S> <C>
2000.............................................................. $ 6,101
2001.............................................................. 6,523
2002.............................................................. 12,342
2003.............................................................. 367
-------
Total principal payments.......................................... 25,333
Less: Current portion............................................. (6,101)
-------
Long-term portion of principal payments........................... $19,232
=======
</TABLE>
NOTE 7--INCOME TAXES:
The provision for income taxes was as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year ended June 30,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Current
Federal................................... $ 9,492 $ 14,216 $ 21,586
State..................................... 1,463 1,943 2,499
-------- -------- --------
10,955 16,159 24,085
-------- -------- --------
Deferred
Federal................................... (2,170) (3,500) (4,855)
State..................................... (308) (517) (813)
-------- -------- --------
(2,478) (4,017) (5,668)
-------- -------- --------
$ 8,477 $ 12,142 $ 18,417
======== ======== ========
Tax rate reconciliation:
Federal income tax statutory rate......... 35.0% 35.0% 35.0%
State taxes, net of federal tax benefit... 2.9 2.6 2.3
Permanent differences..................... -- 4.7 3.9
Foreign sales corporation benefit......... (2.7) (4.2) (3.0)
Research and development credit........... (0.7) (1.0) (1.1)
Other..................................... 1.4 3.3 2.9
-------- -------- --------
35.9% 40.4% 40.0%
======== ======== ========
</TABLE>
F-14
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred tax assets and liabilities were comprised of the following (in
thousands):
<TABLE>
<CAPTION>
June 30,
--------------
1998 1999
------ -------
<S> <C> <C>
Deferred tax assets:
Inventory reserves....................................... $1,444 $ 2,579
Uniform cost capitalization for inventory................ 789 1,250
Sales return and bad debt reserves....................... 2,268 3,906
Warranty reserves........................................ 1,437 1,780
Vacation and other accruals.............................. 657 2,428
State taxes.............................................. 693 910
Other.................................................... 585 689
------ -------
7,873 13,542
Deferred tax liabilities................................... -- (3,481)
------ -------
Net deferred tax assets.................................... $7,873 $10,061
====== =======
</TABLE>
Deferred tax liabilities of $3,481,000 at June 30, 1999 related to the tax
effect of a book/tax basis difference for the Company's investment in ADVA.
NOTE 8--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
On December 2, 1998, all shares of Convertible Preferred Stock converted
into an aggregate of 30,000,000 shares of Common Stock. Prior to the
conversion, the holders of the Convertible Preferred Stock had various rights
and preferences as follows:
Voting
Each share of Convertible Preferred Stock had voting rights equal to an
equivalent number of shares of Common Stock into which it was convertible and
voted together as one class with the Common Stock. Holders of Convertible
Preferred Stock had the right to elect three of the five members of the Board
of Directors.
Cumulative dividends
Dividends on each share of Convertible Preferred Stock accrued at a rate of
8% per annum of the liquidation value of $4.00 per share. For the years ended
June 30, 1998 and 1999, the Company recorded $9,021,000 and $3,882,000,
respectively, for the accretion of the value of the Convertible Preferred
Stock related to the 8% dividend per annum on the $120,000,000 liquidation
value of the Convertible Preferred Stock.
The holders of the Convertible Preferred Stock were also entitled to
participate in dividends on Common Stock, when and if declared by the Board of
Directors, based on the number of shares of Common Stock held on an as-if
converted basis.
Redemption
The holders of the Convertible Preferred Stock had the option to redeem the
stock at the then liquidation value if there were a change in ownership of the
Company. The liquidation value was defined as the greater of (i) an amount of
$4.00 per share, plus any unpaid dividends or (ii) the consideration per share
payable to holders of Common Stock assuming conversion to Common Stock of all
outstanding Convertible Preferred Stock, plus any unpaid dividends, prior to
liquidation.
F-15
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 9--RESTRICTED STOCK AND STOCK OPTION PLANS:
Restricted stock
During fiscal 1998 and 1999, under the Company's 1997 stock option plans,
the Company issued 7,211,000 and 125,000 shares of Common Stock, respectively,
to employees and officers of the Company in exchange for promissory notes in
an aggregate principal amount of $18,215,000 and $1,250,000, respectively.
These notes, which are secured by the shares of Common Stock, are generally
full recourse and payable in five years from the purchase date or upon
termination of employment by the Company, whichever comes first. Because these
notes do not bear interest, the $18,215,000 and $1,250,000 face values were
discounted using a 6% interest rate to $13,615,000 and $934,000, respectively,
with the difference recorded as deferred compensation cost. During fiscal 1998
and 1999, the Company recognized $600,000 and $960,000, respectively, of
compensation expense and $600,000 and $960,000, respectively, of interest
income related to this imputed interest income. These shares sold in exchange
for the promissory notes are subject to a right of repurchase by the Company,
subject to vesting, which is generally over a four year period from the grant
date, until vesting is complete.
In addition, under the Company's 1997 stock option plans, the Company issued
88,000 and 158,000 shares of Common Stock to employees of the Company for
$210,000 and $460,000 in cash during fiscal 1998 and fiscal 1999,
respectively. These shares sold are subject to a right of repurchase by the
Company, subject to vesting, which is generally over a four year period from
the date of grant, until vesting is complete.
At June 30, 1999, there were 3,139,000 shares of Common Stock purchased
under the Company's 1997 stock option plans subject to repurchase.
1997 Equity Incentive Plan
In July 1997, the Company adopted the 1997 Equity Incentive Plan (the
"Equity Plan") which provided for granting of incentive stock options and non-
statutory stock options to employees, officers and consultants of the Company
for up to 10,556,000 shares of Common Stock.
Under the Equity Plan, incentive stock options were granted at a price that
is not less than 100% of the fair market value of the stock on the date of
grant,. Non-statutory stock options were granted at a price that was not to be
less than 85% of the fair market value of the stock on the date of grant. The
exercise price of any option granted to a 10% stockholder would not be less
than 110% of the fair market value of the stock on the date of grant.
Options are exercisable immediately subject to repurchase options held by
the Company which generally lapse over a maximum period of four years at such
times and under such conditions as determined by the Board of Directors. In
August 1998, the Equity Plan was terminated and the remaining options
available for grant under the Equity Plan were transferred to the 1998 Stock
Plan.
1997 Executive Equity Incentive Plan
In October 1997, the Company adopted the 1997 Executive Equity Incentive
Plan (the "Executive Plan") which provided for granting of incentive stock
options and non-statutory stock options to officers or directors of the
Company for up to 4,444,000 shares of Common Stock.
Under the Executive Plan, incentive stock options are granted at a price
that was not less than 100% of the fair market value of the stock on the date
of grant. Non-statutory stock options were
F-16
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
granted at a price that was not to be less than 85% of the fair market value
of the stock on the date of grant. The exercise price of any option granted to
a 10% stockholder would not be less than 110% of the fair market value of the
stock on the date of grant.
Options were exercisable immediately subject to repurchase by the Company
which generally lapse over a maximum period of four years at such times and
under such conditions as determined by the Board of Directors. In August 1998,
the Executive Plan was terminated and the remaining options available for
grant under the Executive Plan were transferred to the 1998 Stock Plan.
1998 Stock Option Plan
In August 1998, the Company adopted the 1998 Stock Plan (the "1998 Plan") to
replace the Equity Plan and Executive Plan. The 1998 Plan provides for the
grant of incentive stock options to employees (including officers and employee
directors) and for the grant of non-statutory stock options and stock purchase
rights to employees, directors and consultants. A total of (i) 3,000,000
shares of the Company's Common Stock (plus shares which have been reserved but
unissued under the Company's Equity Plan and Executive Plan), (ii) any share
returned to the Equity Plan and the Executive Plan as a result of termination
of options or repurchase of shares by the Company, and (iii) annual increases
equal to the lesser of 3,000,000 shares, or 4% of the outstanding shares, are
currently reserved for issuance pursuant to the 1998 Plan.
The term of stock options granted under the 1998 Plan is generally 10 years.
Under the 1998 Plan, incentive stock options are granted at a price that is
not less than 100% of the fair market value of the stock on the date of grant.
Non-statutory stock options are granted at a price that is not to be less than
85% of the fair market value of the stock on the date of grant. The exercise
price of any option granted to a 10% stockholder will not be less than 110% of
the fair market value of the stock on the date of grant. Options vest in four
years under the 1998 Plan.
Directors' Stock Option Plan
In August, 1998, the Company adopted the 1998 Director Option Plan (the
"Director Plan"). A total of 250,000 shares of the Company's Common Stock,
plus an annual increase equal to the optioned stock underlying options granted
in the immediately preceding year, have been reserved for issuance under the
Director Plan.
Under the Director Plan, non-statutory stock options are granted at 100% of
the fair value of the stock on the date of grant. The term of stock options
granted under the Director Plan is generally 10 years. Options vest in four
years. At June 30, 1999, no options have been issued under the Director Plan.
1998 Employee Stock Purchase Plan
In August 1998, the Company adopted the 1998 Employee Stock Purchase Plan
(the "1998 Purchase Plan"). Under the 1998 Purchase Plan, eligible employees
may purchase Common Stock at a price equal to 85% of the lower of the fair
market value of the Common Stock at the beginning of a 24-month period or end
of each six-month segment within such offering period. Participation is
limited to 10% of an employee's compensation (not to exceed amounts allowed by
the Internal Revenue Code). A total of 750,000 shares of Common Stock have
been reserved for issuance under the 1998 Purchase Plan, plus annual increases
equal to the lesser of (i) 750,000 shares, (ii) 1% of the outstanding shares
on such date, or (iii) such lesser amount as may be determined by the Board of
Directors. To date, 120,000 shares of Common Stock have been issued under the
1998 Purchase Plan.
F-17
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes activities under all of E-TEK's stock option
plans:
<TABLE>
<CAPTION>
Weighted
Options Average
Available Outstanding Exercise
for Grant Shares Price
-------------- -------------- --------
(in thousands) (in thousands)
<S> <C> <C> <C>
Shares authorized..................... 15,000 -- $ --
Granted............................... (10,525) 10,525 2.97
Exercised............................. -- (7,299) 2.52
Cancelled............................. 176 (176) 2.41
------- ------
Balance at June 30, 1998.............. 4,651 3,050 4.05
Shares authorized..................... 3,250 -- --
Granted............................... (3,095) 3,095 18.68
Exercised............................. -- (283) 6.05
Repurchased........................... 48 -- 2.65
Cancelled............................. 123 (123) 8.39
------- ------
Balance at June 30, 1999.............. 4,977 5,739 $11.75
======= ======
</TABLE>
The weighted average fair value of options granted for fiscal 1998 and 1999
was $0.75 and $10.18, respectively.
Under the 1997 option plans, options are exercisable immediately and subject
to repurchase by the Company which generally lapse over a period of four
years. At June 30, 1999, 4,150,000 options with a weighted average exercise
price of $6.08 were outstanding and exercisable, of which 1,316,000 options
were vested.
Management calculated deferred compensation of $1,043,000 and $1,413,000
related to the option grants during fiscal 1998 and fiscal 1999, respectively.
Such deferred compensation is amortized over the vesting period, which is
generally four years. Amortization expense amounted to $290,000 and $540,000
for fiscal 1998 and 1999, respectively.
Option groups outstanding at June 30, 1999 and related weighted average
exercise price and contractual life information are as follows:
<TABLE>
<CAPTION>
Options Exercisable
Options Outstanding at June 30, 1999 at June 30, 1999
----------------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
- -------------- --------------- ------------ ------------- -------------- --------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C>
$ 2.30 -
$ 2.30 876 8.11 $ 2.30 876 $ 2.30
$ 3.25 -
$ 3.25 1,281 8.60 $ 3.25 1,281 $ 3.25
$ 4.20 -
$ 8.00 273 8.83 $ 6.42 273 $ 6.42
$10.00 -
$10.00 2,143 9.13 $ 10.00 1,674 $10.00
$12.00 -
$43.50 1,166 9.76 $ 32.64 46 $12.00
------------ -----
$ 2.30 -
$43.50 5,739 8.97 $ 11.75 4,150 $ 6.08
============ =====
</TABLE>
F-18
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair value disclosures
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant dates for the awards under a method
prescribed by SFAS No. 123, the Company's net income and pro forma net income
per share would have been decreased to the pro forma amounts indicated below
(in thousands, except per share data):
<TABLE>
<CAPTION>
Fiscal Year Ended
June 30,
-----------------
1998 1999
-------- --------
<S> <C> <C>
Net income:
As reported............................................ $ 17,924 $ 27,625
======== ========
Pro forma.............................................. $ 16,681 $ 24,398
======== ========
Net income available for Common Stockholders:
As reported............................................ $ 8,903 $ 23,744
======== ========
Pro forma.............................................. $ 7,660 $ 20,517
======== ========
Net income per share:
As reported:
Basic................................................. $ 0.39 $ 0.55
======== ========
Diluted............................................... $ 0.32 $ 0.45
======== ========
Pro forma:
Basic................................................. $ 0.33 $ 0.48
======== ========
Diluted............................................... $ 0.30 $ 0.34
======== ========
</TABLE>
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes Model. The minimum value method was used for fiscal
1998 and for the period between July 1, 1998 and December 1, 1998 with the
following assumptions: a risk-free interest rate of 6.00% for fiscal 1998 and
5.91% for the period between July 1, 1998 and December 1, 1998; an expected
term of option of 5 years and a dividend yield of 0.00% for both periods. For
the period between December 2, 1998 and June 30, 1999, the following
assumptions were used in the fair value calculations: a risk-free interest
rate of 5.91%, a volatility rate of 82%, an expected term of option of 5 years
and a dividend yield of 0.00%.
Sales under the 1998 Purchase Plan were 120,000 shares at an average price
per share of $10.20 in fiscal 1999. Pro forma compensation expense for the
grant date fair value, as defined by SFAS 123, of the purchase rights granted
under the 1998 Purchase Plan was calculated using the Black-Scholes Model with
the following assumptions: an expected life of 1.25 years, an expected
volatility rate of 80%, a dividend yield of 0.00 % and a risk-free interest
rate of 5.91%. The weighted average fair value per share, as defined by SFAS
123, of rights to purchase stock under the 1998 Purchase Plan was $4.95.
Because additional option grants are expected to be made each year, the
above pro forma disclosures are not representative of pro forma effects of
reported net income for future years.
NOTE 10--EMPLOYEE BENEFIT PLAN:
The Company sponsors a 401(k) Savings Plan (the "Plan"). All employees are
eligible to participate in the Plan following certain minimum eligibility
requirements. Under the Plan, employees
F-19
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
may elect to contribute up to 15% of their pre-tax compensation to the Plan,
subject to annual limitations. Matching employer contributions are 25% of the
employees' contributions but limited to the first 10% of the employees'
deferral. Employer contributions are vested over five years after employees'
two years of services and employee contributions are 100% vested at all times.
The Company's contribution to the plan was $211,000, $313,000 and $1,027,000
for fiscal 1997, 1998 and 1999, respectively.
NOTE 11--MAJOR CUSTOMERS AND CONCENTRATION OF RISKS:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash equivalents and
trade accounts receivable. The Company invests primarily in money market
accounts and marketable securities with high quality financial, government or
corporate institutions. The Company sells its products to original equipment
manufacturers and distributors. The Company performs ongoing credit
evaluations of its customers' financial condition and maintains an allowance
for uncollectible accounts receivable based upon the expected collectibility
of all accounts receivable. At June 30, 1998, two customers and their
affiliates accounted for 43% and 11% of accounts receivable. At June 30, 1999,
four customers and their affiliates accounted for 30%, 15%, 11% and 11% of
accounts receivable.
During fiscal 1997, three customers and their affiliates accounted for 27%,
22% and 12% of total revenues. During fiscal 1998, three customers and their
affiliates accounted for 30%, 16% and 14% of total revenues. During fiscal
1999, three customers and their affiliates accounted for 35%, 17% and 12% of
total revenues. Export sales were approximately 42%, 53%, and 42% of total net
sales for fiscal 1997, 1998 and 1999, respectively.
NOTE 12--INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION:
The Company operates in a single industry segment--the design and
manufacture of components and modules for fiber optic networks. The Company
operates in three geographic regions: the United States, Europe and
Asia/Pacific. The following is a summary of sales by geographic area (in
thousands):
<TABLE>
<CAPTION>
Fiscal Year ended June 30,
--------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
United States................................... $ 42,532 $ 50,724 $ 92,319
Europe.......................................... 27,107 49,251 73,090
Asia/Pacific.................................... 3,437 6,949 7,255
</TABLE>
NOTE 13--COMMITMENTS AND CONTINGENCIES:
Leases
The Company has entered into a number of noncancelable lease agreements
involving machinery and equipment and automobiles. The principal portions of
the minimum rentals have been capitalized and the related assets and
obligations recorded using the interest rates implicit in the respective
leases.
During fiscal 1999, the Company entered into a facility lease for one
manufacturing plant. The lease expires in 2006.
F-20
<PAGE>
E-TEK DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum payments under all noncancelable leases are as follows (in
thousands):
<TABLE>
<CAPTION>
Operating Capital
Fiscal Year Ending June 30, Leases Leases
--------------------------- --------- -------
<S> <C> <C>
2000.................................................... $ 1,964 $1,508
2001.................................................... 1,908 1,508
2002.................................................... 1,908 546
2003.................................................... 1,908 417
2004.................................................... 1,908 --
Thereafter.............................................. 3,498 --
------- ------
Total minimum lease payments............................ $13,094 3,979
=======
Less: Amount representing interest...................... (421)
------
Present value of capitalized lease obligations.......... 3,558
Less: Current portion................................... (1,277)
------
Long-term portion of capitalized lease obligations...... $2,281
======
</TABLE>
At June 30, 1998 and June 30, 1999, the cost of machinery and equipment and
automobiles under capital leases, net of accumulated depreciation, was
$4,025,000 and $2,195,000, respectively.
Total rent expense on all operating leases was $283,000, $472,000 and
$365,000 for fiscal 1997, 1998 and 1999, respectively.
Contingencies
The Company is party to litigation matters and claims which are normal in
the course of its operations. While the results of such litigations and claims
cannot be predicted with certainty, the Company believes that the final
outcome of such matters will not have a material adverse effect on its
financial position and results of operations or cash flows.
NOTE 14--SUBSEQUENT EVENT:
On July 27, 1999, the Company signed a definitive agreement to acquire SMC
Kaifa (Holdings) Ltd., for a total purchase price of 697,000 shares of its
Common Stock and cash of $12,000,000. The Company estimates that the purchase
will result in approximately $36,000,000 of goodwill and other intangible
assets which will be amortized over 3 years. The closing of the transaction is
subject to several conditions, including required governmental approvals. The
Company cannot be certain that the acquisition will be completed.
F-21
<PAGE>
AUDITORS' REPORT
To the Shareholder of E-TEK Electrophotonics Solutions Corporation (formerly
Electrophotonics Corporation)
We have audited the balance sheets of E-TEK Electrophotonics Solutions
Corporation (formerly Electrophotonics Corporation) as at April 30, 1999 and
July 31, 1998 and the statements of operations and deficit and cash flows for
the nine-month period ended April 30, 1999 and the year ended July 31, 1998.
These 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 generally accepted auditing
standards in Canada. Those standards require that we plan and perform an audit
to obtain reasonable assurance 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at April 30, 1999 and July
31, 1998 and the results of its operations and its cash flows for the nine-
month period ended April 30, 1999 and the year ended July 31, 1998 in
accordance with generally accepted accounting principles in Canada.
PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Canada
July 21, 1999 (except for note 12(c)
which is as at July 23, 1999)
Comments by Auditor for U.S. Readers on Canada-U.S. Reporting Difference
In the United States, reporting standards for auditors require the addition
of an explanatory paragraph (following the opinion paragraph) when the
financial statements are affected by conditions and events that cast
substantial doubt on the company's ability to continue as a going concern,
such as those described in Note 1 to the financial statements. Our report to
the shareholders dated July 21, 1999, except for note 12(c) which is as at
July 23, 1999, is expressed in accordance with Canadian reporting standards
which do not permit a reference to such events and conditions in the auditors'
report when these are adequately disclosed in the financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Canada
July 21, 1999 (except for note 12(c)
which is as at July 23, 1999)
F-22
<PAGE>
E-TEK ELECTROPHOTONICS SOLUTIONS CORPORATION
(formerly Electrophotonics Corporation)
BALANCE SHEETS
(In thousands of Canadian dollars)
<TABLE>
<CAPTION>
April July
30, 31,
1999 1998
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 2,714 $ 5,492
Accounts receivable -- net of allowance for doubtful
accounts of $40 (1998 -- $0).............................. 136 136
Investment tax credits recoverable......................... 399 510
Inventory.................................................. 225 48
Prepaid expenses and other receivables..................... 108 95
------- -------
3,582 6,281
Capital assets (note 4)...................................... 838 588
License -- net of accumulated amortization of $25 (1998 --
$0)......................................................... 145 170
------- -------
$ 4,565 $ 7,039
======= =======
LIABILITIES
Current liabilities:
Accounts payable and accrued liabilities................... $ 837 $ 708
Current portion of term loan (note 6)...................... 45 20
------- -------
882 728
Term loan (note 6)........................................... -- 40
------- -------
882 768
------- -------
SHAREHOLDER'S EQUITY
Capital stock (note 7)
Common shares.............................................. 7,865 7,519
Warrants................................................... -- 92
Contributed surplus........................................ 5 5
Stock options.............................................. 72 --
Deficit...................................................... (4,259) (1,345)
------- -------
3,683 6,271
------- -------
$ 4,565 $ 7,039
======= =======
Going concern (note 1)
</TABLE>
F-23
<PAGE>
E-TEK ELECTROPHOTONICS SOLUTIONS CORPORATION
(formerly Electrophotonics Corporation)
STATEMENTS OF OPERATIONS AND DEFICIT
(In thousands of Canadian dollars)
<TABLE>
<CAPTION>
Nine-Month
Period Ended Year Ended
April 30, July 31,
1999 1998
------------ ----------
<S> <C> <C>
Revenue................................................ $ 428 $ 686
Cost of goods sold..................................... 348 467
------- -------
Gross profit......................................... 80 219
Interest income........................................ 148 133
------- -------
228 352
------- -------
Operating expenses:
Research and development (note 5).................... 1,341 811
Marketing and sales.................................. 583 312
Administrative ...................................... 816 648
Interest............................................. 13 18
Amortization......................................... 389 139
------- -------
3,142 1,928
------- -------
Loss before income taxes............................... (2,914) (1,576)
Recovery of deferred income taxes...................... -- 43
------- -------
Loss for the period.................................... (2,914) (1,533)
Retained earnings (deficit)-- Beginning of period...... (1,345) 188
------- -------
Deficit -- End of period............................... $(4,259) $(1,345)
======= =======
Going concern (note 1)
</TABLE>
F-24
<PAGE>
E-TEK ELECTROPHOTONICS SOLUTIONS CORPORATION
(formerly Electrophotonics Corporation)
STATEMENTS OF CASH FLOWS
(in thousands of Canadian dollars)
<TABLE>
<CAPTION>
Nine-month
period ended Year ended
April 30, July 31,
1999 1998
------------ ----------
<S> <C> <C>
Cash provided by (used in)
Operating activities
Loss for the period.................................. $(2,914) $(1,533)
Items not affecting cash
Amortization....................................... 389 139
Deferred income taxes.............................. -- (43)
Issuance of stock options for common shares for
services rendered................................. 72 --
------- -------
(2,453) (1,437)
Changes in non-cash operating working capital items
Accounts receivable.................................. -- (38)
Investment tax credits recoverable................... 111 (292)
Inventory............................................ (177) 149
Prepaid expenses and other receivables............... (13) (90)
Accounts payable and accrued liabilities............. 129 476
------- -------
(2,403) (1,232)
------- -------
Investing activities:
License.............................................. -- (170)
Capital asset purchases.............................. (614) (671)
------- -------
(614) (841)
Financing activities:
Repayment of bank term loan.......................... (15) (20)
Issuance of common shares............................ 254 7,507
Issuance of warrants................................. -- 109
Decrease in amounts due to shareholders.............. -- (29)
------- -------
239 7,567
------- -------
Increase (decrease) in cash and cash equivalents during
the period ........................................... (2,778) 5,494
Cash and cash equivalents -- Beginning of period....... 5,492 (2)
------- -------
Cash and cash equivalents -- End of period............. $ 2,714 $ 5,492
======= =======
Supplemental information:
Interest paid........................................ $ 10 $ 8
======= =======
Issuance of stock options for common shares for
services rendered................................... $ 72 $ --
======= =======
</TABLE>
F-25
<PAGE>
E-TEK ELECTROPHOTONICS SOLUTIONS CORPORATION
(formerly Electrophotonics Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1999 and July 31, 1998
(tabular amounts in thousands of dollars)
(amounts in Canadian dollars, except where otherwise noted)
1--GOING CONCERN
These financial statements are prepared on a going concern basis, which
assumes that E-TEK Electrophotonics Solutions Corporation (the company) will
realize its assets and discharge its liabilities in the normal course of
business. The company incurred an operating loss of $2,914,000 for the nine-
month period ended April 30, 1999 (July 31, 1998--$1,533,000) and reported a
deficit at April 30, 1999 of $4,259,000 (July 31, 1998-$1,345,000). The
ability of the company to continue as a going concern is dependent upon
obtaining adequate sources of financing and developing and maintaining
profitable operations. Should the company be unable to continue as a going
concern, assets and liabilities would require restatement on a liquidation
basis, which would differ materially from the going concern basis.
On June 22, 1999, the company was acquired by a U.S. public company (note
12(b)). Management anticipates that this transaction will provide the funding
and create the strategic alliances necessary to meet the company's plans.
Nevertheless, there are no assurances that these arrangements will be
successful or that, together with the projected cash flow from the operations
of the company, they will be sufficient to meet its obligations as they become
due.
2--NATURE OF OPERATIONS
The company was formed on June 18, 1999 through an amalgamation of 3030155
Nova Scotia Company and Electrophotonics Corporation Limited (see note 12(a)).
The business of the company was previously operated as Electrophotonics
Corporation, a company incorporated on August 9, 1993 under the laws of the
Province of Ontario, Canada.
The company is a developer of components and modules for optical networks.
The company is in the early stages of commercial manufacturing and marketing
of its products.
3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in Canadian dollars in
accordance with accounting principles generally accepted in Canada, which, in
the case of the Company, differ in certain respects from those in the United
States as explained in Note 11. The principal accounting policies of the
company are summarized below.
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 amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition
Revenue from the sale of the company's products is recognized when shipment
occurs and title passes to the customer. A provision is made for estimated
warranty costs at the time of the sale. The
F-26
<PAGE>
E-TEK ELECTROPHOTONICS SOLUTIONS CORPORATION
(formerly Electrophotonics Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1999 and July 31, 1998
company calculates a return provision based on historical experience and makes
appropriate reserves at the time the revenue is recognized.
Cash and cash equivalents
The company considers all highly liquid investments with an original or
remaining maturity of three months or less at the date of purchase to be cash
equivalents.
Financial instruments
The carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, receivables, accounts payable and term
loan approximate fair value due to their short-term maturities.
Certain risks and concentrations
The company's financial instruments, which are exposed to concentration of
credit risk, consist primarily of cash and cash equivalents and accounts
receivable. The company maintains its accounts for cash and cash equivalents
with large low-credit-risk financial institutions in Canada in order to reduce
its exposure. The company performs ongoing credit valuations of its customers'
financial condition. At April 30, 1999, two customers accounted for 32% and
24% of total accounts receivable. At July 31, 1998, three customers accounted
for 34%, 23% and 21% of total accounts receivable. Revenue from a single
customer represented 41% of total revenue for the nine-month period ended
April 30, 1999 and 34% of total revenue for the year ended July 31, 1998.
Foreign currency translation
Monetary assets and liabilities denominated in foreign currencies are
translated into Canadian dollars at the exchange rate prevailing at the
balance sheet date. Non-monetary assets and liabilities and transactions are
translated at exchange rates prevailing at the respective transaction dates.
Revenue and expenses are translated at average rates prevailing during the
period. Exchange gains and losses are included in the statements of operations
and deficit.
Inventory
Inventory is valued at the lower of cost and net realizable value. Cost is
determined by the first-in, first-out method.
Capital assets
Capital assets are recorded at the lower of cost, net of accumulated
amortization, and net recoverable amount. Amortization charges are calculated
on a straight-line basis over the estimated three-year useful lives of the
assets. Leasehold improvements are amortized over the term of the lease plus
one renewal period, or the estimated lives, whichever is shorter. The Company
reviews capital assets for impairment whenever events or changes in
circumstances indicate that the carrying amounts of an asset may not be
recoverable. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amounts by which the carrying amount of the
assets exceeds the projected future cash flows arising from the asset.
F-27
<PAGE>
E-TEK ELECTROPHOTONICS SOLUTIONS CORPORATION
(formerly Electrophotonics Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1999 and July 31, 1998
Licences
External costs of licences are recorded at cost and amortized over their
estimated useful lives of five years. If the carrying amount of a licence is
no longer recoverable, the related unamortized cost is written down to fair
value.
Research and development
Research costs are expensed as incurred. Development costs are expensed as
incurred unless a project meets the criteria under generally accepted
accounting principles for deferral and amortization. The company has not
deferred any development costs to date. Investment tax credits earned on
scientific research and experimental development expenditures are accounted
for using the cost reduction method and accordingly are deducted from the
related research and development expenses or related assets in the year of
expenditure, provided there is reasonable assurance they will be realized.
Income taxes
The company follows the deferral method of tax allocation in accounting for
income taxes. Under the deferral method, income taxes are provided for based
on accounting income for tax purposes included in the financial statements,
regardless of when such income is subject to taxes under tax laws. The
differences between the taxes currently payable and taxes accrued are reported
as deferred income taxes on the balance sheet. Deferred tax assets for loss
carry-forwards are recorded when virtual certainty exists that the benefits
will be realized.
4--CAPITAL ASSETS
<TABLE>
<CAPTION>
April 30, 1999
------------------------
Accumulated
Cost amortization Net
------ ------------ ----
$ $ $
<S> <C> <C> <C>
Computer equipment 132 52 80
Technical equipment 278 120 158
Optical equipment 734 256 478
Furniture and fixtures 201 79 122
Leasehold improvements 41 41 --
------ ---- ----
1,386 548 838
====== ==== ====
<CAPTION>
July 31,1998
------------------------
Accumulated
Cost amortization Net
------ ------------ ----
$ $ $
<S> <C> <C> <C>
Computer equipment 68 20 48
Technical equipment 127 58 69
Optical equipment 440 70 370
Furniture and fixtures 101 32 69
Leasehold improvements 36 4 32
------ ---- ----
772 184 588
====== ==== ====
</TABLE>
F-28
<PAGE>
E-TEK ELECTROPHOTONICS SOLUTIONS CORPORATION
(formerly Electrophotonics Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1999 and July 31, 1998
5--RESEARCH AND DEVELOPMENT EXPENDITURES
<TABLE>
<CAPTION>
April July 31,
30, 1999 1998
-------- --------
$ $
<S> <C> <C>
Gross research and development expenditures 1,341 1,151
Less: Investment tax credits -- (340)
-------- --------
Research and development expenditures--net 1,341 811
======== ========
</TABLE>
6--TERM LOAN
The company has arranged a term loan, bearing interest at prime plus 2.5%,
repayable in monthly instalments of $1,667, guaranteed under the Small
Business Loans Act. Subsequent to April 30, 1999 the term loan was repaid in
full.
7--CAPITAL STOCK
a) Common shares
<TABLE>
<CAPTION>
April July
30, 31,
1999 1998
------- -------
<S> <C> <C>
Authorized...................................................
Unlimited common shares....................................
Issued and outstanding.......................................
2,331,374 (1998-2,288,174) common shares................. $ 7,865 $ 7,519
======= =======
</TABLE>
The common share transactions are as follows:
<TABLE>
<CAPTION>
April 30, 1999 July 31, 1998
---------------- ----------------
Number of Number of
shares Amount shares Amount
--------- ------ --------- ------
<S> <C> <C> <C> <C>
Issued -- Beginning of period............ 2,288,174 $7,519 100 $ --
On stock split(i)........................ -- -- 999,900 --
On exercise of employee stock options
(i)..................................... 15,000 -- -- --
Issued for private placement #1 -- net of
issued costs (ii)....................... -- -- 430,000 1,265
Issued for private placement #2 -- net of
issue costs (iii)....................... 580,000 4,793
On conversion of warrants (ii), (iii).... 28,200 346 278,174 1,461
--------- ------ --------- -----
Issued-End of period..................... 2,331,374 7,865 2,288,174 7,519
========= ====== ========= =====
</TABLE>
F-29
<PAGE>
E-TEK ELECTROPHOTONICS SOLUTIONS CORPORATION
(formerly Electrophotonics Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1999 and July 31, 1998
b) Warrants
The warrant transactions are as follows:
<TABLE>
<CAPTION>
April 30, 1999 July 31, 1998
---------------- -----------------
Number of Number of
warrants Amount warrants Amount
--------- ------ --------- ------
<S> <C> <C> <C> <C>
Issued--Beginning of period............. 28,200 $92 -- $
Issued in connection with private
placement #1 (ii)...................... -- -- 215,000 106
Issued for brokerage services (ii),
(iii).................................. -- -- 80,000 147
On conversion of brokerage warrants
(ii)................................... -- -- 22,500 10
Converted into common shares............ (28,200) (92) (278,174) (166)
Expired................................. -- -- (11,126) (5)
------- --- -------- ----
Issued--End of period................... -- 28,200 92
======= === ======== ====
</TABLE>
i) On September 25, 1997, the company subdivided each of the issued common
shares into 10,000 common shares, increasing the total number of common
shares issued and outstanding from 100 to 1,000,000 and the number of
stock options outstanding from 1.5 to 15,000. These options were
exercised for an aggregate total of $3 cash on November 2, 1998.
ii) Private placement #1
On September 26, 1997, the company issued 430,000 units at a price of
$3.50 per unit for cash proceeds of $1,505,000. Each unit consists of
one common share and one-half of a warrant, entitling the holder to
purchase an additional common share of the company for $4.75. The
warrants expire on June 30, 1998. Costs of the transaction include fees
of $90,300 and an issuance of 45,000 warrants with a fair value of
$43,292. Each warrant entitled the holder to purchase a unit consisting
of one common share of the company and one-half of a warrant for a
price of $3.50 per unit. Each whole warrant entitled the holder to
purchase an additional common share of the company for a price of $4.75
per share. These warrants expire on June 30, 1998.
The fair values of the warrants were estimated using the Black-Scholes
option-pricing model. The following assumptions were used in the model:
no annual dividends, expected volatility of 70%, risk free interest
rate of 3.81%, and expected life of nine months.
Based on the fair value of the underlying instruments within the units
$1,265,071 of the net proceeds was allocated to common shares and the
balance of $106,337 was allocated to the private placement #1 warrants.
During fiscal 1998, 204,250 private placement #1 warrants were
exercised for cash proceeds of $970,188. The remaining warrants expired
on June 30, 1998. The amount of $5,000 attributed to the expired
warrants has been reflected as contributed surplus.
During fiscal 1998, 45,000 brokerage warrants were exercised for cash
proceeds of $157,500. Of the additional 45,000 half warrants acquired
upon the exercise of the brokerage warrants, 44,624 half warrants were
exercised for cash proceeds of $105,982 and the remaining 376 half
warrants expired on June 30, 1998.
F-30
<PAGE>
E-TEK ELECTROPHOTONICS SOLUTIONS CORPORATION
(formerly Electrophotonics Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1999 and July 31, 1998
iii) Private placement #2
On February 9, 1998, the company issued 580,000 common shares at a
price of $9.00 per share for cash proceeds of $5,220,000. Costs of the
transaction include fees of $313,200 and an issuance of 35,000
brokerage warrants with a fair value of $114,091. Each warrant entitled
the holder to purchase one common share of the company for a price of
$9.00 per share. These warrants expire on February 5, 1999.
The fair values of the brokerage warrants were estimated using the
Black-Scholes option-pricing model. The following assumptions were used
in the model: no annual dividends, expected volatility of 70%, interest
rate of 5.06%, and expected life of one year.
During fiscal 1998, 6,800 brokerage warrants were exercised for cash
proceeds of $61,200. During the nine-month period ended April 30, 1999,
the remaining 28,200 brokerage warrants were exercised for cash
proceeds of $253,900.
c) Stock Options
On September 26, 1997, the company approved a stock option plan for the
benefit of certain key employees, officers and directors. The plan allows
options to be issued aggregating not more than 10% of the issued and
outstanding shares of the company. Each option under the incentive plan allows
for the purchase of one common share and expires not later than ten years from
the date granted. Any unvested options may be cancelled if employment is
terminated.
<TABLE>
<CAPTION>
Number
-------
<S> <C>
Balance--July 31, 1997.......................................... 15,000
Granted at $3.50................................................ 114,750
Granted at $9.00................................................ 88,014
Exercised....................................................... --
Cancelled....................................................... --
-------
Balance--July 31, 1998.......................................... 217,764
Granted at $9.00................................................ 26,400
Exercised....................................................... (15,000)
Cancelled....................................................... (17,418)
-------
Balance--April 30, 1999......................................... 211,746
=======
</TABLE>
F-31
<PAGE>
E-TEK ELECTROPHOTONICS SOLUTIONS CORPORATION
(formerly Electrophotonics Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1999 and July 31, 1998
As at April 30, 1999, the company had stock options outstanding as follows:
<TABLE>
<CAPTION>
Fiscal
year Number of
Class of option holder issued options issued Expiry Exercise price
- ---------------------- ------- -------------- ------ --------------
$
<S> <C> <C> <C> <C>
December 2000-
Employees................ 1998 98,013 September 2002 3.50-9.00
August 2001-
1999 17,400 April 2002 9.00
December 2000-
Executive officers....... 1998 20,833 September 2002 3.50
Directors not executives December 2000-
or employees............ 1998 54,000 May 2003 3.50-9.00
October 2000-
Non-employees............ 1998 12,500 October 2002 3.50
1999 9,000 April 2002 9.00
-------
211,746
=======
</TABLE>
The options are subject to various vesting requirements as outlined in the
plan.
Non-employee options
The fair value of stock options granted to non-employees was estimated on
the date the non-employee earned the option using the Black-Scholes option-
pricing model with the following weighted average assumptions: no annual
dividend, expected volatility of 70%, interest rate of 4.88% and expected life
of three years. The weighted average fair value of stock options earned in the
nine-month period ended April 30, 1999 was $6.83. The resulting values have
been charged to the statements of operations and deficit in the period that
services were rendered. The fair value of the stock options charged to the
statements of operations and deficit in 1999 was $71,672.
8--INCOME TAXES
Investment tax credits
Investment tax credits have been claimed on qualifying research and
development expenditures and are subject to review and audit by Revenue
Canada. As a result, amounts recovered may differ from the amounts recorded in
the financial statements.
Assuming the Company is a qualifying corporation for the taxation year that
includes the nine-month period ended April 30, 1999, during the period ended
April 30, 1999, the company has generated refundable investment tax credits of
approximately $425,000. The benefit of these refundable investment tax credits
has not been recorded in the accounts.
F-32
<PAGE>
E-TEK ELECTROPHOTONICS SOLUTIONS CORPORATION
(formerly Electrophotonics Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1999 and July 31, 1998
The company has non-refundable investment tax credits available for carry-
forward against future years' federal income taxes payable of approximately
$153,000, expiring $108,000 in 2006 and $45,000 in 2007, and unclaimed
scientific research and development expenditures of $1,733,000 that may be
carried forward indefinitely. The benefit of these amounts has not been
recorded in the accounts.
Income taxes
The company has income tax loss carry-forwards of $2,077,000 for federal
purposes and $3,351,000 for provincial purposes. The benefit of these losses
has not been recorded in the accounts. The income tax loss carry-forwards
expire as follows:
<TABLE>
<CAPTION>
Federal Provincial
------- ----------
<S> <C> <C>
2000....................................................... $ -- $ 23
2001....................................................... 47
2002....................................................... -- 99
2003....................................................... 579 1,350
2004....................................................... 1,498 1,832
------ ------
2,077 3,351
====== ======
</TABLE>
9--COMMITMENTS
The company's commitments under premises and equipment leases are as
follows:
<TABLE>
<S> <C>
2000................................................................... $57
2001................................................................... 9
2002................................................................... 2
2003................................................................... 2
---
70
---
</TABLE>
10--UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information
using year 2000 dates is processed. In addition, similar problems may arise in
some systems which use certain dates in 1999 to represent something other than
a date. The effects of the Year 2000 Issue may be experienced before, on, or
after January 1, 2000, and, if not addressed, the impact on operations and
financial reporting may range from minor errors to significant systems failure
which could affect an entity's ability to conduct normal business operations.
It is not possible to be certain that all aspects of the Year 2000 Issue
affecting the entity, including those related to the efforts of customers,
suppliers, or other third parties, will be fully resolved.
F-33
<PAGE>
E-TEK ELECTROPHOTONICS SOLUTIONS CORPORATION
(formerly Electrophotonics Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1999 and July 31, 1998
11--UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These financial statements have been prepared in accordance with generally
accepted accounting principles in Canada (Canadian GAAP) which, in the case of
the company conform, in all material respects with generally accepted
accounting principles in the United States (U.S. GAAP), except as set forth
below.
Accounting for income taxes
Under Canadian GAAP, the deferral method is used, whereby deferred tax
assets for loss carry-forwards may be recognized if it is virtually certain
that the benefit will be realized. Under U.S. GAAP, the liability method is
used, whereby deferred tax assets for loss carry-forwards are recognized and
reduced by a valuation allowance if it is more likely than not that some or
all of the deferred tax assets will not be realized. The difference between
the deferral and liability methods has had no effect on the statements of
operations and deficit. The company has maintained its 100% valuation
allowance on the net deferred tax asset because of the lack of profitability
in the past, the risk that taxable income may not be generated in the future
and the non-transferable nature of the deferred tax asset.
The deferred tax balances are summarized as follows:
<TABLE>
<CAPTION>
April 30, July 31,
1999 1998
--------- --------
<S> <C> <C>
Deferred tax assets
Share issue costs....................................... $ 145 $ 178
Research expenses....................................... 773 482
Non-capital losses...................................... 1,125 404
------- ------
2,043 1,064
------- ------
Deferred tax liabilities
Capital assets.......................................... 152 179
Warranty and other provisions........................... 178 228
------- ------
330 407
------- ------
1,713 657
Valuation allowance....................................... (1,713) (657)
------- ------
Net deferred tax asset.................................... -- --
------- ------
</TABLE>
The valuation allowance increased by $1,056,000 during the nine-month period
ended April 30, 1999.
Accounting for stock-based compensation
Under U.S. GAAP, the company has elected to continue to measure compensation
cost related to awards of stock options using the intrinsic value based method
of accounting (APB25).
In accordance with APB25, the compensation component related to options
granted during the year ended July 31, 1998 is $518,468 and during the nine-
month period ended April 30, 1999 is $192,042, which would be amortized into
the results of operations over the option vesting period.
F-34
<PAGE>
E-TEK ELECTROPHOTONICS SOLUTIONS CORPORATION
(formerly Electrophotonics Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1999 and July 31, 1998
Under Financial Accounting Standards Board (FASB) Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-based
Compensation," the company is required to have pro forma disclosures of the
loss for the period as if the fair value based method of accounting had been
applied for stock options granted to employees and directors.
For disclosure purposes, the fair value of each stock option granted to
employees and directors was estimated on the date of grant using the Black-
Scholes option-pricing model, with the following weighted average assumptions
used for stock options granted:
<TABLE>
<CAPTION>
April 30, July 31,
1999 1998
--------- ----------
<S> <C> <C>
Annual dividends.......................................... nil nil
Expected volatility....................................... -- --
Interest rate............................................. 4.98% 5.12%
Expected life............................................. 3 years 3.45 years
</TABLE>
Under the above model, the total value of stock options granted to employees
and directors was $628,604 during the year ended July 31, 1998 and $213,291
during the nine-month period ended April 30, 1999, which would be amortized on
a pro forma basis over the option vesting period. Had the company determined
compensation cost for these plans in accordance with SFAS No. 123, the company
pro forma loss would have been unchanged at $1,533,000 for the year ended July
31, 1998 and $2,986,000 for the nine-month period ended April 30, 1999.
Operations
The reconciliation of the loss determined in accordance with Canadian GAAP
to the loss determined as result of the application of the above-noted U.S.
accounting principles is as follows:
<TABLE>
<CAPTION>
April 30, July 31,
1999 1998
--------- --------
<S> <C> <C>
Loss for the period as reported............................. $(2,914) $(1,533)
Accounting for stock based compensation..................... (58) --
------- -------
Loss for the period in accordance with U.S. GAAP............ (2,972) (1,533)
======= =======
</TABLE>
12 SUBSEQUENT EVENTS
a) On June 14, 1999, Electrophotonics Corporation, a company incorporated
under the laws of the Province of Ontario, Canada, received a continuance to
carry on business in the Province of Nova Scotia, Canada, changed its name to
Electrophotonics Corporation Limited and amended its authorized capital to a
maximum of 100 million common shares. On June 18, 1999, Electrophotonics
Corporation Limited was amalgamated with 3030155 Nova Scotia Company, a
company incorporated under the laws of the Province of Nova Scotia, Canada, to
form an amalgamated company named E-TEK Electrophotonics Solutions
Corporation.
b) On June 22, 1999, the company was acquired by Lundy Technology Co.
(Lundy), a wholly owned subsidiary of E-TEK Dynamics Inc. (E-TEK), a U.S.
public company. Immediately prior to the acquisition, 101,068 stock options
were converted into common shares of the company for proceeds of $449,000.
Promissory notes pertaining to these stock option conversions of $246,000 were
issued by the company. Lundy acquired all of the company's outstanding common
shares, in exchange for a combination of approximately 400,000 shares of Class
A common stock of Lundy and US$26,728,000 in cash. Shares of Class A common
stock of Lundy are exchangeable into the shares of common stock
F-35
<PAGE>
E-TEK ELECTROPHOTONICS SOLUTIONS CORPORATION
(formerly Electrophotonics Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1999 and July 31, 1998
of E-TEK at the option of the holder within two years of the transaction. As
of June 22, 1999, the value of E-TEK common stock that could have been
received upon the conversion of the shares of Class A common stock of Lundy
was US$13,709,000. All unexercised options were cancelled on the date of the
transaction.
c) On July 23, 1999, the company entered into an agreement to lease premises
for future minimum commitments of approximately $1,260,000, payable over the
next five years commencing August 1, 1999.
F-36
<PAGE>
E-TEK DYNAMICS, INC. ACQUISITION OF ELECTROPHOTONICS CORPORATION
Unaudited Pro Forma Financial Information
On June 22, 1999, E-TEK Dynamics ("the Company" or "E-TEK") acquired
ElectroPhotonics Corporation ("ElectroPhotonics"), a Canadian-based privately
held company that develops optical networks components and modules. Under the
term of the agreement, E-TEK acquired all of the outstanding stock of
ElectroPhotonics in exchange for 400,000 shares of E-TEK's Common Stock and
$26.7 million in cash. The Company's shares were valued at $34.27 per share
based on the average closing price of E-TEK Common Stock three days before and
three days after the transaction, as quoted on the Nasdaq National Market. In
addition, the Company incurred $460,000 in acquisition costs. The transaction
was accounted for using the purchase method of accounting and the results of
ElectroPhotonics were included in the results of E-TEK from June 22, 1999, the
closing date of the transaction.
The following unaudited Pro Forma Consolidated Statement of Operations for
the year ended June 30, 1999 gives effect to the acquisition by E-TEK of
ElectroPhotonics as if it had occurred on July 1, 1998. It has been derived
from the Consolidated Statement of Operations of E-TEK for the year ended June
30, 1999 appearing elsewhere in the Prospectus and the unaudited Statement of
Operations of ElectroPhotonics for the period from July 1, 1998 to June 21,
1999. The unaudited Pro Forma Consolidated Statement of Operations should be
read in conjunction with the historical financial statements and notes thereto
of E-TEK and ElectroPhotonics included elsewhere in this Prospectus.
F-37
<PAGE>
E-TEK DYNAMICS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Year ended June 30, 1999
(unaudited)
<TABLE>
<CAPTION>
Pro Forma
----------------------
Acquisition
E-TEK ElectroPhotonics(1) Adjustments Combined
-------- ------------------- ----------- --------
<S> <C> <C> <C> <C>
Net revenues.............. $172,664 $ 430 -- $173,094
Cost of goods sold........ 85,123 330 -- 85,453
-------- ------- ------- --------
Gross profit.............. 87,541 100 -- 87,641
-------- ------- ------- --------
Operating expenses:
Research and
development............ 14,687 1,217 -- 15,904
Selling, general and
administrative......... 24,516 1,709 -- 26,225
Purchased in-process
research and
development............ 4,207 -- (4,207)(2) --
Amortization of
intangibles............ 300 -- 11,706 (2) 12,006
-------- ------- ------- --------
Total operating
expenses............. 43,710 2,926 7,499 54,135
-------- ------- ------- --------
Operating income (loss)... 43,831 (2,826) (7,499) 33,506
Interest income, net...... 2,211 127 (1,200)(3) 1,138
-------- ------- ------- --------
Income (loss) before
income taxes............. 46,042 (2,699) (8,699) 34,644
Provision for income
taxes.................... 18,417 -- (3,479)(4) 14,938
-------- ------- ------- --------
Net income (loss)......... 27,625 (2,699) (5,220) 19,706
Convertible Preferred
Stock accretion.......... 3,882 -- -- 3,882
-------- ------- ------- --------
Net income (loss)
available to Common
Stockholders............. $ 23,743 $(2,699) $(5,220) $ 15,824
======== ======= ======= ========
Net income per share:
Basic................... $ 0.55 $ 0.36
Diluted................. $ 0.45 $ 0.32
Shares used in net income
per share calculation:
Basic................... 43,152 392 (5) 43,544
Diluted................. 61,706 392 (5) 62,098
</TABLE>
See accompanying notes to unaudited Pro Forma Consolidated Statement of
Operations for explanation of pro forma acquisition adjustments.
F-38
<PAGE>
E-TEK DYNAMICS, INC. ACQUISITION OF ELECTROPHOTONICS CORPORATION
Notes to Unaudited Pro Forma Financial Information
(1) Basis of Presentation
The statement of operations of ElectroPhotonics has been prepared in
accordance with accounting principles generally accepted in the U.S. The
amounts were translated from Canadian dollars to US dollars using the average
exchange rate for the period.
(2) Allocation of Purchase Price and Related Amortization
The purchase price was allocated to tangible net assets and identifiable
intangible assets with remaining the unallocated purchase price attributed to
goodwill. The fair value of tangible assets approximated their historical book
value at June 22, 1999. The identifiable intangible assets and goodwill, along
with their estimated lives for amortization, are as follows (in thousands):
<TABLE>
<CAPTION>
Life
----
<S> <C> <C>
Developed technology............................................ $ 933 2
Core Technology................................................. 2,335 3
In-process research and development............................. 4,207
Trade names..................................................... 238 1
Acquired work forces............................................ 230 2
Goodwill........................................................ 31,149 3
</TABLE>
The value assigned to in-process research and development was expensed at
the time of acquisition in accordance with generally accepted accounting
principles. The Pro Forma Consolidated Statement of Operations excludes the
charge for in-process research and development due to the non-recurring nature
of the charge.
(3) Interest Income
In connection with the payment of $27.2 million in cash paid for the
acquisition, including acquisition costs, interest income was reduced for the
period from July 1, 1998 to June 22, 1999 using the 4.4% annual interest rate
earned in such funds.
(4) Income Taxes
The provision for income taxes was adjusted to reflect adjustments (2) and
(3).
(5) Shares Used in Net Income Per Share Calculation
The number of shares used in net income per share calculation was adjusted
as if the 400,000 shares for the acquisition were issued as of July 1, 1998.
F-39
<PAGE>
UNDERWRITING
E-TEK, the selling stockholders and the underwriters for the offering (the
"Underwriters") named below have entered into an underwriting agreement with
respect to the shares being offered. Subject to certain conditions, each
Underwriter has severally agreed to purchase the number of shares indicated in
the following table.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co. .....................................
Morgan Stanley & Co. Incorporated.........................
Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated.............................................
Schroder & Co. Inc. ......................................
SoundView Technology Group, Inc...........................
U.S. Bancorp Piper Jaffray Inc............................
---------
Total................................................. 6,000,000
=========
</TABLE>
----------------
If the Underwriters sell more shares than the total number set forth in the
table above, the Underwriters have an option to buy up to an additional
900,000 shares from certain selling stockholders to cover such sales. They may
exercise that option for 30 days. If any shares are purchased pursuant to this
option, the Underwriters will severally purchase shares in approximately the
same proportion as set forth in the table above.
The following tables show the per share and total underwriting discounts and
commissions to be paid to the Underwriters by E-TEK and the selling
stockholders. Such amounts are shown assuming both no exercise and full
exercise of the Underwriters' option to purchase additional shares.
<TABLE>
<CAPTION>
Paid by the Company
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share........................................ $ $
Total............................................ $ $
</TABLE>
<TABLE>
<CAPTION>
Paid by the Selling Stockholders
---------------------------------
No Exercise Full Exercise
---------------------------------
<S> <C> <C>
Per Share............................ $ $
Total................................ $ $
</TABLE>
Shares sold by the Underwriters to the public will initially be offered at
the initial price to public set forth on the cover of this prospectus. Any
shares sold by the Underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial price to public. Any such
securities dealers may resell any shares purchased from the Underwriters to
certain other brokers or dealers at a discount of up to $ per share from
the initial price to public. If all the shares are not sold at the initial
price to public, the Underwriters may change the offering price and the other
selling terms.
E-TEK, its directors and officers and the selling stockholders have agreed
with the Underwriters not to dispose of or hedge any of their common stock or
securities convertible into or exchangeable for shares of common stock during
the period from the date of this prospectus continuing through the date 90
days after the date of this prospectus, except with the prior written consent
of the Underwriters. This agreement does not apply to any existing employee
benefit plans or shares issued by E-TEK in connection with acquisitions. See
"Shares Eligible for Future Sale" for a discussion of certain transfer
restrictions relating to our outstanding shares of common stock.
U-1
<PAGE>
In connection with the offering, the Underwriters may purchase and sell
shares of common stock in the open market. These transactions may include
short sales, stabilizing transactions and purchases to cover positions created
by short sales. Short sales involve the sale by the Underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offering is in progress.
The Underwriters also may impose a penalty bid. This occurs when a
particular Underwriter repays to the Underwriters a portion of the
underwriting discount received by it because the Underwriters have repurchased
shares sold by or for the account of such Underwriter in stabilizing or short
covering transactions.
These activities by the Underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by
the Underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
As permitted by Rule 103 under the Exchange Act, certain Underwriters and
selling group members, if any, that are market makers ("passive market
makers") in the common stock may make bids for or purchases of common stock in
the Nasdaq National Market until a stabilizing bid has been made. Rule 103
generally provides that:
. a passive market maker's net daily purchases of the common stock may not
exceed 30% of its average daily trading volume in such securities for the
two full consecutive calendar months, or any 60 consecutive days ending
within the 10 days, immediately preceding the filing date of the
registration statement of which this prospectus forms a part,
. a passive market maker may not effect transactions or display bids for
common stock at a price that exceeds the highest independent bid for the
common stock by persons who are not passive market makers, and
. bids made by passive market makers must be identified as such.
E-TEK estimates that the total expenses for the offering, excluding
underwriting discounts and commissions, will be approximately $750,000.
E-TEK and the selling stockholders have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
U-2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely
on any unauthorized information or representations. This prospectus is an
offer to sell only the shares offered hereby, but only under circumstances and
in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Special Note Regarding Forward-Looking Statements........................ 14
Use of Proceeds.......................................................... 15
Price Range of Common Stock.............................................. 15
Dividend Policy.......................................................... 15
Capitalization........................................................... 16
Selected Consolidated Financial Data..................................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 24
Management............................................................... 31
Certain Transactions..................................................... 39
Principal and Selling Stockholders....................................... 41
Description of Capital Stock............................................. 43
Shares Eligible For Future Sale.......................................... 46
Validity of Common Stock................................................. 48
Experts.................................................................. 48
Where You Can Find Additional Information................................ 48
Index to Consolidated Financial Statements............................... F-1
Underwriting............................................................. U-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
6,000,000 Shares
E-TEK Dynamics, Inc.
Common Stock
-----------
[LOGO OF E-TEK DYNAMICS APPEARS HERE]
-----------
Goldman, Sachs & Co.
Morgan Stanley Dean Witter
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
Schroder & Co. Inc.
SoundView Technology Group
U.S. Bancorp Piper Jaffray
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth all the costs and expenses, other than the
underwriting discounts and commissions, payable by the Registrant in
connection with the sale of the common stock being registered. All amounts
shown are estimates except for the SEC registration fee, the NASD filing fee
and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
SEC registration fee............................................. $ 78,767
NASD filing fee.................................................. 28,834
NASDAQ National Market listing fee............................... 17,500
Blue Sky qualification fees and expenses......................... 10,000
Printing and engraving expenses.................................. 100,000
Legal fees and expenses.......................................... 350,000
Accounting fees and expenses..................................... 100,000
Transfer agent and registrar fees................................ 10,000
Miscellaneous.................................................... 54,899
--------
Total........................................................ $750,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers
As permitted by Section 145 of the Delaware General Corporation Law (the
"DGCL"), the Registrant's Certificate of Incorporation provides that each
person who is or who has agreed to become a director or officer of the
Registrant or who has agreed at the request of the Registrant's Board of
Directors or an officer of the Registrant to serve as an employee or agent of
the Registrant or as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall be
indemnified by the Registrant to the full extent permitted by the DGCL or any
other applicable laws. Such Certificate of Incorporation also provides that
the Registrant may enter into one or more agreements with any person which
provides for indemnification greater or different than that provided in such
Certificate, and that no amendment or repeal of such Certificate shall apply
to or have any effect on the right to indemnification permitted or authorized
thereunder for or with respect to claims asserted before or after such
amendment or repeal arising from acts or omissions occurring in whole or in
part before the effective date of such amendment or repeal.
The Registrant's Bylaws provide that the Registrant shall indemnify to the
full extent authorized by law any person made or threatened to be made a party
to an action or a proceeding, whether criminal, civil, administrative or
investigative, by reason of the fact that he, his testator or intestate was or
is a director, officer or employee of the Registrant or any predecessor of the
Registrant or serves or served any other enterprise as a director, officer or
employee at the request of the Registrant or any predecessor of the
Registrant.
The Registrant has entered into indemnification agreements with its
directors and certain of its officers.
The Registrant has purchased and maintained insurance on behalf of any
person who is a director or officer against any loss arising from any claim
asserted against him and incurred by him in any such capacity, subject to
certain exclusions.
See also the undertakings set out in response to Item 17 herein.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
Since July 1, 1996, the Registrant has sold and issued the following
securities which were not registered under the Securities Act of 1933, as
amended:
1. On July 23, 1997, the Registrant issued 30,000,000 shares of its Class
A Convertible Preferred Stock for an aggregate purchase price of
$120,000,000, or $4.00 per share, to a group of 8 investors.
2. On July 23, 1997, the Registrant issued 1,111,111 shares of its Common
Stock for an aggregate purchase price of $2,555,555.30, or $2.30 per share,
to an executive officer of the Registrant.
3. On July 23, 1997, the Registrant issued 1,111,110 shares of its Common
Stock for an aggregate purchase price of $2,555,553.00, or $2.30 per share,
to an employee of the Registrant.
4. From July 1, 1996 to June 30, 1999, the Registrant issued to
employees, officers, directors and consultants of the Registrant options to
purchase an aggregate of 13,618,342 shares of Common Stock of the
Registrant, at exercise prices ranging from $2.30 per share to $43.50 per
share, pursuant to the Registrant's 1997 Equity Incentive Plan, 1997
Executive Equity Incentive Plan and 1998 Stock Plan.
5. From July 1, 1996 to June 30, 1999, the Registrant issued an aggregate
of 7,581,610 shares of Common Stock of the Registrant upon the exercise of
options at exercise prices ranging from $2.30 to $10.00 per share.
6. On June 22, 1999, the Registrant issued 400,062 shares of Common Stock
to the shareholders of ElectroPhotonics Corporation in connection with the
acquisition of ElectroPhotonics.
The issuances described in paragraphs 1, 2, 3 and 6 above were deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2)
of the Securities Act as transactions by an issuer not involving a public
offering. In addition, the sale of securities described in paragraph 5 was
deemed to be exempt from the registration requirements of the Securities Act
in reliance on Rule 701 promulgated under Section 3(b) of the Securities Act
as transactions by an issuer pursuant to compensatory benefit plans and
contracts relating to compensation as provided under such Rule 701. The
recipients of securities in each such transaction represented their intention
to acquire the securities for investment only and not with a view to or for
sale in connection with any distribution thereof and appropriate legends were
affixed to the share certificates and other instruments issued in such
transactions. The granting of stock options described in paragraph 4 above did
not require registration under the Securities Act, or an exemption therefrom,
insofar as such grants did not involve a "sale" of securities as such term is
used in Section 2(3) of the Securities Act. All recipients either received
adequate information about the Registrant or had access, through employment or
other relationships, to information about the Registrant.
Item 16. Exhibits
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1+ Form of Underwriting Agreement.
3.1* Certificate of Incorporation of the Registrant.
3.2* Bylaws of the Registrant.
4.1* Specimen Stock Certificate of the Registrant.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1* Form of Indemnification Agreement for directors and officers of the
Company.
10.2* Employment Agreement, as amended, dated July 23, 1997, by and
between the Registrant and Jing Jong Pan.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.3* Employment Agreement, dated October 1, 1997, by and between the
Registrant and Michael J. Fitzpatrick.
10.4* Employment Agreement, dated December 2, 1997, by and between the
Registrant and Sanjay Subhedar.
10.5* Employment Letter Agreement, dated May 26, 1998, by and between the
Registrant and Philip Anthony.
10.6* Employment Letter Agreement, dated July 21, 1998, by and between the
Registrant and Jim Northington.
10.7* Executive Agreement, dated June 27, 1997 and April 1, 1998, by and
between the Registrant and Ming Shih.
10.8* Executive Agreement, dated June 27, 1997 and April 1, 1998, by and
between the Registrant and Kung Shih.
10.9 Lease, dated February 3, 1999, by and between the Registrant and
Mission West Properties, L.P.
10.10* 1998 Stock Plan.
10.11* 1998 Employee Stock Purchase Plan.
10.12* 1998 Director Option Plan.
10.13* 1997 Equity Incentive Plan.
10.14* 1997 Executive Equity Incentive Plan.
10.15* Recapitalization Agreement, as amended, dated June 27, 1997, by and
between the Registrant, the Purchasers named therein, Theresa Stone
Pan, Jing Jong Pan and the Trusts named therein.
10.16* Shareholders Agreement, dated July 23, 1997, by and between the
Registrant and the Shareholders named therein.
10.17* Registration Agreement, as amended, dated July 23, 1997, by and
among the Registrant, the Investors named therein, Theresa Stone
Pan, Jing Jong Pan and the J.J. & Theresa Pan Revocable Trust (the
"Registration Agreement").
10.18* Purchase and Sale Agreement for Real Property and Escrow
Instructions, dated August 28, 1996, by and between the Registrant
and TR Brell Cal Corp.
10.19* Purchase and Sale Agreement and Escrow Instructions, dated July 11,
1997, by and between the Registrant and Nexus Properties, Inc.
10.20* Standing Loan Agreement, dated November 8, 1996, by and between the
Registrant and Bank of America National Trust and Savings
Association.
10.21* Business Loan Agreement, as amended, dated September 30, 1997, by
and between the Registrant and Bank of America National Trust and
Savings Association.
10.22* Design and Construction Contract, as amended, dated March 30, 1998,
by and between the Registrant and Rudolph and Sletten, Inc.
10.23* Joint Venture Agreement, dated March 3, 1998, by and between the
Registrant and Walsin Lihwa Corporation.
10.24* Distributorship Agreement, dated March 3, 1998, by and between the
Registrant and Walsin Lihwa Corporation.
10.25* Supply Agreement, dated March 3, 1998, by and between the Registrant
and Walsin Lihwa Corporation.
10.26* Mutual Confidentiality Agreement, dated September 2, 1997, by and
between the Registrant and Walsin Lihwa Corporation.
10.27* Technical Licensing Agreement on Fiberoptic Products, dated December
17, 1997, by and between the Registrant and Walsin Lihwa
Corporation.
10.28* Employment Agreement, dated September 21, 1998, by and between the
Registrant and William H. Diamond, Jr.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.29 Share Purchase Agreement, dated as of May 26, 1999, among the
Registrant, Shemiran Holdings Inc., A. Tino Alavic, Robert Maaskant,
Lundy Technology Co. and ElectroPhotonics Corporation.
10.30 Registration Rights Agreement, dated as of June 22, 1999, by and
between the Registrant and the shareholders of E-TEK
ElectroPhotonics Solutions Corporation.
10.31+ Amendment No. 2 to Registration Agreement, dated July 23, 1999.
21.1+ List of E-TEK Dynamics Subsidiaries.
23.1 Consent of Independent Accountants.
23.2 Consent of Wilson Sonsini Goodrich & Rosati (See Exhibit 5.1).
23.3 Consent of Independent Accountants.
24.1+ Power of Attorney.
27.1+ Financial Data Schedule.
</TABLE>
- --------
*Incorporated by reference to the exhibit filed with the Registration
Statement on Form S-1 (No. 333-61763), as amended.
+Previously filed.
(b) Financial Statement Schedules
Schedules have been omitted because the information required to be set forth
therein is not applicable or is readily available in the financial statements
or notes thereto.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement on Form S-1 to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of San Jose, State of California, on the 29th day of July, 1999.
E-Tek Dynamics, Inc.
/s/ Michael J. Fitzpatrick
By: _________________________________
Michael J. Fitzpatrick
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act, this Amendment No. 1 to
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signatures Title Date
<S> <C> <C>
/s/ Michael J. Fitzpatrick President, Chief July 29, 1999
- ------------------------------------- Executive Officer
Michael J. Fitzpatrick and Chairman of the
Board of Directors
(Principal
Executive Officer)
/s/ Sanjay Subhedar Senior Vice July 29, 1999
- ------------------------------------- President,
Sanjay Subhedar Operations, Chief
Financial Officer
and Secretary
(Principal
Financial Officer
and Principal
Accounting Officer)
* Director July 29, 1999
- -------------------------------------
Walter G. Kortschak
Director
- -------------------------------------
David W. Dorman
Director
- -------------------------------------
Joseph W. Goodman
* Director July 29, 1999
- -------------------------------------
Donald J. Listwin
* Director July 29, 1999
- -------------------------------------
Peter Y. Chung
*By: /s/ Sanjay Subhedar
- -------------------------------------
Sanjay Subhedar
Attorney-in-Fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1+ Form of Underwriting Agreement.
3.1* Certificate of Incorporation of the Registrant.
3.2* Bylaws of the Registrant.
4.1* Specimen Stock Certificate of the Registrant.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1* Form of Indemnification Agreement for directors and officers of the
Company.
10.2* Employment Agreement, as amended, dated July 23, 1997, by and
between the Registrant and Jing Jong Pan.
10.3* Employment Agreement, dated October 1, 1997, by and between the
Registrant and Michael J. Fitzpatrick.
10.4* Employment Agreement, dated December 2, 1997, by and between the
Registrant and Sanjay Subhedar.
10.5* Employment Letter Agreement, dated May 26, 1998, by and between the
Registrant and Philip Anthony.
10.6* Employment Letter Agreement, dated July 21, 1998, by and between the
Registrant and Jim Northington.
10.7* Executive Agreement, dated June 27, 1997 and April 1, 1998, by and
between the Registrant and Ming Shih.
10.8* Executive Agreement, dated June 27, 1997 and April 1, 1998, by and
between the Registrant and Kung Shih.
10.9 Lease, dated February 3, 1999, by and between the Registrant and
Mission West Properties, L.P.
10.10* 1998 Stock Plan.
10.11* 1998 Employee Stock Purchase Plan.
10.12* 1998 Director Option Plan.
10.13* 1997 Equity Incentive Plan.
10.14* 1997 Executive Equity Incentive Plan.
10.15* Recapitalization Agreement, as amended, dated June 27, 1997, by and
between the Registrant, the Purchasers named therein, Theresa Stone
Pan, Jing Jong Pan and the Trusts named therein.
10.16* Shareholders Agreement, dated July 23, 1997, by and between the
Registrant and the Shareholders named therein.
10.17* Registration Agreement, as amended, dated July 23, 1997, by and
among the Registrant, the Investors named therein, Theresa Stone
Pan, Jing Jong Pan and the J.J. & Theresa Pan Revocable Trust (the
"Registration Agreement").
10.18* Purchase and Sale Agreement for Real Property and Escrow
Instructions, dated August 28, 1996, by and between the Registrant
and TR Brell Cal Corp.
10.19* Purchase and Sale Agreement and Escrow Instructions, dated July 11,
1997, by and between the Registrant and Nexus Properties, Inc.
10.20* Standing Loan Agreement, dated November 8, 1996, by and between the
Registrant and Bank of America National Trust and Savings
Association.
10.21* Business Loan Agreement, as amended, dated September 30, 1997, by
and between the Registrant and Bank of America National Trust and
Savings Association.
10.22* Design and Construction Contract, as amended, dated March 30, 1998,
by and between the Registrant and Rudolph and Sletten, Inc.
10.23* Joint Venture Agreement, dated March 3, 1998, by and between the
Registrant and Walsin Lihwa Corporation.
10.24* Distributorship Agreement, dated March 3, 1998, by and between the
Registrant and Walsin Lihwa Corporation.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.25* Supply Agreement, dated March 3, 1998, by and between the Registrant
and Walsin Lihwa Corporation.
10.26* Mutual Confidentiality Agreement, dated September 2, 1997, by and
between the Registrant and Walsin Lihwa Corporation.
10.27* Technical Licensing Agreement on Fiberoptic Products, dated December
17, 1997, by and between the Registrant and Walsin Lihwa
Corporation.
10.28* Employment Agreement, dated September 21, 1998, by and between the
Registrant and William H. Diamond, Jr.
10.29 Share Purchase Agreement, dated as of May 26, 1999, among the
Registrant, Shemiran Holdings Inc., A. Tino Alavie, Robert
Maashant, Lundy Technology Co. and ElectroPhotonics Corporation.
10.30 Registration Rights Agreement, dated as of June 22, 1999, by and
between the Registrant and the shareholders of E-TEK
ElectroPhotonics Solutions Corporation.
10.31+ Amendment No. 2 to Registration Agreement, dated July 23, 1999.
21.1+ List of E-TEK Dynamics Subsidiaries.
23.1 Consent of Independent Accountants.
23.2 Consent of Wilson Sonsini Goodrich & Rosati (See Exhibit 5.1).
23.3 Consent of Independent Accountants.
24.1+ Power of Attorney (see pg. II-5).
27.1+ Financial Data Schedule.
</TABLE>
- --------
*Incorporated by reference to the exhibit filed with the Registration Statement
on Form S-1 (No. 333-61763), as amended.
+Previously filed.
<PAGE>
EXHIBIT 5.1
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
E-Tek Dynamics, Inc.
1885 Lundy Avenue
San Jose, CA 95131
RE: REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed by you
with the Securities and Exchange Commission ("SEC") on July 27, 1999
(Registration No. 333-83857), as amended by Amendment No. 1 thereto filed with
the SEC on July 30, 1999 (the "Registration Statement"), in connection with the
registration under the Securities Act of 1933, as amended, of up to 6,900,000
shares of your Common Stock (the "Shares"). The Shares include an over-allotment
option granted to the underwriters of the offering to purchase 900,000 shares.
We understand that the Shares are to be sold to the underwriters of the offering
for resale to the public as described in the Registration Statement. As your
legal counsel, we have examined the proceedings taken, and are familiar with the
proceedings proposed to be taken, by you in connection with the sale and
issuance of the Shares.
It is our opinion that, upon completion of the proceedings being taken
or contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, including the proceedings being taken in order to permit such
transaction to be carried out in accordance with applicable state securities
laws, the Shares, when issued and sold in the manner described in the
Registration Statement and in accordance with the resolutions adopted by the
Board of Directors of the Company, will be legally and validly issued, fully
paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendments thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ Wilson Sonsini Goodrich & Rosati
<PAGE>
EXHIBIT 10.9
STANDARD FORM LEASE
- ------------------------------------------------------------------------------
Parties: This Lease, executed in duplicate at Cupertino, California, on February
3, 1999, by and between Mission West Properties, L.P., a Delaware Limited
Partnership, and E-Tek Dynamics, Inc., a Delaware Corporation, hereinafter
called respectively Lessor and Lessee, without regard to number or gender.
Use: Witnesseth: That Lessor hereby leases to Lessee, and Lessee hires from
Lessor, Building 4 (defined below) for the purpose of conducting therein office,
research and development, light manufacturing, and warehouse activities, and any
other legal activity; and for no other purpose without obtaining the prior
written consent of Lessor.
Premises: The real property with appurtenances as shown on Exhibit A, including
a three building business park consisting of building 2, 3, and 4 on
approximately 14.13 acres including improvements, appurtenances and related
parking (collectively, the "Premises") situated in the City of San Jose, County
of Santa Clara, State of California, Building 4 of which is more particularly
described as follows:
"Building 4" is that approximately 80,640 square foot building, including
improvements, appurtenances, and parking areas shown on Exhibit A.1 as
"Building 4". Lessor shall provide Lessee the right to use on an exclusive
basis 10 parking spaces identified on Exhibit A.1 and, on a non-exclusive
basis, at least an additional 310 unreserved parking spaces located in the
area designated for non-exclusive parking on Exhibit A.1, the non-exclusive
right to use the common areas, and all other appurtenances to Building 4.
The address for Building 4 is 1750 Automation Parkway, San Jose,
California. Lessee's pro-rata share of the Premises is 36.27% based on
222,336 square feet of total square footage in the three buildings
constituting the Premises. Lessor shall in no event oversubscribe parking
at the Premises and shall equitably allocate parking at the Premises.
Term: The term shall be for eighty four (84) months unless extended pursuant to
Section 35 of this Lease (the "Lease Term"), commencing on the Commencement Date
as defined in Section 1 and ending on the seventh anniversary of said
Commencement Date.
Base Rent: Subject to adjustment for changes in the TI Allowance as provided in
Section 2.1.2, below, base rent shall be payable in monthly installments as
follows:
<TABLE>
<CAPTION>
Total Base
Month Monthly Rent Replacements Estimated CAC** Total
<S> <C> <C> <C> <C>
1-12 $ 126,282 $2,338 $16,609** $145,229
13-24 130,702 $2,338 16,609** 149,649
25-36 135,276 $2,338 16,609** 154,223
37-48 140,011 $2,338 16,609** 158,958
49-60 144,911 $2,338 16,609** 163,858
61-72 149,983 $2,338 16,609** 168,930
73-84 155,233 $2,338 16,609** 174,180
</TABLE>
* Base Monthly Rent shall be adjusted as provided in Section 2.1 to reflect
any unused amount of the Lessor's TI allowance and for any Additional TI
Allowance. For the purposes of the foregoing, "Month 1" is the first full
lease
<PAGE>
month after the Commencement Date. If the Commencement Date is not the
first day of a month, then the first month shall be a partial month
(prorated), and shall be added to the Lease Term. Base Monthly Rent for the
partial month shall four thousand two hundred nine and 00/100 dollars
($4,209.00) per day. Month 1 shall commence on the first day of the first
full month of the Lease Term.
** CAC charges to be adjusted per Common Area Charges Section below.
Base rent and CAC shall be payable in advance on the first day of each calendar
month during the Lease Term. The term "Rent," as used herein shall be deemed to
be and to mean the base monthly rent and all other sums required to be paid by
Lessee pursuant to the terms of
this Lease. Rent shall be paid in lawful money
of the United States of America, without offset or deduction, and shall be paid
to Lessor at such place or places as may be designated from time to time by
Lessor. Rent for any period less than a calendar month shall be a pro rata
portion of the monthly installment. Upon execution of this Lease, Lessee shall
deposit with Lessor the total first month's rent of One Hundred Forty-Five
Thousand Two Hundred Twenty Nine Dollars ($145,229).]
Security Deposit: Lessee shall deposit with Lessor the sum of One Hundred Forty
Five Thousand Two Hundred Twenty Nine Dollars ($145,229)] (the "Security
Deposit"). The Security Deposit shall be held by Lessor as security for the
faithful performance by Lessee of all of the terms, covenants, and conditions of
this Lease applicable to Lessee. If Lessee commits a default as provided for
herein, including but not limited to a default with respect to the provisions
contained herein relating to the condition of Building 4, Lessor m
ay (but shall
not be required to) use, apply or retain all or any part of the Security Deposit
for the payment of any amount which Lessor may spend by reason of default by
Lessee. If any portion of the Security Deposit is so used or applied, Lessee
shall, within ten days after written demand therefor, deposit cash with Lessor
in an amount sufficient to restore the Security Deposit to its original amount.
Lessee's failure to do so shall be a default by Lessee. Any attempt by Lessee to
transfer or encumber its interest in the Security Deposit shall be null and
void. Upon execution of this Lease, Lessee shall deposit with Lessor the
Security Deposit. Notwithstanding the above, Lessor agrees to waive the
requirement for Lessee to make a security deposit provided Lessee's
shareholder's equity exceeds $50 million. If at any time during this Lease and
for so long as, Lessee's shareholder's equity is less than $50 million, Lessee
shall deposit with Lessor the Security Deposit referenced above within ten days
aft
er the issuance of Lessee's financial statements indicating the reduction in
shareholder's equity below $50 million. If Lessee fails to make the Security
Deposit as required, Lessee shall be deemed to be in default per Section 14.1
(a) of this Lease.
Common Area Charges: Lessee shall pay to Lessor, as additional Rent, an amount
equal to Lessee's pro-rate share of the total common area charges of the
Premises ("CAC"). Lessee shall pay to Lessor as Rent, on or before the first day
of each calendar month during the Lease Term, subject to adjustment and
reconciliation as provided herein below, the sum of Sixteen Thousand Six Hundred
Nine Dollars ($16,609), said sum representing Lessee's estimated monthly payment
of Lessee's percentage share of CAC. It is understood and agreed that Lessee's
obligation under this paragraph shall be prorated to reflect the Commencement
Date and the end of the Lease Term.
Lessee's estimated monthly payment of CAC payable by Lessee during the calendar
year in which the Lease c
ommences is set forth above. At or prior to the
commencement of each succeeding calendar year term (or as soon as practical
thereafter), Lessor shall provide Lessee with Lessee's estimated monthly payment
for CAC which Lessee shall pay to Lessor as Rent. Within 120 days of the end of
the calendar year and the end of the Lease Term, Lessor shall provide Lessee a
statement of actual CAC incurred for the preceding year or other applicable
period in the case of a termination year. If such statement shows that Lessee
has paid less than its actual percentage, then Lessee shall on demand pay to
Lessor the amount of such deficiency. If such statement shows that Lessee has
paid more than its actual percentage, then Lessor shall, promptly refund such
excess to Lessee
Page 2
<PAGE>
or credit the amount thereof to the Rent next becoming due from Lessee. Lessor
reserves the right to revise the monthly estimate for CAC if the actual or
projected CAC show an increase or decrease in excess of 10% from an earlier
estimate for the same period. In such event, Lessor shall provide a revised
estimate to Lessee, together with an explanation of the reasons therefor, and
Lessee shall revise its monthly payments accordingly. Lessor's and Lessee's
obligation with respect to adjustments at the end of the Lease Term or earlier
expiration of this Lease shall survive the Lease Term or earlier expiration. In
addition to any Rent or other amounts payable under this Lease, Lessee shall
also pay to Lessor $2,338 per month for HVAC, roof, and parking lot re
placement,
which means new HVAC units, new roof, and new parking lot ("Replacements").
As used in this Lease, CAC shall exclude the cost of Replacements and shall
include but is not limited to: (i) items as specified in Sections 5(b), 6, 16
and 31; (ii) all costs and expenses including but not limited to supplies,
materials, equipment and tools used or required in connection with the operation
and maintenance of Building 4 and the common areas of the Premises; (iii)
licenses, permits and inspection fees; (iv) all other costs incurred by Lessor
in maintaining and operating Building 4 and the common areas of the Premises;
(v) Required Capital Repairs and Replacements for Building 4 and the common
areas of the Premises; and (vi) an amount equal to five percent (5%) of the
aggregate of all other CAC, as compensation for Lessor's overhead, accounting
and processing services in the manner noted in Exhibit C. Lessee shall have the
right to review the basis and computation analysis, which shall be based on
reas
onable commercial standards in the industry used to derive the CAC
applicable to this Lease annually. Lessor's monthly estimate of Lessee's CAC for
the first twelve months of the Lease Term is set forth on Exhibit C.
Notwithstanding anything to the contrary set forth in this Lease, in no event
shall Lessee have any obligation to perform or to pay directly, or to reimburse
Lessor for (as CAC or otherwise); all or any portion of the following repairs,
maintenance, improvements, replacements, premiums, claims, losses, fees,
charges, costs and expenses (collectively, "Costs"), nor shall any portion of
the TI Allowance or Additional TI Allowance be applied to, any of the following:
A. Losses Caused By Others: Costs occasioned by the act, omission or
-----------------------
violation of any law, rule, regulation, ordinance, covenant,
condition, by any other occupant of the Premises, or their respective
agents, employees
or contractors, and Costs occasioned by the sole
negligence, willful misconduct or breach of this Lease or applicable
Law by Lessor or Lessor's Agents.
B. Casualties and Condemnations: Except as expressly required by this
----------------------------
Lease to be paid by Lessee under another provision of this Lease.
C. Capital Improvements: Except as expressly provided in Section 5(b),
--------------------
below, Costs relating to repairs, alterations, improvements, equipment
and tools which could properly be capitalized under generally accepted
accounting principles, unless and except to the extent that (i) such
Costs reduce the expenses that would otherwise be incurred by Lessee
under the Lease and (ii) Lessee's share of such Cost during any
twelve-month period of the Lease is equitably determine
d and amortized
over the useful life of the capital item in question.
D. Reimbursable Expenses: Costs for which Lessor has a right of
---------------------
reimbursement from others.
E. Taxes: Taxes, assessments, all other governmental levies, and any
-----
increases in the foregoing occasioned by or relating to (i) land and
improvements not reserved for Lessee's exclusive or nonexclusive use,
(ii) assessments and other fees for improvements and services which do
not benefit the Premises, or (iii)
Page 3
<PAGE>
construction of improvements for other occupants of the Premises,
except as required under Section 16 of this Lease.
F. Construction Defects: Costs to correct any construction defect in the
--------------------
Premises, to comply with any law, rule, regulation, covenant,
condition, or restrictions, applicable to Building 4 or the Premises
on the Commencement Date, or to bring Building 4 or the Premises into
compliance with Section 2.1.8 as of the Commencement Date.
G. Utilities or Services: Costs (i) arising from the disproportionate use
---------------------
of any utility or service supplied by Lessor to any other occupant of
the Premises, or (ii) associated with utilities and services of a type
not provided to Lessee, except as expressly required under this Lease.
H. Interior Improvements: The cost of any renovation, improvement,
---------------------
painting or redecorating of any portion of the Premises not made
available for Lessee's use.
I. Leasing Expenses: Fees, commissions, attorneys' fees, Costs or other
----------------
disbursements incurred in connection with negotiations, disputes with,
or the breach of a lease by, any other occupant of the Premises.
J. Reserves: Depreciation, amortization or other expense reserves, except
--------
for Replacements.
K. Mor
tgages: Interest, charges and fees incurred on debt, payments on
---------
mortgages and-rent under ground leases.
L. Capital Leases: Lease payments and Costs for capital machinery and
--------------
equipment, such as air conditioners, elevators, and the like, except
as expressly required under this Lease.
M. Art: Costs of sculptures, fountains, paintings and other art objects.
---
N. Insurance: Insurance Costs for coverage not required to be carried by
---------
Lessor under this Lease, increases in insurance Costs caused by the
activities of another occupant of the Premises, except as expressly
provided under this Lease.
O. Management: Wage
s, salaries, compensation, and labor burden for any
----------
time when such employee is not actually working at the Premises or any
fee, profit or compensation retained by Lessor or its affiliates for
management and administration of the Premises in excess of the 5%
management and accounting fee specified above.
P. Duplication: Costs for which Lessee pays directly to a third person.
-----------
Late Charges: Lessee hereby acknowledges that a late payment made by Lessee to
Lessor of Rent and other sums due hereunder will cause Lessor to incur costs not
contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges, which may be imposed on Lessor
according to the terms of any mortgage or trust deed
covering the Premises.
Accordingly, if any installment of base monthly rent or monthly estimate of CAC
is not received by Lessor or Lessor's designee within five (5) days after such
amount is due or if any other Rent or other sum payable to Lessor is not
received by Lessor or Lessor's designee within ten (10) days
Page 4
<PAGE>
after Lessor delivers a written notice to Lessee, the Lessee shall pay to Lessor
a late charge equal to five (5%) percent of such overdue amount. The parties
hereby agree that such late charge represents a fair and reasonable estimate of
the costs Lessor will incur by reason of late payments made by Lessee.
Acceptance of such late charges by Lessor shall in no event constitute a waiver
of Lessee's default with respect to such overdue amount, nor shall it prevent
Lessor from exercising any of the other rights and remedies granted hereunder.
Notwithstanding the above, Lessor agrees to waive one late charge per any twelve
month period if it is the result of a non-recurring unusual event such as an
accounting error.
Quiet Enjoyment: Lessor covenants and agree
s with Lessee that upon Lessee paying
Rent and performing its covenants and conditions under this Lease, Lessee shall
and may peaceably and quietly have, hold and enjoy the Premises for the Lease
Term, subject, however, to the rights reserved by Lessor hereunder. Lessee's
duty to subordinate this Lease to any present or future lease of Building 4
and/or the Premises is conditioned upon Lessor providing to Lessee, and Lessor
shall provide Lessee with, a Recognition and Non-Disturbance Agreement in a
commercially reasonable form acceptable to Lessee and a major national lender.
It Is Further Mutually Agreed Between The Parties As Follows:
1. Possession: Possession shall be deemed tendered and the term shall commence
upon the first to occur of the following (the "Commencement Date"): (i) Building
4 and the Lessee Interior Improvements are Substantially Complete or (ii) Lessee
occupies Building 4 and commences to conduct business operations or (iii) if
Lessor is prevented from or delayed in completing its
work under this Lease due
to Lessee Delays, such work will be deemed Substantially Complete as of the date
on which it would have been Substantially Complete had it not been for such
Lessee Delays. Subject to the foregoing, it is the intention of Lessee and
Lessor that April 1, 1999 shall be the Substantial Completion Date and the
Commencement Date. "Substantially Complete" shall mean that: (i) Lessor has
tendered possession of Building 4 to Lessee, (ii) Lessor has met all legal
requirements for occupancy of the Building 4 (including the Lessee's
Improvements to be constructed therein by Lessor) and Lessor has obtained all
related city and fire marshal approvals for such occupancy, (iii) The Lessee
Interior Improvements have been completed in accordance with the Lessee
Improvement Plans (as defined in Section 2) except for punchlist items which
would not materially and adversely affect Lessee's intended use of Building 4,
and (iv) said interior of the building is in a "broom clean" condition.
1.1 Commen
cement Date Memorandum: When the actual Commencement Date is
determined, the parties shall execute a Commencement Date Memorandum setting
forth the Commencement Date, the expiration date of the Lease Term, but failure
to do so shall not affect the continuing validity and enforceability of this
Lease, which shall remain in full force and effect. Lessee's execution of the
Commencement Date Memorandum and/or acceptance of Building 4 on the Commencement
Date shall not be deemed a waiver of any of Lessor's obligations to construct
the Lessee Improvements in accordance with this Lease. Upon execution of such
memorandum, Lessor shall also be deemed to have assigned to Lessee all
warranties with respect to Building 4, which would reduce Lessee's maintenance
and surrender obligations hereunder and shall cooperate with Lessee to enforce
all such warranties.
2. Lessee's Improvements
2.1 Lessee's Improvements: The "Lessee Interior Improvements" shall be defined
as all items not part of the Building Shell (the "Bui
lding Shell" is defined on
attached Exhibit B, which shall be constructed by Lessor at its sole expense)
and shall be constructed by independent contractors to be employed by and under
the supervision of Lessor, in accordance with this Lease and the plans and
specifications prepared by Lessor for submission to the City of San Jose
("Lessee Improvement Plans"), complete with all mechanical and electrical
design, approved in writing by Lessee, and then to be attached hereto as Exhibit
C. 1. Lessee and its designated representatives, shall at all times during the
construction of the Lessee Interior Improvements have
Page 5
<PAGE>
access to Building 4 to monitor the progress of construction and Lessor's
compliance with its obligation hereunder; provided however, that such access
shall not unreasonably interfere with the activities of Lessor or its
contractors.
2.1.1 Budget: Before entering into any contract with a contractor furnishing
labor or materials in connection with the construction of the Lessee Interior
Improvements where the payment due under such contract is estimated by Lessor to
be in excess of Twenty-Five Thousand Dollars ($25,000), Lessor shall request
bids from at least three (3) qualified contractors selected by Lessor and
approved by Lessee (which approval shall not be unreasonably withheld) for
bidding. Unless Lessor and Lessee mutually agree otherwise, Lessor wi
ll accept
the lowest bid. Lessee shall have the opportunity to review and approve the
bidders list prepared by Lessor, which approval shall not be unreasonable
withheld, and may select a bidder of their choice for the bid, provided the
bidder, meets the Lessor's reasonable requirements.
2.1.2 Lessor's TI Allowance: Lessor shall contribute up to Three Million Six
Hundred Twenty-Eight Thousand Eight Hundred Dollars ($3,628,800) towards
construction of the Lessee Interior Improvements (the "TI Allowance"), which
cost is reflected in the Base Monthly Rent. In addition, if Lessee so requests,
Lessor shall also contribute up to an additional One Million Two Hundred Nine
Thousand Six Hundred Dollars ($1,209,600) (the "Additional TI Allowance") toward
construction of the Lessee's Interior Improvements, in which case the Additional
TI Allowance expended by Lessor shall result in an increase in monthly base rent
for each month during the term of this Lease equal to $16.60 for each $1,000 of
Additional TI Allowanc
e so expended. No part of the Additional TI Allowance used
by Lessee shall be used in calculating any annual or other periodic increases to
the base monthly rent. If any portion of the TI Allowance is not expended by
Lessor, then the monthly base rent for each month during the term of this Lease
shall be reduced by $14 for each $1,000 of TI Allowance not expended.
2.1.3 Cost Statement & Lessee's Contribution: Lessor has prepared and Lessee has
approved the cost statement substantially in the form attached as Exhibit D (the
"Cost Statement"), showing the expected construction cost and the actual items
to be constructed by Lessor of the Lessee Interior Improvements, the TI
Allowance, and the maximum cost Lessee must pay for construction of the Lessee
Interior Improvements. Lessor may include in the Cost Statement, a construction
management fee, covering all of its overhead, accounting,, profit, and other
similar costs not otherwise expressly indicated on the Cost Statement, equal to
four and one-half perc
ent (4.5%) of the cost of the Lessee Interior
Improvements, but in no case less than $150,000 or greater than $200,000.
General Condition expense shall be reflected in the Cost Statement. Lessee's
Cost Statement indicates that Lessee's share of the construction cost of Lessee
Interior Improvements will be zero (the "Lessee's Maximum Contribution"). After
the bids for construction of the Lessee's Improvements, as specified above are
obtained, the indicated amount of Lessee's share of the construction cost of
Lessee Interior Improvements based on such bids is more than 5% in excess of the
Lessee's Maximum Contribution as shown on the Lessee's Cost Statement, then
Lessee may either (a) proceed with the Lease and the Lessee's Maximum
Contribution shall be increased to the higher number established by the bidding,
or (b) Lessee shall have the right to modify the Lessee's Improvement Plans or
to remove items from such Plans, until the maximum amount to be paid by Lessee
is acceptable to Lessee. In all events,
Lessor and Lessee shall negotiate in
good faith to reduce the total bid for construction of the Lessee Interior
Improvements for by modifying the plans or taking other appropriate actions
Lessor. shall not exceed above without approval of Lessee. Lessee shall pay its
approved share of the cost for construction of the Lessee Interior Improvements,
up to an aggregate amount not exceeding the Lessee's Maximum Contribution,
within fifteen (15) days after the Commencement Date. All costs payable by
Lessee for construction of the Lessee Interior Improvements shall be reasonably
documented and subject to verification by Lessee. Notwithstanding anything to
the contrary in this Lease, in no event shall the Lessee's Cost Statement
including the TI Allowance (or Additional TI Allowance) be used to pay, nor
shall Lessee be required to pay, any of the following costs in connection with
the construction of Lessee Improvements: (a) the cost of constructing the
Building Shell or any other construction work which is not
described on the
Lessee Improvement Plans attached hereto Exhibit C the be modified in accordance
with this Lease, (b) the cost resulting from the default by Lessor, or any
architect, contractor or supplier in constructing the Lessee Interior
Improvements, Building 4 or the Premises in
Page 6
<PAGE>
accordance with this Lease and any agreement entered into by such parties in
connection with the construction of the Lessee Interior Improvements, (c) costs
that are recoverable by the Lessor from a third party (e.g., insurers,
warrantors, tortfeasors), (d) costs for overtime or expediting not authorized by
Lessee in writing, (e) profit, overhead, and administrative expenses in excess
of the fee described herein, (f) the cost incurred to construct and complete the
Building Shell, and/or (g) any costs of a type not budgeted on the Cost
Statement.
2.1.4 Change Orders: No change made to the plans for the Lessee Interior
Improvements and Cost Statement after the final approval by the parties thereof
shall be effective, unless such change is approved in writin
g by Lessor and
Lessee, which approval shall not be unreasonably withheld. In this regard,
Lessor shall not be required to approve any change(s) which will increase its
cost contribution above the TI Allowance (unless Lessee agrees to increase the
Lessee's Maximum Contribution by such increase), structurally impair Building 4,
or materially and adversely effect the outside appearance of the subject
building, and Lessee shall not be required to approve any change which will
increase its cost contribution above the Lessee's Maximum Contribution,
interfere with the conduct of Lessee's business, or materially detract from the
inside appearance of Building 4. Change orders shall be written and shall
describe the nature of the change and the reasonably determined increase or
decrease in each item of the Cost Statement (including the Lessor's management
fee) occasioned by the change. No increase in the Cost Statement shall be made
for any change caused by the default of Lessor or its architects, contractors,
an
d suppliers or any error in the plans for the Lessee Interior Improvements and
the actual increase in the cost of constructing the Lessee's Improvements shall
be the sole responsibility of the Lessor. If Lessee requests a change which will
delay the Substantial Completion of the Lessee Interior Improvements beyond the
Scheduled Completion Date (defined below), the maximum amount of Lessee delay
that can be attributed to the change shall also be specified in the change
order.
2.1.5 Inability to Obtain Materials: If Lessor notifies Lessee that any
fittings, finished or other materials specified by Lessee for the Lessee
Interior Improvements cannot be obtained within forty five (45) days after
placing an order therefore and Lessor reasonably determines that such extended
delivery time will prohibit Lessor from Substantially Completing the Lessee
Interior Improvements by the Scheduled Completion Date, and Lessor provides
Lessee with an estimate of such delay and the information that will permit
Lessee reaso
nably to select an alternative fitting, finish, or material,
including, without limitation any expected delays in the Scheduled Completion
Date associated with each alternative, then within three (3) business days,
Lessee shall either (i) execute a change order in accordance with the foregoing
requirements selecting an alternative presented by Lessor or developed by Lessee
and approved by Lessor, which approval shall not be unreasonably withheld, or
(ii) agree that any delay in the Substantial Completion of the Lessee Interior
Improvements as a consequence of the inability to obtain the item, up to the
maximum amount of delay estimated by Lessor in its notice, will be a Lessee
Delay.
2.1.6 Time Periods For Approval: Lessee shall approve or disapprove any
preliminary plan or change order on or before the fifth (5th) business day
following submission to Lessee of the plan and or change order to Lessee. Lessee
shall approve or disapprove on or before the fifth (5th) business day following
submission to Les
see of any final plans. If plans or change orders are
disapproved, Lessee shall state the reason for disapproval and Lessor and Lessee
shall act in good faith to resolve any issues.
2.1.7 Completion of the Work & Delay: Lessor shall use its best efforts to
Substantially Complete the Building Shell and the Lessee Interior Improvements
(collectively the "Improvements") on or before April l, 1999 (the "Scheduled
Completion Date"). Lessor and Lessee agree that Substantial Completion of the
Lessee Interior Improvements after the Scheduled Completion Date, provided
Lessee meets the deadlines for providing Lessee information and approvals set
forth in Exhibit E will cause Lessee and Lessor to incur costs not contemplated
by this Lease, the exact amount of Which will be extremely difficult to
ascertain. Accordingly, in addition to the Rent abatement provided herein until
the Commencement Date does occur, if the Lessee Interior Improvements are not
Substantially Completed on or before May 1, 1999, then Lessor ag
rees to reduce
the base monthly rental first payable by Lessee under this Lease by an
additional amount equal to Four Thousand Eight Hundred Eighty-Nine Dollars
Page 7
<PAGE>
$4,889) for each day of delay on and after May 1, 1999. The parties agree that
the abatement of base monthly rent and the right of termination in the event of
prolonged delay (as provided below)specified herein represents a fair and
reasonable settlement for both parties and neither party shall have further
liability to the other for any damages associated with delay in Substantial
Completion of the Lessee Interior Improvements. If the Lessee Interior
Improvements are not Substantially Completed on or before June 1, 1999, the
("Required Completion Date"), Lessee may as its sole option, by delivery of
written notice to Lessor at any time after the Required Completion Date, until
the Substantial Completion of the Lessee Interior Improvements, terminate this
Lease. Notwithstanding the foregoing, the Scheduled Completion Date and the
Required Completion Date shall be extended one date for each day Lessor's
Substantial Completion of the Improvements is actually delayed due to (i)
governmental action after receipt of the building permits for the Lessee
Interior Improvements (other than governmental refusal to approve work which
fails to comply with the approved Lessee Improvement Plans or applicable Law or
the building permit), (ii) acts of God, (iii) due to circumstances beyond
Lessor's control and (iv) "Lessee Delay" (which means an actual delay in
Substantial Completion of the Lessee Interior Improvements resulting from (a)
the Lessee's failure (through no fault of Lessor) to meet Lessee's deadlines for
approval of the plans for the Lessee Interior Improvements as set forth above,
(b) any change in the work requested by Lessee (up to the maximum delay
specified in the change order), and (c) any delay Lessee agrees in writing to
bear because of the inability
to obtain any fitting, finish or material pursuant
to Subsection 2.1.5, above) up to the maximum such Lessee Delay specified in the
Change Order for such work.
2.1.8 Standard of Performance: Lessor shall be responsible for ensuring that the
Building Shell and the Lessee Interior Improvements conform to all applicable
laws and the approved plans for the Lessee Interior Improvements. Neither
Lessee's approval of the plans for the Lessee Interior Improvements, the Cost
Estimate, or any contractor or architect, nor Lessee's recommendation of any
contractor or architect for the work, shall relieve Lessor of its obligations
under this Lease nor make Lessee liable to Lessor or any contractor or
architect, or their subcontractors with respect to the work.
2.1.9 Identification Of Lessee's Property: If Lessee pays a portion of the cost
for construction of the Lessee Interior Improvements, then as soon as reasonably
practicable after Substantial Completion of the Lessee Interior Improvements,
Lessor and Lessee sh
all designate as Lessee's property Lessee Interior
Improvements that have a cost approximately equal to the construction cost
amount paid by Lessee. Lessee shall be entitled to all investment tax credit,
depreciation and other tax and ownership attributes associated with the
improvements so designated as Lessee's property, including the right to remove
such items from the Premises at any time. Items designated as Lessee's property
shall not include any basic systems necessary for reasonable building operation.
Lessee shall be permitted during the installation of Lessee Improvements by
Lessor to install Lessee items such as telephone and security and other Lessee
related work provided it does not interfere with or delay Lessor's work or final
approvals ("Lessee's Work").
2.3 Acceptance And Covenants To Surrender: Lessor represents that the Lessee
Interior Improvements, Building 4 and the Premises shall comply with the
approved plans therefor and shall be in good working order and repair, and shall
compl
y with all requirements for occupancy as of the Commencement Date. Lessee
agrees on the last day of the Lease Term, or upon any sooner termination of the
Lease as a consequence of Lessee's default to surrender Building 4 to Lessor in
Good Condition and Repair except for insured casualties, condemnations, and
Hazardous Materials which are not the responsibility of the Lessee under Section
33, and the Substitutions and other alterations and additions that Lessor has
stated in writing may be surrendered. Good Condition and Repair ("Good Condition
and Repair") shall not mean original condition, nor a condition as bad as would
exist, if ordinary wear and tear was not addressed by performance of
commercially reasonable maintenance. Instead, "Good Condition and Repair" shall
generally mean that the leased premises are in the condition that one would
expect such premises (as Substantially Completed by Lessor) to be in, if
throughout the Lease Term Lessee uses and maintains said premises in a
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<PAGE>
commercially reasonable manner and in accordance with the requirements of this
Lease. "Required Repairs and Replacements" are the repair or replacement to
worn-out equipment, fixtures and improvements that a commercially reasonable
owner-user would make, which are not required to be capitalized as provided in
Section 5. All of the following are to be in Good Condition and Repair; (i) the
interior walls and floors of all offices and other interior areas, (ii) all
suspended ceilings and any carpeting are to be cleaned, (iii) all glazing,
windows, doors, door closures, and plate glass if not covered by insurance or
subject to the deductible and (iv) all electrical systems including light
fixtures and ballasts, plumbing and HVAC including temperature control s
ystems.
Lessee, on or before the end of the Lease Term or sooner termination of this
Lease, shall remove all its personal property and trade fixtures from the
Premises, and all such property not so removed on or before the last day of the
Lease Term, upon any sooner termination of the Lease as a consequence of
Lessee's default shall be deemed to be abandoned by Lessee. Lessee shall
reimburse Lessor for all disposition costs incurred by Lessor relative to
Lessee's abandoned property. If Building 4 is not surrendered at the end of the
Lease Term or earlier termination of this Lease, Lessee shall indemnify Lessor
against loss or liability resulting from any delay caused by Lessee in
surrendering Building 4 including, without limitation, any claims made by any
succeeding Lessee founded on such delay.
3. Uses Prohibited: Lessee shall not commit, or suffer to be committed, any
waste upon the Premises, or any nuisance, or other act or thing which may
disturb the quiet enjoyment of any other Lessee in or around
the Premises or
allow any sale by auction in Building 4, or allow Building 4 to be used for any
improper, immoral, unlawful or objectionable purpose, or place any loads upon
the floor, wails, or ceiling which may endanger the structure, or use any
machinery or apparatus which will in any manner vibrate or shake the Premises,
or place any harmful liquids in the drainage system of the building. No waste
materials or refuse shall be dumped upon or permitted to remain upon any part of
the Premises outside of Building 4, except as provided in the following
sentence. No materials, supplies, equipment, finished products or semi-finished
products, raw materials or articles of any nature shall be stored upon or
permitted to remain on any portion of the Premises outside of the building
structure, except to the extent approved by the local, state federal or other
applicable governing authority. Lessor consents to Lessee's use of materials
which are incidental to the normal, day-to-day operations of any office user
,
such as copier fluids, cleaning materials, etc. and to the use of the other
Hazardous Materials required for the conduct of Lessee's business, but this does
not relieve Lessee of any of its obligations not to contaminate the Premises and
related real property or violate any Hazardous Materials Laws applicable to such
use.
4. Alterations And Additions: Lessee shall not make, or suffer to be made, any
alteration or addition to said Premises, or any part thereof, without the
express, advance written consent of Lessor. All alterations and improvements
made to Building 4 by Lessee shall be Lessee's property and Lessee may remove
such alterations and improvements, other than replacements or substitutions of
the improvements constructed at Lessor's expense (herein "Substitutions"), at
any time. Lessee shall be entitled to all investment tax credit, depreciation,
other tax attributes, insurance proceeds, and condemnation proceeds for the
alterations and improvements made by Lessee which are not Substitutions.
Lessee
agrees that it will not proceed to make such alterations or additions until all
required government permits have been obtained and after having obtained consent
from Lessor to do so, until five (5) days from the receipt of such consent, so
that Lessor may post appropriate notices to avoid any liability to contractors
or material suppliers for payment for Lessee's improvements. Lessee shall at all
times permit such notices to be posted and to remain posted until the completion
of work. Subject to the requirements concerning the surrender condition of
Building 4 pursuant to Section 2.3 of the Lease, at the end of the Lease Term or
earlier termination of this Lease, Lessee may be required by Lessor to remove
Lessee's equipment, trade fixtures, and furniture, and any additions or
alterations installed by Lessee at or during the Lease Term and Lessee shall
return Building 4 to the condition that existed before the installation of
Lessee alterations and additions. Notwithstanding the above, Lessor agre
es to
allow any reasonable alterations and improvements and will notify Lessee at the
time of approval if such improvements or alterations are to be removed at the
end of the Lease Term or earlier termination of this Lease. Lessee may make
nonstructural improvements up to $50,000 in any calendar year without approval
of Lessor subject to other terms stated herein. Lessee may install or furnish in
and to Building 4 all
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<PAGE>
furniture, furnishings, fixtures, trade fixtures, equipment, supplies, shelving,
racking, bins and inventory which it requires for its use of Building 4, and all
of same will remain Lessee's property and may be removed by Lessee at any time
before expiration of the term provided that Lessee will repair any damage caused
by such removal. Lessor shall have no lien or other interest whatsoever in any
of Lessee's alteration improvements or items of personal property located in
Building 4 (other than the Substitutions), or any portion thereof or interest
therein, and Lessor hereby waives all such liens and interests. Within ten (10)
days following Lessee's request, Lessor shall execute documents in the form
attached as Exhibit F to evidence Lessor's waiver of a
ny right, title, lien or
interest in Lessee's Property located on or in the Premises.
5. Maintenance Of Premises:
(a) Subject to Section 5(b), 9, 19, and 21 of this Lease, Lessee shall at its
sole cost and expense keep, repair, and maintain the interior of Building 4,
including, but not limited to, all electrical, lighting systems, HVAC,
process piping, other special improvements, temperature control systems, and
plumbing systems in Good Condition and Repair, including any required
replacements which are not required to be capitalized for in accordance with
general accounting principles. Lessee shall maintain all wall surfaces and
floor coverings in Good Condition and Repair, free of holes, gouges, or
defacements and provide interior and exterior window washing as needed.
(b) Subject to the "Common Area Charges" provision of this Lease, above, Lessor
shall keep, repair, and maintain in Good Condition and Repair including
replacements the following, which shall be incl
uded in the monthly CAC as
provided below:
1. The exterior of the building, any appurtenances and every part thereof,
including but riot limited to,
glazing, sidewalks, parking areas, roof membrane, and painting of exterior
walls.
2. The landscaping by a landscape contractor to water, maintain, trim and
replace, when necessary, any
shrubbery and landscaping at the Premises.
3. The roof membrane by a service contract with a licensed reputable
roofing contractor which contract shall provide for a minimum of semi-
annual maintenance, cleaning of storm gutters, drains, removing of debris,
and trimming overhanging trees, repair of the roof and application of a
finish coat every five years to Building 4.
4. Exterior pest control.
5. Fire monitoring services and on request, Lessor will provide Lessee with
evidence of 24 hour monitoring.
6. Parking lot sweeping.
7. The HVAC is to be maintained by a service contract carried by L
essor or,
at Lessee's option, by Lessee, with a licensed air conditioning and heating
contractor, which contract shall provide for a minimum of quarterly
maintenance of all air conditioning and heating equipment at Building 4,
including HVAC repairs and Required Capital Repairs and Replacements which
are either excluded from such service contract or any existing equipment
warranties and are not Replacements.
Lessee shall reimburse Lessor for the reasonable cost incurred by Lessor in
performing the foregoing maintenance and repairs and in making any alterations,
repairs, or improvement to comply with applicable Law pursuant to Section 9,
below, or to comply with any insurance organization with respect to Building 4
pursuant to Section 6.A, below, as follows: Lessee shall reimburse Lessor (i)
its prorata portion of such cost, based on square footage or other equitable
means for work that benefits several tenant spaces, and (ii) the entire amount
of such cost which are directl
y related to Lessee's use of the Premises;
provided, however, that if the work performed by Lessor is a Required Repair or
Replacement, and the cost of an such item items of work exceeds for any lease
year Fifteen Thousand Dollars ($15,000), then during the Lease Term the amount
reimbursable by Lessee to Lessor shall be amortized (calculated in terms of
months) over the estimated useful life of the repair, replacement, alteration or
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<PAGE>
improvement commencing when the work is substantially complete, at an interest
rate equal to Wells Fargo's prime rate on the date the same is completed plus 1%
and Lessee shall pay to Lessor the monthly amortized amount so derived as part
of CAC during the Lese Term.
(c) To the extent inconsistent with the terms of this Lease, Lessee hereby
waives any and all rights to make repairs at the expense of Lessor as provided
in Section 1942 of the Civil Code of the State of California, and all rights
provided for by Section 1941 of said Civil Code.
(d) Lessor, at its sole cost and expense, shall be responsible for the repair of
any structural defects in the Premises including the roof structure (not
membrane), exterior walls and foundation during the Lease Term
.
6. Insurance:
A) Hazard Insurance: Lessee shall not use, or permit said Premises, or any part
thereof, to be used, for any purpose other than that for which Building 4 is
hereby leased; and no use shall be made or permitted to be made of Building 4,
nor acts done, which may cause a cancellation of any insurance policy covering
the Premises, or any part thereof, nor shall Lessee sell or permit to be kept,
used or sold, in or about Building 4, any article which may be prohibited by a
fire and extended coverage insurance policy. Lessee shall comply with any and
all reasonable requirements, pertaining to the Premises, of any insurance
organization or company, necessary for the maintenance of reasonable fire and
extended coverage insurance, covering the Premises, which relate to Lessee's
particular use and occupancy of Building 4. Lessor shall comply with all other
such insurance organization requirements applicable to the condition of the
Premises, subject to reimbursement by Lessee of the costs so incu
rred by Lessor
in accordance with Section 5, above. Lessor shall, at Lessee's sole cost and
expense, purchase and keep in force fire and extended coverage insurance,
covering loss or damage to the Premises in an amount equal to the full
replacement cost of the Premises, as determined by Lessor, with proceeds payable
to Lessor. In the event of a loss per the insurance provisions of this paragraph
to Building 4, Lessee shall be responsible for deductibles up to a maximum of
$5,000 per occurrence. Lessee acknowledges that the insurance referenced in this
paragraph does not include coverage for Lessee's personal property.
B) Loss of Rents Insurance: Lessor shall, at Lessee's sole cost and expense,
purchase and maintain in full force and effect, a policy of rental loss
insurance, in an amount equal to the amount of Rent payable by Lessee commencing
within sixty (60) days of date of loss (or on date of loss, if reasonably
available) for the next ensuing one (1) year, as reasonably determined by Lessor
with pr
oceeds payable to Lessor ("Loss of Rents Insurance").
C) Liability and Property Damage Insurance: Lessee, as a material part of the
consideration to be rendered to Lessor, hereby waives all claims against Lessor
and Lessor's Agents for damages to goods, wares and merchandise, and all other
personal property in, upon, or about the Premises, and for injuries to persons
in, upon, or about the Premises, from any cause arising at any time, and Lessee
will hold Lessor and Lessor's Agents exempt and harmless from any damage or
injury to any person, or to the goods, wares, and merchandise and all other
personal property of any person, arising from the use or occupancy of the
Premises by Lessee, or from the failure of Lessee to keep Building 4 in Good
Condition and Repair, as herein provided. Lessee shall, at Lessee's sole cost
and expense, purchase and keep in force a standard policy of commercial general
liability insurance and property damage liability policy for Building 4, and for
Lessee's and Lessee's Agen
ts' use and occupancy of the Premises, insuring the
Lessee having a combined single limit for both bodily injury, death and property
damage in an amount not less than five million dollars ($5,000,000.00). The
limits of said insurance shall not, however, limit the liability of Lessee
hereunder. Lessee shall, at its sole cost and expense, comply with all of the
legal insurance requirements of all local, municipal, state and federal
authorities now in force, or which may hereafter be in force, pertaining to
Lessee's use and occupancy of the Premises.
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<PAGE>
D) Personal Property Insurance: Lessee shall obtain, at Lessee's sole cost and
expense, a policy of fire and extended coverage insurance including coverage for
direct physical loss special form, and a sprinkler leakage endorsement insuring
the personal property of Lessee. The proceeds from any personal property damage
policy shall be payable to Lessee.
E) General Requirements: All insurance policies required in 6 C) and 6 D) above
shall: (i) provide for a certificate of insurance evidencing the insurance
required herein, being deposited with Lessor ten (10) days prior to the
Commencement Date, and upon each renewal, such certificates shall be provided 30
days prior to the expiration date of such coverage, (ii) be in a form reasonably
satisfactory to Lesso
r and shall provide the coverage required of Lessee in this
Lease, (iii) be carried with companies with a Best Rating of A minimum, (iv)
specifically provide that such policies shall not be subject to cancellation,
reduction of coverage, or other change except after 30 days prior written notice
to Lessor, and (v) with respect to the policy required by Section 6 C), name
Lessor, Lessor's lender, and any other party with an insurable interest in the
Premises identified to Lessee in writing as additional insurers by endorsement
to said policy.
F) Lessee's Reimbursement: Lessee agrees to pay to Lessor, as additional Rent,
on demand, the full cost of the insurance polices referenced in 6 A) and 6 B)
above as evidenced by insurance billings to Lessor which shall be included in
the CAC. If Lessee does not occupy the entire property covered by any such
policy, the insurance premiums shall be allocated to the portion of the Premises
occupied by Lessee on a pro-rata square footage or other equitable basis, as
det
ermined by Lessor and the liable party shall pay the deductible unless it
applies to all Lessee's. It is agreed that Lessee's obligation under this
paragraph shall be prorated to reflect the Commencement Date and the end of the
Lease Term.
G) Waivers and Subrogation: Notwithstanding anything to the Contrary in this
Lease Lessor and Lessee, hereby waive any rights each may have against the other
and their respective agents, employees, officers, directors, assigns, and
subtenant under this Lease, related to any loss or damage caused to Lessor or
Lessee as the case may be, or to the Premises or its contents, and which may
arise from any insured risk covered or to be covered by fire and extended
coverage insurance or Lessee's personal property coverage as required under this
Lease. The parties shall provide that their respective insurance policies
insuring the property or the personal property include a waiver of any right of
subrogation, which said insurance company may have against Lessor or Lessee, as
th
e case may be.
7. Abandonment: Lessee shall not vacate or abandon Building 4 at any time during
the Lease Term; and if Lessee shall abandon, vacate or surrender Building 4, or
be dispossessed by process of law, or otherwise, any personal property belonging
to Lessee and left on the Premises shall be deemed to be abandoned, at the
option of Lessor. Notwithstanding the above, Building 4 shall not be considered
vacated or abandoned if Lessee maintains Building 4 in Good Condition and
Repair, provides security and is not in default.
8. Free From Liens: Lessee shall keep the subject Premises free from any and all
liens including but not limited to liens arising out of any work performed,
materials furnished, or obligations incurred by Lessee. However, the Lessor
shall allow Lessee to contest a lien claim, so long as the claim is discharged
prior to any foreclosure proceeding being initiated against the property and
provided Lessee provides Lessor a bond if the lien exceeds $5,000.
9. Compliance With Govern
mental Regulations: Lessee shall, at its sole cost and
expense, comply with all of the requirements of all local, municipal, state and
federal authorities which may be enacted after the Commencement Date, pertaining
to Building 4, and shall faithfully observe in the use and occupancy of Building
4 all local and municipal ordinances and state and federal statutes now in force
or which may hereafter be in force. Notwithstanding the foregoing, Lessee shall
not be required to pay for the construction of any single improvement required
under this paragraph in excess of $15,000, unless such improvement is required
to comply with Lessee's particular use of Building 4; if such improvement is not
required due to Lessee's particular use
Page 12
<PAGE>
of Building 4 and such improvement cost exceeds $15,000, such improvement cost
shall be amortized over the estimated useful life of the improvement at Wells
Fargo prime rate on the date such improvement is completed plus one percent
(1%). Lessee shall pay to Lessor the amortized costs of such improvement on a
monthly basis over the Lease Term as part of the CAC.
10. Intentionally Omitted.
11. Advertisements And Signs: Lessee agrees to pay its pro-rata share of a sign
monument to be installed by Lessor for Lessee on the Premises in an amount not
to exceed four thousand dollars ($4,000.00). Lessee shall be entitled to utilize
a pro-rata share of the monument sign at the Premises. Lessee shall not place or
permit to be placed, in, upon or about the Premises
any unusual or extraordinary
signs, or any signs not approved by the city, local, state, federal or other
applicable governing authority. Lessee shall not place, or permit to be placed
upon the Premises, any signs, advertisements or notices without the written
consent of the Lessor, and such consent shall not be unreasonably withheld. A
sign so placed on the Premises shall be so placed upon the understanding and
agreement that Lessee will remove same at the end of the Lease Term or earlier
termination of this Lease and repair any damage or injury to the Premises caused
thereby, and if not so removed by Lessee, then Lessor may have the same removed
at Lessee's expense.
12. Utilities: Lessee shall pay for all water, gas, heat, light, power,
telephone and other utilities supplied to Building 4. Any charges for sewer
usage, PG&E and telephone site service or related fees shall be the obligation
of Lessee and paid for by Lessee. If any such services are not separately
metered to Lessee, Lessee shall pay a r
easonable proportion of all charges which
are jointly metered, the determination to be made by Lessor acting reasonably
and on any equitable basis. Lessor and Lessee agree that Lessor shall not be
liable to Lessee for any disruption in any of the utility services to Building
4.
13. Attorney's Fees: In case suit should be brought relating to the Premises,
for the recovery of any sum due hereunder, because of the breach of any other
covenant herein, or to enforce, protect, or establish any term, conditions, or
covenant of this Lease or the right of either party hereunder, the losing party
shall pay to the Prevailing Party reasonable attorney's fees which shall be
deemed to have accrued on the commencement of such action and shall be
enforceable whether or not such action is prosecuted to judgment. The term
"Prevailing Party" shall mean the party that received substantially the relief
requested, whether by settlement, dismissal, summary judgment, judgment, or
otherwise.
14. Default and Remedies:
14.1 De
fault: The occurrence of any of the following shall constitute a default
and breach of this Lease by Lessee: a) Any failure by Lessee to pay Rent or to
make any other payment required to be made by Lessee hereunder when due if not
cured within ten (10) days after written notice thereof by Lessor to Lessee;
b) The abandonment of Building 4 by Lessee except as provided in Section 7; c)
Failure by Lessee to observe or perform any other provision of this Lease to
be observed or performed by Lessee, where such failure continues for thirty
days after written notice thereof by Lessor to Lessee; provided, however, that
if the nature of such default is such that the same cannot be reasonably cured
within such thirty (30) day period, Lessee shall not be deemed to be in
default if Lessee shall, within such period, commence such cure and thereafter
diligently prosecute the same to completion; d) The making by Lessee of any
general assignment for the benefit of creditors; the filing by or agai
nst
Lessee of a petition to have Lessee adjudged a bankrupt or of a petition for
reorganization or arrangement under any law relating to bankruptcy which
persists for more than 60 days; e) The appointment of a trustee or receiver to
take possession of substantially all of Lessee's assets or Lessee's interest
in this Lease, or the attachment, execution or other judicial seizure of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease. Failure by Lessor to observe or perform any provision
of this Lease to be observed or performed by Lessor, where such failure
continues for thirty days after written notice thereof by Lessee to Lessor,
shall constitute a breach of this Lease
Page 13
<PAGE>
by Lessor; provided, however, that if the nature of such default is such that
the same cannot be reasonably cured within such thirty day period, Lessor
shall not be deemed to be in default if Lessor shall, within such period,
commence such cure and thereafter diligently prosecute the same to completion.
14.2 Surrender Of Lease: In the event of any such default by Lessee, then in
addition to any other remedies available to Lessor at law or in equity, Lessor
shall have the immediate option to terminate this Lease before the end of the
Lease Term and all rights of Lessee hereunder, by giving written notice of such
intention to terminate. In the event that Lessor terminates this Lease due to a
default of Lessee, then Lessor may recover from Lessee: a)
the worth at the time
of award of any unpaid Rent which had been earned at the time of such
termination; plus b) the worth at the time of award of unpaid Rent which would
have been earned after termination until the time of award exceeding the amount
of such rental loss that the Lessee proves could have been reasonably avoided;
plus c) the worth at the time of award of the amount by which the unpaid Rent
for the balance of the Lease Term after the time of award exceeds the amount of
such rental loss that the Lessee proves could have been reasonably avoided; plus
d) any other amount necessary to compensate Lessor for all the detriment
proximately caused by Lessee's failure to perform his obligations under this
Lease or which in the ordinary course of things would be likely to result
therefrom; and e) at Lessor's election, such other amounts in addition to or in
lieu of the foregoing as may be permitted from time to time by applicable
California law. As used in (a) and (b) above, the "worth at the time of
award"
is computed by allowing interest at the rate of Wells Fargo's prime rate plus
two percent (2%) per annum. As used in (c) above, the "worth at the time of
award" is computed by discounting such amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of award plus one percent
(1%).
14.3 Right of Entry and Removal: In the event of any such default by Lessee,
Lessor Shall also have the right, with or without terminating this Lease, to re-
enter Building 4 and remove all persons and property therefrom; such property
may be removed and stored in a public warehouse or elsewhere at the cost of and
for the account of Lessee.
14.4 Abandonment: In the event of the abandonment, except as provided in Section
7, of Building 4 by Lessee or in the event that Lessor shall elect to re-enter
as provided in paragraph 14.3 above or shall take possession of Building 4
pursuant to legal proceeding or pursuant to any notice provided by law, and
Lessor does not elect to terminate this Lease
as provided in Section 14.2 above,
then Lessor may from time to time, without terminating this Lease, either
recover all Rent as it becomes due or relet Building 4 or any part thereof for
such term or terms and at such rental rates and upon such other terms and
conditions as Lessor, in its sole discretion, may deem advisable with the right
to make alterations and repairs to Building 4. In the event that Lessor elects
to relet Building 4, then any Rent received by Lessor from such reletting shall
be applied; first, to the payment of any indebtedness other than Rent due
hereunder from Lessee to Lessor; second, to the payment of any cost of such
reletting; third, to the payment of the cost of any alterations and repairs to
Building 4; fourth, to the payment of Rent due and unpaid hereunder; and the
residue, if any, shall be held by Lessor and applied to the payment of future
Rent as the same may become due and payable hereunder. Should that portion of
such Rent received from such reletting during any month
, which is applied by the
payment of Rent hereunder according to the application procedure outlined above,
be less than the Rent payable during that month by Lessee hereunder, then Lessee
shall pay such deficiency to Lessor immediately upon demand therefor by Lessor.
Such deficiency shall be calculated and paid monthly. Lessee shall also pay to
Lessor, as soon as ascertained, any costs and expenses incurred by Lessor in
such reletting or in making such alterations and repairs not covered by the
rentals received from such reletting.
14.5 No Implied Termination: No re-entry or taking possession of the Premises by
Lessor pursuant to Section 14.3 or Section 14.4 of this Lease shall be construed
as an election to terminate this Lease unless a written notice of such intention
is given to Lessee or unless the termination thereof is decreed by a court of
competent jurisdiction. Notwithstanding any reletting without
Page 14
<PAGE>
termination by Lessor because of any default by Lessee, Lessor may at any time
after such reletting elect to terminate this Lease for any such default.
14.6 Habitual Default: Lessor and Lessee agree that if Lessee shall have
defaulted in the payment of base monthly rent or estimated CAC for three or more
times during any twelve month period during the Lease Term, then such conduct
shall, at the option of the Lessor, represent a separate event of default which
cannot be cured by Lessee. Lessee acknowledges that the purpose of this
provision is to prevent repetitive defaults by the Lessee under the Lease, which
constitute a hardship to the Lessor and deprive the Lessor of the timely
performance by the Lessee hereunder.
15. Surrender Of Lease: The voluntary
or other surrender of this Lease by
Lessee, or a mutual cancellation thereof, shall not work a merger, and shall, at
the option of Lessor, terminate all or any existing subleases or sub tenancies,
or may, at the option of Lessor, operate as an assignment to him of any or all
such subleases or sub tenancies.
16. Taxes: Lessee shall pay and discharge punctually and when the same shall
become due and payable without penalty, its share (as herein provided) of all
real estate taxes, personal property taxes, taxes based on vehicles, consultant
and invitees utilizing parking areas in the Premises, taxes computed or based on
rental income (other than federal, state and municipal net income taxes),
Environmental Surcharges, privilege taxes, excise taxes, business and occupation
taxes, school fees or surcharges, gross receipts taxes, sales and/or use taxes,
employee taxes, occupational license taxes, water and sewer taxes, assessments
(including, but not limited to, assessments for public improvements or benefit
),
assessments for local improvement and maintenance districts, and all other
governmental impositions and charges of every kind and nature whatsoever,
regardless of whether now customary or within the contemplation of the parties
hereto and regardless of whether resulting from increased rate and/or valuation,
or whether extraordinary or ordinary, general or special, unforeseen or
foreseen, or similar or dissimilar to any of the foregoing (all of the foregoing
being hereinafter collectively called "Tax" or "Taxes") which, at any time
during the Lease Term, shall be applicable to Lessee or which shall be a lien
against the Premises, or shall become due and payable and a lien or charge upon
the Premises under or by virtue of any present or future laws, statutes,
ordinances, regulations, or other requirements of any governmental authority
whatsoever. Lessee shall only be responsible for the Taxes assessed against
Building 4 and not for any other portion of the Premises. All taxes shall be
prorated to the te
rm of the Lease and only sums applicable to the term of the
Lease shall be included therein. Notwithstanding anything to the contrary in
this Lease, Lessee's obligation to pay or reimburse Lessor for Taxes will not
mean the following: fines, interest, penalties (except as a result of actions of
Lessee); franchise, estate, gift, inheritance, successorship, capital levy,
capital stock or transfer taxes: income, excess profits, or other similar
revenue tax, assessment, charge or levy on rent; installments of taxes other
than the then current installment; installments which are not applicable to the
term of the Lease; cost and expenses associated with contesting Taxes (provided
that Lessee's share of any refund as a result of such contest may be reduced by
Lessee's share of Lessor's reasonable costs and expenses of obtaining such
refund), Taxes associated with the property or vehicles of other tenants of the
Premises or their respective employees, contractors and invitees, and Taxes of
the type described in
the second sentence hereafter, to the extent that such
Taxes are attributable to any other occupant of the Premises or their space or
activities. The term "Environmental Surcharge" shall include any and all
expenses, taxes, charges or penalties imposed by the Federal Department of
Energy, Federal Environmental Protection Agency, the Federal Clean Air Act, or
any regulations promulgated thereunder, or any other local, state or federal
governmental agency or entity now or hereafter vested with the power to impose
taxes, assessments or other types of surcharges as a means of controlling or
abating environmental pollution or the use of energy in regard to the use,
operation or occupancy of the Premises, but will not include costs directly
related to investigation or remediation of environmental conditions or Hazardous
Materials, unless related to actions or omissions of Lessee as provided in
Section 33 or as a result of an area wide assessment not related to a specific
lessee. The term "Tax" shall include, w
ithout limitation, all taxes,
assessments, levies, fees, impositions or charges levied, imposed, assessed,
measured, or based in any manner whatsoever (i) in whole or in part on the Rent
payable by Lessee under this Lease, (ii) upon or with respect to the use,
possession, occupancy,
Page 15
<PAGE>
leasing, operation or management of the Premises, (iii) upon this transaction or
any document to which Lessee is a party creating or transferring an interest or
an estate in the Premises, (iv) upon Lessee's business operations conducted at
the Premises, (v) upon, measured by or reasonably attributable to the cost or
value of Lessee's equipment, furniture, fixtures and other personal property
located on the Premises or the cost or value of any leasehold improvements made
in or to the Premises by or for Lessee, regardless of whether title to such
improvements shall be in Lessor or Lessee, or (vi) in lieu of or equivalent to
any Tax set forth in this Section 16. In the event any such Taxes are payable by
Lessor and it shall not be lawful for Lessee to reimbur
se Lessor for such Taxes,
then the Rent payable thereunder shall be increased to net Lessor the same net
rent after imposition of any such Tax upon Lessor as would have been payable to
Lessor prior to the imposition of any such Tax. It is the intention of the
parties that Lessor shall be free from all such Taxes and all other governmental
impositions and charges of every kind and nature whatsoever. However, nothing
contained in this Section 16 shall require Lessee to pay any Federal or State
income, franchise, estate, inheritance, succession, transfer or excess profits
tax imposed upon Lessor. If any general or special assessment is levied and
assessed against all or any portion of the Premises, Lessor agrees to use its
best reasonable efforts to cause the assessment to become a lien on the Premises
securing repayment of a bond sold to finance the improvements to which the
assessment relates which is payable in installments of principal and interest
over the maximum term allowed by law. It is understood
and agreed that Lessee's
obligation under this paragraph will be prorated to reflect the Commencement
Date and the end of the Lease Term. It is further understood that if Taxes cover
more than Building 4 and Lessee does not occupy the entire property to which
such taxes shall apply, the Taxes will be allocated to the portion of the
Premises occupied by Lessee based on a pro-rata square footage or other
equitable basis, as reasonably determined by Lessor. All tax payment by Lessee
required herein shall be paid as part of the monthly CAC.
Subject to any limitations or restrictions imposed by any deeds of trust or
mortgages now covering or affecting the Premises, Lessee shall have the right to
contest or review the amount or validity of any Tax by appropriate legal
proceedings but which is not to be deemed or construed in any way as relieving,
modifying or extending Lessee's covenant to pay such Tax at the time and in the
manner as provided in this Section 16. However, as a condition of Lessee's right
to c
ontest, if such contested Tax is not paid before such contest and if the
legal proceedings shall not operate to prevent or stay the collection of the Tax
so contested, Lessee shall, before instituting any such proceeding, protect the
Premises and the interest of Lessor and of the beneficiary of a deed of trust or
the mortgagee of a mortgage affecting the Premises against any lien upon the
Premises by a surety bond, issued by an insurance company acceptable to Lessor
and in an amount equal to one and one-half (1 1/2) times the amount contested
or, at Lessor's option, the amount of the contested Tax and the interest and
penalties in connection therewith. Any contest as to the validity or amount of
any Tax, whether before or after payment, shall be made by Lessee in Lessee's
own name, or if required by law, in the name of Lessor or both Lessor and
Lessee. Lessee shall defend, indemnify and hold harmless Lessor from and against
any and all costs or expenses, including attorneys' fees, in connection with any
such proceedings brought by Lessee, whether in its own name or not. Lessee shall
be entitled to retain any refund of any such contested Tax and penalties or
interest thereon, which have been paid by Lessee. Nothing contained herein shall
be construed as affecting or limiting Lessor's right to contest any Tax at
Lessor's expense.
17. Notices: Unless otherwise provided for in this Lease, any and all written
notices or other communication (the "Communication") to be given in connection
with this Lease shall be given in writing and shall be given by personal
delivery, facsimile transmission or by mailing by registered or certified mail
with postage thereon or recognized overnight courier, fully prepaid, in a sealed
envelope addressed to the intended recipient as follows:
(a) to the Lessor at: 10050 Bandley Drive
Cupertino, California 95014
Attention: Carl E. Berg
Facsimile No.: 408.725.1626
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<PAGE>
(b) to the Lessee at: 1865 Lundy Ave.
San Jose, California 95131
Attention: C.F.O.
Facsimile No. 408.954.5940
or such other addresses, or individual as may be designated by a Communication
given by a party to the other parties as aforesaid. Any Communication given by
personal delivery shall be conclusively deemed to have been given and received
on a date it is so delivered at such address provided that such date is a
business day, otherwise on the first business day following its receipt, and if
given by registered or certified mail, on the day on which delivery is made or
refused or if given by recognized overnight courier, on the first business day
following deposit with such over
night courier and if given by facsimile
transmission, on the day on which it was transmitted provided such day is a
business day, failing which, on the next business day thereafter.
18. Entry By Lessor: Lessee shall permit Lessor and its agents to enter into and
upon Building 4 at all reasonable times using the minimum amount of interference
and inconvenience to Lessee and Lessee's business, subject to any security
regulations of Lessee, for the purpose of inspecting the same or for the purpose
of maintaining said building, or for the purpose of making repairs, alterations
or additions to any other portion of said building, including the erection and
maintenance of such scaffolding, canopies, fences and props as may be required,
without any rebate of Rent and without any liability to Lessee for any loss of
occupation or quiet enjoyment of the Premises; and shall permit Lessor and his
agents, at any time within ninety (90) days prior to the end of the Lease Term,
to place upon said Premises any usual or
ordinary "For Sale" or "For Lease"
signs and exhibit the Premises to prospective lessees at reasonable hours.
19. Destruction Of Premises: In the event of a destruction of Building 4 during
the Lease Term from any cause which is required to be covered by Lessor's
property insurance, Lessor shall forthwith repair the same to the condition
existing immediately prior to the destruction, but such destruction shall in no
way annul or void this Lease, except that Lessee shall be entitled to a
proportionate reduction of Rent while such repairs are being made to the extent
of payments received by Lessor under its Loss of Rents Insurance coverage
(coverage shall last up to twelve (12) months after start). With respect to any
destruction which Lessor is obligated to repair or may elect to repair under the
terms of this paragraph, the provision of Section 1932, Subdivision 2, and of
Section 1933, Subdivision 4, of the Civil Code of the State of California are
waived by Lessee. Notwithstanding the above, Lessor is
only obligated to repair
or rebuild to the extent of the total of (i) insurance proceeds which are
payable pursuant to the insurance Lessor is required to carry under the terms of
this Lease, plus (ii) any deductible amount which Lessee is required to pay
under the terms of this Lease, plus (iii) any other funds Lessee may elect in
its discretion to contribute. Should Lessor determine that insufficient or no
insurance proceeds (together with the deductible and any other contributed
funds) are available for repair or reconstruction of Building 4 (for any reason
other than Lessor's failure to carry the insurance required by Section 6),
Lessor, at its sole option, may terminate the Lease. Notwithstanding such Lessor
termination Lessee shall have the option of continuing this Lease by agreeing to
pay all repair costs to Building 4 which are not required to be covered by
Lessor's insurance. If Building 4 is so damaged or made unusable by fire or
casualty that same cannot be restored and made suitable and safe
within 180 days
from such damage or destruction, or if the restoration of Building 4 is not
substantially completed within said one hundred eighty day (180) period, Lessee
may terminate the Lease effective as of the date of such fire or casualty by
written notice given to Lessor, whereupon the Lease will terminate and all rent
and other charges then due under the lease will be apportioned as of the date of
such fire casualty, subject to a one day delay for each day of delay due to (i)
governmental action after receipt of the building permits for the Lessee
Interior Improvements (other than governmental refusal to approve work which
fails to comply with the approved Lessee Improvement Plans or applicable Law or
the building permit), (ii) acts of God, (iii) due to circumstances beyond
Lessor's reasonable control and (iv) Lessee Delay.
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<PAGE>
20. Assignment And Subletting: Lessee shall not assign this Lease, or any
interest therein, and shall not sublet Building 4 or any part thereof, or any
right or privilege appurtenant thereto, or cause any other person or entity (a
bona fide successor in interest, subsidiary or affiliate of Lessee excepted) to
occupy or use Building 4, or any portion thereof, without the advance written
consent of Lessor, which consent shall not be unreasonably withheld or delayed.
Any such assignment or subletting without such consent shall be void, and shall,
at the option of the Lessor, terminate this Lease. This Lease shall not, or
shall any interest therein, be assignable, as to the interest of Lessee, by
operation of law, without the written consent of Lessor; provide
d, however, the
sale of Lessee's stock through a public exchange shall not be deemed to be an
assignment by operation of law. Notwithstanding the foregoing, Lessee may sublet
or assign this Lease to a legal entity which controls, is controlled by, or is
under common control with Lessee, or to a successor in interest, whether by
merger or acquisition, provided there is no substantial reduction in the net
worth of the resulting entity, or to the purchaser of substantially all of the
Lessees business conducted in Building 4. Whether or not Lessor's consent to a
sublease or assignment is required, in the event of any sublease or assignment,
Lessee shall be and shall remain primarily liable for the performance of all
conditions, covenants, and obligations of Lessee hereunder and, in the event of
a default by an assignee or sublessee, Lessor may proceed directly against the
original Lessee hereunder and/or any other predecessor of such assignee or
sublessee without the necessity of exhausting remedies against
said assignee or
sublessee.
21. Condemnation: If any part of Building 4 shall be taken for any public or
quasi-public use, under any statute or by right of eminent domain or private
purchase in lieu thereof, and a part thereof remains which is susceptible of
occupation hereunder, this Lease shall as to the part so taken, terminate as of
the date title vests in the condemnor or purchaser, and the Rent payable
hereunder shall be adjusted so that the Lessee shall be required to pay for the
remainder of the Lease Term only that portion of Rent as the value of the part
remaining. The rental adjustment resulting will be computed at the same base
monthly rental rate for the remaining part not taken. If all of Building 4, or
such part thereof be taken so that there does not remain a portion susceptible
for occupation hereunder, this Lease shall thereupon terminate, for the purposes
hereof, a portion susceptible for occupancy shall mean a portion of Building 4
in excess of 85% thereof. If a part or all of Buildi
ng 4 be taken, all
compensation awarded upon such taking shall be payable to the Lessor. Lessee may
file a separate claim and be entitled to any award granted to Lessee for
condemnation proceeds (whether by award or payment under threat of condemnation)
based on: (i) the value of the condemned improvements Lessee has the right to
remove from Building 4; (ii) Lessee's moving cost; (iii) loss to Lessee's
goodwill as a consequence of the condemnation; and (iv) Lessee's trade fixtures.
22. Effects Of Conveyance: The term "Lessor" as used in this Lease, means only
the owner for the time being of the land and buildings constituting the
Premises, so that, in the event of any sale of said land or building, or in the
event of a ground lease of said building, Lessor shall be and hereby is entirely
freed and relieved of all covenants and obligations of Lessor hereunder, and it
shall be deemed and construed, without further agreement between the parties and
the purchaser of any such sale, or the Lessor of the build
ing, that the
purchaser or lessor of the building has assumed and agreed to carry out any and
all covenants and obligations of the Lessor hereunder. If any security is given
by Lessee to secure the faithful performance of all or any of the covenants of
this Lease on the part of Lessee, Lessor shall transfer and deliver the
security, as such, to the purchaser at any such sale of the building, and
thereupon the Lessor shall be discharged from any further liability.
23. Subordination: This Lease, in the event Lessor notifies Lessee in writing,
shall be subordinate to any ground lease, deed of trust, or other hypothecation
for security now or hereafter placed upon the real property at which the
Premises is a part and to any and all advances made on the security thereof and
to renewals, modifications, replacements and extensions thereof. Lessee agrees
to promptly execute any commercially reasonable documents which may be required
to effectuate such subordination. Notwithstanding such subordination, if Lessee
is not in default and so long as Lessee shall pay the Rent and observe and
perform all of the provisions and covenants required under this Lease, Lessee's
right to quiet possession of the Premises and Lessee's
Page 18
<PAGE>
right and remedies under this Lease shall not be disturbed or effected by any
subordination, and each successor to Lessor's interest in the Lease (by
foreclosure, deed-in-lieu of foreclosure, or otherwise) shall be bound by and
shall perform the obligations of the Lessor to be performed after the date it
acquires the Lessor's interest in the Lease (except that the successor shall not
be liable for any prior defaults of the Lessor, the return of any security
deposit not transferred to the successor, nor for the cost of restoring the
Premises following a peril or condemnation in excess of the insurance and
condemnation proceeds actually received).
24. Waiver: The waiver by Lessor or Lessee of any breach of any term, covenant
or condition, herein contained s
hall not be construed to be a waiver of such
term, covenant or condition or any subsequent breach of the same or any other
term, covenant or condition therein contained. The subsequent acceptance of Rent
hereunder by Lessor shall not be deemed to be a waiver of Lessee's breach of any
term, covenant, or condition of the Lease.
25. Holding Over: Any holding over after the end of the Lease Term requires
Lessor's written approval prior to the end of the Lease Term, which,
notwithstanding any other provisions of this Lease, Lessor may withhold. Such
holding over shall be construed to be a tenancy at sufferance from month to
month. Lessee shall pay to Lessor monthly base rent equal to one and one-quarter
(1.25) times the monthly base rent installment due in the last month of the
Lease Term and all other additional rent and all other terms and conditions of
the Lease shall apply, so far as applicable. Holding over by Lessee without
written approval of Lessor shall subject Lessee to the liabilities and
obligati
ons provided for in this Lease and by law, including, but not limited to
those in Section 2 of this Lease. Lessee shall indemnify and hold Lessor
harmless against any loss or liability resulting from any delay caused by Lessee
in surrendering Building 4, including without limitation, any claims made or
penalties incurred by any succeeding lessee or by Lessor. No holding over shall
be deemed or construed to exercise any option to extend or renew this Lease in
lieu of full and timely exercise of any such option as required hereunder.
26. Lessor's Liability: If Lessee should recover a money judgment against Lessor
arising in connection with this Lease, the judgment shall be Satisfied only out
of the Lessor's interest in the Premises and neither Lessor or any of its
partners shall be liable personally for any deficiency.
27. Estoppel Certificates: Lessee or Lessor shall at any time during the Lease
Term, upon not less than ten (10) business days prior written notice, execute
and deliver a statement in writ
ing certifying that, this Lease is unmodified and
in full force and effect (or, if modified, stating the nature of such
modification) and the dates to which the Rent and other charges have been paid
in advance, if any, and acknowledging that there are not, to their knowledge,
any uncured defaults on the part of Lessor hereunder or specifying such defaults
(if they are claimed). Any such statement may be conclusively relied upon by any
prospective purchaser or encumbrancer of the Premises. Failure to deliver such a
statement within such time shall be conclusive upon the Lessee that (a) this
Lease is in full force and effect, without modification except as may be
represented in the certificate presented for execution; by Lessor, and (b) there
are no uncured defaults in performance.
28. Time: Time is of the essence of the Lease.
29. Captions: The headings on titles to the paragraphs of this Lease are not a
part of this Lease and shall have no effect upon the construction or
interpretation of any part ther
eof. This instrument contains all of the
agreements and conditions made between the parties hereto and may not be
modified orally or in any other manner than by an agreement in writing signed by
all of the parties hereto or their respective successors in interest.
30. Party Names: Lessor and Lessee may be used in various places in this Lease
as a substitute for Lessor and Lessee respectively.
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<PAGE>
31. Earthquake Insurance: As a condition of Lessor agreeing to waive the
requirement for earthquake insurance, Lessee agrees that it will pay, as
additional Rent, which shall be included in the monthly CAC, an amount not to
exceed Thirty Two Thousand Two Hundred Dollars ($32,200) per year for earthquake
insurance if Lessor desires to obtain some form of earthquake insurance in the
future, if and when available, on terms acceptable to Lessor as determined in
the sole and absolute discretion of Lessor.
32. Intentionally Omitted.
33. Hazardous Materials
33.1 Definitions: As used in this Lease, the following terms shall have the
following meaning:
a. The term "Hazardous Materials" shall mean (i) polychlorinated biphenyls;
(ii) radioactive materia
ls and (iii) any chemical, material or substance
now or hereafter defined as or included in the definitions of "hazardous
substance" "hazardous water", "hazardous material", "extremely hazardous
waste", "restricted hazardous waste" under Section 25115, 25117 or 15122.7,
or listed pursuant to Section 25140 of the California Health and Safety
Code, Division 20, Chapter 6.5 (Hazardous Waste Control Law), (ii) defined
as "hazardous substance" under Section 25316 of the California Health and
Safety Code, Division 20, Chapter 6.8 (Carpenter-Presley-Tanner Hazardous
Substances Account Act), (iii) defined as "hazardous material", "hazardous
substance", or "hazardous waste" under Section 25501 of the California
Health and Safety Code, Division 20, Chapter 6.95 (Hazardous Materials
Release, Response, Plans and Inventory), (iv) defined as a "hazardous
substance" under Section 25181 of the California Health and Safety Code,
Division 201, Chapter 6.7 (U
nderground Storage of Hazardous Substances),
(iv) petroleum, (vi) asbestos, (vii) listed under Article 9 or defined as
"hazardous" or "extremely hazardous" pursuant to Article II of Title 22 of
the California Administrative Code, Division 4, Chapter 20, (viii) defined
as "hazardous substance" pursuant to Section 311 of the Federal Water
Pollution Control Act, 33 U.S.C. 1251 et seq. or listed pursuant to Section
1004 of the Federal Water Pollution Control Act (33 U.S.C. 1317), (ix)
defined as a "hazardous waste", pursuant to Section 1004 of the Federal
Resource Conservation and Recovery Act, 42 U.S.C. 6901 et seq., (x) defined
as "hazardous substance" pursuant to Section 101 of the Comprehensive
Environmental Responsibility Compensations, and Liability Act, 42 U.S.C.
9601 et seq., or (xi) regulated under the Toxic Substances Control Act, 156
U.S.C. 2601 et seq.
b. The term "Hazardous Materials Laws" shall mean any local, state and
fede
ral laws, rules, regulations, or ordinances relating to the use,
generation, transportation, analysis, manufacture, installation, release,
discharge, storage or disposal of Hazardous Material.
c. The term "Lessor's Agents" shall mean Lessor's agents, representatives,
employees, contractors, subcontractors, directors, officers, partners,
tenants, and invitees.
d. The term "Lessee's Agents" shall mean Lessee's agents, representatives,
employees, contractors, subcontractors, directors, officers, partners,
former employees who have not been employed by any other occupant of the
Premises, relatives of employees or such former employees, and invitees.
33.2 Lessee's Right to Investigate: Lessee shall be entitled to cause such
inspection, soils and ground water tests, and other evaluations to be made of
the Premises as Lessee deems necessary regarding (i) the presence and use of
Hazardous Materials in or about the Premises, and (ii) the potential for
exposure to L
essee's employees and other persons to any Hazardous Materials used
and stored by previous occupants in or about the Premises. Lessee shall provide
Lessor with copies of all inspections, tests and evaluations. Lessee shall
indemnify, defend and hold Lessor harmless from any cost, claim or expense
arising from such entry by Lessee or from the performance of any such
investigation by such Lessee.
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<PAGE>
33.3 Lessor's Representations: Lessor hereby represents and warrants to the best
of Lessor's knowledge that the Premises are, as of the date of this Lease, in
compliance with all Hazardous Material Laws.
33.4 Lessee's Obligation to Indemnify: Lessee, at its sole cost and expense,
shall indemnify, defend, protect and hold Lessor and Lessor's Agents harmless
from and against any and all cost or expenses, including those described under
subparagraphs i, ii and iii herein below set forth, to the extent arising from
or caused in whole or in part, directly or indirectly by:
a. Lessee's or Lessee's Agents' use, analysis, storage, transportation,
disposal, release, threatened release, discharge or generation of Hazardous
Material to, in, on, under,
about or from the Premises ("Hazardous
Materials Activities") in violation of applicable Hazardous Material Laws;
or
b. Lessee's or Lessee's Agents failure to comply with Hazardous Material
Laws applicable to their Hazardous Material Activities; or
The cost and expenses so indemnified against include, but are not limited to the
following:
i. Any and all claims, actions, suits, proceedings, losses, damages,
liabilities, deficiencies, forfeitures, penalties, fines, punitive damages,
cost or expenses;
ii. Any claim, action, suit or proceeding for personal injury (including
sickness, disease, or death), tangible or intangible property damage,
compensation for lost wages, business income, profits or other economic
loss, damage to the natural resources of the environment, nuisance,
pollution, contamination, leaks, spills, release or other adverse effects
on the environment;
iii. The cost of any repair, clean-up, treatment or detoxif
ication of the
Premises necessary to bring the Premises into compliance with all Hazardous
Material Laws, including the preparation and implementation of any closure,
disposal, remedial action, or other actions with regard to the Premises,
and expenses (including, without limitation, reasonable attorney's fees and
consultants fees, investigation and laboratory fees, court cost and
litigation expenses) relating thereto.
33.5 Lessee's Obligation to Remediate Contamination: Lessee shall, at its sole
cost and expense, promptly take any and all action necessary as required by
applicable Hazardous Materials Laws to remediate contamination of the Premises
by Hazardous Materials for which Lessee is responsible under Article 33.4.
33.6 Lessor's Waiver and Obligation to Remediate Contamination: If required by a
governmental agency having jurisdiction and after Lessor has exhausted all its
other legal remedies, Lessor shall, at its sole cost and expense, promptly take
any and all act
ion necessary to remediate repair, clean-up, treatment or
detoxification of the Premises necessary to bring the Premises into compliance
with all Hazardous Material Laws, other than remedial actions required to be
completed by Lessee pursuant to Section 33.5.
33.7 Obligation to Notify: Lessor and Lessee shall each give written notice to
the other as soon as reasonably practical of any contamination of the Premises
by Hazardous Materials which constitutes a violation of any Hazardous Material
Laws.
33.8 Survival: The obligations of Lessee under this Section 33 shall survive the
Lease Term or earlier termination of this Lease.
33.9 Certification and Closure: On or before the end of the Lease Term or
earlier termination of this Lease, Lessee shall deliver to Lessor a
certification executed by Lessee stating that, to the best of Lessee's
knowledge, there exists no violation of Hazardous Material Laws resulting from
Lessee's obligation in Paragraph 33. If pursuant to local ordinance, state or
federal law,
Lessee is required, at the expiration of the Lease Term, to submit
a closure plan for Building 4 to a local, state or federal agency, then
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<PAGE>
Lessee shall, at its sole cost and expense, comply with all agency requirements
concerning such plan and furnish to Lessor a copy of such plan and proof of
compliance.
33.10 Prior Hazardous Materials: Notwithstanding anything to the contrary in
this Lease, and except for any Environmental Surcharges (as defined in Section
16), Lessee shall have no obligation to clean up or comply with any Hazardous
Materials Laws or to hold Lessor harmless or reimburse Lessor (as a CAC charge
or otherwise) with respect to any Hazardous Material or wastes discovered on the
Premises which were introduced into, in, on, about, from or under the Premises
prior or subsequent to the Lease Term or any Hazardous Materials originating
from any source off Premises or caused by any r
elease or disposal of Hazardous
Material by Lessor, Lessor's Agents, any other occupant of the Premises or their
respective agents, employees, contractors or invitees; provided, however, that
the foregoing shall not release Lessee or Lessee's Agents from its obligations
under Section 33.4, above.
34. Brokers: Lessor and Lessee represent that they have not utilized or
contacted a real estate broker or finder with respect to this Lease other than
CPS and Lessee agrees to indemnify and hold Lessor harmless against any claim,
cost, liability or cause of action asserted by any broker or finder claiming
through Lessee other than CPS. Lessor shall at its sole cost and expense pay the
brokerage commission of $2.00 per square foot to CPS in connection with this
transaction. Lessor represents and warrants that it has not utilized or
contacted a real estate broker or finder with respect to this Lease other than
CPS and Lessor agrees to indemnify and hold Lessee harmless against any claim,
cost, liability or cause
of action asserted by any broker or finder claiming
through Lessor. On any expansions, Lessor will pay a broker, only at the request
of Lessee, up to $2.00 per square foot, and such fee shall be amortized over the
Lease Term and added to the base rent for the expansion space.
35. Option to Extend: A. Option: Lessor hereby grants to Lessee two (2) option
------
to extend the Lease Term, each for a period of five (5) years, on the following
terms and conditions, which shall apply separately to each option to extend:
(i) Lessee shall give Lessor written notice of its exercise of one of its
options to extend no earlier than twenty-four (24) calendar months, nor
later than six (6) calendar months before the Lease Term would end but for
said exercise. Lessee must provide Lessor written notice of its exercise of
its options as provided hereunder at least six (6) months before the Lease
Term would end but for
said exercise for purposes of negotiating rental
terms. Lessee may withdraw its notice of exercise of an extension option
for any reason prior to six (6) months before the Lease Term would end but
for said exercise. Lessor shall provide Lessee with Lessor's proposed base
monthly rent for the option period within twenty (20) days of Lessee's
request. Lessee may rescind its notice of exercise at any time, but only
provided it delivers and rescission notice in writing to Lessor at least
six (6) months before the Lease Term would end but for said exercise and,
subject to the provisions of this Section 35, such notice shall operate to
rescind Lessee's election to extend the Lease Term. Upon any extension of
the Lease Term pursuant to this Section 35, the term "Lease Term" as used
in this Lease shall thereafter include the then extended term. Time is of
the essence.
(ii) Lessee may not extend the Lease Term pursuant to any option granted by
this section 35 if Lessee is in default as of the date of the exercise of
its option. If Lessee has committed a monetary or material non-monetary
default as defined in Section 14 that has not been cured or waived by
Lessor in writing by the date that any extended term is to commence, then
Lessor may elect not to allow the Lease Term to be extended,
notwithstanding any notice given by Lessee of an exercise of this option to
extend by exercising its remedy to declare termination of this Lease on
account of such default.
(iii) Lessee must exercise each option consecutively, and if it fails to
exercise any one option, it waives the right to exercise the subsequent
option and the Lease Term shall not be extended further.
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<PAGE>
(iv) All terms and conditions of this Lease shall apply during each
extended term, except that the base monthly rent and base month rent
increases for each extended term shall be determined as provided in Section
35 (B) below
(v) Upon any extension of the Lease Term pursuant to this Section 35, the
term "Lease Term" as used in this Lease shall thereafter include the then
extended term.
(vi) The option rights of E-Tek Dynamics granted under this Section 35 are
granted for E-Tek Dynamics personal benefit and may not be assigned or
transferred by E-Tek Dynamics except to a permitted assignee of this Lease
pursuant to Section 20, nor exercise if E-Tek Dynamics (or such permitted
assignee) is occupy
ing Building 4 at the time of exercise.
B. Extended Term Rent - Option Period: The monthly base Rent for Building 4
----------------------------------
during the extended term shall equal (a) ninety-five (95%) of the fair market
monthly base rent for Building 4 as of the commencement date of the extended
term, but in no case, less than (b) the base monthly rent payable under this
Lease during the last month of the prior Lease term. Promptly upon Lessee's
exercise of the option to extend, Lessee and Lessor shall meet and attempt to
agree on the fair market monthly base rent for Building 4 as of the commencement
date of the extended term. In the event the parties fail to agree upon the
amount of the monthly base rent for the extended term prior to commencement
thereof, the monthly base rent for the extended term shall be determined by
appraisal in the manner hereafter set forth; provided, however, that in no event
shall the monthly base rent for the extended term b
e less than in the immediate
preceding period. Annual base rent shall be increased on each anniversary of the
Commencement Date during the extended term by three and one-half percent (3
1/2%) of' the base monthly rent payable for the immediately preceding lease
year. In the event it becomes necessary under this paragraph to determine the
fair market monthly base Rent of Building 4 by appraisal, Lessor and Lessee each
shall appoint a real estate appraiser who shall be a member of the American
Institute of Real Estate Appraiser ("AIREA") and such appraisers shall each
determine said fair market monthly Rent taking into account the rental value of
Building 4 and the amenities provided by the outside areas, the common areas,
and the Premises, the other terms and conditions of this Lease (as compared to
the terms of the comparable leases used for comparison), and prevailing
comparable rentals in the area. Such appraisers shall, within twenty (20)
business days after their appointment, complete their appraisal
s and submit
their appraisal reports to Lessor and Lessee. If the fair market monthly base
rent established in the two (2) appraisals varies by five percent (5%) or less
of the higher appraisal, the average of the two shall be controlling. If said
fair market monthly base rent varies by more than five percent (5%) of the
higher appraisal, said appraisers, within ten (10) days after submission of the
last appraisal, shall appoint a third appraiser who shall be a member of the
AIREA and who shall also be experienced in the appraisal of rent values and
adjustment practices for commercial properties in the vicinity of Building 4.
Such third appraiser shall, within twenty (20) business days after his
appointment, determine by evaluating the first two appraisals which more
accurately reflects the fair market monthly base rent taking into account the
same factors referred to above, and submit his appraisal report to Lessor and
Lessee. If the two appraisers appointed by Lessor and Lessee are unable to agree
upon
a third appraiser within the required period in accordance with the
foregoing, application shall be made within twenty (20) days thereafter by
either Lessor or Lessee to AIREA, which shall appoint a member of said institute
willing to serve as appraiser. The cost of all appraisals under this
subparagraph shall be borne equally be Lessor and Lessee. If rent is not
determined at least ten (10) days before the date which is six (6) months prior
to expiration of the Lease Term, the deadline for Lessee's right to rescind its
election to renew will be extended ten (10) days after the parties shall agree
upon the base rent for the renewal term or ten (10) days after Lessee receives
notice of determination of the third appraiser.
36. Approvals & Reimbursement Requests: Whenever in this Lease the Lessor's or
Lessee's consent is required, such consent shall not be unreasonably or
arbitrarily withheld or delayed. In the event that the Lessor or Lessee does not
respond to a request for any consents which may be re
quired of it in this Lease
within ten business days of the request of such consent in writing by
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<PAGE>
the Lessee or Lessor, such consent shall be deemed to have been given by the
Lessor or Lessee. Any expenditure by a party permitted or required under the
Lease, for which such party is entitled to demand and does demand reimbursement
from the other party, shall be limited to the fair market value of the goods and
services involved, shall be reasonably incurred, and shall be substantiated by
documentary evidence available for inspection and review by the other party or
its representative during normal business hours.
37. Authority: Each party executing this Lease represents and warrants that he
or she is duly authorized to execute and deliver the Lease. If executed on
behalf of a corporation, that the Lease is executed in accordance with the by-
laws of sa
id corporation (or a partnership that the Lease is executed in
accordance with the partnership agreement of such partnership), that no other
party's approval or consent to such execution and delivery is required, and that
the Lease is binding upon said individual, corporation (or partnership) as the
case may be in accordance with its terms.
38. Indemnification:
38.1 Of Lessor: Except to the extent caused by the sole negligence or willful
misconduct of Lessor or Lessor's Agents or Lessor's breach of this Lease or
applicable Law, Lessee shall defend, indemnify and hold Lessor harmless from and
against any and all obligations, losses, costs, expenses, claims, demands,
attorney's fees, investigation costs or liabilities on account of, or arising
out of the use or occupancy of Building 4, Lessee's or Lessee's Agents' use or
occupancy of the Premises, or any acts or omissions to act of Lessee or Lessee's
Agents, including, without limitation, any of the foregoing provisions arising
out of the use, generation
, manufacture, installation, release, discharge,
storage, or disposal of Hazardous Materials by Lessee or Lessee's Agents in
violation of applicable Hazardous Material Laws. It is understood that Lessee is
and shall be in control and possession of Building 4 and that Lessor shall in no
event be responsible or liable for any injury or damage or injury to any person
whatsoever, happening on, in, or in connection with Building 4, or for any
injury or damage to the Premises or any part thereof caused by Lessee's or
Lessee's Agents' use or occupancy thereof, except to the extent caused by the
sole negligence or, willfulness conduct of Lessor or Lessor's Agents, and Lessee
releases and indemnifies Lessor from all other liability arising out of the
condition, use or occupancy of Building 4, and of Lessee's or Lessee's Agents'
use or occupancy of the Premises. This Lease is entered into on the express
condition that Lessor shall not be liable for, or suffer loss by reason of
injury to person or property, from wh
atever cause, which in any way may be
connected with the use, condition or occupancy of Building 4 or personal
property located therein, or Lessee's or Lessee's Agents' use or occupancy of
the Premises, except to the extent caused by the sole negligence or willfulness
conduct of Lessor or Lessor's Agents. Except to the extent caused by the sole
negligence or willful misconduct of Lessor or Lessor's Agents or Lessor's breach
of this Lease or applicable Law, Lessee releases and indemnifies Lessor from all
other liability arising out of the Lessee's use or occupancy of the Premises.
The provisions of this Lease permitting Lessor to enter and inspect Building 4
are for the purpose of enabling Lessor to become informed as to whether Lessee
is complying with the terms of this Lease and Lessor shall be under no duty to
enter, inspect or to perform any of Lessee's covenants set forth in this Lease.
Lessee shall further indemnify, defend and hold harmless Lessor from and against
any and all claims arising from an
y breach or default in the performance of any
obligation on Lessee's part to be performed under the terms of this Lease. The
provisions of Section 38.1 shall survive the Lease Term or earlier termination
of this Lease with respect to any damage, injury or death occurring during the
Lease Term.
38.2 Of Lessee: Lessor shall defend, indemnify and hold Lessee harmless from and
against any and all obligations, losses, costs, expenses, claim, demands,
attorney's fees, investigation costs or liabilities on account of, or arising
out of the sole negligence or willful misconduct of Lessor or Lessor's Agents or
a breach by Lessor of its obligations under this Lease. The provisions of
Section 38.2 shall survive the Lease Term or earlier termination of this Lease
with respect to any damage, injury or death occurring during the Lease Term.
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<PAGE>
39. Successors And Assigns: The covenants and conditions herein contained shall,
subject to the provisions as to assignment, apply to and bind the heirs,
successors, executors, administrators and assigns of all of the parties hereto;
and all of the parties hereto shall be jointly and severally liable hereunder.
40. Right of First Offer to Lease or Buy: Prior to Lessor accepting any offer to
lease, sell or otherwise transfer any part of the Premises or the proposed
approximately 114, 000 square foot building or any other building constructed on
the Adjacent Parcel ("Building 1"), or any portion of the foregoing
(collectively the "Expansion Property"), or prior to Lessor making any offer to
lease or sell any Expansion Property, Lessor shall give Lessee writ
ten notice of
such offer and Lessee shall have the opportunity to lease or buy the Expansion
Property, or the part thereof offered for lease, on the terms and conditions set
forth in Lessor's notice of offer. Lessee shall have the option, which may be
exercised by written notice to Lessor at any time within thirty (30) days from
the receipt of the Lessor's notice to agree to lease or sell the portion of the
Expansion Property specified in the notice to Lessee on the terms and conditions
specified in Section 41 if applicable, or such terms as are specified in
Lessor's notice as Lessee may elect to accept. If Lessee fails to exercise its
option within the 30-day period, Lessor shall have 180 days thereafter to lease
or sell the Expansion Property specified in the notice, but in no case on terms
more favorable than those available to Lessee pursuant to this section.
If Lessor elects, within 180 days of Lessor's notice, to lease or sell the
Expansion Property to a third party on terms more favorable to the
third party
lessee than the terms available to Lessee under the foregoing subsection, then
Lessor must re-offer the Expansion Property to Lessee on the same terms and
conditions offered to the third party ("Lessor's Second Notice"). Lessee shall
have five (5) business days from Lessee's receipt of Lessor's Second Notice to
elect to lease or buy the Expansion Property. If Lessee does not respond in
writing accepting all terms and conditions, Lessor shall thereafter be entitled
to lease or sell the Expansion Property to the third party on the terms and
conditions set forth in Lessor's Second Notice or on other terms and conditions
not more favorable to the Lessee as said terms and conditions in Lessor's Second
Notice for a period of 180 days after which Lessee's right of first offer shall
again be in effect for said Expansion Property.
Lessee's failure to exercise its right to lease or buy the Expansion Property
pursuant to this Section on any particular occasion shall not be deemed a waiver
of its right
s to lease or buy the Expansion Property on any other occasion and
shall not release Lessor from its obligation to offer to Lessee the right to
lease or buy the Expansion Property, or any portion thereof that Lessor elects
to lease, in accordance with the terms of this Section.
41. Expansion Agreements: In addition to the rights granted to Lessee pursuant
to Section 40, Lessor and Lessee also agree to the following related to future
facilities expansion right:
(a) Lessor shall hold any Building 1 constructed or to be constructed on the
Adjacent Parcel or, alternatively (at the option of Lessor), Building 3
exclusively for Lessee until February 1, 2000 and Lessee shall have an option to
lease such Expansion Property (Building 1 or Building 3 as Lessor may elect).
Lessee shall exercise such option by delivering to Lessor written notice of such
exercise at any time on or before January 1, 2000. After January 1, 2000, Lessee
will only have the right of first offer to lease or buy the Expansion Property
as
provided in Section 40.
(b) If Lessee elects to expand by exercising its option as provided in
Subsection 41 (a), above, then:
(i) if Lessee leases Building 1 to be built thereon, then the Building
Shell for Building 1 shall be substantially equal in quality to the
Building Shell for Building 4 and shall consist of at least 114,000 square
feet and shall not exceed 135,000 square feet with 35,000 square feet or
less of second story space;
(ii) if Lessee leases Building 3, then Building 3 shall contain
approximately 80,646 square feet of rentable area and be constructed at
Lessor's sole cost in general conformance with the specifications for the
Building Shell of Building 4 as set forth herein;
(iii) Lessee shall receive a minimum TI Allowance for construction of
Lessee's Interior Improvements in the Building Shell of either Building 1
or Building 3 equal to $45.00 per square foot, provided Lessee has a net
shareholder's equity of at leas
t One Hundred Million Dollars ($100,000,000)
said TI Allowance will be increased to $60.00 per square foot. The
Page 25
<PAGE>
base monthly rent has been computed assuming a tenant improvement allowance
of $45 per square foot. Any increases above the standard $45 tenant
improvement allowance, shall result in an increase to the base rent equal
to $16.60 per month for each $1,000 expended in excess of the standard
allowance. For any amounts less than the $45 per square foot standard,
Lessee shall receive a credit against the base monthly rent equal to $14.05
per month for each $1,000 Lessee's tenant improvements are below the
standard allowance;
(iv) the Expansion Property lease shall be a seven year lease;
(v) parking rights on a nonexclusive basis for 4 cars per 1,000 square feet
of the Expansion Property leased with at leas
t ten of such spaces
designated for Lessee's visitors;
(vi) if Lessee leases Building 3, this Lease shall be modified to redefine
the leased premises as Building 3 and Lessee's prorata share of CAC shall
be adjusted to reflect the percentage of space leased by Lessee in relation
to the total space at the Premises and any other terms and conditions of
this Lease dependent on the square footage of the Premises shall also be
appropriately adjusted;
(vii) if Lessee leases Building 1, (a) this Lease shall be modified to
redefine the space leased by Lessee as the Building 1 constructed on the
Adjacent Parcel and the "Premises" as the "Premises" hereunder plus the
Adjacent Parcel and Building 1 thereon, (b) Lessee's prorata share of CAC
for the Premises hereunder shall be adjusted to reflect the percentage of
space leased by Lessee in relation to the revised total space at the
Premises, and (c) any other terms and conditions of this Lease d
ependent on
the square footage of the Premises shall also be appropriately adjusted;
(viii) the initial base monthly rent for Building 1 or Building 3 shall be
the base monthly rental payable from time to time under this Lease,
adjusted prorata for any deviations in the total square footage between.
Building 4, on the one hand, and Building 1 or 3 (as the case may be) on
the other hand, appropriately adjusted for TI Allowance expended by
Landlord in excess of $45.00 per square foot as set forth in sub-part (iii)
above, and any other terms and conditions of this Lease dependent on the
square footage of the Premises shall also be appropriately adjusted;
(ix) in addition to the adjustment provisions of (viii) above, if the
Expansion Space is Building 1, then (a) for every 1% change in the actual
cost of shell construction from January 1, 1999, as reasonably proven by
Lessor, the base monthly rent for Building 1 shall increase by $.00758 per
square foot per month, and (b) for every 1/4% increase in the 10 year
treasury rate (as published in the Wall Street Journal, base to be 5%) the
base monthly rent for Building 1 shall increase by $.0125 per square foot
per month;
(x) all other terms and conditions of the Lease for the Expansion Property
so leased by Lessee shall conform to the terms and conditions of this
Lease; and
(xi) at Lessee's option, this Lease (including, without limitation, any
extension options) shall be extended to the termination date for the
Expansion Property lease; provided, that in such event the base monthly
rent for Building 4 under this Lease shall continue to be increased from
year to year during the initial term during any such extend term of this
lease with the frequency and using the formula by which base monthly rent
is to be increased under the "Base Rent" Section of this Lease, any
unexercised options under this Lease shall be availabl
e as provided herein
at the end of said extended term, and, otherwise, the terms and conditions
of this Lease shall continue in full force and effect.
Upon written request from Lessee, Lessor shall construct Building 1 in general
conformance to the terms of Section 2 herein. Lessor shall use its best efforts
to complete any Lessee Improvements for Building 3 within 3 months, and for
Building 1 within 9 months, following Lessee's exercise of its expansion option,
subject to delays as provided in Section 2.1.7, above.
42. Miscellaneous Provisions: All rights and remedies hereunder are cumulative
and not alternative to the extent permitted by law and is in addition to all
other rights or remedies in law and in equity.
Page 26
<PAGE>
43. Choice of Law: This lease shall be construed and enforced in accordance with
the substantive laws of the State of California. The language of all parts of
this lease shall in all cases be construed as a whole according to its fair
meaning and not strictly for or against either Lessor or Lessee.
44. Entire Agreement: This Lease is the entire agreement between the parties,
and there are no agreements or representations between the parties except as
expressed herein. Except as otherwise provided for herein, no subsequent change
or addition to this Lease shall be binding unless in writing and signed by the
parties hereto.
[Signatures on Next Page]
Page 27
<PAGE>
In Witness Whereof, Lessor and Lessee have executed this Lease effective, the
day and year first above written.
Lessor Lessee
Mission West Properties, L.P. E-Tek Dynamics
By: Mission West Properties, Inc.
General Partner
By: /s/ Carl E. Berg By: /s/ Sanjay Subhedar
------------------------- --------------------------
signature of authorized signature of authorized
representative representative
Carl E. Berg SANJAY SUBHEDAR
------------ ---------------
printed name printed name
Pres. Sr. V.P. Operations, CFO
----- ------------------------
Title Title
2/3/99 2/3/99
------ ------
Date Date
Page 28
<PAGE>
Exhibit A
Diagram of Site Plan For Automation Parkway and Mckay Drive, San Jose, Ca
Page 29
<PAGE>
Exhibit A.1
Diagram of Site Plan for Building 4 at 1750 Automation Parkway, San Jose, Ca
Page 30
<PAGE>
Exhibit B
Diagram of Floor Plan
Page 31
<PAGE>
Project: Automaion Parkway
CAC ESTIMATE ANALYSIS
Prepared for: E-Tek
Address: Automation Parkway
<TABLE>
<CAPTION>
Monthly
Description Amount
- -------------------------------------------- ---------
<S> <C>
Property Taxes 12,902 *
Insurance 538
Landscape Maintenance 980
Parking Lot Sweeping 101
HVAC maintenance and repairs 806
Roof maintenance and repairs 267
Elevator Maintenance 0
Fire Alarm Monitoring
80
Exterior Paint repairs 144
Utilities 0
Administration Fee @ 5% 791
-------
Monthly Amount $16,609
-------
Amount per Sq. Ft. per Month 0.206
-------
</TABLE>
*Taxes estimated
In addition to the $16,609 monthly CAC, Lessee shall pay Lessor a fixed monthly
sum of $2,338 for Replacements.
Page 32
<PAGE>
Exhibit C.1
Plan and Specifications to be attached
Page 33
<PAGE>
Exhibit D
Cost Statement to be attached
Page 34
<PAGE>
Exhibit E
Lessee Approvals if any to be attached
Page 35
<PAGE>
EXHIBIT F
LANDLORD'S WAIVER AND CONSENT
LESSOR:
LESSEE:
LANDLORD: Berg & Berg Enterprises
-----------------------
RECITALS:
A. LESSEE desires to lease from LESSOR the below described personal
property ("Personal Property")' See attached Schedule "A' - Equipment List.
B. LESSEE intends to install, place, maintain, operate and/or keep the
Personal Property at the below described location' ("Real Property")
C. LESSOR is willing to lease the Personal Property to LESSEE only if
LANDLORD subordinates and waives as to LESSOR any claims or rights LANDLORD may
have or hereafter acquires with respect to the Personal Property.
NOW, THEREFORE for good and sufficient consi
deration, receipt of which is
hereby acknowledged, LANDLORD consents to the placing of the Personal Property
on the Real Property, and agrees with LESSOR as follows:
1. The Personal Property shall be considered to be personal property
and shall not be considered part of the Real Property regardless of whether or
by what means it is or may become attached or affixed to the Real Property.
2. The undersigned has not and will not claim any interest in the
Personal Property.
3. The undersigned will permit LESSOR or its successors and assigns to
enter upon the Real Property during the lease term for the purpose of exercising
any right it may have under the terms of the lease for the Personal Property,
with the right to remove the Personal Property; provided, however, that if
LESSOR, in removing said Personal Property damages any improvements of the
undersigned in or on the Real Property, LESSOR will, at its expense, cause same
to be repaired.
4. THIS LANDLORD'S WAIVER
AND CONSENT is assignable by LESSOR with the
lease for the Personal Property and shall be binding upon the executors,
administrators, successors, transferees or assignees of LANDLORD and shall inure
to the benefit of the successors and assigns of LESSOR.
IN WITNESS WHEREOF, LANDLORD has executed this LANDLORD'S WAIVER AND CONSENT
this ___ day of _________, 199_.
LANDLORD: Berg & Berg Enterprises
-----------------------
By: ______________________
Carl E. Berg President
Telephone: 408-725-0700
Fax 408-725-1626
Page 36
<PAGE>
EXHIBIT F
LANDLORD'S WAIVER AND CONSENT
LENDER:
BORROWER:
LANDLORD: Berg & Berg Enterprises
-----------------------
RECITALS:
A. BORROWER desires to borrow funds from LENDER to be secured by the
personal property described on attached Schedule "A" (Personal Property)
B. BORROWER intends to install, place, maintain, operate and/or keep the
Personal Property at the below described location: ("Real Property")
C. LENDER is willing to lend funds to BORROWER to be secured by the
Personal Property only if LANDLORD subordinates and waives as to LENDER any
claims or rights LANDLORD may have or hereafter acquires with respect to the
Personal Property.
NOW, THEREFORE fo
r good and sufficient consideration, receipt of which is
hereby acknowledged, LANDLORD consents to the placing of the Personal Property
on the Real Property, and agrees with LENDER as follows:
1. The Personal Property shall be considered to be personal property
and shall not be considered part of the Real Property regardless of whether or
by what means it is or may become attached or affixed to the Real Property.
2. The undersigned has not and will not claim any interest in the
Personal Property.
3. The undersigned will permit LENDER or its successors and assigns to
enter upon the Real Property during the lease term for the purpose of exercising
any right it may have under the terms of the loan agreement for the Personal
Property, with the right to remove the Personal Property; provided, however,
that if LENDER, in removing said Personal Property damages any improvements of
the undersigned in or on the Real Property, LENDER will, at its expense, cause
same to be repaired.
4. THIS LANDLORD'S WAIVER AND CONSENT is assignable by LENDER with the
loan secured by the Personal Property and shall be binding upon the executors,
administrators, successors, transferees or assignees of LANDLORD and shall inure
to the benefit of the successors and assigns of LENDER.
IN WITNESS WHEREOF, LANDLORD has executed this LANDLORD'S WAIVER AND CONSENT
this ___ day of _________,199_.
LANDLORD: Berg & Berg Enterprises
-----------------------
By: ______________________
Carl E. Berg President
Telephone: 408-725-0700
Fax 408-725-1626
Page 37
<PAGE>
EXHIBIT 10.29
========================
SHARE PURCHASE AGREEMENT
========================
AMONG:
SHEMIRAN HOLDINGS INC.
- and -
A. TINO ALAVIE
- and -
ROBERT MAASKANT
- and -
LUNDY TECHNOLOGY CO.
- and -
E-TEK DYNAMICS, INC.
- and -
ELECTROPHOTONICS CORPORATION
May 26, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<C> <S> <C>
ARTICLE 1 INTERPRETATION....................................................... 3
1.1 Definitions............................................................ 3
1.2 Gender and Number...................................................... 9
1.3 Currency............................................................... 9
1.4 Accounting Principles.................................................. 9
1.5 Headings............................................................... 9
1.6 Tax Definitions........................................................ 9
ARTICLE 2 EXHIBITS & SCHEDULES................................................. 10
2.1 Description of Exhibits................................................ 10
2.2 Description of Schedules............................................... 10
ARTICLE 3 AGREEMENT OF PURCHASE AND SALE....................................... 11
3.1 Offer to Purchase...................................................... 11
3.2 Agreement of Vendors to Sell........................................... 12
ARTICLE 4 PAYMENT OF PURCHASE PRICE............................................ 12
4.1 Payment of Purchase Price.............................................. 12
4.2 Security for Deferred Consideration.................................... 12
4.3 Shareholder Debt and Withholding Taxes................................. 12
4.4 Pre-Closing Amalgamation............................................... 13
ARTICLE 5 EXCHANGE RIGHTS...................................................... 13
5.1 Exchange............................................................... 13
5.2 Funding of the Purchaser............................................... 13
5.3 Reservation of Shares of E-TEK Common Stock............................ 15
5.4 Notification of Certain Events......................................... 15
5.5 Delivery of Shares of E-TEK Common Stock............................... 15
5.6 Tender Offers.......................................................... 16
5.7 E-TEK Not to Vote Class A Shares....................................... 16
5.8 Qualification of Shares of E-TEK Common Stock.......................... 16
5.9 Amendments, Modifications, etc......................................... 17
5.10 Ministerial Amendments................................................. 17
5.11 Survival............................................................... 18
5.12 Changes in Capital of E-TEK and the Purchaser.......................... 18
ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF THE VENDORS........................ 18
6.1 Joint and Several Representations and Warranties of the Vendors........ 18
6.2 Several Representations and Warranties of Vendors...................... 37
6.3 Interpretation of Section 6.2.......................................... 40
ARTICLE 7 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER...................... 40
7.1 Representations and Warranties of the Purchaser........................ 40
ARTICLE 8 REPRESENTATIONS AND WARRANTIES OF E-TEK.............................. 42
8.1 Representations and Warranties of E-TEK................................ 42
ARTICLE 9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES........................... 45
9.1 Survival of Representations and Warranties of the Vendors.............. 45
9.2 Survival of Representations and Warranties of the Purchaser and E-TEK.. 45
</TABLE>
<PAGE>
<TABLE>
<S> <C>
ARTICLE 10 COVENANTS OF THE VENDORS............................................ 45
10.1 Covenants of the Vendors............................................... 45
ARTICLE 11 COVENANTS OF THE PURCHASER AND E-TEK................................ 52
11.1 Covenants of the Purchaser............................................. 52
ARTICLE 12 PURCHASER'S CONDITIONS OF CLOSING................................... 54
12.1 Conditions for the Benefit of the Purchaser............................ 54
12.2 Non-Fulfilment of Conditions etc. for the Benefit of the Purchaser..... 57
ARTICLE 13 VENDORS' CONDITIONS OF CLOSING...................................... 58
13.1 Conditions for the Benefit of the Vendors.............................. 58
13.2 Non-Fulfilment of Conditions etc. for the Benefit of the Vendors....... 60
ARTICLE 14 CLOSING ARRANGEMENTS................................................ 60
14.1 Date, Time and Place of Closing........................................ 60
14.2 Closing Arrangements................................................... 60
ARTICLE 15 INDEMNIFICATION..................................................... 61
15.1 Indemnification by the Vendors......................................... 61
15.2 Indemnification by the Purchaser and E-TEK............................. 62
15.3 Procedure for Indemnification.......................................... 62
15.4 Subsequent Recovery.................................................... 64
15.5 Details of Claims...................................................... 65
15.6 Mitigation............................................................. 65
15.7 Selling Shareholders' Representatives.................................. 66
ARTICLE 16 MISCELLANEOUS....................................................... 66
16.1 Further Assurances..................................................... 66
16.2 Announcements.......................................................... 66
16.3 Notices................................................................ 66
16.4 Time of the Essence.................................................... 68
16.5 Costs and Expenses..................................................... 68
16.6 Applicable Law......................................................... 68
16.7 Entire Agreement....................................................... 68
16.8 Effect of Closing...................................................... 69
16.9 Counterparts and Facsimile............................................. 69
16.10 Assignment............................................................. 69
16.11 Parties in Interest.................................................... 69
16.12 Third Parties.......................................................... 69
16.13 English Language....................................................... 69
16.14 Facsimile Signature.................................................... 70
</TABLE>
<PAGE>
THIS AGREEMENT dated as of the 26th day of May, 1999
AMONG:
SHEMIRAN HOLDINGS INC., a corporation incorporated
under the laws of Ontario
(hereinafter called "Shemiran")
OF THE FIRST PART
- and -
A. TINO ALAVIE, of Richmond Hill, in the Province of
Ontario
(hereinafter called "Dr. Alavie")
OF THE SECOND PART
- and -
ROBERT MAASKANT, of King City, in the Province of
Ontario
(hereinafter called "Dr. Maaskant")
OF THE THIRD PART
(Shemiran, Dr. Alavie and Dr. Maaskant are hereinafter
collectively referred to as the "Vendors")
- and -
LUNDY TECHNOLOGY CO., an unlimited company formed under
the laws of the Province of Nova Scotia
(hereinafter called the "Purchaser")
OF THE FOURTH PART
- and -
<PAGE>
E-TEK DYNAMICS, INC., a corporation incorporated under
the laws of the State of Delaware
(hereinafter called "E-TEK")
OF THE FIFTH PART
- and -
ELECTROPHOTONICS CORPORATION., a corporation
incorporated under the laws of the Province of Ontario
(hereinafter called the "Corporation")
OF THE SIXTH PART
WHEREAS the Vendors are the registered and beneficial owners of certain of
the issued and outstanding common shares and options to purchase shares in the
capital of the Corporation;
AND WHEREAS the Purchaser wishes to purchase from the Vendors and the
Vendors wish to sell to the Purchaser the Purchased Shares (as defined herein);
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the
respective covenants, agreements, representations, warranties, indemnities, and
payments hereinafter set forth, and for other good and valuable consideration
(the receipt and sufficiency of which are acknowledged by each party) the
parties hereto agree as follows:
Article 1
---------
INTERPRETATION
--------------
1.1 Definitions
-----------
Whenever used in this Agreement, unless there is something in the subject
matter or context inconsistent therewith, the following words and phrases shall
have the respective meanings ascribed to them as follows:
1.1.1 "Affiliate" has the meaning set out in the Business Corporations Act
(Ontario) as in effect on the date hereof.
1.1.2 "Agreement" means this agreement and all the Exhibits and Schedules
attached hereto.
1.1.3 "Articles of Incorporation" means the Certificate and Articles of
Incorporation of the Corporation dated August 9, 1993 and the
Certificate and Articles of Amendment dated September 26, 1997.
1.1.4 "Financial Statements" means the financial statements of the
Corporation as at the Financial Year End consisting of the balance
sheet of the Corporation as at the
<PAGE>
Financial Year End and the accompanying statements of operations,
retained earnings, income statement and changes in financial
position for the 12 month period then ended.
1.1.5 "Business" means the business currently carried on by the
Corporation which consists of the design, development and
manufacture of fibre optic devices, components and instruments for
telecommunications and sensing applications.
1.1.6 "Business Day" means a day other than a Saturday, Sunday or any
other day on which the principal chartered banks located in the City
of Toronto are not open for business during normal banking hours.
1.1.7 "Cdn$" means Canadian dollars.
1.1.8 "Claim" has the meaning set out in Section 15.3.
1.1.9 "Class A Shares" means Class A shares without nominal or par value
in the capital of the Purchaser;
1.1.10 "Closing" means the completion of the transactions herein
contemplated, including the sale to and purchase by the Purchaser of
the Purchased Shares hereunder as herein contemplated.
1.1.11 "Closing Date" means June 10, 1999 or such earlier or later date as
may be agreed upon by both parties in writing.
1.1.12 "Common Shares" means common shares without par value in the capital
of the Corporation;
1.1.13 "Debt Instrument" means any bond, debenture, promissory note or
other instrument evidencing indebtedness for borrowed money.
1.1.14 "Deferred Consideration" means that portion of the cash
consideration payable for the purchase of Common Shares that is not
due until a date subsequent to the Closing Date.
1.1.15 "Employee Benefits" means:
(i) salaries, wages, bonuses, vacation entitlements, commissions,
fees, stock option plans, stock purchase plans, incentive
plans, deferred compensation plans, profit-sharing plans and
other similar benefits, plans or arrangements;
(ii) insurance, health, welfare, drug, disability, pension,
retirement, travel, hospitalization, medical, dental, legal,
counselling, eye care and other similar benefits, plans or
arrangements; and
<PAGE>
(iii) agreements or arrangements with any labour union or employee
association, written or oral employment agreements or
arrangements and agreements or arrangements for the retention
of the services of independent contractors, consultants or
advisors.
1.1.16 "Employee Shareholders" means those shareholders who are employees
of the Corporation, other than the Vendors.
1.1.17 "Encumbrance" means any mortgage, charge, easement, encroachment,
lien, adverse claim, assignment by way of security, security
interest, servitude, pledge, hypothecation, conditional sale
agreement, security agreement, title retention agreement, financing
statement, option, right of pre-emption, privilege, obligation to
assign, license or sub-license Intellectual and Industrial Property
Rights or other encumbrance.
1.1.18 "Escrow Agent" means the Escrow Agent appointed under the Escrow
Agreement, who shall be jointly selected by the Vendors and the
Purchaser.
1.1.19 "Escrow Agreement" means the escrow agreement, substantially in the
form attached as Exhibit A, made among the Vendors, the Purchaser
and the Escrow Agent and to which the offerees who accept the Offer
agree to be bound.
1.1.20 "Escrow Funds" means $4,300,000 deposited in escrow with the Escrow
Agent in accordance with this Agreement and the Offers and the
Escrow Agreement, as such amount may be increased by income earned
thereon from time to time, and reduced by the amount of all charges
which the Escrow Agent from time to time may pay out of amounts held
in escrow, in each case in accordance with the terms of the Escrow
Agreement, this Agreement and the Offers.
1.1.21 "E-TEK Common Stock" means shares of Common Stock of E-TEK.
1.1.22 "E-TEK Indemnity Agreement" means the indemnity agreement,
substantially in the form attached as Exhibit I, to be granted by E-
TEK in favour of the Selling Shareholders.
1.1.23 "Financial Year End" means July 31, 1998.
1.1.24 "Government Authority" means any international, national, state,
federal, provincial, county, municipal, district or local government
body, or any public administrative or regulatory agency, political
subdivision, commission, board or body, or representative of any of
the foregoing, foreign or domestic, established by any such
government or government body;
1.1.25 "Guarantee" means any agreement, contract or commitment providing
for the guarantee, indemnification, assumption or endorsement or any
like commitment with respect to the obligations, liabilities
(contingent or otherwise) or indebtedness of any Person.
<PAGE>
1.1.26 "Institutional Shareholders" means those shareholders who are not
Employee Shareholders or Vendors.
1.1.27 "Intellectual and Industrial Property Rights" means:
(i) all trade-marks (including logos), trade names, service marks
and brand names and all applications therefor;
(ii) all patents (including divisions, reissues, renewals and
extensions) and all applications therefor;
(iii) all copyrights, industrial designs and other industrial
property rights and all applications therefor;
(iv) all know-how, trade secrets and any licensed property or
technology used in carrying on the business of the
Corporation; and
(v) all unrecorded assets such as custom-written source code and
executable object code;
both domestic and foreign and whether or not registered.
1.1.28 "Interested Person" means any present or former officer, director,
shareholder, employee, consultant or advisor of or to the
Corporation or any Person with which the Corporation or any of the
foregoing does not deal at arm's length within the meaning of the
Income Tax Act (Canada).
1.1.29 "Interim Financial Statements" means the financial statements of the
Corporation as at January 31, 1999 consisting of the balance sheet
of the Corporation as at January 31, 1999 and the accompanying
statement of income and deficit and statement of changes in
financial position for the period between the Financial Year End and
January 31, 1999.
1.1.30 "Key Employees" means Tino Alavie, Robert Maaskant, Myo Ohn, Ming
Gang Xu, Frank Say and Alex Grgorinic.
1.1.31 "knowledge of the Vendors" means, other than with respect to Section
6.1.36, the knowledge of the Vendors after having made such
reasonable enquiries of the records of the Corporation and the
Director of Finance and Administration of the Corporation, a
management employee who is reasonably likely to have knowledge of
relevant matters as are necessary to obtain informed knowledge.
1.1.32 "Leased Property" means all the right, title and interest of the
Corporation in and to the subject matter (whether realty or
personality) of the Leases.
1.1.33 "Leases" means the real or personal property leases or other rights
of occupancy relating to real property which the Corporation is a
party to or bound by or subject
<PAGE>
to, including, without limitation, those set forth and described in
the Disclosure Schedule.
1.1.34 "Legal Proceeding" means any litigation, action, suit,
investigation, hearing, claim, complaint, grievance, arbitration
proceeding or other proceeding and includes any appeal or review and
any application for same.
1.1.35 "material" means, in the context of the Corporation, any event or
occurrence which has or could have a financial impact on the
Corporation exceeding Cdn $25,000.
1.1.36 "New Options" means the options to be issued by E-TEK pursuant to
Section 3.3 hereof;
1.1.37 "Note" means the form of promissory note attached as Exhibit J to be
issued by the Purchaser to each of the Selling Shareholders in the
aggregate principal amount of the Deferred Consideration;
1.1.38 "Offers" has the meaning ascribed thereto in Section 3.1;
1.1.39 "Option" means a Vested Option or an Unvested Option;
1.1.40 "Option Holder" means the holder of an Option;
1.1.41 "ordinary course" when used in relation to the conduct by the
Corporation of the Business, means any transaction which constitutes
an ordinary day-to-day business activity, conducted in a
commercially reasonable and businesslike manner, having no unusual
or special features, and being such as a Person of similar nature
and size and engaged in a similar business might reasonably be
expected to carry out from time to time.
1.1.42 "Person" means any individual, corporation, firm, partnership, sole
proprietorship, syndicate, joint venture, trustee, trust, any
unincorporated organization or association and any Tribunal; and
pronouns have a similar extended meaning.
1.1.43 "Products" means the fibre optic devices, components and instruments
for telecommunications and sensing applications.
1.1.44 "Purchase Price" means the purchase price payable by the Purchaser
to the Vendors for the Purchased Shares provided for in Article 4.
1.1.45 "Purchased Shares" means all of the issued and outstanding Common
Shares without par value in the capital of the Corporation owned by
the Vendors and includes any shares of a successor corporation.
<PAGE>
1.1.46 "Registration Rights Agreement" means the registration rights
agreement, substantially in the form attached hereto as Exhibit B,
made among the Vendors, the offerees under the Offer who accept the
Offer and E-TEK.
1.1.47 "Selling Shareholders" means the Vendors, the Employee Shareholders
and the Institutional Shareholders.
1.1.48 "Selling Shareholders' Representatives" means those persons
appointed as Selling Shareholders' Representatives under the Selling
Shareholders' Representatives Agreement.
1.1.49 "Selling Shareholders' Representatives Agreement" means the
agreement to be made between the Selling Shareholders and the
Selling Shareholders' Representatives substantially in the form
attached hereto as Exhibit G.
1.1.50 "Stock Option Plan" means the employee stock option plan of the
Corporation dated September 26, 1997 providing for the issuance by
the Corporation of options for the purchase of shares of the
Corporation.
1.1.51 "Subsidiary" has the meaning ascribed thereto in the Business
Corporations Act (Ontario) as in effect on the date hereof.
1.1.52 "Time of Closing" means 10:00 a.m. (Toronto time) on the Closing
Date or such other time on the Closing Date as the parties may agree
as the time at which the Closing shall take place.
1.1.53 "Tribunal" means:
(i) any court (including a court of equity);
(ii) any federal, provincial, state, county, municipal or other
government or governmental department, ministry, commission,
board, bureau, agency or instrumentality;
(iii) any securities commission, stock exchange or other regulatory
or self-regulatory body;
(iv) any board of trade, chamber of commerce or other business or
professional organization or association;
(v) any arbitrator or arbitration tribunal; and
(vi) any other tribunal;
whether domestic or foreign.
1.1.54 "Unvested Option" means any option granted by the Corporation and
outstanding on the Closing Date to purchase Common Shares, that is
not
<PAGE>
exercisable by the holder thereof on or before the Closing Date and
is listed and identified as such in Schedule 3.
1.1.55 "Vendors" means collectively, the parties to this Agreement other
than the Purchaser and the Corporation.
1.1.56 "Vested Options" means any option granted by the Corporation and
outstanding on the Closing Date to purchase Common Shares, that is
exercisable by the holder thereof on or before the Closing Date and
is listed and identified as such in Schedule 3.
1.2 Gender and Number
-----------------
In this Agreement words importing a specific gender include all genders and
words importing the singular include the plural and vice versa.
1.3 Currency
--------
Unless otherwise indicated all dollar amounts referred to in this
Agreement, including the symbol "$", refer to lawful money of the United States
of America.
1.4 Accounting Principles
---------------------
Wherever in this Agreement reference is made to generally accepted
accounting principles such reference shall be deemed to be to the generally
accepted accounting principles from time to time approved by the Canadian
Institute of Chartered Accountants, or any successor entity, applicable as at
the date on which such principles are applied and applied in accordance with the
generally accepted accounting principles from time to time approved by the
Financial Accounting Standards Board, or any successor entity.
1.5 Headings
--------
The division of this Agreement into Articles and Sections and the use of a
table of contents and headings are for convenience of reference only and shall
not affect the interpretation of this Agreement.
1.6 Tax Definitions
---------------
Whenever used in this Agreement, the following words and phrases shall have
the respective meanings ascribed to them as follows:
1.6.1 "Income Tax Act (Canada)" means, collectively, the Income Tax Act,
R.S.C. 1985, 5th Supplement, the Income Tax Application Rules, 1971,
S.C. 1970-71-72 c. 63 and the Income Tax Regulations, as amended to
date.
1.6.2 "Tax Legislation" means, collectively, the Income Tax Act (Canada)
and the corresponding statute law, case law, rules, regulations,
interpretation bulletins and releases, orders and decrees of any
other jurisdiction, domestic or foreign.
<PAGE>
1.6.3 "Taxes" means all taxes payable under any applicable Tax
Legislation, including, without limitation, income taxes, excise
taxes, sales taxes, goods and services taxes, value added taxes,
transfer taxes, property taxes, capital taxes, import and customs
duties and other governmental charges and assessments, and includes
additions by way of penalties, interest, fines and other amounts
with respect thereto.
1.6.4 "Tax Returns" means all tax returns required to be filed under the
provisions of any applicable Tax Legislation and any tax forms
required to be filed, whether in connection with a Tax Return or
not, under the provisions of any applicable Tax Legislation.
Article 2
---------
Exhibits & Schedules
--------------------
2.1 Description of Exhibits
-----------------------
The following are the Exhibits attached to and incorporated in this
Agreement by reference and deemed to be a part hereof:
<TABLE>
<S> <C>
Exhibit A - Form of Escrow Agreement
Exhibit B - Form of Registration Rights Agreement
Exhibit C1 - Form of Employment Agreement for Key Employees who are Vendors
Exhibit C2 - Form of Employment Agreement for Key Employees who are not Vendors
Exhibit D1 - Form of Release by Vendors
Exhibit D2 - Form of Release in favour of Vendors
Exhibit E - Form of Legal Opinion of Vendors' and Corporation's Counsel
Exhibit F - Form of Legal Opinion of Purchaser's and E-TEK's Counsel
Exhibit G - Form of Selling Shareholders' Representatives Agreement
Exhibit H - Exchangeable Share Provisions
Exhibit I - Form of E-TEK Indemnity Agreement
Exhibit J - Form of Note to be delivered to Selling Shareholders
</TABLE>
2.2 Description of Schedules
The Disclosure Schedule and the following are the Schedules attached to and
incorporated in this Agreement by reference and deemed to be a part hereof:
<TABLE>
<S> <C>
Schedule 1 - List of Shares Beneficially Owned by Vendors
Schedule 2 - List of Registered Shareholders
Schedule 3 - List of EPC Options and Summary of New Options
</TABLE>
<PAGE>
Article 3
---------
AGREEMENT OF PURCHASE AND SALE
------------------------------
3.1 Offer to Purchase
------------------
Subject to the terms and conditions hereof, the Purchaser shall on or
before June 1, 1999, or such other date agreed by the parties, offer to acquire
all of the outstanding Common Shares of the Corporation together with all Common
Shares issued prior to the Time of Closing upon the exercise of the Vested
Options as set forth in Schedule 3 (collectively the Offer") in exchange, at the
option of each of the Selling Shareholders, for:
Option 1: Cdn. $22.42 cash per Common Share, together with a Note
evidencing the Deferred Consideration in the principal amount
equal to the product obtained by multiplying $4,300,000 by the
fraction x/y, the payment of which will be deferred in accordance
with the terms of the Escrow Agreement; or
Option 2: 0.411 Class A Shares of the Purchaser per Common Share, together
with a Note evidencing the Deferred Consideration in the
principal amount equal to the product obtained by multiplying
$4,300,000 by the fraction x/y, the payment of which will be
deferred in accordance with the terms of the Escrow Agreement; or
Option 3: a combination of Cdn. $22.42 cash per Common Share and 0.411
Class A Shares of the Purchaser per Common Share, together with a
Note evidencing the Deferred Consideration in the principal
amount equal to the product obtained by multiplying $4,300,000 by
the fraction x/y, the payment of which will be deferred in
accordance with the terms of the Escrow Agreement; or
Option 4: a combination of Cdn. $22.42 cash per Common Share (to a maximum
of 5% of the aggregate consideration payable to such Selling
Shareholder for his Common Shares) and 0.411 Class A Shares of
the Purchaser per Common Share, together with a Note evidencing
the Deferred Consideration in the principal amount equal to the
product obtained by multiplying $4,300,000 by the fraction x/y,
the payment of which will be deferred in accordance with the
terms of the Escrow Agreement,
provided that, for the purposes of the Offer and each of the options thereof:
x - the number of Common Shares registered in the name of the Selling
Shareholder selecting the option; and
y - the aggregate number of issued and outstanding Common Shares.
The Offer will be made only for Common Shares issued at the Time of Closing
and will not be made for any options to purchase Common Shares which have not
vested on or prior to Closing. Any holder of Vested Options who desires to
accept the Offer should, to the extent
<PAGE>
permitted by the terms thereof, exercise the options and deposit Common Shares
issued on the exercise of such Options under the Offer in accordance with one of
the options set forth above.
Selling Shareholders must select only one option with respect to all of the
Common Shares held by such Selling Shareholder. A Selling Shareholder who does
not properly indicate such Selling Shareholder's selection or who does not mark
any box in the letter of transmittal accompanying the Offer will be deemed to
have chosen option 2 for all such Common Shares deposited under the terms of the
offer.
If any fractional interest in a Class A Share would, except for the
provisions of the Offer be deliverable upon the Common Shares being taken up and
paid for in accordance with the option selected by a Selling Shareholder, the
Purchaser shall adjust the fractional interest by paying to the holder of the
Common Shares deposited pursuant to the Offer an amount based on a price per
Class A share equal to Cdn$25.00 per share.
3.2 Agreement of Vendors to Sell
----------------------------
Subject to the terms and conditions hereof, each of the Vendors
unconditionally and irrevocably agrees to accept either Option 2 or Option 4 of
the Offer by depositing all of the Common Shares held by such Vendor in the
manner and at the time specified in this Agreement.
ARTICLE 4
---------
PAYMENT OF PURCHASE PRICE
-------------------------
4.1 Payment of Purchase Price
-------------------------
At the Time of Closing, the Purchaser shall make the cash payments, issue
the Class A Shares and deliver the Notes to the Selling Shareholders in
accordance with the option selected by each Selling Shareholder pursuant to
Section 3.1 hereof.
4.2 Security for Deferred Consideration
-----------------------------------
As security for the payment of the Notes, the Purchaser shall deposit with
the Escrow Agent pursuant to the Escrow Agreement a certified cheque, bank draft
or wire transfer in an amount equal to $4,300,000 which shall constitute the
initial Escrow Funds.
4.3 Shareholder Debt and Withholding Taxes
--------------------------------------
The first payment due to any Vendor pursuant to this Article 4 shall be net
of any and all amounts owed to the Corporation by such Vendor. Any and all
amounts payable to any Vendor hereunder shall be made net of any obligation of
the Purchaser to withhold monies to be remitted to the appropriate Government
Authority for any Tax.
<PAGE>
4.4 Pre-Closing Amalgamation
------------------------
The parties acknowledge that it is a condition of closing that prior to
Closing the Corporation be continued under the laws of Nova Scotia and then
amalgamate with a newly formed Nova Scotia unlimited liability company to form a
Nova Scotia unlimited company to be named Electrophotonics Nova Scotia Company
or such other name which is acceptable to the Vendors and the Purchaser
(collectively, the "Pre-Closing Amalgamation"). E-TEK and the Purchaser shall
provide all necessary assistance in connection with such actions and shall be
responsible for all reasonable costs incurred in connection with the Pre-Closing
Amalgamation and, if the transactions contemplated hereunder do not close, for
all costs incurred in connection with continuing the Corporation back under the
Business Corporations Act (Ontario). E-TEK shall also deliver to the Vendors
prior to Closing an indemnity substantially in the form and content of the E-TEK
Indemnity Agreement.
ARTICLE 5
---------
EXCHANGE RIGHTS
---------------
5.1 Exchange
--------
The terms and provisions of the Class A Shares shall provide that the
Shareholders shall have the right to exchange Class A Shares of the Purchaser
for shares of E-TEK Common Stock on the basis provided in Exhibit H (the
"Exchangeable Share Provisions").
5.2 Funding of the Purchaser
------------------------
So long as any Class A Shares are outstanding, E-TEK will:
(a) cause the Purchaser to declare simultaneously with the declaration
of any dividend on shares of E-TEK Common Stock an equivalent
dividend on the Class A Shares and, when such dividend is paid on
shares of E-TEK, cause the Purchaser to pay simultaneously
therewith such equivalent dividend on the Class A Shares, in each
case in accordance with the Exchangeable Share Provisions;
(b) advise the Purchaser sufficiently in advance of the declaration by
E-TEK of any dividend on shares of E-TEK Common Stock and take all
such other actions as are necessary, in co-operation with the
Purchaser, to ensure that the respective declaration date, record
date and payment date for a dividend on the Class A Shares shall
be the same as the record date, declaration date and payment date
for the corresponding dividend on shares of E-TEK Common Stock;
(c) provide or cause to be provided to the Purchaser, by any means
which E-TEK deems appropriate from time to time, such assets,
funds and other property as may be necessary in order that the
Purchaser will have sufficient assets, funds and other property
available to enable the due declaration and the due and punctual
payment, in accordance with
<PAGE>
applicable law, of all dividends on the Class A Shares in accordance
with the Exchangeable Share Provisions;
(d) take all such actions and do all such things as are necessary or
desirable to enable and permit the Purchaser, in accordance with
applicable law, to pay and otherwise perform its obligations with
respect to the satisfaction of the Liquidation Amount in respect of
each issued and outstanding Class A Shares upon the liquidation,
dissolution or winding-up of the Purchaser, including without
limitation all such actions and all such things as are necessary or
desirable to enable and permit the Purchaser, subject to the
provisions of the Escrow Agreement, to cause to be delivered shares of
E-TEK Common Stock to the holders of Class A Shares in accordance with
the Exchangeable Share Provisions;
(e) take all such actions and do all such things as are necessary or
desirable to enable and permit the Purchaser, in accordance with the
applicable law, to pay and otherwise perform its obligations with
respect to the satisfaction of the Retraction Amount and the
Redemption Price, including without limitation, all such actions and
all such things as are necessary or desirable to enable and permit the
Purchaser, subject to the provisions of the Escrow Agreement, to cause
to be delivered shares of E-TEK Common Stock to the holders of Class A
Shares upon the retraction or redemption of the Class A Shares in
accordance with the Exchangeable Share Provisions;
(f) not sell, assign, pledge or otherwise dispose of or relinquish
ownership of any shares in the capital of the Purchaser with the
effect that E-TEK would lose control (as this term is used in the Nova
Scotia Companies Act (the "Act") of the Purchaser; and
(g) not exercise its vote as a shareholder to initiate or approve the
voluntary liquidation, dissolution or winding-up, amalgamation or
capital reorganization of the Purchaser or sale of the Purchaser or
substantially the whole of its undertaking nor take any action or omit
to take any action that is designed to result in the liquidation,
dissolution, winding-up, amalgamation or capital reorganization of the
Purchaser or sale of the Purchaser or substantially the whole of its
undertaking unless E-TEK, having regard to the interests of the
holders of the Class A Shares, satisfied itself that the rights and
privileges of the holders of the Class A Shares are maintained without
material impairment or alteration as a result of such action or
omission, provided however, that nothing herein shall prevent the
Purchaser or E-TEK from taking such proceedings or actions (including
proceedings under the Bankruptcy and Insolvency Act (Canada) or
Companies Creditors Arrangement Act (Canada), or doing such things as
they may, in good faith, determine as being necessary to protect their
respective interests, assets or rights from claims or assertions of
creditors or other third party claimants.
<PAGE>
5.3 Reservation of Shares of E-TEK Common Stock.
--------------------------------------------
E-TEK hereby represents, warrants and covenants that it has irrevocably
reserved for issuance and will at all times keep available, free from pre-
emptive and other rights, out of its authorized and unissued capital stock such
number of shares of E-TEK Common Stock (or other shares or securities into which
shares of E-TEK Common Stock may be reclassified or changed as contemplated in
the Exchangeable Share Provisions) as is equal to the sum of (a) the number of
Class A Shares issued and outstanding from time to time, (b) the number of Class
A Shares outstanding from time to time, and (c) the number of shares of E-TEK
Common Stock as are now and may hereinafter be required to enable and permit the
Purchaser to meet its obligations hereunder and under the Exchangeable Share
Provisions.
5.4 Notification of Certain Events.
-------------------------------
In order to assist E-TEK to comply with its obligations hereunder, the
Purchaser will give E-TEK notice to each of the following events at the time set
forth below:
(a) in the event of any determination by the Board of Directors of the
Purchaser to institute voluntary liquidation, dissolution, winding
up or share capital reorganization proceedings with respect to the
Purchaser or to effect any other distribution of the assets of the
Purchaser among its shareholders for the purpose of winding up its
affairs, at least 30 days prior to the proposed effective date of
such liquidation, dissolution, winding up or other distribution;
(b) immediately, upon the earlier of receipt by the Purchaser of
notice of the Purchaser otherwise becoming aware of any threatened
or instituted claim, suit, petition or other proceedings with
respect to the involuntary liquidation, dissolution or winding up
of the Purchaser or to the effect any other distribution of the
assets of the Purchaser among its shareholders for the purpose of
winding up of its affairs;
(c) immediately, upon a determination of the Board of Directors of the
Purchaser to exercise its Redemption Right (as defined in the
Exchangeable Share Provisions );
(d) immediately, upon receipt by the Purchaser of a Retraction Request
(as defined in the Exchangeable Share Provisions); and
(e) as soon as practicable upon the issuance by the Purchaser of any
Class A Shares or rights to acquire Class A Shares.
5.5 Delivery of Shares of E-TEK Common Stock.
-----------------------------------------
In furtherance of E-TEK's obligations under sections 5.4 and 5.5 hereof,
upon notice from the Purchaser of any event which requires the Purchaser to
cause to be delivered shares of E-TEK Common Stock to any holder of Class A
Shares, E-TEK shall forthwith issue and deliver the requisite shares of E-TEK
Common Stock (subject to the provisions of the Escrow
<PAGE>
Agreement), to or to the order of the former holder of the surrendered Class A
Shares, as the Purchaser shall direct. All such shares of E-TEK shall be duly
issued as fully-paid and non-assessable and shall be free and clear of any lien,
claim or encumbrance. In consideration of the issuance of each such share of E-
TEK, the Purchaser shall issue to E-TEK or as E-TEK shall direct, such number of
common shares of the Purchaser as is equal to the fair value of such shares of
E-TEK Common Stock.
5.6 Tender Offers.
--------------
In the event that a tender offer, share exchange offer, issuer bid, take-
over bid or similar transaction with respect to E-TEK Common Stock (an "Offer")
is proposed by E-TEK or is proposed to E-TEK or its shareholders and is
recommended by the Board of Directors of E-TEK (the "Board"), or is otherwise
effected or to be effected with the consent or approval of the Board, E-TEK will
cause the Purchaser to immediately give the holders of the Class A Shares notice
of the Offer and will expeditiously use its best efforts in good faith to
endeavour to permit holders of Class A Shares to participate in such Offer to
the same material extent as the holders of shares of E-TEK Common Stock. Without
limiting the generality of the foregoing, E-TEK and the Board will expeditiously
use their respective best efforts in good faith to endeavour to permit the
holders of Class A Shares to participate in all such Offers without being
required to retract Class A Shares as against the Purchaser (or, if so required,
to ensure that any such retraction shall be effective only upon, and shall be
conditional upon, the closing of the Offer and to the extent necessary to tender
or deposit to the Offer). For greater certainty, if in the reasonable judgement
of the Board such efforts would be detrimental to the interests of E-TEK or the
holders of shares E-TEK Common Stock or the Offer, the Board shall not be
required to take any further steps in the interests of the holders of the Class
A Shares.
5.7 E-TEK Not to Vote Class A Shares.
---------------------------------
E-TEK covenants and agrees that it will appoint and cause to be appointed
proxyholders with respect to all Class A Shares held by E-TEK and its affiliates
as defined in the Act for the sole purpose of attending each meeting of the
holders of Class A Shares in order to be counted as part of the quorum for each
such meeting. E-TEK further covenants and agrees that it will not, and will
cause its affiliates not to, exercise any voting rights which may be exercisable
by holders of Class A Shares from time to time pursuant to the Exchangeable
Share Provisions or pursuant to the provisions of the Act or any successor or
other corporate statute by which the Purchaser may in the future be governed
with respect to any Class A Shares held by it or by its affiliates in respect of
any matter considered at any meeting of holders of Class A Shares.
5.8 Qualification of Shares of E-TEK Common Stock.
----------------------------------------------
In connection with the issuance of any shares of E-TEK Common Stock (or
other shares or securities into which share of E-TEK Common Stock may be
reclassified or changed) to be issued and delivered hereunder, including for
greater certainty, pursuant to the Exchangeable Share Provisions, E-TEK will use
all reasonable commercial efforts to:
<PAGE>
(a) comply with the provisions of the Registration Rights Agreement of
even date herewith between E-TEK and the holders of Class A Shares
("Holders");
(b) cooperate in good faith with the Purchaser in obtaining exemption
orders from the prospectus and registration requirements of al
Canadian provincial securities laws, rules, regulations and
policies in each province in which a Holder is resident which will
permit such Holders to trade shares of E-TEK Common Stock so
issued pursuant to the terms and conditions of such exemption
orders; and
(c) in good faith, expeditiously take all such actions and do all such
things as are necessary or advisable to cause shares of E-TEK
Common Stock (or other shares or securities into which shares of
E-TEK Common Stock may be reclassified or changed) to be issued
and delivered hereunder, including for greater certainty, pursuant
to the Exchangeable Share Provisions to be listed, quoted or
posted for trading on all stock exchanged and quotation systems on
which such shares are listed, quoted or posted for trading at such
time.
5.9 Amendments, Modifications, etc.
-------------------------------
This Article 5 may not be amended or modified except by an agreement in
writing executed by the Purchaser and E-TEK and approved by the Holders in the
manner and under the conditions set out in the Exchangeable Share Provisions.
5.10 Ministerial Amendments.
-----------------------
Notwithstanding the provisions of Section 5.9 hereof, the Purchaser and E-
TEK to this agreement may in writing, at any time and from time to time, without
approval of the Holders, amend or modify this agreement for the purposes of:
(a) adding to the covenants of either or both parties hereto for the
protection of the Holders hereunder;
(b) making such amendments or modifications not inconsistent with this
agreement as may be necessary or desirable with respect to mattes
or questions which, in the opinion of the Board of Directors of
each of E-TEK and Purchaser, having in mind the best interests of
the Holders as a whole, it may be expedient to make, provided that
such Boards of Directors shall be of the opinion that such
amendments and modifications will not be prejudicial to the
interests of the Holders as a whole; or
(c) making such changes or corrections which, on the advice of counsel
to the Purchaser and E-TEK, are required for the purpose of curing
or correcting any ambiguity or defect or inconsistent provision or
clerical omission or mistake or manifest error, and the Board of
Directors of each of the Purchaser and E-TEK shall be of the
opinion that such changes or
<PAGE>
corrections will not be prejudicial to the interests of the Holders as
a whole.
5.11 Survival.
---------
This Article 5 shall continue in full force and effect until there are no
Class A Shares held by a Holder other than by E-TEK or any of its affiliates or
associates (as defined in the Act).
5.12 Changes in Capital of E-TEK and the Purchaser.
----------------------------------------------
At all times after the occurrence of any event as a result of which either
shares of E-TEK Common Stock or Class A Shares or both are in any way changed,
this Article 5 shall forthwith be amended and modified as necessary in order
that it shall apply with full force and effect, mutatis mutandis, to all new
securities into which shares of E-TEK Common Stock or the Class A Shares or both
are so changed and the parties hereto shall execute and deliver an agreement in
writing giving effect to and evidencing such necessary amendments and
modifications.
ARTICLE 6
---------
REPRESENTATIONS AND WARRANTIES OF THE VENDORS
---------------------------------------------
6.1 Joint and Several Representations and Warranties of the Vendors
---------------------------------------------------------------
The Vendors hereby jointly and severally represent and warrant to the
Purchaser as follows and acknowledge that the Purchaser is relying on such
representations and warranties in connection with the transactions herein
contemplated:
6.1.1 Incorporation and Organization of the Corporation
-------------------------------------------------
The Corporation is a corporation duly incorporated and subsisting
under the laws of Ontario. No proceedings have been instituted or
are pending for the dissolution or liquidation of the Corporation.
True and complete copies of the Articles of Incorporation and by-
laws of the Corporation have been provided to the Purchaser. No
Articles of Amendment have been filed or authorized by the
shareholders of the Corporation since September 26, 1997 and no by-
laws have been enacted since August 9, 1993. The Corporation has the
corporate power to enter into this Agreement and to perform its
obligations thereunder.
6.1.2 Authorization
-------------
This Agreement has and all the closing documents to be executed by
the Corporation will be duly authorized, executed and delivered by
the Corporation and is or will be a legal, valid and binding
obligation of the Corporation, enforceable against the Corporation
by the Purchaser in accordance with its terms, except as enforcement
may be limited by bankruptcy, insolvency or other laws affecting the
rights of creditors generally and except that equitable remedies may
be granted only in the discretion of a court of competent
jurisdiction.
<PAGE>
6.1.3 Qualification of the Corporation to do Business
-----------------------------------------------
The Corporation has the necessary corporate power, authority and
capacity to own or lease its property and assets and to carry on the
Business as now being conducted by it and is qualified to carry on
the Business under the laws of the Provinces of Ontario, being the
only jurisdiction in which the nature of the Business as carried on
by the Corporation or the property or assets owned or leased by it
makes such qualification necessary.
6.1.4 Authorized Capital
------------------
The authorized capital of the Corporation consists an unlimited
number of common shares.
6.1.5 Issued Shares and Options
-------------------------
Of the authorized capital of the Corporation, on the date hereof
2,331,374 common shares without par value (and no more), being all
the issued and outstanding shares of the Corporation, have been duly
and validly allotted and issued and are outstanding as fully paid
and non-assessable shares and immediately prior to Closing 2,432,442
common shares without par value (and no more), being all the issued
and outstanding shares of the Corporation at such time, will have
been duly and validly allotted and will be issued and outstanding as
fully paid and non-assessable shares. Schedule 2 sets forth a true
and complete list of all outstanding common shares and the
registered holders of all such shares. Schedule 3 sets forth a true
and complete list of all Options, including the date of grant, the
holder of the options, the exercise price therefore and the extent
to which such Options have vested or become currently exercisable as
of the date hereof and to the extent not so vested or exercisable,
the schedule on which such Options will vest or become exercisable.
As of the date hereof, options to purchase 223,746 Common Shares
(and no more) are outstanding, 101,068 of which will have vested on
or before Closing and 122,678 of which will not have vested on or
before Closing. All options which will have vested on or before the
Closing Date will have been duly exercised before Closing. Except as
disclosed in the Disclosure Schedule, the certificates evidencing
the Purchased Shares bear no restrictive legends and none of the
Articles of Incorporation or by-laws of the Corporation or any
shareholder agreement or unanimous shareholder agreement governing
the affairs of the Corporation or the relationship, rights and
duties of shareholders contains or provides for any restrictions or
restrictive legends with respect to the Purchased Shares or any of
them.
6.1.6 Subsidiaries
------------
Except as set forth in the Disclosure Schedule, the Corporation has
no subsidiary and owns no shares in the capital of any other
corporation and has not agreed to acquire any subsidiary or any
shares in the capital of any other corporation.
<PAGE>
6.1.7 Issue of Shares or Other Securities
-----------------------------------
Except as set forth in Schedule 3, no Person has any agreement or
option or any right or privilege (whether by law, pre-emptive or
contractual) capable of becoming an agreement or option, including
any convertible securities, warrants or convertible obligations of
any nature, for the purchase, acquisition, subscription, allotment
or issuance of any unissued shares or other securities of the
Corporation.
6.1.8 Financial Statements
--------------------
The Financial Statements have been prepared in accordance with
generally accepted accounting principles applied on a basis
consistent with those of previous years and present fairly:
(i) all the assets, liabilities (whether accrued, absolute,
contingent or otherwise) and the financial condition of the
Corporation as at the Financial Year End; and
(ii) the revenues, earnings and results of operations of the
Corporation for the 12 month period ended on the Financial
Year End.
6.1.9 Interim Statements
------------------
The Interim Financial Statements have been prepared in accordance
with generally accepted accounting principles applied on a basis
consistent with those of previous years and present fairly:
(i) all the assets, liabilities (whether accrued, absolute,
contingent or otherwise) and the financial condition of the
Corporation as at January 31, 1999; and
(ii) the revenues, earnings and results of operations of the
Corporation for the six month period ended on January 31,
1999,
provided, however, that (i) the Interim Financial Statements do not
contain all footnotes required under generally accepted accounting
principles, and (ii) the Interim Financial Statements are subject to
adjustments for taxes (including investment tax credits), accruals
for bonuses, revenue cut-off, payables cut-off and review of
accounts receivable; provided that the net effect of such
adjustments would not be material to a purchaser contemplating the
purchase of shares of the Corporation.
6.1.10 Business Carried on in Ordinary Course
--------------------------------------
The Business has been carried on in the ordinary course since the
Financial Year End and the Corporation has not, since the Financial
Year End, sold or otherwise disposed of any of its property or
assets. Since the Financial Year End:
<PAGE>
(i) there has been no change in the Business, operations, affairs,
prospects or condition (financial or otherwise) of the
Corporation, including any such change arising as a result of
any legislative or regulatory change, revocation of any
licence, registration, permit or right to do business or as a
result of fire, explosion, accident, casualty, labour problem,
flood, drought, riot, storm, act of God or otherwise, except
for changes occurring in the ordinary course of business and
which, in the aggregate, have not materially adversely
affected and will not materially adversely affect the
Business, operations, affairs, prospects or condition
(financial or otherwise) of the Corporation;
(ii) the Corporation has not waived, or has agreed or become bound
to waive, any right of substantial value or entered into any
commitment or transaction not in the ordinary course of
business where such right, commitment or transaction is or
would be material in relation to the Corporation, taken
together, or to the Business; and
(iii) except as set forth in the Disclosure Schedule, the
Corporation has not created, or has agreed or become bound to
create, or has permitted the creation of, any Encumbrance on
any of its property or assets (except for any lien for unpaid
Taxes not yet due).
6.1.11 Minute Books and Corporate Records
----------------------------------
The minute and record books of the Corporation contain in all
material respects complete and accurate minutes of all meetings of,
and copies of all by-laws and resolutions passed by, the directors
and shareholders of the Corporation since its incorporation; all
such meetings were duly called and held and all such by-laws and
resolutions were duly passed or enacted. The share certificate
books, registers of shareholders, registers of transfers, registers
of directors, registers of holders of Debt Instruments and other
corporate registers of the Corporation comply with the provisions of
governing law and are complete and accurate in all material
respects. Except as disclosed in the Disclosure Schedule, the
Corporation is not a party to or bound by or subject to any
shareholder agreement or unanimous shareholder agreement governing
the affairs of the Corporation or the relationships, rights and
duties of shareholders.
6.1.12 Accuracy of Books and Records
-----------------------------
The books and records, accounting, financial and otherwise, of the
Corporation fairly and correctly set out and disclose in all
material respects the financial position of the Corporation as at
the date hereof and all material financial transactions of the
Corporation have been accurately recorded in such books and records
on a consistent basis and in conformity with generally accepted
accounting principles. Except as disclosed in the Disclosure
Schedule, all
<PAGE>
records, systems, controls, data or information relating to the
Corporation or to the Business (including any digital, electronic,
mechanical, photographic or other technological process or device
whether computerized or not) are in the full possession and control
of and are owned exclusively by the Corporation.
6.1.13 Guarantees
----------
Except as set forth and described in the Disclosure Schedule, the
Corporation is not a party to or bound by or subject to any
Guarantee.
6.1.14 Dividends
---------
Since the Financial Year End, the Corporation has not declared or
paid or has been deemed under the Income Tax Act (Canada) to have
declared or paid any dividend or any other distribution (whether out
of capital or surplus or otherwise) on any of its outstanding
securities and has not redeemed, purchased or otherwise acquired any
of its outstanding securities or agreed or become bound to do so.
6.1.15 Interested Persons
------------------
(a) Since the Financial Year End, no payment has been made or
authorized by the Corporation to or for the benefit of any
Interested Person except in the ordinary course of business and
at the regular rate payable as Employee Benefits, rents,
management and other fees, the reimbursement of expenses
incurred on behalf of the Corporation or otherwise.
(b) Except as set forth and described in the Disclosure Schedule,
since the Financial Year End, the aggregate amount of Employee
Benefits, rents, management and other fees, reimbursement of
expenses incurred on behalf of the Corporation or other
payments have been paid at no greater rates than those
prevailing on the Financial Year End.
(c) Except as set forth and described in the Disclosure Schedule:
(i) the Corporation is not a party to or bound by or subject
to any agreement, contract or commitment with any
Interested Person;
(ii) the Corporation does not have any loan or indebtedness
outstanding (except for obligations incurred in the
ordinary course of business with respect to Employee
Benefits, rents, management or other fees, the
reimbursement of expenses incurred on behalf of the
Corporation or otherwise) to any Interested Person;
(iii) no Interested Person owns, directly or indirectly, in
whole or in part, any property that the Corporation uses
in the operation of the Business as heretofore carried
on; or
<PAGE>
(iv) to the knowledge of the Vendors, no Interested Person has
any cause of action or other claim whatsoever against, or
owes any amount to, the Corporation in connection with
the Business as heretofore carried on, except for any
liability reflected in the Audited Financial Statements
and claims in the ordinary course of business such as for
accrued vacation pay and accrued benefits under the
Employee Benefits.
6.1.16 Capital Expenditures
--------------------
Since the Financial Year End, the Corporation has made or
authorized capital expenditures of approximately $650,000 (and no
more), all such expenditures having been planned in the ordinary
course of business.
6.1.17 Employment and Employee Benefit Matters
---------------------------------------
(a) The Corporation has thirty-nine (39) full time and one (1)
part time employee, two (2) co-op students and three (3)
seasonal employees. The names of such individuals, their years
of service, their job descriptions and the Employee Benefits
to which they are entitled are set forth and described in the
Disclosure Schedule. To the knowledge of the Vendors, no Key
Employee, nor any group of Key Employees, intends to terminate
his or its employment with the Corporation. To the knowledge
of the Vendors, general relations between the Corporation and
its employees are good and there is no present, pending or
threatened labour strike, dispute, slowdown or work stoppage.
(b) The Disclosure Schedule contains a complete list of
individuals who are not employees of the Corporation, and who
supply their services to the Corporation under personal
services contracts (including independent contractors,
employees of agencies, secondees or leased employees and
consultants) specifying location, start and end date of
engagement, services supplied, supplying agency and fees and
other amounts payable by the Corporation. There are no
complaints, claims or charges outstanding or, to the knowledge
of the Vendors, anticipated relating to the engagement of such
individuals.
(c) The Disclosure Schedule contains a complete list of all
Employee Benefits maintained, or otherwise contributed to or
required to be contributed to, by the Corporation for the
benefit of employees or former employees of the Corporation.
(d) Except as set forth and described in the Disclosure Schedule:
(i) the Corporation is not a party to or bound by or
subject to any agreement or arrangement with respect
to Employee Benefits and no such agreement or
arrangement contains any specific provision
<PAGE>
as to notice of termination of employment or severance
pay in lieu thereof;
(ii) the Corporation has no obligations to amend any
Employee Benefit and no amendments will be made or
promised prior to the Closing Date;
(iii) all obligations of the Corporation as of the Financial
Year End with respect to Employee Benefits are
reflected in and have been fully accrued in the
Financial Statements;
(iv) the Corporation is not a party to or bound by or
subject to any agreement or arrangement with any
labour union or employee association or has made any
commitment to or conducted any negotiation or
discussion with any labour union or employee
association with respect to any future agreement or
arrangement and, to the knowledge of the Vendors,
there is no current attempt to organize or establish
any labour union or employee association with respect
to employees of the Corporation. The Corporation has
experienced no work stoppages or strikes (legal or
otherwise);
(v) to the knowledge of the Vendors, the Corporation is
not liable or alleged to be liable for any damages to
any employee or former employee resulting from the
violation or alleged violation of any applicable
employment law or regulation, including any employment
equity, human rights, health or safety law or
regulation, or any agreement or arrangement with
respect to Employee Benefits;
(vi) there are no outstanding inspection orders against the
Corporation under the Occupational Health and Safety
Act (Ontario) or Regulations thereto (the "OHSA").
There are no outstanding prosecution orders against
the Corporation under the Provincial Offences Act
(Ontario) for violations of the OHSA nor are the
Vendors aware of any threatened prosecutions or,
except as disclosed in the Disclosure Schedule,
grounds upon which any prosecution may be commenced.
The Corporation has fully complied with the OHSA in
respect of compliance with workplace hazardous
materials information systems;
(vii) except as set forth in the Disclosure Schedule, the
Corporation has complied with the requirements of the
Pay Equity Act (Ontario);
(viii) the Corporation has made no representations or
commitments to its employees with respect to future
increases in wages or other compensation;
<PAGE>
(ix) The Disclosure Schedule lists the employees of the
Corporation who have resigned or who have been
terminated by the Corporation and, to the knowledge of
the Vendors, the subsequent employment position
obtained by such person immediately after their
departure from the Corporation's employ.
(x) to the knowledge of the Vendors, no employee of the
Corporation is bound by any confidentiality, non-
solicitation or non-competition agreement in favour of
any Person other than the Corporation;
(xi) no employees of the Corporation are currently in
receipt of workers' compensation benefits;
(xii) no employees of the Corporation are currently on
pregnancy or parental leave;
(xiii) except as disclosed in the Disclosure Schedule, and
except by reason of short-term absence arising from
illness, vacation, bereavement or other similar leave:
A. all of the employees are at work performing the
usual and ordinary functions of their respective
positions;
B. none of the employees is receiving benefits under
applicable workers compensation legislation in
relation to their employment;
C. none of the employees has received any such
benefits within the last twelve months;
(xiv) [intentionally deleted]
(xv) no person will become entitled to any retirement,
severance, bonus or other such payment as a result of
the transactions contemplated hereby; and
(xvi) the Corporation is not a party to any side letter or
other written or oral commitment with any employee or
contractor which has not been specifically disclosed
in the Disclosure Schedule.
6.1.18 Pension and Retirement Plans
----------------------------
The Corporation does not sponsor or participate in any pension
and/or retirement plan.
<PAGE>
6.1.19 Debt Instruments
----------------
Except as set forth and described in the Disclosure Schedule, the
Corporation is not a party to or bound by or subject to:
(i) any Debt Instrument; or
(ii) any agreement, contract or commitment to create, assume or
issue any Debt Instrument;
and no Debt Instrument or Encumbrance which the Corporation is a
party to or bound by or subject to is dependent upon the Guarantee
of or any security provided by any other Person.
6.1.20 Real Property
-------------
The Corporation does not own or, except for the Leases of real
property set forth and described in the Disclosure Schedule, have
any interest in, nor is the Corporation a party to or bound by or
subject to any agreement, contract or commitment, or any option to
purchase, any real or immovable property.
6.1.21 Leases and Leased Property
--------------------------
(a) The Corporation is not a party to or bound by or subject to
nor has the Corporation agreed or become bound to enter into
any real or personal property lease or other right of
occupancy relating to real property, whether as lessor or
lessee, except for the Leases set forth and described in the
Disclosure Schedule, in which is specified the parties to and
dates of each of the Leases, their dates of execution and
expiry dates, particulars of any options to renew, particulars
of any requirement thereunder for the consent, approval,
permit or acknowledgement of any party thereto or any other
Person to the change of control of the Corporation herein
contemplated, the locations (including municipal addresses) of
the Leased Property and the rental payable and any other
payments required under the Leases, including if applicable
operating costs, hydro charges, Taxes and similar charges.
Except as described in the Disclosure Schedule, the
Corporation occupies the Leased Property and has the exclusive
right to occupy and use the Leased Property.
(b) All rental and other payments required to be paid by the
Corporation as lessee pursuant to the Leases have been duly
paid to date and the Corporation is not otherwise in default
in meeting its obligations under any of the Leases; to the
knowledge of the Vendors, no event exists which, but for the
passing of time or the giving of notice, or both, would
constitute a default by either party to any Lease and, to the
knowledge of the Vendors, no party to any Lease is claiming
any such default or taking any action purportedly based upon
any such default.
<PAGE>
6.1.22 Personal Property
-----------------
Except as set forth and described in the Disclosure Schedule, the
Corporation is the owner of all of its personal property and assets
with good and marketable title thereto free of any Encumbrance.
6.1.23 Insurance
---------
(a) The Corporation maintains insurance covering its property,
assets and personnel and protecting the Business against loss
or damage on a basis that is comparable to the insurance
maintained by reasonable Persons operating businesses similar
to the Business as heretofore carried on. The Disclosure
Schedule sets forth a list of all insurance policies currently
maintained by the Corporation, true and complete copies of
which have been provided to the Purchaser. Each of such
insurance policies is valid and subsisting and in good
standing, there is no default, whether as to the payment of
the premiums or otherwise, under any material term or
condition of such insurance policies, and each person which is
an insured party under any of such insurance policies is
entitled to all rights and benefits thereunder.
(b) The Disclosure Schedule sets forth and describes all pending
claims under any of such insurance policies and includes true
and complete copies of the most recent inspection reports, if
any, received from insurance underwriters as to the condition
or insurance value of the insured property and assets. The
Corporation has not failed to give any notice or present any
claim under any of such insurance policies in due and timely
fashion. To the best of the knowledge and belief of the
Vendors no circumstances have occurred which might entitle the
Corporation to make a claim under any of such insurance
policies or which might be required under any of such
insurance policies to be notified to the insurers and no
material claim under any of such insurance policies has been
made by the Corporation since the Financial Year End.
(c) None of such insurance policies is subject to any premium in
excess of the stipulated or normal rate. No notice of
cancellation or non-renewal with respect to, nor disallowance
of any claim under, any of such insurance policies has been
received by the Corporation.
6.1.24 Material Contracts
------------------
Except for agreements, contracts and commitments in the ordinary
course of business, none of which has more than one month to run,
the Corporation is not a party to or bound by or subject to any
agreement, contract or commitment, written or oral, of any nature
or kind except for:
(i) service contracts on office equipment;
<PAGE>
(ii) agreements and arrangements with Interested Persons set
forth and described at Section 6.1.15 of the Disclosure
Schedule;
(iii) agreements and arrangements with respect to Employee
Benefits set forth and described at Section 6.1.17 of
the Disclosure Schedule;
(iv) Guarantees and Debt Instruments set forth and described
at Sections 6.1.13 and 6.1.19, respectively, of the
Disclosure Schedule;
(v) Leases set forth and described under Section 6.1.21 of
the Disclosure Schedule;
(vi) insurance policies set forth and described under
Section 6.1.23 of the Disclosure Schedule;
(vii) licences set forth and described under Section 6.1.36
of the Disclosure Schedule; and
(viii) other agreements, contracts and commitments, including
without limitation Encumbrances, set forth and
described under Section 6.1.24 of the Disclosure
Schedule;
and, except as disclosed in the Disclosure Schedule, no consent,
approval, permit or acknowledgement is required under any of such
agreements, contracts or commitments from any party thereto or any
other Person in connection with the completion of the transactions
herein contemplated. No consent or approval is required in
connection with the change in control resulting from the
acquisition of all of the outstanding shares of the Corporation by
the Purchaser or in order to assign any of such agreements,
contracts or commitments from any party thereto or any other Person
in connection with the completion of the transactions herein
contemplated, except as identified in the Disclosure Schedule, and
in these cases where consent is required, the agreement may be
transferred or assigned by the Corporation without costs to either
the Corporation or the transferee or assignee. The Corporation has
made available to the Purchaser a true and complete copy of each
contract listed, described or referred to in this Section 6.1.24
and all amendments thereto to the date hereof.
6.1.25 Obligations to Customers and Suppliers
--------------------------------------
Except as set forth in the Disclosure Schedule, there are no
outstanding warranties, consulting contracts or other maintenance
obligations with or to customers or other users of the products and
services of the Corporation and the Corporation is not required to
provide any bonding or other financial security arrangements in
connection with any transactions with any of its customers or
suppliers, whether or not in the ordinary course of the Business.
The Disclosure Schedule sets forth full details with respect to any
side letters or other written or
<PAGE>
oral commitments to customers which are not contained in the
applicable customer contract.
6.1.26 Status of Agreements
--------------------
Except as set forth and described in the Disclosure Schedule, each
of the agreements, contracts and commitments, written or oral,
which the Corporation is a party to or bound by or subject to
(including, without limitation, those agreements, contracts and
commitments referred to in Section 6.1.25) is valid and subsisting
and in good standing, there is no material default thereunder and
to the knowledge of the Vendors, there are no material facts which,
after notice or lapse of time or both, would constitute such a
material default. The Corporation is a party to or bound by or
subject to any of such agreements, contracts or commitments and is
entitled to all rights and benefits thereunder.
6.1.27 Legal Proceedings
-----------------
Except as set forth in the Disclosure Schedule, there is no Legal
Proceeding (whether or not purportedly on behalf of the
Corporation) in progress, pending, or to the knowledge of the
Vendors, threatened which affect the Corporation at law or in
equity or before or by any Tribunal which Legal Proceeding involves
the possibility of any judgement or other liability of the
Corporation not fully covered by insurance. There is no judgement,
decree, injunction, ruling, order or award of any Tribunal
outstanding against or affecting the Corporation.
6.1.28 Banking Information
-------------------
The Disclosure Schedule sets forth and describes:
(i) the name and location (including municipal address) of
each bank, trust company or other institution in which
the Corporation has an account, money on deposit or a
safety deposit box and the name of each Person authorized
to draw thereon or to have access thereto; and
(ii) the name of each Person holding a general or special
power of attorney from the Corporation and a summary of
the terms thereof.
6.1.29 Tax Matters
-----------
(a) Taxes and Tax Returns
---------------------
The Corporation has duly filed in the prescribed manner and
within the prescribed time all Tax Returns required to be
filed by it; such Tax Returns are true, correct and complete
in all material respects and the Corporation has made complete
and accurate disclosure in such Tax Returns and in all
materials accompanying such Tax Returns, except in respect of
a particular Tax Return to the extent that it may have been
<PAGE>
modified in a subsequent Tax Return. Except as set forth and
described in the Disclosure Schedule, the Corporation has paid
all Taxes shown on such Tax Returns as being due and payable
and all Taxes payable under any assessment or reassessment.
(b) Liabilities for Taxes
---------------------
The Financial Statements fully reflect accrued liabilities for
all Taxes which were not yet then due and payable and for
which Tax Returns were not yet then required to be filed.
Except as set forth and described in the Disclosure Schedule,
there is no Legal Proceeding and no assessment, reassessment
or request for information in progress, pending or, to the
best of the knowledge and belief of the Vendors threatened
against or affecting the Corporation in respect of Taxes nor
are any issues under discussion with any taxing authority
relating to any matters which could result in claims for
additional Taxes.
(c) Waivers
-------
Except as set forth and described in the Disclosure Schedule,
there are no agreements, waivers or other arrangements
providing for an extension of time with respect to any
assessment or reassessment of Tax, the filing of any Tax
Return or the payment of any Tax by the Corporation.
(d) Withholding and Instalments
---------------------------
The Corporation has withheld from each payment made by it the
amount of all Taxes and other deductions required under any
applicable Tax Legislation to be withheld therefrom and has
paid all such amounts withheld and all instalments of Taxes
due and payable before the date hereof to the relevant taxing
or other authority within the time prescribed under any
applicable Tax Legislation.
6.1.30 Accounts Receivable
-------------------
All accounts receivable of the Corporation reflected in the
Financial Statements or which have come into existence since the
date of the Financial Statements were created in the ordinary
course of the Business and, except to the extent that the same have
been paid in the ordinary course of the Business since the date of
the Financial Statements, are valid and enforceable and payable in
full, without any right of set-off or counterclaim or any reduction
for doubtful accounts reflected in the Financial Statements and, in
the case of accounts receivable which have come into existence
since the date of the Financial Statements, of a reasonable
allowance for doubtful accounts consistent with the Corporation's
previous practice.
<PAGE>
6.1.31 Compliance with Applicable Laws
-------------------------------
Except in respect of environmental matters which are separately
dealt with in Section 6.1.33 and matters relating to the Leased
Property which are separately dealt with in Section 6.1.21 and
except as set forth in the Disclosure Schedule, the Corporation has
conducted and is conducting the Business in compliance with all
applicable laws, rules and regulations, in each jurisdiction in
which the Business is carried on, is not in breach of any of such
laws, rules, policies, guidelines or regulations, and is duly
licensed or registered in each jurisdiction in which it owns or
leases its property and assets or carries on the Business, so as to
enable the Business to be carried on as now conducted and its
property and assets to be so owned or leased. The Disclosure
Schedule sets out a complete and accurate list of all licences,
permits, approvals, consents, certificates, registrations and
authorizations (whether governmental, regulatory or similar type)
other than the intellectual property licences held by or granted to
the Corporation, and there are no other licences, permits,
approvals, consents, certificates, registrations, or authorization
necessary to carry on the Business as presently carried on or to
own or lease any of the property or the assets utilized by the
Corporation except where the lack of grant of such to the
Corporation would not have a material adverse effect on the
condition (financial or otherwise) of the Corporation or the
Business as heretofore carried on. Each of such licences and
registrations is valid and subsisting and in good standing and
there is no default thereunder. None of such licences and
registrations contains any burdensome term, provision, condition or
limitation which has or could have an adverse effect on the
Corporation or the Business, or except as specifically disclosed in
this Agreement including the Schedules hereto, requires the
consent, approval, permit or acknowledgement of any Person in
connection with the completion of the transactions herein
contemplated.
6.1.32 Consents and Approvals
----------------------
Except as set out in the Disclosure Schedule, there is no
requirement to make any filing with, give any notice to or to
obtain any licence, permit, certificate, registration,
authorization, consent or approval of, any Government Authority as
a condition to the lawful consummation of the transactions
contemplated by this Agreement or the closing documents except for
the filings, notifications, licences, permits, certificates,
registrations, consents and approvals either pursuant to securities
legislation or which relate solely to the identity of the Purchaser
or which are of a purely administrative nature and could be
completed without adverse effect on the Corporation or the Business
immediately after the Closing Date.
6.1.33 Environmental Matters
---------------------
Except as set forth in the Disclosure Schedule, the Corporation is
not in violation of any applicable statute, law or regulations
relating to the environment and no material expenditures are or, to
the knowledge of the Vendors, will be required in
<PAGE>
order to comply with such existing statute, law or regulation. The
Corporation possesses all necessary environmental licenses,
permits, approvals, consents, certificates, registrations and other
authorizations in order for it to conduct its business in material
compliance with applicable statutes, law and regulations relating
to the environment.
6.1.34 Liabilities
-----------
There are no material liabilities of the Corporation of any kind
(whether accrued, absolute, contingent or otherwise) existing on
the date hereof except for:
(i) liabilities (including liabilities for unpaid Taxes)
disclosed on, reflected in or provided for in the
Financial Statements;
(ii) liabilities disclosed or referred to in this Agreement,
including the Schedules hereto; and
(iii) liabilities incurred in the ordinary course of business
and attributable to the period since the Financial Year
End, none of which is materially adverse to the Business,
operations, affairs, prospects or condition (financial or
otherwise) of the Corporation.
6.1.35 Condition and Sufficiency of Assets
-----------------------------------
All facilities, machinery and equipment owned or used by the
Corporation in connection with the Business are in good operating
condition and in a state of good repair and maintenance, reasonable
wear and tear excepted. The Corporation owns or leases all of the
property and assets necessary for the conduct of the Business as it
is currently being conducted. Except as set out in the Disclosure
Schedule, since the incorporation of the Corporation there has not
been any significant interruption of operations, supplies, access
or services by contractors of the Business as heretofore carried on
due to inadequate maintenance of any of the property or assets
owned and used by the Corporation. With the exception of inventory
in transit, all of the tangible assets of the Corporation are
situate at the locations specified in the Disclosure Schedule.
6.1.36 Intellectual and Industrial Property Rights
-------------------------------------------
(a) The Disclosure Schedule sets forth and describes all
Intellectual and Industrial Property Rights used in whole or
in part in the carrying on by the Corporation of the Business
as now carried on, and specifies, for each item, whether the
Intellectual and Industrial Property Rights are owned by the
Corporation (in this Section "Owned I.P.") or whether the
Intellectual and Industrial Property Rights are used by the
Corporation under a licence agreement or arrangement from
another Person (in this Section "Licensed I.P.").
<PAGE>
(b) The Disclosure Schedule contains a list of all Owned I.P. True and
complete copies of all patents and patent applications have been
provided to the Purchaser. The Disclosure Schedule sets forth the
registration or application number and country of registration or
application for each patent and patent application. Except as set
forth and described in the Disclosure Schedule, all of the Owned
I.P. are owned by the Corporation with good and marketable title
thereto free of any Encumbrance or co-ownership interest except for
the Encumbrance granted in favour of The Bank of Nova Scotia as set
forth in Section 6.1.19 of the Disclosure Schedule and, except for
any unregistered Owned I.P. not under application for registration,
all registrations and filings necessary to preserve the rights of
the Corporation in and to the Owned I.P. have been made. There are
no current restrictions or other impediments to the assignment or
transfer by the Corporation of all or any part of the Owned I.P. to
the Purchaser and there are, to the knowledge of the Vendors, no
restrictions or other impediments to the subsequent licensing of
the Owned I.P. by the Purchaser to its associates. Any such
assignment or transfer and subsequent licensing of all or any part
of the Owned I.P. would neither violate nor result in the breach,
modification, cancellation, termination or suspension of any of the
Owned I.P. nor, to the knowledge of the Vendors, require the
consent of any other Person.
(c) The Disclosure Schedule contains a list of all agreements relating
to the Licensed I.P., true and complete copies of which have been
provided to the Purchaser. Each licence agreement or arrangement
with respect to Licensed I.P. is valid and subsisting and in good
standing and there is no material default thereunder. Except as set
forth in the Disclosure Schedule, the Corporation has the right to
sub-license or to re-sell sub-licences to distributors, purchasers
and end-users of the Corporation's Products to use the Licensed
I.P. which is currently incorporated in or distributed with or
which the Corporation has contemplated incorporating in or
distributing with the Corporation's Products. Except as set forth
in the Disclosure Schedule, the aforesaid sub-licensing of the
Licensed I.P. would neither violate nor result in the breach,
modification, cancellation, termination or suspension of any of the
Licenced I.P. nor require the consent of any other Person. Except
as set forth in the Disclosure Schedule, there are no restrictions
or other impediments to the assignment or transfer by the
Corporation of all or any part of the Licensed I.P. to the
Purchaser and there are no restrictions or other impediments to the
subsequent sub-licensing of the Licensed I.P. by the Purchaser to
its associates. Except as set forth in the Disclosure Schedule, any
such assignment or transfer and subsequent sub-licensing of all or
any part of the Licensed I.P. would neither violate nor result in
the breach, modification, cancellation, termination or suspension
of any of the Licensed I.P. nor require the consent of any other
Person.
<PAGE>
(d) Except as set forth in the Disclosure Schedule, the consummation of
the transactions contemplated in this Agreement will neither
violate nor result in the breach, modification, cancellation,
termination or suspension of any of the Owned I.P. or any of the
Licensed I.P., nor require the consent of any other Person provided
that, the Vendors make no representations with respect to consent
requirements under the generally available general application
software licenses listed in the Disclosure Schedule.
(e) The Owned I.P. and the Licensed I.P. have not been used or
enforced, or failed to be used or enforced, in a manner that would
result in the non-renewal, modification, abandonment, cancellation
or unenforceability of any of the Owned I.P. or the Licensed I.P.
The Corporation has renewed or made applications for renewal within
the applicable renewal periods for all registered Owned I.P. and
for all Licensed I.P.
(f) The Corporation has not granted rights to use Owned I.P. to any
Person.
(g) No Person has commenced any Legal Proceeding claiming adverse
ownership, invalidity, lack of distinctiveness or conflict with
respect to any of the Owned I.P. or the Licensed I.P. or
challenging any rights of the Corporation in and to the Owned I.P.
or the Licensed I.P. or the right of the Corporation to use the
Owned I.P. or the Licensed I.P. in the conduct of the Business.
(h) To the knowledge of the Vendors, the conduct of the business by the
Corporation and its use of the Owned I.P. and the Licensed I.P.
does not infringe upon the Intellectual and Industrial Property
Rights or the trade-secrets, know-how or confidential or
proprietary information of any other Person. Neither the
Corporation nor the Vendors has received any notice, complaint,
threat or claim alleging infringement of any Intellectual and
Industrial Property Rights or the trade secrets, know-how or
confidential or proprietary information of any other Person.
(i) The Corporation has not commenced any Legal Proceeding challenging
the Intellectual and Industrial Property Rights of any other Person
and to the knowledge of the Vendors, other than as set forth in the
Disclosure Schedule, no other Person is using any Intellectual and
Industrial Property Rights which conflict with, infringe upon or
violate the rights of the Corporation in and to the Owned I.P. or
the Licensed I.P.
(j) All software licensed to the Corporation pursuant to the Licensed
I.P. could be reasonably promptly replaced by a suitable
alternative if the supplier of such software were to cease
operations. Except as set forth in the Disclosure Schedule, current
copies of source code for all material software included in the
Owned I.P. have been appropriately recorded on machine readable
media, clearly identified and stored by the Corporation in an
appropriate secure, fire-proof storage location, physically
separated
<PAGE>
from the systems area but within the same premises. A current and
accurate list identifying the location of all copies of source code
for all material software included in the Owned I.P. is included in
the Disclosure Schedule.
(k) The Corporation owns, or has valid rights to use (without any
condition, payment or fee except as set out in the Disclosure
Schedule) such computer software as is necessary for the conduct of
the Business as currently being conducted.
(l) For the purposes of this Section 6.1.36, "knowledge of the Vendors"
means the knowledge of the Vendors and, without having made
specific inquiry, the knowledge of inventors of the Owned I.P. who
have been employed by, affiliated with or acted as contractors to
the Corporation.
(m) The assignment of all right, title and interest to the Corporation
in the following patent applications (and corresponding issued
patents) is valid and binding in all respects as to all the
inventors named therein: United States Patent Application Serial
No. 08/550,565 (filed October 31, 1995); Canadian Application for a
Patent Serial No. 2,134,958 (filed November 2, 1994); United States
Patent 5,694,501 (issued December 2, 1997). No other patents or
intellectual property are owned by the Vendors which are related to
the Business which have not been assigned to the Corporation,
except as disclosed herein.
6.1.37 Commitments for Purchases or Sales at Losses
--------------------------------------------
The Corporation does not have any agreement, contract or commitment
for purchases or sales of its products or services at prices
involving material prospective losses.
6.1.38 Significant Customers
---------------------
Except as set out in the Disclosure Schedule, the Business is not
dependent on any single customer in any fiscal year of the
Corporation for more than twenty percent of its gross revenues, as
reported in the Financial Statements.
6.1.39 Significant Suppliers
---------------------
Except as set out in the Disclosure Schedule, none of the suppliers
of the Corporation is a sole supplier and the products and services
provided by each supplier are available from other suppliers.
6.1.40 Conflicting Instruments
-----------------------
The entering into of this Agreement by the parties hereto and the
completion of the transactions herein contemplated do not and will
not conflict with or result in the breach or violation of any of
the terms and provisions of (i) the Articles of
<PAGE>
Incorporation or by-laws of the Corporation, except for
restrictions on transfer contained in the Articles of Incorporation
of the Corporation, (ii) subject to obtaining any consent,
approval, permit or acknowledgement which may be required
thereunder in connection with the completion of the transactions
herein contemplated, except for the shareholders' agreement as set
forth in Schedule 6.1.11, which agreement shall be terminated on
Closing, any licence or registration or any agreement, contract or
commitment, written or oral, which the Corporation or each of the
Vendors is a party to or bound by or subject to, details of which
are set forth in the Disclosure Schedule or (iii) any law or
regulation, or any judgement, decree, injunction, ruling, order or
award of any Tribunal.
6.1.41 Paid Up Capital
---------------
The paid up capital for all the issued and outstanding Common
Shares as of July 31, 1998 for purposes of the Income Tax Act
(Canada) was $7,615,577.
6.1.42 Information Technology and Year 2000 Matters
--------------------------------------------
(a) The Corporation's products are Year 2000 compliant, which
means that the Corporation's products will consistently
process dates/times and date/time related data prior to,
during and after the calendar year 2000 as follows: the
Corporation's products shall, when processing date/time data
from, into, in and between the 20th and 21st centuries, and
the years 1999 and 2000, and performing leap year
calculations, process such date/time data in the same manner
on and after January 1, 2000 as before (including, but not
limited to inputting, outputting, extracting, displaying,
calculations, comparing, sorting and sequencing such data),
and shall not, as a result of the processing of such data on
and after January 1, 2000 (A) create any logical or
mathematical error or inconsistency, (B) malfunction or (C)
cease to function.
(b) A copy of the Corporation's Year 2000 inventory, testing and
remediation plan with respect to the Corporation's operating
business systems (the "Year 2000 Plan") has been provided to
the Purchaser. The Corporation is in the process of
implementing the Year 2000 Plan and is on schedule to complete
the inventory, testing and remediation of potential Year 2000
problems in accordance with the provisions of the Year 2000
Plan.
(c) Except as set forth in the Disclosure Schedule, the
Corporation's Products are free of any disabling codes or
instructions (a "Disabling Code"), and any virus or other
contaminant (a "Contaminant"), that may, or may be used to,
access, modify, delete, damage or disable the systems that
serve the Products or that may result in damage thereto.
(d) Components supplied by third parties to the Corporation are,
to the knowledge of the Vendors, free of any Disabling Codes
or Contaminants that may, or may be used to, access, modify,
delete, damage or disable any
<PAGE>
of the systems that serve the Products or that might result in
damage thereto.
(e) Except as forth in the Disclosure Schedule, the Corporation
has taken reasonable steps and implemented all reasonable
procedures to ensure that its internal operating business
systems are free from Disabling Codes and Contaminants.
(f) Except as set forth in the Disclosure Schedule, the
Corporation has in place appropriate disaster recovery plans,
procedures and facilities and has taken all reasonable steps
to safeguard the Corporation's internal operating systems and
restrict unauthorized access thereto.
6.1.43 [Intentionally Deleted]
-----------------------
6.1.44 Product Liability
-----------------
The Disclosure Schedule lists all warranties made by the
Corporation relating to the products of the Business sold to any
person. There is no existing claim, lawsuit, recall or proceeding,
or to the knowledge of the Vendors, threatened or anticipated
claim, lawsuit, recall or proceeding against the Corporation with
respect to the performance or defects, or the breach of any express
or implied warranty for any product sold by the Corporation prior
to Closing.
6.1.45 Disclosure
----------
The representations and warranties of each of the Vendors contained
in this Agreement and in any agreement, certificate, affidavit,
statutory declaration or other document delivered or given pursuant
to this Agreement are true and correct in all material respects and
do not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements contained in
such representations and warranties not misleading to a prospective
purchaser of the Purchased Shares.
6.2 Several Representations and Warranties of Vendors
-------------------------------------------------
Each of the Vendors hereby severally represents and warrants to the
Purchaser as follows and acknowledge that the Purchaser is relying on such
representations and warranties in connection with the transactions herein
contemplated:
6.2.1 Ownership of Purchased Shares
-----------------------------
He is the beneficial owner of the number of the Purchased Shares set
forth opposite his name in Schedule 1 free of any Encumbrance,
except for restrictions on transfer contained in the Articles of
Incorporation of the Corporation.
<PAGE>
6.2.2 Conflicting Instruments
-----------------------
Except for the shareholders' agreement as set forth in Schedule
6.1.11, which agreement shall be terminated on Closing, the entering
into of this Agreement by such Vendor and the performance of his
obligations hereunder do not and will not conflict with or result in
the breach or violation of any agreement, contract or commitment,
written or oral, which such Vendor is a party to or bound by or
subject to.
6.2.3 No Other Agreements to Purchase
-------------------------------
No Person, other than the Purchaser under this Agreement, has any
agreement or option or any right or privilege (whether by law, pre-
emptive or contractual) capable of becoming an agreement or option
for the purchase from the Vendors or any of them of any of the
Purchased Shares owned by them respectively, except that each of the
Vendors is party to a shareholders' agreement, as set forth in
Schedule 6.1.11, containing share transfer provisions, which
agreement shall be terminated on Closing.
6.2.4 Legal Proceedings
-----------------
There is:
(i) no Legal Proceeding (whether or not purportedly on
behalf of the Vendors individually or collectively) in
progress, pending, threatened against or affecting such
Vendor or affecting the title of such Vendors to any of
the Purchased Shares owned by him at law or in equity
or before or by any Tribunal and, to the best of the
knowledge and belief of each of such Vendor, there are
no grounds on which any such Legal Proceeding might be
commenced with any reasonable likelihood of success;
and
(ii) no judgement, decree, injunction, ruling, order or
award of any Tribunal outstanding against or affecting
such Vendor;
which, in any such case, might adversely affect the ability of such
Vendor to enter into this Agreement or to perform their respective
obligations hereunder.
6.2.5 Residence of Vendors
--------------------
He is not a "non-resident" of Canada within the meaning of the
Income Tax Act (Canada).
6.2.6 Investment Representations
--------------------------
(a) He is receiving the Class A Shares and the E-TEK Common Stock
issuable upon the exchange thereof as principal and for his own
account and not with a view to resale or distribution of any
part thereof and has no
<PAGE>
present intention of selling, granting any participation in, or
otherwise distributing the same.
(b) He acknowledges that the Class A Shares and the E-TEK Common
Stock issuable upon the exchange thereof are "restricted
securities" under the federal securities laws of the United
States in as much as they are being acquired in a transaction
not involving a public offering and that under such laws and
applicable regulations such securities may be resold without
registration under the Securities Act only in certain limited
circumstances.
(c) He is aware of the further limitations on disposition of such
Class A Shares and E-TEK Common Stock set forth elsewhere
herein.
(d) He is not a U.S. Person as such term in defined in and pursuant
to Regulation S promulgated under the Securities Act.
(Regulation S defines "U.S. Persons" to include, among others,
any (i) natural person or resident in the United States; (ii)
partnership or corporation incorporated or organized under U.S.
laws, or by or for the benefit of U.S. investors, and (iii)
estate or trust whose executor, administrator or trustee is a
U.S. Person.)
(e) He is not acquiring the securities for the account or benefit
of any U.S. Person.
(f) He agrees not to resell the Class A Shares except in accordance
with the Articles of Incorporation of the Purchaser.
(g) He has had the opportunity to review with his own tax advisors
the tax consequences to him of the transactions contemplated by
this Agreement. He understands that he must rely solely on his
own advisors and not on any statements or representations by E-
TEK, the Purchaser or any of their agents with respect to tax
matters. He understands that he (and not E-TEK or the
Purchaser) shall be responsible for his own tax liability if
such tax liability arises as a result of the transactions
contemplated by this Agreement.
(h) He:
(i) has such knowledge and experience in financial and
business matters as to be capable of evaluating the
merits and risks of the Class A Shares and E-TEK Common
Stock issuable upon the exchange thereof;
(ii) has received copies of the SEC Documents (as defined in
Section 8.1.6);
<PAGE>
(iii) has received all the information he has requested from E-
TEK, the Purchaser and the Corporation which he considers
necessary or appropriate for deciding whether to accept
the Class A Shares and E-TEK Common Stock issuable upon
the exchange thereof in return for his Common Shares;
(iv) has the ability to bear the economic risks of an
investment in the Class A Shares or the E-TEK Common
Stock issuable upon the exchange thereof; and
(v) is able, without materially impairing his financial
condition, to hold the Class A Shares and E-TEK Common
Stock issuable upon the exchange thereof for an
indefinite period of time.
6.2.7 Legends
-------
He acknowledges that the certificates representing the Class A
Shares and E-TEK Common Stock issuable upon the exchange thereof
will contain the following legends:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"). SUCH
SECURITIES MAY NOT BE TRANSFERRED UNLESS A REGISTRATION
STATEMENT UNDER THE ACT IS IN EFFECT AS TO SUCH TRANSFER OR,
IN THE OPINION OF COUNSEL SATISFACTORY TO SUCH ISSUER, SUCH
TRANSFER MAY BE MADE PURSUANT TO RULE 144 OR PURSUANT TO
ANOTHER EXEMPTION FROM REGISTRATION UNDER THE ACT."
6.3 Interpretation of Section 6.2
-----------------------------
Insofar as the representations and warranties contained in Section 6.2 are
concerned, the representations and warranties of each Vendor shall be restricted
in their application to information pertaining to such Vendor and shall not
extend to be interpreted to mean that any Vendor represents and warrants the
truth of any fact relating to any other Vendor.
Article 7
---------
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
-----------------------------------------------
7.1 Representations and Warranties of the Purchaser
-----------------------------------------------
The Purchaser hereby represents and warrants to each of the Vendors as
follows and acknowledges that each of the Vendors is relying on such
representations and warranties in connection with the transactions herein
contemplated:
<PAGE>
7.1.1 Incorporation, Organization and Authority of the Purchaser, Due
---------------------------------------------------------------
Authorization of Agreement and Enforceability of Obligations
------------------------------------------------------------
The Purchaser is a company duly incorporated and subsisting under the
laws of the Province of Nova Scotia and has the necessary corporate
power, authority and capacity to enter into this Agreement, to purchase
the Purchased Shares from the Vendors as herein contemplated and to
perform its other obligations hereunder. The execution and delivery of
this Agreement and the completion of the transactions herein contemplated
have been duly and validly authorized by all necessary corporate action
on behalf of the Purchaser and this Agreement has been duly and validly
executed and delivered by the Purchaser and is a valid and binding
obligation of the Purchaser enforceable against the Purchaser in
accordance with its terms.
7.1.2 Conflicting Instruments
-----------------------
The entering into of this Agreement by the Purchaser and the performance
of its obligations hereunder do not and will not conflict with or result
in the breach or violation of the Memorandum or Articles of Association
of the Purchaser; or any agreement, contract or commitment, written or
oral, which the Purchaser is a party to or bound by or subject to.
7.1.3 Legal Proceedings
-----------------
There is:
(i) no Legal Proceeding (whether or not purportedly on behalf of
the Purchaser) in progress, pending, threatened against or
affecting the Purchaser at law or in equity or before or by
any Tribunal and, to the best of the knowledge and belief of
the Purchaser, there are no grounds on which any such Legal
Proceeding might be commenced with any reasonable likelihood
of success; and
(ii) no judgement, decree, injunction, ruling, order or award of
any Tribunal outstanding against or affecting the Purchaser;
which, in any such case, might adversely affect the ability of the
Purchaser to enter into this Agreement or to perform its obligations
hereunder.
7.1.4 Authorized and Issued Shares
----------------------------
The authorized capital of the Purchaser consists of 10,000,000 Common
Shares, of which 100 Common Shares (and no more) are issued and
outstanding. Prior to Closing, the authorized capital of the Purchaser
will be amended to create an additional class of shares to be designated
as Class A Shares which will be issued in exchange for the Purchased
Shares, the attributes of which shall be subject to the approval of the
Vendors.
<PAGE>
Article 8
---------
REPRESENTATIONS AND WARRANTIES OF E-TEK
---------------------------------------
8.1 Representations and Warranties of E-TEK
---------------------------------------
E-TEK hereby represents and warrants to each of the Vendors as follows and
acknowledges that each of the Vendors is relying on such representations and
warranties in connection with the transactions herein contemplated:
8.1.1 Incorporation, Organization and Authority of E-TEK, Due
-------------------------------------------------------
Authorization of Agreement and Enforceability of Obligations
------------------------------------------------------------
E-TEK is a corporation duly incorporated and existing under the laws
of the State of Delaware and has the necessary corporate power,
authority and capacity to enter into this Agreement and to perform
its other obligations hereunder. The execution and delivery of this
Agreement and the completion of the transactions herein contemplated
have been duly and validly authorized by all necessary corporate
action on behalf of E-TEK and this Agreement has been duly and
validly executed and delivered by E-TEK and is a valid and binding
obligation of E-TEK enforceable against E-TEK in accordance with its
terms.
8.1.2 Conflicting Instruments
-----------------------
The entering into of this Agreement by E-TEK and the performance of
its obligations hereunder do not and will not conflict with or
result in the breach or violation of its certificate of
incorporation or by-laws of E-TEK; or any agreement, contract or
commitment, written or oral, which E-TEK is a party to or bound by
or subject to.
8.1.3 Legal Proceedings
-----------------
There is:
(i) no Legal Proceeding (whether or not purportedly on
behalf of E-TEK) in progress or pending against or
affecting the Purchaser at law or in equity or before or
by any Tribunal; and
(ii) no judgement, decree, injunction, ruling, order or award
of any Tribunal outstanding against or affecting E-TEK;
which, in any such case, might adversely affect the ability of the
Purchaser to enter into this Agreement or to perform its obligations
hereunder.
8.1.4 Capital Structure
-----------------
(a) The authorized stock of E-TEK consists of 300,000,000 shares of
Common Stock, $0.01 par value, of which 61,424,128 shares were
issued and outstanding as of April 2, 1999, and 25,000,000
shares of
<PAGE>
undesignated Preferred Stock, $0.01 par value, of which no
shares were issued and outstanding as of April 2, 1999. All
such shares have been duly authorized, and all such issued and
outstanding shares have been validly issued, are fully paid and
non-assessable and are free of any liens or encumbrances other
than any liens or encumbrances created by or imposed upon the
holders thereof.
(b) The Class A Shares and the E-TEK Common Stock to be issued upon
exchange of the Class A Shares will be duly authorized, validly
issued, fully paid, non-assessable and based upon the
representations of Shareholders contained in Section 6.2.5 will
be issued in accordance with applicable securities laws.
8.1.5 No Conflict, etc.
-----------------
The execution and delivery of this Agreement do not, and the
consummation of the transactions contemplated hereby will not,
conflict with, or result in any violation of, or default (with or
without notice or lapse of time, or both), or give rise to a right
of termination, cancellation or acceleration of any obligation or to
loss or a benefit under (i) any provision of the Articles of
Incorporation or Bylaws of E-TEK and the Purchaser or (ii) any
material mortgage, indenture, lease, contract or other agreement or
instrument, permit, concession, franchise, license, judgement,
order, decree, statute, law, ordinate, rule or regulation applicable
to E-TEK or its properties or assets. No consent, approval, order or
authorization of, or registration, declaration or filing with, any
Government Authority is required by or with respect to E-TEK and the
Purchaser in connection with the execution and delivery of this
Agreement by E-TEK and the Purchaser or the consummation by E-TEK
and the Purchaser of the transactions contemplated hereby, except
for (i) the filing of a notice pursuant to the Investment Canada Act
within 30 days following the Closing, (ii) the filing after the
Closing of the Registration Statement on Form S-3 with the United
States Securities And Exchange Commission ("SEC") required pursuant
to the Registration Rights Agreement, and any filings as may be
required under applicable state securities laws and the laws of any
foreign country, and (iii) such other consents, authorizations,
filings, approvals and registrations which if not obtained or made
would not have a material adverse effect on E-TEK or the
shareholders of E-TEK or the Purchaser.
8.1.6 SEC Documents; E-TEK Financial Statements
-----------------------------------------
E-TEK has furnished the Vendors with a true and complete copy of its
Form S-1 effective December 1, 1998, its Form 10-Q for the quarter
ended January 1, 1999, and its Form 10-Q for the quarter ended April
2, 1999, which are all the documents (other than preliminary
material) that E-TEK was required to file with the Securities and
Exchange Commission (the "SEC") pursuant to the Securities Exchange
Act of 1934 (the "Exchange Act") since December 1, 1998, and prior
to the Closing Date, E-TEK will have furnished the Vendors with true
and complete copies of any additional documents required to be filed
with the SEC by E-TEK
<PAGE>
prior to the Closing (collectively, the "SEC Documents"). As of
their respective filing dates, the SEC Documents complied in all
material respects with the requirements of the Exchange Act, and
none of the SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements made therein, in
light of the circumstances in which they were made, not misleading,
except to the extent corrected by a subsequently filed SEC Document.
The financial statements of E-TEK, including the notes thereto,
included in the SEC Documents (the "E-TEK Financial Statements") are
complete and correct in all material respects, comply as to form in
all material respects with applicable accounting requirements and
with the published rules and regulations of the SEC with respect
thereto, and have been prepared in accordance with U.S. generally
accepted accounting principles applied on a basis consistent
throughout the periods indicated and consistent with each other
(except as may be indicated in the notes thereto or, in the case of
unaudited statements, as permitted by Form 10-Q of the SEC). The E-
TEK Financial Statements fairly present the consolidated financial
condition and operating results of E-TEK at the dates and during the
periods indicated therein (subject, in the case of unaudited
statements, to normal, year-end adjustments, which will not be
material in the aggregate). There has been no change in E-TEK
accounting policies except as described in the notes to the E-TEK
Financial Statements. E-TEK has no material obligations other than
(i) those set forth in the E-TEK Financial Statements and (ii) those
not required to be set forth in the E-TEK Financial Statements under
generally accepted accounting principles. The Purchaser has not
conducted any operations to date and currently has no assets other
than Cdn$100 in paid in capital. E-TEK is in compliance in all
material respects with applicable NASDAQ listing standards.
8.1.7 No Material Adverse Change
--------------------------
Since May 10, 1999, E-TEK has conducted its business in the ordinary
course and there has not occurred: (a) any material adverse change
in the business of E-TEK; or (b) any amendments or changes in the
Certificates of Incorporation or Bylaws of E-TEK.
8.1.8 Representations Complete
------------------------
None of the representations or warranties made by E-TEK herein, nor
any statement made in any list or other statement separately
certified by E-TEK, Exhibit or certificate furnished pursuant to
this Agreement or the SEC Documents, when all such documents are
read together in their entirety, contains or will contain any untrue
statement of a material fact at the Closing, or omits or will omit
to state any material fact necessary in order to make the statements
contained herein or therein, in the light of the circumstances under
which made, not misleading.
<PAGE>
Article 9
---------
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
------------------------------------------
9.1 Survival of Representations and Warranties of the Vendors
----------------------------------------------------------
The representations and warranties of the Vendors contained in this
Agreement and in any agreement, certificate, affidavit, statutory declaration or
other document delivered or given pursuant to this Agreement shall survive the
Closing and, notwithstanding such Closing or any investigation made by or on
behalf of the Purchaser with respect thereto, shall continue in full force and
effect for the benefit of the Purchaser provided, however, that no claim in
respect thereof shall be valid unless it is made within two (2) years of the
Closing Date, and any such claim as aforesaid shall be made in accordance with
the provisions of the indemnity in Article 15. Notwithstanding the foregoing, a
claim for any breach of any of the representations and warranties contained in
this Agreement involving fraud or fraudulent misrepresentation by a Vendor or
the Corporation may be made at any time following the Closing Date against such
Vendor or the Corporation, as the case may be, subject only to applicable
limitation periods imposed by law; provided that if the fraud is conducted or
the fraudulent misrepresentation is made by a person who is also a Vendor, on
behalf of the Corporation, it shall be deemed to be fraud by that Vendor as well
as by the Corporation.
9.2 Survival of Representations and Warranties of the Purchaser and E-TEK
---------------------------------------------------------------------
The representations and warranties of the Purchaser and E-TEK contained in
this Agreement and in any agreement, certificate, affidavit, statutory
declaration or other document delivered or given pursuant to this Agreement
shall survive the Closing and, notwithstanding such Closing or any investigation
made by or on behalf of the Vendors, with respect thereto, shall continue in
full force and effect for the benefit of each of the Vendors provided, however,
that no claim in respect thereof shall be valid unless it is made within a
period of two (2) years from the Closing Date and in accordance with the
provisions set forth in Article 15 and, upon the expiry of such limitation
period, the Purchaser and E-TEK shall have no further liability to each of the
Vendors with respect to any of such representations or warranties, except in
respect of claims which have theretofore been made in accordance with the
provisions set forth above. Notwithstanding the foregoing, a claim for any
breach of any of the representations and warranties contained in this Agreement
involving fraud or fraudulent misrepresentation by the Purchaser may be made at
any time following the Closing Date against the Purchaser, subject only to
applicable limitation periods imposed by law.
Article 10
----------
COVENANTS OF THE VENDORS
------------------------
10.1 Covenants of the Vendors
------------------------
The Vendors hereby covenant and agree with the Purchaser as follows:
10.1.1 Investigations and Availability of Records
------------------------------------------
Between the date hereof and the Closing Date each of the Vendors
shall permit the Purchaser and its advisors to make such
investigations of the Business and the
<PAGE>
property and assets of the Corporation, their legal, financial and
tax condition and their compliance with such applicable laws or
regulations as the Purchaser deems necessary or desirable; provided
that such investigations shall be carried out without undue
interference with the operations of the Corporation and the Vendors
shall co-operate fully in facilitating such investigations and
shall furnish copies, at the Purchaser's cost, of all such
documents and materials relating to such matters as may be
reasonably requested by or on behalf of the Purchaser. The
documents and materials to be made available by the Vendors shall
include, but shall not be limited to the books and records referred
to in Section 6.1.11 and the records maintained in connection with
the Business, including financial statements, records of past
sales, customer lists, supplier lists, payroll records, inventory,
work in progress, data, accounts receivable data, and data relating
to the Leased Property and the uses thereof including uses thereof
relating to environmental matters. Such investigations shall not,
however, affect or mitigate the representations and warranties of
the Vendors contained in this Agreement or in any agreement,
certificate, affidavit, statutory declaration or other document
delivered or given pursuant to this Agreement, which
representations and warranties shall continue in full force and
effect for the benefit of the Purchaser as provided in Section 9.1.
10.1.2 Consents, etc.
--------------
Commencing forthwith after the date hereof, each of the Vendors
shall use his best efforts to obtain at or prior to the Time of
Closing:
(i) from the parties (other than the Corporation) to the
agreements, contracts and commitments referred to in
Sections 6.1.24, 6.1.32 and 6.1.36; and
(ii) from such other Persons from whom any such consent,
approval, permit or acknowledgement may be required;
all necessary consents, approvals, permits and acknowledgements
which may be required in connection with the completion of the
transactions herein contemplated.
10.1.3 Conduct of the Business
-----------------------
Between the date hereof and the Time of Closing the Vendors shall:
(i) cause the Corporation to carry on the Business in the
ordinary course (except as may be otherwise required or
contemplated by the provisions of this Agreement,
including this Section 10.1.3);
(ii) use their best efforts to cause the Corporation to
preserve the Business and the goodwill of suppliers,
customers and others having relations with the
Corporation and to maintain in full force and effect all
Intellectual and Industrial Property Rights owned by
<PAGE>
and all licence agreements or arrangements with respect
to Intellectual and Industrial Property Rights held by
the Corporation;
(iii) use their best efforts to cause the Corporation to
retain the services of the present executives,
employees, consultants and advisors of or to the
Corporation (except as may be otherwise required or
contemplated by the provisions of this Agreement,
including this Section 10.1.3);
(iv) use their best efforts to cause the Corporation to
continue in force and effect the insurance coverage
referred to in Section 6.1.23 and to take out such
additional insurance as may be required in the ordinary
course of the Business or as may be reasonably requested
by the Purchaser and to use their best efforts to cause
the Corporation to give all notices and to present all
claims under all insurance policies in a due and timely
fashion and to promptly advise the Purchaser in writing
of any such claims;
(v) use their best efforts to cause the Corporation to pay
and discharge its liabilities in the ordinary course in
accordance and consistent with the previous practice of
the Corporation, except those contested in good faith by
the Corporation;
(vi) [intentionally deleted]
(vii) use their best efforts to cause the Corporation to
promptly supply to the Purchaser copies of all
litigation or legal proceedings pertaining to the
Corporation or the Business which may arise subsequent
to the execution of this Agreement and will also advise
the Purchaser promptly in writing of any threat of
litigation or other legal proceeding pertaining to the
Corporation or the Business which is made between the
date hereof and the Closing Date; and
(viii) during the period from the date of this Agreement to the
Closing Date, give prompt notice to the Purchaser, and
the Purchaser shall give prompt notice to the Vendors
and the Corporation, of the occurrence or non-occurrence
of any event of which they have knowledge, the
occurrence or non-occurrence of which would be likely
(i) to cause any representation or warranty contained in
this Agreement to be untrue or inaccurate at or prior to
the Closing Date, (ii) to relate to the employment of
any existing or new employee of the Corporation, or
(iii) that could result in an expense or a Claim against
the Corporation of greater than $75,000.
(b) Between the date hereof and the Time of Closing the Vendors shall
use their best efforts to ensure that the Corporation (except as
may be
<PAGE>
otherwise required or contemplated by the provisions of this
Agreement, including this Section 10.1.3) shall not, without the
prior written consent of the Purchaser:
(i) become a party to or bound by or subject to any new
agreement, contract or commitment with any Interested
Person or amend or concur in the amendment of any such
existing agreement, contract or commitment or make or
authorize any payment to or for the benefit of any
Interested Person at a rate greater than as described in
Section 6.1.15;
(ii) make or authorize capital expenditures which in the
aggregate exceed $75,000;
(iii) become a party to or bound by or subject to any new
agreement or arrangement with respect to Employee Benefits
(other than an employment or personal services agreement or
arrangement which is terminable by the Corporation without
liability on no more than 30 days' notice) or amend or
concur in the amendment of or increase any payment or
obligation under any existing agreement or arrangement with
respect to Employee Benefits;
(iv) take any step to dissolve, wind-up or otherwise affect its
continuing corporate existence or amalgamate or merge with
any Person or amend its Articles of Incorporation or by-
laws;
(v) make any loan to or investment in any Person;
(vi) become a party to or bound by or subject to any new Debt
Instrument or amend or concur in the amendment of or prepay
or vary the terms of any indebtedness or other obligation
under any existing Debt Instrument;
(vii) become a party to or bound by or subject to any Guarantee
or amend or concur in the amendment of any existing
Guarantee;
(viii) declare or pay any dividend or other distribution (whether
out of capital or surplus or otherwise) on any of its
outstanding securities or redeem, purchase or otherwise
acquire any of its outstanding securities;
(ix) purchase, sell or lease any property or assets other than
in the ordinary course of business, save that the
Corporation shall be entitled to enter into a lease of
premises located at 2770 14th Avenue, Markham, Ontario, in
respect of which an offer to lease has been signed and a
copy of which offer has been provided to the Purchaser;
<PAGE>
(x) cancel, waive or vary the terms of any debt owing to or any
claim or right of the Corporation, save that this subsection
10.1.3(b)(x) shall not apply to the subject matter of the
legal proceeding set forth in section 6.1.27 of the Disclosure
Schedule;
(xi) issue any shares or other securities or make any change in the
number or class of or rights attached to any issued or
unissued shares of its capital stock or grant, issue or make
any option, warrant, subscription, convertible security or
other right or commitment to purchase or acquire any shares of
its capital stock or other securities;
(xii) incur any obligation or liability except in the ordinary
course of business or make, authorize or accept any early
payment of any existing obligation or liability;
(xiii) create or permit the creation of any new Encumbrance on any of
its property or assets (except for any lien for unpaid Taxes
not yet due) or amend or concur in the amendment of any such
existing Encumbrance;
(xiv) terminate, transfer, assign, modify or change, or grant any
rights under, any Intellectual and Industrial Property Rights;
or
(xv) agree or become bound to do any of the foregoing.
(c) Between the date hereof and the Time of Closing the Vendors shall use
their best efforts to cause the Corporation:
(i) to prepare and file in a timely manner all Tax Returns
required to be filed by it and pay all Taxes required under
any applicable Tax Legislation to be paid by it for any
taxation year ending before the Pre-Closing Amalgamation and
to ensure that all such Tax Returns are true, correct and
complete in all material respects and that such Tax Returns
and all materials accompanying such Tax Returns reflect
complete and accurate disclosure;
(ii) to pay within the time prescribed by any applicable Tax
Legislation any required instalments of Taxes;
(iii) to make adequate provision in its financial statements for the
Taxes which relate to any taxation year or part thereof ending
or arising before the Closing Date or ending as a consequence
of the Closing which are not yet due and payable and for which
Tax Returns are not yet required to be filed;
(iv) to withhold from each payment made by it the amount of all
Taxes and other deductions required under any applicable Tax
<PAGE>
Legislation to be withheld therefrom and to pay all such
amounts withheld to the relevant taxing or other authority
within the time prescribed under any applicable Tax
Legislation; and
(v) not to enter into any arrangements to provide for an extension
of time with respect to any assessment or reassessment of Tax,
the filing of any Tax Return or the payment of any Tax by it
without the prior written consent of the Purchaser.
10.1.4 Delivery of Books and Records
-----------------------------
At the Time of Closing the Vendors shall deliver or cause the
Corporation to deliver to the Purchaser all the documents referred to in
Section 6.1.11, including minute and record books, corporate records and
documents, corporate seals, books of account, accounting records, past
financial statements, Tax Returns, share certificate books and share
records, Intellectual and Industrial Property Rights owned by and
licence agreements or arrangements with respect to Intellectual and
Industrial Property Rights held by the Corporation, licences,
registrations and permits held by the Corporation, Debt Instruments,
Guarantees, Encumbrances, agreements, contracts and commitments which
the Corporation is a party to or bound by or subject to, lists of
suppliers and customers of the Business and all other documents, files,
records and other data, financial or otherwise, of the Corporation which
may be in the possession of the Corporation or the Vendors.
10.1.5 Transfer of Purchased Shares
----------------------------
The Vendors shall take, and shall cause the Corporation to take, all
necessary steps and proceedings as approved by counsel for the Purchaser
to permit the Purchased Shares to be duly and validly transferred to the
Purchaser and/or its nominees and to have such transfers duly and
validly recorded on the books of the Corporation so that the Purchaser
and/or its nominees are entered on the books of the Corporation as the
holder or holders of the Purchased Shares and to issue one or more share
certificates to the Purchaser and/or its nominees representing the
Purchased Shares.
10.1.6 Resignations of Directors
-------------------------
The Vendors shall cause each director of the Corporation to resign,
such resignations to be effective at the Time of Closing unless a
later time is specified by the Purchaser.
10.1.7 Resignation of Accountants
--------------------------
The Vendors shall cause the accountants of the Corporation to resign,
such resignation to be effective at the Time of Closing unless a later
time is specified by the Purchaser.
<PAGE>
10.1.8 Releases
--------
Each of the Vendors shall cause to be executed and delivered to the
Purchaser at the Time of Closing a release by each of them and by each
director and officer of the Corporation, each such release to be in
the form annexed hereto as Exhibit D1.
10.1.9 Non-Competition and Non-Solicitation
------------------------------------
(a) No Vendor nor any Person controlled by a Vendor, without the
prior written consent of the Purchaser shall:
(i) For (A) three years after the Closing Date or (B) two
years after the termination of such Vendor's employment
with E-TEK or the Corporation, whichever is longer,
directly or indirectly, engage in (whether as an officer,
employee, consultant, director, proprietor, partner,
consultant or otherwise), or have any ownership interest
in, or participate in the financing, operation,
management or control of, any person, firm, corporation
or business that engages in a Restricted Business in a
Restricted Territory. Ownership of no more than five
percent (5%) of the outstanding voting stock of a
publicly-traded corporation shall not constitute a
violation of this Section.
(ii) For (A) four years after the Closing Date or (B) two
years after the termination of such Vendor's employment
with E-TEK or the Corporation, whichever is longer: (i)
directly or indirectly take any action to, or do anything
reasonably intended to, divert business from E-TEK or the
Corporation or influence or attempt to influence any
representative, vendor, supplier, customer or potential
customer of E-TEK or the Corporation, to cease doing
business with E-TEK or the Corporation or to alter its
business relationship with E-TEK or the Corporation; or
(ii) directly or indirectly recruit, attempt to hire,
solicit, or assist others in recruiting or hiring, any
person who is an employee of or contractor to E-TEK or
the Corporation, or induce or attempt to induce any such
employee to terminate employment or relationship with E-
TEK or the Corporation.
(b) Each of the Vendors acknowledges that a material violation of this
Section 10.1.9 would cause irreparable injury to E-TEK, for which
E-TEK would have no adequate remedy at law. Accordingly, E-TEK
shall be entitled to preliminary and other injunctive relief and to
specific performance of the terms and provisions of this section.
(c) For the purposes of this Section 10.1.9, the terms:
(i) "Restricted Business" shall mean any business competitive
with the Business being carried on by the Corporation
presently or any business competitive with the business of
the Corporation (which
<PAGE>
shall include the Business) at the time referred to in
Subsections (A) or (B) above; and
(ii) "Restricted Territory" shall mean any country in which
customers of E-TEK or the Corporation are located at the
time that the following covenants become operative.
10.1.10 Actions to Satisfy Closing Conditions
-------------------------------------
Each Vendor shall take all such actions as are within its power to control,
and shall use its reasonable efforts to cause other actions to be taken which
are not within its power to control, so as to ensure compliance with any of the
conditions set forth in Article 12.
10.1.11 Intellectual Property
---------------------
(a) For each of the inventors of the inventions described in
Section 6.1.36 (m) who are not Selling Shareholders (and for
each of such inventor's successors or assignees, if any), the
Vendors shall obtain within 6 months after the Time of
Closing an irrevocable waiver of any right to receive
royalties from the Corporation with respect to any Owned I.P.
or Licensed I.P., including the inventions described in
Section 6.1.36 (m).
(b) E-TEK shall pay no more than Cdn $50,000 in the aggregate to
secure the waivers described in subparagraph (b) above. Any
payment in excess of that amount will be deducted from the
Vendors' pro-rata share of the escrow funds within 30 days of
any payment required to be made under this section.
Article 11
----------
COVENANTS OF THE PURCHASER AND E-TEK
------------------------------------
11.1 Covenants of the Purchaser
--------------------------
The Purchaser hereby covenants and agrees with each of the Vendors as
follows:
11.1.1 Tax Matters
-----------
The Purchaser shall cause the Corporation from and after the
Closing Date:
(i) to prepare and file in a timely manner all Tax Returns
required to be filed by it, and to pay all Taxes required
to be paid by it for the taxation years ending as a
consequence of the Pre-Closing Amalgamation and the
Closing. Such Tax Returns shall be prepared in a manner
consistent with prior Tax Returns filed by the
Corporation and shall be prepared in a manner which will
result in the least amount of Taxes being payable in
respect of such taxation year, provided that the
Corporation may file any election or make any choice
provided or available under any applicable Tax
<PAGE>
Legislation or by generally accepted accounting
principles to the extent that it pays, without recourse
to the Vendors, any additional Taxes arising from such
election or choice; and
(ii) to retain all books and records and any other documents,
information and files of the Corporation relating to any
period ending on or prior to the Closing Date for a
period of six years following the Closing Date. So long
as such books and records and other documents,
information and files are retained by the Corporation
pursuant to the provisions hereof, each of the Vendors
shall have the right, for the purpose of filing any Tax
Returns as required under this Agreement and for the
purpose of contesting any assessment or reassessment for
Tax in accordance with the provisions of the indemnity in
Article 15.
11.1.2 Section 85 Election
-------------------
Each Vendor shall be entitled to make an income tax election
pursuant to section 85 of the Income Tax Act (Canada) and any other
similar provision of provincial law with respect to the transfer of
their Common Shares in the capital of the Corporation to the
Purchaser referred to in section 3.1 of the Agreement by providing
two signed copies of the necessary election forms to the Purchaser
within 90 days following the Closing Date, duly completed with the
details of the number of shares transferred and the applicable
agreed amounts for the purposes of such election. Thereafter,
subject to the election forms complying with the provisions of the
Income Tax Act (Canada), the forms will be signed by the Purchaser
and returned to each Vendor for filing with Revenue Canada within
180 days following the Closing Date.
11.1.3 Releases
--------
The Purchaser, E-TEK and the Corporation shall deliver to all
directors and officers of the Corporation a release in favour of
such directors and officers, each such release to be in the form
annexed hereto as Exhibit D2.
11.1.4 Employee Loans to Exercise Vested Options
-----------------------------------------
Notwithstanding the provisions of Article 10 hereof, the Purchaser
agrees to permit the Corporation to lend to employees who are
Option Holders and who hold Options which are exercisable on or
before the Closing Date sufficient funds, not to exceed Cdn$250,000
in the aggregate, to exercise such options provided that:
(a) such loans shall be non-interest bearing for the first year
and shall bear interest for the second year at a rate equal to
the prime rate of interest charged from time to time by The
Bank of Nova Scotia to its most creditworthy customers plus
one percent (1%), payable when the loan is due as set forth
below;
<PAGE>
(b) be due on the earlier of (i) the date that any Option Holder
ceases to be an employee, (ii) the date that the Option Holder
first exercises or is deemed to exercise his right to exchange
any Class A Shares issued hereunder for shares of E-TEK Common
Stock (to the extent of the proceeds resulting from such
sale), and (iii) two years after the Closing Date; and
(c) be secured by a pledge of the Common Shares issued on the
exercise of such options (to be replaced with a pledge of the
Class A Shares issued by the Purchaser in exchange for such
Common Shares pursuant hereto).
11.1.5 E-TEK Indemnity
---------------
E-TEK shall execute and deliver in favour of the Selling
Shareholders the E-TEK Indemnity Agreement.
11.1.6 Actions to Satisfy Closing Conditions
-------------------------------------
Each of the Purchaser and E-TEK shall take all such actions as are
within its power to control, and shall use its reasonable efforts
to cause other actions to be taken which are not within its power
to control, so as to ensure compliance with any conditions set
forth in Article 13.
Article 12
----------
PURCHASER'S CONDITIONS OF CLOSING
---------------------------------
12.1 Conditions for the Benefit of the Purchaser
-------------------------------------------
The transactions herein contemplated, including the sale and purchase of
the Purchased Shares in accordance with the terms of this Agreement, are subject
to the following conditions, each of which is hereby declared to be for the
exclusive benefit of the Purchaser. Each of such conditions is to be fulfilled
and/or performed at or prior to the Time of Closing. Each of the Vendors
covenants and agrees to use his best efforts to cause each of such conditions to
be fulfilled and/or performed at or prior to the Time of Closing.
12.1.1 Truth of Representations and Warranties of the Vendors
------------------------------------------------------
The representations and warranties of each of the Vendors contained
in this Agreement and in any agreement, certificate, affidavit,
statutory declaration or other document delivered or given pursuant
to this Agreement (including, without limitation, the
representations and warranties set forth in Article 6) shall be
true and correct on the date hereof and at the Time of Closing with
the same force and effect as if such representations and warranties
had been made on and as of each of such times. Each of the Vendors
shall deliver to the Purchaser at the Time of Closing certificates,
affidavits, statutory declarations or other evidence to that effect
and to the effect that as of the Closing Date each of the
conditions set forth in this Article 12 has been complied with.
Notwithstanding the foregoing, the receipt of such certificates,
affidavits, statutory declarations or other evidence and the
completion of the transactions herein contemplated shall not
constitute a
<PAGE>
waiver of any of such representations and warranties, each of which
shall survive the Closing and remain in full force and effect for
the benefit of the Purchaser as provided in Section 9.1.
12.1.2 Performance of Covenants etc. by the Vendors
--------------------------------------------
Each of the Vendors shall have performed all obligations, covenants
and agreements contained in this Agreement to be performed by them
at or prior to the Time of Closing, including, without limitation,
the covenants set forth in Article 10.
12.1.3 Acceptance of Offer
-------------------
The Offers shall have been accepted in accordance with their terms,
by (i) holders of Common Shares holding not less than all of the
number of Common Shares outstanding on the Closing Date (when
aggregated with the number of Common Shares to be sold to the
Purchaser by the Vendors pursuant to this Agreement), and (ii)
holders of Vested Options holding not less than all of the Vested
Options outstanding on the Closing Date (when aggregated with the
Vested Options held by the Vendors who exercise such Options and
sell the underlying Common Shares pursuant to this Agreement) and
such holders shall have delivered the appropriately executed share
certificates to evidence the ownership of all shares and letters of
acceptance and any other documentation required to evidence the
ownership and effect the transfer of the Common Shares. All the
Vendors and the Employee Shareholders shall have accepted either
Option 2 or Option 4 as described in Section 3.1 hereof.
12.1.4 Continuance and Amalgamation Under the Laws of Nova Scotia
----------------------------------------------------------
The Corporation shall have been continued under the Nova Scotia
Companies Act and then amalgamated to form an unlimited liability
company under the Nova Scotia Companies Act, the form and content
of all required actions in such respect having been approved by the
Purchaser.
12.1.5 Legal Opinion
-------------
A legal opinion of the Vendors' solicitors dated the Closing Date
and being substantially in the form annexed hereto as Exhibit E
shall have been received by the Purchaser at the Time of Closing.
In rendering such opinion, counsel may rely as to the laws of
jurisdictions other than the Province of Ontario upon the opinions
of counsel qualified to practice in such jurisdictions satisfactory
to the Purchaser and as to matters of fact upon certificates of
officers of the Corporation and of public officials and others,
provided that copies of all such opinions and certificates so
relied on shall be furnished to the Purchaser at the Time of
Closing.
12.1.6 No Adverse Change
-----------------
Between the date hereof and the Time of Closing:
<PAGE>
(i) no substantial damage by fire or other hazard to the
property or assets of the Corporation shall have
occurred;
(ii) no Legal Proceeding shall have been commenced or shall
be pending or threatened against the Corporation at
law or in equity or before or by any Tribunal; and
(iii) no material adverse change in the Business, assets,
personnel, operations, affairs, prospects or condition
(financial or otherwise) of the Corporation shall have
occurred;
which, in the case of any such occurrence, in the reasonable
opinion of the Purchaser, would have a material adverse effect on
the Corporation or on the Business.
12.1.7 Consents, etc.
--------------
There shall have been obtained from all appropriate Persons, as
referred to in Sections 6.1.24, 6.1.32 and 6.1.36, such consents,
approvals, permits and acknowledgements as may be required in
connection with the completion of the transactions herein
contemplated.
12.1.8 No Action Taken Restricting Sale
--------------------------------
No Legal Proceeding shall have been commenced or shall be pending
or threatened against any of the Vendors at law or in equity or
before or by any Tribunal which would affect the title of either
of the Vendors to the Purchased Shares owned by such Vendor or
would enjoin, restrict or prohibit or would have the effect of
preventing the completion of the transactions herein contemplated,
including the sale and purchase of the Purchased Shares in
accordance with the terms of this Agreement or which might
adversely affect the ability of any of the Vendors to enter into
this Agreement or to perform their respective obligations
hereunder.
12.1.9 Form of Documents
-----------------
The form and substance of all opinions, agreements, certificates,
affidavits, statutory declarations, instruments of transfer and
other documentation prepared pursuant to this Agreement to
implement the transactions herein contemplated shall be
satisfactory in all respects to counsel for the Purchaser.
12.1.10 Employment Agreements
---------------------
Employment agreements substantially in form and substance as
attached as Exhibit C1 shall have been entered into by the Key
Employees who are also Vendors prior to Closing. Employment
agreements substantially in form and substance as attached as
Exhibit C2 shall have been entered into by the Key Employees who
are not Vendors prior to Closing.
<PAGE>
12.1.11 Invention Agreements
--------------------
All employees of the Corporation shall have executed and delivered
standard E-TEK confidentiality and invention assignment agreements.
12.1.12 Options
-------
All holders of Vested Options shall have exercised such options
prior to Closing and all holders of Unvested Options shall have
agreed to the cancellation of such options on or prior to the
Closing.
12.1.13 Intellectual Property Waivers
-----------------------------
Each of the Key Employees and Ray Measures shall have delivered at
the Time of Closing an irrevocable waiver of any right to receive
royalties from the Corporation with respect to any Owned I.P. or
Licensed I.P., including the inventions described in Section
6.1.36(m), any other agreement to the contrary notwithstanding.
12.1.14 Due Diligence
-------------
The Purchaser shall be satisfied acting reasonably, with all due
diligence disclosures which were not made available for effective
review prior to the signing of this Agreement.
12.2 Non-Fulfilment of Conditions etc. for the Benefit of the Purchaser
------------------------------------------------------------------
In the event that any condition, obligation, covenant or agreement of any
of the Vendors to be fulfilled and/or performed hereunder at or prior to the
Time of Closing, including, without limitation, the conditions set forth in this
Article 12, shall not be fulfilled and/or performed at or prior to the Time of
Closing, the Purchaser may terminate this Agreement by notice to each of the
Vendors and in such event the Purchaser shall be released from all obligations
hereunder except for obligations under the Letter referred to in Section 16.7
and, unless the Purchaser can show that the one or more conditions, obligations,
covenants or agreements for the non-fulfilment or non-performance of which the
Purchaser has terminated this Agreement is or are reasonably capable of being
fulfilled and/or performed or caused to be fulfilled and/or performed by the
Vendors, then each of the Vendors shall also be released from all obligations
hereunder except for obligations under the Letter referred to in Section 16.7;
provided, however, that any of the said conditions, obligations, covenants or
agreements may be waived in whole or in part by the Purchaser without prejudice
to the Purchaser's right of rescission in the event of the non-fulfilment and/or
non-performance of any other condition, obligation, covenant or agreement, any
such waiver to be binding on the Purchaser only if the same is in writing.
<PAGE>
Article 13
----------
VENDORS' CONDITIONS OF CLOSING
------------------------------
13.1 Conditions for the Benefit of the Vendors
-----------------------------------------
The transactions herein contemplated, including the sale and purchase of
the Purchased Shares in accordance with the terms of this Agreement, are subject
to the following conditions, each of which is hereby declared to be for the
exclusive benefit of the Vendors. Each of such conditions is to be fulfilled
and/or performed at or prior to the Time of Closing. The Purchaser covenants and
agrees to use its best efforts to cause each of such conditions to be fulfilled
and/or performed at or prior to the Time of Closing.
13.1.1 Truth of Representations and Warranties of the Purchaser and E-TEK
------------------------------------------------------------------
The representations and warranties of the Purchaser and E-TEK
contained in this Agreement and in any agreement, certificate,
affidavit, statutory declaration, agreement or other document
delivered or given pursuant to this Agreement (including, without
limitation, the representations and warranties set forth in
Articles 7 and 8) shall be true and correct on the date hereof and
at the Time of Closing with the same force and effect as if such
representations and warranties had been made on and as of each of
such times. The Purchaser and E-TEK shall deliver to each of the
Vendors at the Time of Closing certificates, affidavits, statutory
declarations or other evidence to that effect and to the effect
that as of the Closing Date each of the conditions set forth in
this Article 13 has been complied with. Notwithstanding the
foregoing, the receipt of such certificates, affidavits, statutory
declarations or other evidence and the completion of the
transactions herein contemplated shall not constitute a waiver of
any of such representations and warranties, each of which shall
survive the Closing and remain in full force and effect for the
benefit of each of the Vendors as provided in Section 9.2.
13.1.2 Performance of Covenants etc. by the Purchaser
----------------------------------------------
The Purchaser shall have performed all obligations, covenants and
agreements contained in this Agreement to be performed by it at or
prior to the Time of Closing, including, without limitation, the
covenants set forth in Article 11.
13.1.3 No Litigation
-------------
No temporary restraining order, preliminary or permanent injunction
or other order issued by any court of competent jurisdiction or
other legal or regulatory restraint or provision challenging the
proposed acquisition of the Corporation, or limiting or restricting
E-TEK's conduct or operation of the Business of the Corporation (or
its own business) following the transaction shall be in effect, nor
shall any proceeding brought by an administrative agency or
commission or any other Government Authority or instrumentality,
domestic or foreign, seeking any of the foregoing be pending. There
shall be no action, suit, claim or proceeding of any nature pending
or threatened, against E-TEK, the Purchaser or the
<PAGE>
Corporation, their respective properties or any of their officers
or directors, that could materially and adversely affect the
business, assets, liabilities, financial condition, results of
operations or prospects of E-TEK and its subsidiaries taken as a
whole.
13.1.4 No Material Adverse Change
--------------------------
There shall have been no material adverse changes in the business,
operations, affairs, prospects, properties, assets, existing and
potential liabilities, obligations, profits or condition (financial
or otherwise) of E-TEK and its subsidiaries, taken as a whole,
since May 10, 1999.
13.1.5 Consents and Approvals
----------------------
All necessary consents of, and filings with, any Government
Authority or agency or third party relating to the consummation by
E-TEK and the Purchaser of the transactions contemplated herein,
shall have been obtained and made. No action by any Government
Authority or entity challenging or seeking to enjoin the
consummation of the transactions contemplated hereby shall be
pending.
13.1.6 Employment Agreements
---------------------
E-TEK shall have afforded each of the Vendors and the Key Employees
an opportunity to enter into an employment agreement with E-TEK in
a form reasonably satisfactory to E-TEK, as set forth in Exhibits
C1 and C2.
13.1.7 Corporate Resolutions
---------------------
The Vendors shall have received copies of the resolutions of the
Board of Directors of E-TEK and the Purchaser approving the
transactions contemplated herein, certified by an appropriate
corporate officer of such companies.
13.1.8 Registration Rights Agreement
-----------------------------
The Registration Rights Agreement shall have been executed by E-
TEK.
13.1.9 Legal Opinion
-------------
Legal opinions of the solicitors for the Purchaser and E-TEK dated
the Closing Date and being substantially in the forms annexed
hereto as Exhibit F shall have been received by the Purchaser at
the Time of Closing. In rendering such opinion, counsel may rely as
to the laws of jurisdictions other than the Province of Ontario
upon the opinions of counsel qualified to practice in such
jurisdictions satisfactory to the Vendors and as to matters of fact
upon certificates of officers of the Corporation and of public
officials and others, provided that copies of all such opinions and
certificates so relied on shall be furnished to the Vendor at the
Time of Closing.
<PAGE>
13.1.10 New Options
-----------
New Options shall have been granted to employees of the Corporation
as set forth in Schedule 3.
13.2 Non-Fulfilment of Conditions etc. for the Benefit of the Vendors
----------------------------------------------------------------
In the event that any condition, obligation, covenant or agreement of the
Purchaser or E-TEK to be fulfilled and/or performed hereunder at or prior to the
Time of Closing, including, without limitation, the conditions set forth in this
Article 13, shall not be fulfilled and/or performed at or prior to the Time of
Closing, any of the Vendors may terminate this Agreement by notice to the
Purchaser and E-TEK and in such event each of the Vendors shall be released from
all obligations hereunder (except for obligations under the Letter referred to
in Section 16.7) and, unless the Vendors can show that the one or more
conditions, obligations, covenants or agreements for the non-fulfilment or non-
performance of which any or all of the Vendors have terminated this Agreement is
or are reasonably capable of being fulfilled and/or performed or caused to be
fulfilled and/or performed by the Purchaser or E-TEK, then the Purchaser and E-
TEK shall also be released from all obligations hereunder except those set forth
in the Letter referred to in Section 16.7; provided, however, that any of the
said conditions, obligations, covenants or agreement may be waived in whole or
in part by either of the Vendors without prejudice to their respective rights of
rescission in the event of the non-fulfilment and/or non-performance of any
other condition, obligation, covenant or agreement, any such waiver to be
binding upon the Vendors only if the same is in writing.
Article 14
----------
CLOSING ARRANGEMENTS
--------------------
14.1 Date, Time and Place of Closing
-------------------------------
The Closing shall take place at the Time of Closing on the Closing Date at
the offices of Fraser Milner at Toronto or at such other time, on such other
date and/or at such other place as may be agreed upon by the parties hereto.
14.2 Closing Arrangements
--------------------
At the Time of Closing and subject to the fulfilment of all the terms and
conditions set forth in this Agreement which have not been waived in writing by
the parties hereto, respectively:
14.2.1 Purchase and Sale of Purchased Shares
-------------------------------------
Each of the Vendors shall sell to the Purchaser the Purchased
Shares owned by it and the Purchaser shall purchase the Purchased
Shares from the Vendors and pay and satisfy the Purchase Price, all
as hereinafter provided.
14.2.2 Delivery of Share Certificates
------------------------------
<PAGE>
Each of the Vendors shall deliver or cause to be delivered to the
Purchaser certificates representing the Purchased Shares owned by
it duly endorsed in blank for transfer or accompanied by duly
executed stock transfer powers in blank with all security, transfer
and other similar Taxes, if any, paid.
14.2.3 Payment of Purchase Price
-------------------------
Upon the fulfilment of the foregoing provisions of this Article 12
and subject to all the other terms and conditions contained in this
Agreement being complied with and to the transfer of the Purchased
Shares into the name of the Purchaser and/or its nominees being
duly and validly recorded on the books of the Corporation, the
Purchaser shall issue the Class A Shares and deposit the Escrow
Funds in the manner specified in Article 4.
14.2.4 Default by One Vendor
---------------------
In the event that any of the Vendors fails or refuses to deliver to
the Purchaser at the Time of Closing any of the Purchased Shares to
be sold by it hereunder or defaults in the fulfilment of any of its
obligations, covenants or agreements contained in this Agreement,
including this Section 14.2.4, such failure, refusal or default
shall not relieve any of the other Vendors of their obligations,
covenants or agreements contained in this Agreement, including this
Section, and the Purchaser, at its option and without prejudice to
its rights against such defaulting Vendor (including its rights to
all applicable legal and/or equitable remedies), may either
purchase the remaining Purchased Shares which it is entitled to
purchase hereunder from the other Vendors, or refuse to purchase
any of the Purchased Shares and thereby terminate all of its
obligations hereunder except those referred to in Section 16.7.
Article 15
----------
INDEMNIFICATION
---------------
15.1 Indemnification by the Vendors
------------------------------
(a) Subject to this Article 15, in the event that the transactions
herein contemplated are completed at the Closing, each of the
Vendors agrees to severally indemnify and hold the Purchaser,
E-TEK and the Corporation harmless from and against any loss,
damage, Legal Proceeding, deficiency or expense, including all
out-of-pocket costs, and including, without limitation, all
reasonable legal and accounting fees, relating to, arising
from or in connection with any misrepresentation or breach of
any warranty, obligation, covenant or agreement of any of the
Vendors contained in this Agreement or in any agreement,
certificate, affidavit, statutory declaration or other
document delivered or given pursuant to this Agreement.
(b) The obligation of each of the Vendors to indemnify the
Purchaser as set forth in paragraph above shall be subject the
following limitations:
<PAGE>
(i) in respect of any breach of any representation or warranty
of the Vendors, be subject to the limitation periods
provided in section 9.1, after which time if no claims
have been made against a Selling Shareholder with respect
to a breach of any representation or warranty, that
Selling Shareholder shall have no further liability
hereunder with respect to the representation or warranty;
(ii) not be applicable to indemnify the Purchaser until the
aggregate of all Claims sustained by the Purchase exceeds
a base of $50,000 whereupon the full amount of such Claims
(including such initial $50,000) shall be recoverable; and
(iii) be limited to the Selling Shareholder's proportionate
percentage of the Escrow Fund from time to time as set
forth in Schedule 1.
15.2 Indemnification by the Purchaser and E-TEK
------------------------------------------
(a) Subject to this Article 15, in the event that the transactions
herein contemplated are completed at the Closing, the Purchaser
and E-TEK jointly and severally agree to indemnify and hold each
of the Vendors harmless against any loss, damage, Legal
Proceeding, deficiency or expense, including all out-of-pocket
costs, and including, without limitation, all reasonable legal and
accounting fees, relating to, arising from or in connection with
any misrepresentation or breach of any warranty, obligation,
covenant or agreement of the Purchaser or E-TEK contained in this
Agreement or in any agreement, certificate, affidavit, statutory
declaration or other document delivered or given pursuant to this
Agreement.
(b) The obligation of the Purchaser and E-TEK to indemnify the Vendors
as set forth in paragraph above shall be subject to the following
limitations:
(i) in respect of any breach of any representation or warranty
of the Purchase or E-TEK, be subject to the limitation
periods provided in section 9.2, after which time if no
claims have been made against the Purchaser or E-TEK with
respect to a breach of a representation or warranty, the
Purchaser and E-TEK shall have no further liability
hereunder with respect to the representation or warranty;
and,
(ii) not be applicable to indemnify the Selling Shareholders
until the aggregate of all Claims sustained by the Selling
Shareholders, taken as a whole, exceeds a base of $50,000
whereupon the full amount of such Claims (including such
initial $50,000) shall be recoverable.
15.3 Procedure for Indemnification
-----------------------------
<PAGE>
(a) A party claiming indemnification under Sections 15.1 or 15.2
(in this Article an "Indemnitee") shall give notice to the party or
parties against which or against whom indemnification is claimed (in
this Article an "Indemnitor") with reasonable promptness upon becoming
aware of the claim or other facts upon which a claim for
indemnification will be based (a "Claim"). The notice shall set forth
such information and be accompanied by such documentation with respect
thereto as is then reasonably available to the Indemnitee.
(b) To the extent that such information and documentation is in the
possession of the Corporation, the Purchaser shall forthwith cause the
Corporation to deliver such information and documentation to the
Indemnitor. The Purchaser shall take all necessary action to preserve
the rights of the Corporation to object to and defend any such claim.
(c) Subject to the provisions of Subsection 15.3(d) below, the Indemnitor
shall have the right, exercisable by notice to the Indemnitee, given
within 20 days following receipt of the aforesaid notice from the
Indemnitee, to undertake and assume control of the defence of any such
claim asserted by a third party (in this Article a "Third Party
Claim"), including the right of compromise or settlement thereof, and
the Indemnitee shall co-operate in such defence and make available all
information and documentation requested by the Indemnitor with respect
thereto; provided, however, that:
(i) the Indemnitor shall first deliver to the Indemnitee written
acceptance of liability for indemnification with respect to
any such Third Party Claim and written consent to be joined as
a party to any Legal Proceeding relating thereto; and
(ii) the undertaking and assumption of control of the defence,
compromise and/or settlement of any such Third Party Claim
shall, by its terms, be without expense, cost or other
liability to the Indemnitee;
and provided further that the right of the Vendors to contest any
assessment or reassessment for Tax shall only apply after the payment
of the amount of any such assessment or reassessment or by providing
security for the same. The payment of any such assessment or
reassessment by the Vendors on behalf of the Corporation shall be
repaid to the Vendors if and when repaid to the Corporation by the
relevant taxing authority.
(d) If the Purchaser is the Indemnitee and the Third Party Claim is that
of a major client or supplier of the Corporation with respect to the
business conducted by the Corporation, and the Purchaser determines,
in its sole discretion, which determination shall be made within 10
Business Days after receiving the particulars of such Third Party
Claim, that as a result of
<PAGE>
the nature of a Third Party Claim it is essential to the strategic
operation and direction of the business of the Corporation, the
Purchaser or its Affiliates that the Purchaser assume control of the
negotiation and defence of such a Third Party Claim, the Purchaser
shall promptly notify the Indemnitor, and the Indemnitor agrees, that
in such circumstances:
(i) the Indemnitor shall not assume or it shall give up control of
the negotiation or defence of the Third Party Claim; and
(ii) the Indemnitor shall reimburse the Indemnitee for its out-of-
pocket expenses, including the fees and disbursements of its
counsel, relating to the negotiation or defence of the Third
Party Claim.
(e) Upon the assumption of control by the Indemnitor as aforesaid, the
Indemnitor shall diligently proceed with the defence, compromise or
settlement of such Third Party Claim at the Indemnitor's sole expense,
including employment of counsel reasonably satisfactory to the
Indemnitee; and in connection therewith, the Indemnitee shall co-
operate fully with, but at the expense of, the Indemnitor, to make
available to the Indemnitor all pertinent information, documentation
and witnesses under the Indemnitee's control and to make such
assignments and take such other steps as in the opinion of counsel for
the Indemnitor are necessary or desirable to enable the Indemnitor to
conduct such defence.
(f) Following the lapse of all rights of appeal or the acknowledgement of
the Indemnitor that it will not appeal, the final determination of any
such Third Party Claim, including all related expenses, costs and
other liabilities, shall be binding and conclusive upon the parties
hereto as to the validity or invalidity, as the case may be, of such
Third Party Claim against the Indemnitor hereunder.
(g) In the event that the Indemnitor fails to give notice to the
Indemnitee as provided in subsection 15.3(a) above, the Indemnitee
shall be entitled to take such steps in connection with the
compromise, settlement or defence of such Third Party Claim as in its
sole discretion may appear advisable and, subject to the right of the
Indemnitor to deny that the Third Party Claim is a matter in respect
of which the Indemnitor has agreed to indemnify the Indemnitee
pursuant to this Agreement, such settlement or any final determination
of the Third Party Claim shall be binding upon the Indemnitee.
15.4 Subsequent Recovery
-------------------
In the event that the Indemnitee subsequently recovers all or part of a
Third Party Claim from any other Person legally obligated to pay the same, the
Indemnitee shall forthwith repay to the Indemnitor the amounts so recovered up
to an amount not exceeding the amount theretofore paid by the Indemnitor by way
of indemnity together with interest thereon from the date of such
<PAGE>
recovery to the date of payment calculated at the prime commercial rate charged
from time to time for Canadian dollar loans by the Bank of Nova Scotia at
Toronto, Ontario.
15.5 Details of Claims
-----------------
No claim for indemnity hereunder shall be valid unless and until written
notice providing reasonable details of the reasons supporting the claim,
including such information and documentation with respect thereto as is then
reasonably available to the Indemnitee, is given by the Indemnitee to the
Indemnitor at or prior to the expiration of the applicable limitation periods
herein provided for.
15.6 Mitigation
----------
(a) Without prejudice to Purchaser's rights of recovery against the
Vendors hereunder, where any claim hereunder relates to any matter
which is in whole or in part insured by any insurance policy in
respect of the Corporation, the Purchaser shall take all necessary
steps to ensure that such claim is also made against the relevant
insurance company and pursued with all reasonable expedition.
(b) The liability of the Vendors hereunder shall be reduced by the
amount of any recoveries which have been actually received or
obtained by the Corporation or the Purchaser from any third party
responsible or partly responsible for the act, matter or
circumstances giving rise to such breach or claim or from any
insurance policy covering such third party claim. If any recovery
is made after the Vendors have made full payment to the Purchaser
in full satisfaction of any such liability or claim, the Purchaser
shall refund or procure that there is refunded to the Vendors the
lesser of:
(i) the amount of such payment by the Vendors; and
(ii) the amount of such recovery.
Without prejudice to the Purchaser's rights of recovery against the
Vendors, where the Corporation has a claim or potential claim against a
third party in respect of the matter which is the subject of
indemnification hereunder, the Purchaser shall cause the Corporation to
use reasonable efforts to effect the recovery or reimbursement.
<PAGE>
15.7 Selling Shareholders' Representatives
-------------------------------------
Each of the Selling Shareholders shall enter in the Selling Shareholders'
Representatives Agreement in the form attached hereto as Exhibit G with the
Selling Shareholders' Representatives.
Article 16
----------
MISCELLANEOUS
-------------
16.1 Further Assurances
------------------
Each of the parties hereto upon the request of each of the other parties
hereto, whether before or after the Time of Closing, shall do, execute,
acknowledge and deliver or cause to be done, executed, acknowledged and
delivered all such further acts, deeds, documents, assignments, transfers,
conveyances, powers of attorney and assurances as may be reasonably necessary or
desirable to effect complete consummation of the transactions herein
contemplated.
16.2 Announcements
-------------
Except to the extent required by law or by any Tribunal each of the parties
hereto agrees that no disclosure or public announcement with respect to this
Agreement or the transactions herein contemplated shall be made by any party
hereto without the prior written consent of each of the other parties hereto,
which consent shall not be unreasonably withheld (provided, however, E-TEK may
without the consent of any other party publicly announce the execution of this
Agreement, and/or the consummation of the transactions contemplated therein, if
in its reasonable discretion such announcement is necessary or advisable under
the U.S. federal securities laws or the rules of the Nasdaq National Market).
This Section 16.2 shall apply to the employees of each party.
16.3 Notices
-------
(a) Any notice, direction or other instrument required or permitted to be
given to any party hereto shall be in writing and shall be
sufficiently given if delivered personally, mailed or transmitted by
fax or other form of recorded communication tested prior to
transmission to such party, as follows:
(i) in the case of Shemiran or Dr. Alavie, at
[Home address redacted]
(ii) in the case of Dr. Maaskant, at
[Home address redacted]
(iii) with an additional copy (which shall not in itself constitute
notice hereunder) to:
<PAGE>
Wright & Associates
Barristers, Solicitors, Notaries
195 The West Mall
Suite 314
Toronto, Ontario
M9C 5K1
Attention: Patricia E. Wright
Telephone: (416) 620-7905
Facsimile: (416) 622-5690
(iv) in the case of the Purchaser or E-TEK, at
1865 Lundy Avenue
San Jose, California
95131
Attention: General Counsel
Telephone: (408) 546-4727
Facsimile: (408) 273-6342
(v) with an additional copy (which shall not in itself constitute
notice hereunder) to each of:
Fraser Milner
180 Elgin Street
Suite 1200
Ottawa, Ontario
K2P 2K7
Attention: T.A. Houston
Telephone: (613)783-9611
Facsimile: (613) 783-9690
- and -
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California
94303
Attention: Aaron Alter
Telephone: (650) 493-9300
Facsimile: (650) 496-4086
<PAGE>
(b) Any such notice, direction or other instrument, if delivered
personally, shall be deemed to have been given and received on
the day on which it was delivered, provided that if such day
is not a Business Day then the notice, direction or other
instrument shall be deemed to have been given and received on
the first Business Day next following such day; if mailed,
shall be deemed to have been given and received on the fifth
day after it was mailed, provided that if such day is not a
Business Day then the notice, direction or other instrument
shall be deemed to have been given and received on the first
Business Day next following such day; and if transmitted by
fax or other form of recorded communication, shall be deemed
to have been given and received on the day of its
transmission, provided that if such day is not a Business Day
or if it is transmitted or received after the end of normal
business hours then the notice, direction or other instrument
shall be deemed to have been given and received on the first
Business Day next following the day of such transmission.
(c) Any party hereto may change its address for service from time
to time by notice given to each of the other parties hereto in
accordance with the foregoing provisions.
16.4 Time of the Essence
-------------------
Time shall be of the essence of this Agreement.
16.5 Costs and Expenses
------------------
All costs and expenses (including, without limitation, the fees and
disbursements of legal counsel) incurred in connection with this Agreement and
the transactions herein contemplated shall be paid by the party incurring such
costs and expenses provided that, to a maximum amount of Cdn. $200,000, the
Purchaser agrees to reimburse the Vendors for legal expenses incurred by the
Vendors in connection with this Agreement and the transactions herein
contemplated.
16.6 Applicable Law
--------------
This Agreement shall be construed and enforced in accordance with, and the
rights of the parties shall be governed by, the laws of the Province of Ontario
and the laws of Canada applicable therein. Any and all disputes arising under
this Agreement, whether as to interpretation, performance or otherwise, shall be
subject to the exclusive jurisdiction of the Courts of the Province of Ontario
and each of the parties hereto hereby irrevocably attorns to the jurisdiction of
the Courts of such Province.
16.7 Entire Agreement
----------------
This Agreement, together with the non-disclosure agreement dated March 24,
1999, as amended May 6, 1999 (the "Letter"), constitutes the entire agreement
between the parties hereto with respect to the transactions herein contemplated
and cancels and supersedes any prior understandings, agreements, negotiations
and discussions between the parties hereto with respect thereto except as
specifically provided or contemplated in this Agreement or in any agreement,
<PAGE>
certificate, affidavit, statutory declaration or other document delivered or
given pursuant to this Agreement. There are no representations, warranties,
terms, conditions, undertakings or collateral agreements or understandings,
express or implied, between the parties hereto other than those expressly set
forth in this Agreement, the Letter or in any such agreement, certificate,
affidavit, statutory declaration or other document as aforesaid. This Agreement
may not be amended or modified in any respect except by written instrument
executed by each of the parties hereto.
16.8 Effect of Closing
-----------------
Any provision of this Agreement which is capable of being performed after
but which has not been performed at or prior to the Time of Closing and all
obligations, covenants and agreements contained in this Agreement or in any
agreement, certificate, affidavit, statutory declaration or other document
delivered or given pursuant to this Agreement, including, without limitation,
the indemnities herein provided for, shall remain in full force and effect
notwithstanding the Closing, subject to the limitation periods referred to in
Sections 9.1 and 9.2.
16.9 Counterparts and Facsimile
--------------------------
This Agreement may be executed in two or more counterparts or by
facsimile, each of which shall be deemed to be an original and all of which
together shall constitute one and the same Agreement.
16.10 Assignment
----------
This Agreement may not be assigned by any of the parties hereto without
the prior written consent of each of the other parties hereto.
16.11 Parties in Interest
-------------------
This Agreement shall enure to the benefit of and be binding upon the
parties hereto and their respective heirs, executors, successors, administrators
and permitted assigns.
16.12 Third Parties
-------------
Except as specifically set forth or referred to herein, nothing herein is
intended or shall be construed to confer upon or give to any Person, other than
the parties hereto and their respective heirs, executors, successors,
administrators and permitted assigns, any rights or remedies under or by reason
of this Agreement.
16.13 English Language
----------------
The parties confirm that it is their wish that this Agreement and any
other documents delivered or given pursuant to this Agreement, including
notices, have been and shall be in the English language only. Les parties aux
presents confirment leur volonte que cette convention de meme tous les
documents, y compris tous avis, s'y rattachant, soient rediges en anglais
seulement.
<PAGE>
16.14 Facsimile Signature
-------------------
This Agreement may be executed by facsimile signatures and the delivery by
facsimile of signed copies of the Agreement shall constitute and be deemed to be
delivery of the original signatures of the parties. The parties agree to
exchange executed originals in due course.
IN WITNESS WHEREOF this Agreement has been executed by the parties hereto.
SIGNED, SEALED AND DELIVERED )
in the presence of )
)
_________________________ ) ___________________________l/s
Witness: ) A. Tino Alavie Name:
)
)
_________________________ ) ___________________________l/s
Witness: ) Robert Maaskant
Name: )
SHEMIRAN HOLDINGS INC.
By: _______________________________
Name:
Title:
I have the authority to bind the corporation.
<PAGE>
LUNDY TECHNOLOGY CO.
By: _______________________________
Name:
Title:
I have the authority to bind the corporation.
<PAGE>
E-TEK DYNAMICS, INC.
By: _______________________________
Name:
Title:
I have the authority to bind the corporation.
<PAGE>
ELECTROPHOTONICS CORPORATION
By: _______________________________
Name:
Title:
I have the authority to bind the corporation.
<PAGE>
EXHIBIT 10.30
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of June
22, 1999, by and between E-Tek Dynamics, Inc., a Delaware corporation (the
"Company"), and the shareholders (the "Shareholders") of E-Tek Electrophotonics
Solutions Corporation, a Nova Scotia company ("EP") listed on Schedule A hereto.
RECITALS
WHEREAS, pursuant to the Share Purchase Agreement, dated May 26, 1999, by
and among the Company, Lundy Nova Scotia Company ("Company Sub"), EP and certain
other parties (the "Share Purchase Agreement"), Company Sub has agreed to issue
shares of its common stock to the Shareholders in exchange for their shares of
EP capital stock;
WHEREAS, pursuant to the Share Purchase Agreement, the Shareholders may
exchange the shares of Company Sub common stock for shares of Company Common
Stock (the "Common Stock");
WHEREAS, as an inducement to the Shareholders to enter into the Share
Purchase Agreement, as of the Closing Date, the Shareholders shall be granted
certain registration rights with respect to the Common Stock as set forth
herein; and
WHEREAS, the registration rights granted to the Shareholders will be
subordinate to the registration rights previously granted by the Company to its
founders and certain other investors (as more fully described in Section 2.4
hereof).
NOW, THEREFORE, in consideration of the promises, mutual covenants and
conditions herein contained, and of other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. Definitions. For purposes of this Agreement, the following terms shall
-----------
have the following respective meanings:
"1933 Act" means the Securities Act of 1933, as amended.
"1934 Act" means the Securities Exchange Act of 1934, as amended.
"Register," "registered," and "registration" refer to a registration
effected by preparing and filing a registration statement or similar document in
compliance with the 1933 Act, and the declaration or ordering of effectiveness
of such registration statement or document.
"Registration Statement" means any registration statement described in
Section 2.1 or Section 2.2 of this Agreement.
1
<PAGE>
"Registrable Securities" means the Common Stock of the Company issued to
the Shareholders upon the exchange of the Company Sub common stock in accordance
with the terms and conditions of the Share Purchase Agreement, and any
securities of the Company issued as a dividend on or other distribution with
respect to, or in exchange for or replacement of, such Common Stock.
"SEC" means the Securities and Exchange Commission.
2. Registration Rights.
-------------------
2.1 Shelf Registration. Subject to Section 4.1 hereof, the Company
------------------
shall file a Registration Statement on Form S-3 with the SEC within sixty (60)
days of the date it first becomes eligible to file a Form S-3 Registration
Statement (which 60-day period is expected to end on January 31, 2000) to
register under the 1933 Act the resale or other disposition of the Registrable
Securities by the Shareholders, and as promptly as practicable after filing the
Registration Statement the Company shall use its best efforts to cause the
Registration Statement to be declared effective by the SEC. The Company shall
notify Drs. A. Tino Alavie and Robert Maaskant (the "Shareholders' Agent") when
the Registration Statement has been declared effective by the SEC. Except as
provided in Section 4 hereof, the Company shall maintain the effectiveness of
the Registration Statement until at least one month after the period in which
Shareholders may exchange the shares of Company Sub common stock for shares of
Company Common Stock (which is equivalent to a period of 37 months after the
closing of the transactions contemplated by the Share Purchase Agreement) and,
from time to time, will amend or supplement the Registration Statement and the
prospectus contained therein to the extent necessary to comply with the 1933 Act
and any applicable state securities statute or regulation.
2.2 Piggyback Registration. If, but without any obligation to do so,
----------------------
the Company proposes to register its sale of common stock under the Act in
connection with an underwritten public offering of such common stock solely for
cash (other than a registration relating solely to the sale of securities to
participants in a Company stock plan or a transaction covered by Rule 145 under
the 1933 Act (or the resale of securities issued pursuant to such a
transaction), a registration in which the only stock being registered is Common
Stock issuable upon conversion of debt securities which are also being
registered, or any registration on any form which does not include substantially
the same information as would be required to be included in a registration
statement covering the sale of the Registrable Securities), the Company shall,
at such time, give each Shareholder written notice of such registration. Upon
the written request of each Shareholder given within ten (10) days after mailing
of such notice by the Company in accordance with Section 10.1, the Company
shall, subject to the provisions of Section 2.3, cause to be registered under
the 1933 Act all of the Registrable Securities that each such Shareholder has
requested to be registered. The Company's obligations under this Section 2.2
shall terminate upon the effectiveness of the Form S-3 Registration Statement
described in Section 2.1.
2.3 Underwriting Requirements. In connection with any underwritten
-------------------------
public offering described in Section 2.2, the Company shall not be required to
include any of the
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Shareholders' Registrable Securities in such underwriting unless the Shareholder
accepts the terms of the underwriting as agreed upon between the Company and the
underwriters, and then only in such quantity as the underwriters determine in
their sole discretion will not jeopardize the success of the offering by the
Company. If the total amount of securities, including Registrable Securities,
requested to be included in such offering exceeds the amount of securities that
the underwriters determine in their sole discretion is compatible with the
success of the offering, then the Company shall be required to include in the
offering only that number of such securities, including Registrable Securities,
which the underwriters determine in their sole discretion will not jeopardize
the success of the offering. In such event, the Company may reduce the number of
Registrable Securities to be included in the offering, or exclude the
Registrable Securities altogether, prior to reducing or excluding the shares
proposed to be offered by the Company or any other selling stockholders (in the
event that the number of Registrable Securities is reduced, the Registrable
Securities included shall be apportioned pro rata among the Shareholders
according to the total amount of Registrable Securities entitled to be included
therein owned by each Shareholder). For purposes of the preceding parenthetical
clause concerning apportionment, for any Shareholder which is a holder of
Registrable Securities and which is a partnership or corporation, the partners,
retired partners and shareholders of such holder, or the estates and family
members of any such partners and retired partners and any trusts for the benefit
of any of the foregoing persons shall be deemed to be a single "Shareholder,"
and any pro-rata reduction with respect to such "Shareholder" shall be based
upon the aggregate amount of shares carrying registration rights owned by all
entities and individuals included in such "Shareholder," as defined in this
sentence.
2.4 Limitations on Registration Rights. The Shareholders acknowledge
----------------------------------
that the registration rights granted to them hereunder are subordinate to the
registration rights previously granted by the Company to its founders and
certain investors who invested in the Company prior to its initial public
offering. In other words, those founders' and investors' piggyback registration
rights have priority over the Shareholders' piggyback registration rights. Due
to the large number of shares of common stock held by these founders and
investors, it is likely that even if the Shareholders attempt to piggyback on an
underwritten public offering, the Shareholders will be precluded from doing so.
As a result, the Shareholders may not be able to sell any Registrable Securities
until the Registration Statement described in Section 2.1 is available.
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<PAGE>
3. Further Obligations of the Company after Registration.
-----------------------------------------------------
3.1 The Company shall, as soon as reasonably possible after the
effectiveness of a Registration Statement, use its best efforts to register and
qualify the Registrable Securities covered by the Registration Statement under
such other securities or "blue sky" laws of such jurisdictions as shall be
reasonably requested by the Shareholders, provided that the Company shall not be
required in connection therewith or as a condition thereto to qualify to do
business or to file a general consent to service of process in any such states
or jurisdictions unless the Company is already subject to service in such
jurisdiction and except as may be required by the 1933 Act.
3.2 With respect to a Registration Statement filed pursuant to Section
2.1, the Company shall, as soon as reasonably possible after the effectiveness
of the Registration Statement, furnish to the Shareholders' Agent such numbers
of copies of a prospectus in conformity with the requirements of the 1933 Act,
and such other documents as the Shareholders may reasonably request in order to
facilitate the resale or other disposition of Registrable Securities owned by
them.
3.3 With respect to a Registration Statement filed pursuant to Section
2.1, the Company shall promptly notify each selling Shareholder of such
Registrable Securities of the happening of any event as a result of which the
prospectus included in the Registration Statement contains an untrue statement
of a material fact or omits any fact necessary to make the statements therein
not misleading and, at the request of any such Shareholder, the Company will
prepare a supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus will
not contain an untrue statement of a material fact or omit to state any fact
necessary to make the statements therein not misleading.
4. Conditions and Limitations on Registration Rights. The registration
-------------------------------------------------
rights granted by this Agreement are subject to the following additional
conditions and limitations:
4.1 The Company may suspend or delay the effectiveness of a
Registration Statement, or delay the filing of a Registration Statement if the
Company is in possession of material nonpublic information that the Company does
not deem advisable to disclose in the Registration Statement or otherwise to the
public at such time, whether such information relates to a financing project,
pending acquisition, merger, or other material corporate transaction to which
the Company is or expects to be a party, or any other matter or matters. If the
Company suspends the effectiveness of a Registration Statement, the Company will
promptly notice the Shareholders of such suspension and will again notice the
Shareholders when such suspension is no longer necessary.
4.2 Each Shareholder agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3.3 or
4.1 hereof, such Shareholder shall forthwith discontinue disposition of
Registrable Securities until such Shareholder's receipt of copies of the
supplemented or amended prospectus contemplated by Section 3.3 or 4.1 hereof, or
until it is advised in writing (the "Advice") by the Company that the use of the
prospectus may be resumed, and has received copies of any additional or
supplemental filings which are incorporated by reference in the prospectus, and,
if so directed by the Company, such Shareholder will deliver to the
4
<PAGE>
Company all copies of the prospectus covering such Registrable Securities
current at the time of receipt of such notice.
4.3 The registration rights granted by this Agreement shall not be
transferable or assignable without the Company's prior written consent;
provided, however, that notwithstanding the foregoing, the registration rights
- -------- -------
granted under this Agreement may be transferred or assigned together with any
Registrable Securities transferred or assigned to any constituent partner or
affiliate of a Shareholder, or the estate or personal representative of a
Shareholder, provided that such transfer or assignment may otherwise be effected
in accordance with applicable provincial, state and federal securities laws,
written notice of such transfer is delivered to the Company at least ten (10)
days in advance thereof, and the transferee or assignee thereof executes and
delivers a copy of this Agreement thereby agreeing to be bound by the terms and
provisions set forth herein. Any purported transfer or assignment in violation
of this provision shall be void and of no force and effect whatsoever.
4.4 No Shareholder shall have any right to obtain or seek an
injunction restraining or otherwise delaying any such registration as the result
of any controversy that might arise with respect to the interpretation or
implementation of this Section 4.
5. Information from Shareholders. It shall be a condition precedent to
-----------------------------
the obligations of the Company to take any action pursuant to this Agreement
with respect to the Registrable Securities of the Shareholders that the
Shareholders shall furnish to the Company such information regarding themselves,
the Registrable Securities held by them, and the intended method of disposition
of such securities, as shall be required to effect the registration of the
Registrable Securities.
6. Expenses of Registration. The Company shall pay all registration,
------------------------
filing and qualification fees (including SEC filing fees and the listing fees of
the Nasdaq National Market or any stock exchange on which the Company securities
are traded) attributable to the Registrable Securities registered on behalf of
the Shareholders under this Agreement. The Shareholders shall pay all
underwriting discount or commissions attributable to the sale of their
securities and any legal, accounting or other professional fees or expenses
incurred by them.
7. Indemnification.
---------------
7.1 The Company will indemnify and hold harmless the Shareholders,
each of their directors, officers, trustees or beneficiaries, if applicable, and
each person, if any, who controls a non-individual shareholder within the
meaning of the 1933 Act against any losses, claims, damages, or liabilities
(joint or several) to which the Shareholders may become subject under the 1933
Act, or the 1934 Act or other federal or state law, insofar as such losses,
claims, damages, or liabilities (or actions in respect thereof) arise out of or
are based upon any of the following statements, omissions or violations
(collectively a "Violation"): (i) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement, including
any final prospectus contained therein or any amendments or supplements thereto,
or (ii) the omission or alleged omission to state therein a material fact
required to be stated therein, or necessary to make
5
<PAGE>
the statements' therein not misleading, provided, however, that the indemnity
-------- -------
agreement contained in this Section 7.1 shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of the Company, which consent shall
not be unreasonably withheld, nor shall the Company be liable in any such case
for any such loss, claim, damage, liability, or action to the extent that it
arises out of or is based upon a Violation which occurs in reliance upon and in
conformity with information furnished in writing expressly for use in connection
with such registration by the Shareholders seeking indemnification hereunder. In
addition, the Company shall not be liable for any untrue statement or omission
in any prospectus if a supplement or amendment thereto correcting such untrue
statement or omission was delivered to the Shareholders' Agent prior to the
pertinent sale or sales by the Shareholders.
7.2 Each Shareholder will indemnify and hold harmless the Company,
each of its directors, each of its officers who has signed the Registration
Statement, each person, if any, who controls the Company within the meaning of
the 1933 Act, any other shareholder selling securities in the Registration
Statement and any controlling person of any such shareholder, against any
losses, claims, damages, or liabilities (joint or several) to which any of the
foregoing persons may become subject under the 1933 Act or the 1934 Act or other
federal or state law, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereto) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Shareholder solely for such Shareholder's behalf expressly for use in connection
with such registration; provided, however, that the indemnity agreement
-------- -------
contained in this Section 7.2 shall not apply to amounts paid in settlement of
any such loss, claim, damage, liability or action if such settlement is effected
without the consent of such Shareholder, which consent shall not be unreasonably
withheld, provided that in no event shall any indemnity under this Section 7.2
by such Shareholder exceed the gross proceeds from the offering, before
deducting discounts or commissions, containing the Violation at issue received
by such Shareholder.
7.3 Promptly after receipt by an indemnified party under this Section
7 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 7, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties. The failure to deliver written notice to the
indemnifying party promptly upon the commencement of any such action, if
materially prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
7, but the omission so to deliver written notice to the indemnifying party will
not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 7.
7.4 If the indemnification provided for in this Section 7 is held by a
court of competent jurisdiction to be unavailable to an indemnified party with
respect to any loss, liability,
6
<PAGE>
claim, damage, or expense referred to therein, then the indemnifying party, in
lieu of indemnifying such indemnified party hereunder, shall contribute to the
amount paid or payable by such indemnified party as a result of such loss,
liability, claim, damage, or expense in such proportion as is appropriate to
reflect the relative fault of the indemnifying party on the one hand and of the
indemnified party on the other in connection with the statements or omissions
that resulted in such loss, liability, claim, damage, or expense as well as any
other relevant equitable considerations. The relative fault of the indemnifying
party and of the indemnified party shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
7.5 The obligations of the Company, and the Shareholders under this
Section 7 shall survive the completion of any offering of Registrable Securities
under a registration statement filed pursuant to this Agreement or otherwise.
8. Reports Under the Securities Exchange Act. The Company agrees to file
-----------------------------------------
with the SEC in a timely manner all reports and other documents and information
required of the Company under the 1934 Act, and take such other actions as may
be necessary to assure the availability of Form S-3 for use in connection with
the registration rights provided in this Agreement.
9. Rule 144. If the Company is required to file the reports under the
--------
1933 Act and the 1934 Act, the Company shall use its best efforts to file the
reports in a timely manner to permit resales or other dispositions of
Registrable Securities pursuant to Rule 144 promulgated under the 1933 Act
("Rule 144"). In the event that all of a Shareholder's Registrable Securities
may be resold or otherwise disposed of in a ninety (90) day period under Rule
144 without registration under the 1933 Act, the registration rights granted
under this Agreement to such Shareholder, and the obligations of the Company
hereunder (other than its obligations under this Section 8) to such Shareholder,
shall automatically terminate in their entirety and be of no further force and
effect whatsoever without any further action on the part of the Company or any
of the Shareholders.
10. Miscellaneous.
-------------
10.1 Notices. Notice to the Shareholders' Agent shall constitute
-------
notice to all the shareholders party hereto. All notices and other
communications hereunder shall be in writing and shall be deemed given if
delivered personally or by commercial delivery service, or mailed by registered
or certified mail (return receipt requested) or sent via facsimile (with
acknowledgment of complete transmission) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
7
<PAGE>
(1) if to the Company:
E-Tek Dynamics, Inc.
1865 Lundy Avenue
San Jose, California 95131
Attention: General Counsel
Telephone No.: (408) 546-5000
Facsimile No.: (408) 273-6342
with copies to (which shall not constitute notice
hereunder):
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Aaron J. Alter, Esq.
Telephone No.: (650) 493-9300
Facsimile No.: (650) 493-6811
Fraser Milner
180 Elgin Street
Suite 1200
Ottawa, Ontario K2P 2K7
Attention: T.A. Houston
Telephone No.: (613) 783-9611
Facsimile No.: (613) 783-9690
(2) if to the Shareholders' Agent, to
Dr. A. Tino Alavie and Robert Maaskant
[Address]
with a copy to:
Wright & Associates
195 The West Mall, Suite 314
Etobicoke, Ontario M9C 5k1
Attention: Patricia E. Wright
Telephone No.: (416) 620-7905
Facsimile No.: (416) 622-5690
10.2 Interpretation. The words "include," "includes" and "including"
--------------
when used herein shall be deemed in each case to be followed by the words
"without limitation." The table of
8
<PAGE>
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement.
10.3 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
10.4 Entire Agreement; Assignment. This Agreement and the documents
----------------------------
and instruments and other agreements among the parties hereto referenced herein:
(a) constitute the entire agreement among the parties with respect to the
subject matter hereof and supersede all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof; (b) are not intended to confer upon any other person (including, without
limitation, those persons listed on any exhibits hereto) any rights or remedies
hereunder; and (c) shall not be assigned by operation of law or otherwise
without the prior written consent of each party hereto, except that the Company
may assign its rights and obligations hereunder to an affiliate of the Company
provided that the Company shall remain liable for all its obligations hereunder
notwithstanding such assignment. Any assignment of rights or delegation of
duties under this Agreement by a party without the prior written consent of the
other parties, if such consent is required hereby, shall be void.
10.5 Severability. In the event that any provision of this Agreement
------------
or the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
10.6 Other Remedies. Except as otherwise provided herein, any and all
--------------
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
10.7 Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of California, regardless of the laws
that might otherwise govern under applicable principles of conflicts of laws
thereof.
9
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
E-TEK DYNAMICS, INC.
By: ______________________________________
Name:
Title:
SHAREHOLDER
By: ______________________________________
Name:
Title:
[SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT]
10
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SCHEDULE A
List of Shareholders
11
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated July 20, 1999, except
as to Note 14 which is as of July 27, 1999, relating to the consolidated
financial statements of E-TEK Dynamics, Inc. which appears in such Prospectus.
We also consent to the references to us under the heading "Experts" and
"Selected Financial Data" in such Prospectus. However, it should be noted that
PricewaterhouseCoopers LLP has not prepared or certified such "Selected
Financial Data."
PricewaterhouseCoopers LLP
San Jose, California
July 27, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF CHARTERED ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated July 21, 1999, except
as to Note 12(c) which is as of July 23, 1999, relating to the financial
statements of E-TEK ElectroPhotonics Solutions Corporation (formerly
ElectroPhotonics Corporation), which appears in such Prospectus. We also
consent to the references to us under the heading "Experts" in such
Prospectus.
PricewaterhouseCoopers LLP
Toronto, Canada
July 27, 1999
