<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 31, 2000
REGISTRATION NO. 333-92097
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AVANEX CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 3674 94-3285348
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
40919 ENCYCLOPEDIA CIRCLE
FREMONT, CALIFORNIA 94538
(510) 897-4188
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
WALTER ALESSANDRINI
CHIEF EXECUTIVE OFFICER
AVANEX CORPORATION
40919 ENCYCLOPEDIA CIRCLE
FREMONT, CALIFORNIA 94538
(510) 897-4188
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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COPIES TO:
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JUDITH M. O'BRIEN, ESQ. JEFFREY R. VETTER, ESQ.
ANN YVONNE WALKER, ESQ. SCOTT J. LEICHTNER, ESQ.
TERI A. LITTLE, ESQ. CYNTHIA E. GARABEDIAN, ESQ.
SHELDON J. QUAN, ESQ. FENWICK & WEST LLP
WILSON SONSINI GOODRICH & ROSATI TWO PALO ALTO SQUARE
PROFESSIONAL CORPORATION PALO ALTO, CALIFORNIA 94306
650 PAGE MILL ROAD (650) 494-0600
PALO ALTO, CALIFORNIA 94304
(650) 493-9300
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable 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. [ ]
------------------------
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 HEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
PROSPECTUS (Subject to Completion)
Issued January 31, 2000
6,000,000 Shares
LOGO
COMMON STOCK
------------------------
AVANEX CORPORATION IS OFFERING SHARES OF ITS COMMON STOCK. THIS IS OUR INITIAL
PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE
ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $13 AND $15
PER SHARE. CONCURRENT WITH THE SALE OF THE SHARES OF OUR COMMON STOCK IN THIS
OFFERING, WE WILL SELL DIRECTLY TO EACH OF MICROSOFT CORPORATION AND MCI
WORLDCOM VENTURE FUND, AN AFFILIATE OF MCI WORLDCOM, INC., 384,615 SHARES OF OUR
COMMON STOCK AT A PURCHASE PRICE OF $13 PER SHARE. SEE "CONCURRENT SALE OF STOCK
TO CORPORATE INVESTORS" ON PAGE 21.
------------------------
WE HAVE APPLIED TO LIST OUR COMMON STOCK FOR QUOTATION ON THE NASDAQ NATIONAL
MARKET UNDER THE SYMBOL "AVNX."
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 7.
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PRICE $ A SHARE
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS AVANEX
-------- ------------- -----------
<S> <C> <C> <C>
Per Share................................................ $ $ $
Total.................................................... $ $ $
</TABLE>
Avanex has granted the underwriters the right to purchase up to an additional
900,000 shares to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on
, 2000.
------------------------
MORGAN STANLEY DEAN WITTER
LEHMAN BROTHERS
ROBERTSON STEPHENS
U.S. BANCORP PIPER JAFFRAY
, 2000
<PAGE> 3
[INSIDE FRONT COVER]
[The inside front cover page of the prospectus starts with the heading
"Next-Generation Optical Network." Underneath it is a subheading that reads "The
Avanex Solution . . ." followed by a large box. Inside the box is a diagram with
four rectangles, one on top of the other, with a single line between each two
adjacent rectangles. Inside the four rectangles are the following words:
"Communications Service Providers
Optical Systems Providers
[LOGO] Avanex(TM) Photonic Processors
Optical Component Manufacturers"
To the left of the rectangles are two ellipses, one on top of the other,
containing the following words:
"Network System Expertise
Optical Expertise"
There is an arrow pointing from the Avanex rectangle to the bottom of the
Optical Expertise ellipse, arrows from that ellipse pointing up to the Network
System Expertise ellipse and pointing to the right between the Optical Systems
Providers rectangle and the Avanex rectangle, and an arrow pointing from the
Network System Expertise ellipse to the right between the Communications Service
Providers rectangle and Optical Systems Providers rectangles.
Below the large box is the subheading ". . . Meeting Tomorrow's Network
Requirements." Below the subheading are three rectangles side-by-side containing
the words:
"Quality of Service
Flexibility
Scalability"
Below the boxes is the following text:
"Avanex photonic processors optimize optical network performance,
providing flexible, scalable and cost-effective optical transport
solutions that facilitate data transmission over optical networks and
the deployment of next-generation, all-optical network services."]
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.................... 4
Risk Factors.......................... 7
Special Note Regarding Forward-Looking
Statements.......................... 21
Concurrent Sale of Stock to Corporate
Investors........................... 21
Use of Proceeds....................... 22
Dividend Policy....................... 22
Capitalization........................ 23
Dilution.............................. 24
Selected Financial Data............... 25
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 26
</TABLE>
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PAGE
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Business.............................. 35
Management............................ 47
Certain Transactions.................. 60
Principal Stockholders................ 65
Description of Capital Stock.......... 68
Shares Eligible for Future Sale....... 70
Underwriters.......................... 72
Legal Matters......................... 74
Experts............................... 74
Additional Information................ 74
Index to Financial Statements......... F-1
</TABLE>
------------------------
We were incorporated in California in October 1997 and intend to
reincorporate in Delaware in January 2000. Our principal executive offices are
located at 40919 Encyclopedia Circle, Fremont, California 94538, and our
telephone number is (510) 897-4188. Our web site address is www.avanex.com. The
information on our web site is not incorporated by reference into this
prospectus. Avanex, PowerFilter, PowerMux, PowerShaper and The Photonics Center
are our trademarks. This prospectus also contains trademarks of other companies.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell shares of common stock and
seeking offers to buy shares of common stock only in jurisdictions where offers
and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the common stock.
UNTIL , 2000, ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
For investors outside the United States: Neither we nor any of the
underwriters have done anything that would permit this offering or possession or
distribution of this prospectus in any jurisdiction where action for that
purpose is required, other than in the United States. You are required to inform
yourselves about and to observe any restrictions relating to this offering and
the distribution of this prospectus.
Unless otherwise indicated, all information contained in this prospectus:
- assumes that the underwriters' over-allotment option is not exercised;
- except as noted in the financial statements, gives effect to the
conversion of all shares of preferred stock outstanding as of December
31, 1999 into 35,019,134 shares of common stock effective upon the
completion of this offering; and
- reflects the exercise of warrants to purchase 337,500 shares of common
stock prior to the completion of this offering;
- gives effect to the sale of 769,230 shares of common stock to two
corporate investors. The shares will be sold directly to these corporate
investors in a private placement at a price of $13.00 per share
contemporaneously with this offering, for an aggregate of $9,999,990; and
- reflects a 3-for-2 stock split effected in connection with the
reincorporation in Delaware.
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our consolidated financial statements and notes appearing elsewhere
in this prospectus.
Avanex designs, manufactures and markets fiber optic-based products, known
as photonic processors, which are designed to increase the performance of
optical networks. Our photonic processors offer communications service providers
and optical systems manufacturers greater levels of performance and
miniaturization, reduced complexity and increased cost-effectiveness as compared
to current alternatives. We believe photonic processors will enable the
next-generation, all-optical network, which is necessary to support the
increasing demand for capacity, or bandwidth.
The proliferation of the Internet and the increase in activities such as
electronic commerce, the transmission of large data files, Internet-based
businesses and telecommuting, have caused a significant increase in the volume
of traffic across the communications infrastructure. According to Ryan, Hankin &
Kent, a leading market research and consulting firm, Internet traffic will
increase from 350,000 terabytes, or trillions of bytes, per month, at the end of
1999 to over 15 million terabytes per month in 2003. This market research
suggests that, at the end of 1999, the volume of Internet data traffic will have
surpassed the volume of voice traffic. In an effort to increase network capacity
and performance, the transport layer, or medium over which the data traffic is
transmitted, is currently being upgraded from electrical to optical transmission
by many common carriers, including MCI, AT&T and Sprint. Despite the advances
that have occurred in the existing communications infrastructure, there are
still many challenges to deploying a next-generation, optical network,
including:
- the need to prevent an optical signal from degrading, a phenomenon known
as attenuation, by converting it into an electrical signal and back into
an optical signal at frequent intervals across a network;
- the need to compensate for chromatic dispersion, a negative effect caused
by different wavelengths of light traveling down the optical fiber at
different velocities and reaching their destination at different times;
- the need to carry increased amounts of data in each wavelength of light;
- the high cost of the optical products needed for an optical network; and
- the difficulty in deploying large pieces of optical equipment.
Our PowerFilter and PowerMux products are designed to overcome the
technological challenges, such as chromatic dispersion and attenuation, and the
cost and deployment challenges inherent in optical networks. Our products are
designed to enable the transmission of more data in a wavelength of light, at
higher speeds and across greater distances in a network, than currently
available optical technologies. Our customers can also optimize the utilization
of limited network space because we miniaturize our products and combine
multiple components in a single package. We design our products to work within
existing network deployments, as well as in future optical networks. We believe
our photonic processors enable communications service providers and optical
systems manufacturers to maximize the capacity of optical networks to facilitate
next generation services and applications, such as virtual private networking
and business-to-business electronic commerce.
Our objective is to be the leading provider of innovative, fiber
optic-based solutions that enable our customers to deploy and optimize fiber
optic networks. In order to achieve this objective, our strategy is to leverage
our technology leadership and expertise to develop new products and expand
customer relationships. We also intend to expand our manufacturing facilities,
automate our manufacturing processes and extend awareness of our brand. Our
marketing strategy is based on a push-pull approach. With our push approach, we
target optical systems manufacturers that can buy our products and then resell
them as part of their optical solutions. Using our pull approach, we target
communications service providers that can create demand for our products by
directly purchasing, or requiring that their systems incorporate, our products.
We believe this approach will drive demand for our products and help enable the
transition to the next-generation, all-optical network.
4
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THE OFFERING
Common stock offered........................ 6,000,000 shares
Common stock to be outstanding after this
offering.................................... 62,529,320 shares
Use of proceeds............................. We intend to use the net
proceeds for general corporate
purposes, including capital
expenditures and working
capital. See "Use of Proceeds."
Proposed Nasdaq National Market symbol...... AVNX
The above information is based on the number of shares of common stock
outstanding as of December 31, 1999 and assumes the exercise of warrants to
purchase 337,500 shares of common stock at an exercise price of $4.00 per share
prior to the completion of this offering, the subsequent conversion of all of
our outstanding preferred stock as of December 31, 1999 into an aggregate of
35,019,134 shares of common stock upon the completion of this offering and the
sale of 769,230 shares of common stock to two corporate investors at a price of
$13.00 per share for an aggregate of $9,999,990 in a private placement that will
close contemporaneously with this offering. It excludes 3,401,427 shares of
common stock issuable upon exercise of outstanding options with a
weighted-average exercise price of $1.40 per share, 29,347 shares of common
stock issuable upon exercise of an outstanding warrant with an exercise price of
$3.83 per share, 1,245,117 shares of common stock reserved for future awards
under our stock plans as of December 31, 1999 and an additional 7,500,000 shares
reserved for future awards under our stock plans subsequent to December 31,
1999. It also excludes 525,000 shares of stock to be reserved for issuance under
our Employee Stock Purchase Plan and 300,000 shares of stock to be reserved for
issuance under our 1999 Director Option Plan. Both of these plans will become
effective upon the completion of this offering.
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
OCTOBER 24, 1997 ----------------------------
(INCEPTION) TO YEAR ENDED DECEMBER 31, DECEMBER 31,
JUNE 30, 1998 JUNE 30, 1999 1998 1999
---------------- ------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenue................................ $ -- $ 510 $ -- $ 10,916
Gross profit (loss)........................ -- (21) -- 2,722
Stock compensation expense................. 362 3,464 673 15,697
Total operating expenses................... 1,133 9,229 2,609 22,490
Loss from operations....................... (1,133) (9,250) (2,609) (19,768)
Net loss................................... (1,137) (9,221) (2,607) (19,794)
Net loss attributable to common
stockholders............................. (1,137) (9,221) (2,607) (39,845)
Pro forma basic and diluted net loss per
common share (unaudited)................. $ (.39) $ (1.02)
Weighted average shares used in computing
pro forma basic and diluted net loss per
common share (unaudited)................. 23,628 39,110
</TABLE>
5
<PAGE> 7
The following table presents our summary consolidated balance sheet data as
of December 31, 1999. The pro forma as adjusted information reflects:
- the assumed exercise of warrants to purchase 337,500 shares of common
stock at an exercise price of $4.00 per share prior to this offering and
the subsequent conversion of all of our outstanding preferred stock as of
December 31, 1999 into an aggregate of 35,019,134 shares of common stock
upon completion of this offering;
- our sale of 6,000,000 shares of our common stock in this offering, at an
assumed initial public offering price of $14.00 per share, after
deducting estimated underwriting discounts and commissions and our
estimated offering expenses; and
- the sale of 769,230 shares of common stock to two corporate investors at
a price of $13.00 per share for an aggregate of $9,999,990 in a private
placement that will close contemporaneously with this offering.
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AS OF DECEMBER 31, 1999
------------------------
PRO FORMA
ACTUAL AS ADJUSTED
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(UNAUDITED)
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CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $14,379 $101,824
Working capital............................................. 14,313 101,758
Total assets................................................ 28,152 115,597
Long-term obligations, excluding current portion............ 1,320 1,320
Redeemable convertible preferred stock...................... 30,408 --
Total other stockholders' equity (deficit).................. (10,498) 107,355
</TABLE>
6
<PAGE> 8
RISK FACTORS
This offering and any investment in our common stock involve a high degree
of risk. You should carefully consider the risks described below and all of the
information contained in this prospectus before deciding whether to purchase our
common stock. If any of the following risks actually occur, our business,
financial condition and results of operations could be harmed. The trading price
of our common stock could decline, and you may lose all or part of your
investment in our common stock.
RISKS RELATED TO OUR BUSINESS
WE HAVE NEVER BEEN PROFITABLE AND OUR FAILURE TO INCREASE OUR REVENUES
SIGNIFICANTLY WOULD PREVENT US FROM ACHIEVING AND MAINTAINING PROFITABILITY
We have incurred significant losses since inception and expect to continue
to incur losses in the future. We incurred net losses of $1.1 million in the
period from our inception on October 24, 1997 through June 30, 1998, $9.2
million in the fiscal year ended June 30, 1999, $7.5 million in the quarter
ended October 1, 1999 and $12.3 million in the quarter ended December 31, 1999.
As of December 31, 1999, we had an accumulated deficit of $50.2 million. To
date, we have not achieved profitability on a quarterly or annual basis. Due to
lack of cash generated from operations, we have funded our operations through
the sale of equity securities, bank borrowings and equipment lease financing. We
have a large amount of fixed expenses and we expect to continue to incur
significant and increasing manufacturing, sales and marketing, product
development and administrative expenses. As a result, we will need to generate
significantly higher revenues while containing costs and operating expenses if
we are ever to achieve profitability. Although our net revenue has grown from
zero in the quarter ended March 31, 1999 to $10.9 million in the six months
ended December 31, 1999, we cannot be certain that our revenues will continue to
grow or that we will ever achieve sufficient revenue levels to achieve
profitability.
BECAUSE WE HAVE A LIMITED OPERATING HISTORY AND ONLY RECENTLY BEGAN SHIPPING OUR
PRODUCTS, WE MAY BE UNABLE TO ACCURATELY EVALUATE OUR BUSINESS AND FORECAST OUR
PROSPECTS, WHICH MAY PREVENT US FROM MEETING THE PRODUCT DEMANDS OF OUR
POTENTIAL CUSTOMERS IN A TIMELY MANNER
As a result of our limited operating history, particularly our short
history of manufacturing products for sale, it is difficult to forecast our
revenues accurately, and we have limited meaningful historical financial data
upon which to plan future operating expenses. We began operations in October
1997. Until April 1999, we were a development stage company, and our only
activities were research and development. We began shipping our PowerFilter and
PowerMux products to customers for evaluation in April 1999. Volume shipments
did not commence until the quarter ended October 1, 1999. We face the risks and
difficulties frequently encountered by early stage companies in a new and
rapidly evolving market. The revenue and income potential of our products and
business are, and the size of our market is, unproven. Our ability to sell
products and achieve success will depend on, among other things, the level of
demand for our products and our capacity to meet demand.
WE EXPECT OUR QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE
SIGNIFICANTLY AND THIS MAY CAUSE OUR STOCK PRICE TO DECLINE AND YOU MAY LOSE ALL
OR PART OF YOUR INVESTMENT
Our revenues and operating results are likely to vary significantly from
quarter to quarter. A number of factors, many of which are more fully discussed
in other risk factors, are likely to cause these variations, including:
- fluctuations in demand for and sales of our products, which will depend
on the speed and magnitude of the transition to an all-optical network;
- cancellations of orders and shipment rescheduling;
- our ability to significantly expand our manufacturing capacity at our new
facility in Fremont, California, which commenced operations in November
1999;
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<PAGE> 9
- the ability of Concord Micro-Optics, Inc., or CMI, to timely produce and
deliver subcomponents from its facility in China in the quantity and of
the quality we require;
- the practice of companies in the communications industry to sporadically
place large orders with short lead times;
- competitive factors, including introductions of new products and product
enhancements by potential competitors, entry of new competitors into the
photonic processor market, including Lucent Technologies, Nortel Networks
and Fujitsu, and pricing pressures;
- our ability to develop, introduce, manufacture and ship new and enhanced
fiber optic products in a timely manner without defects;
- our ability to control expenses, particularly in light of our limited
operating history;
- availability of components for our products and increases in the price of
these components;
- mix of our products sold; and
- economic conditions specific to the communications and related
industries.
A high percentage of our expenses, including those related to
manufacturing, engineering, sales and marketing, research and development and
general and administrative functions, are essentially fixed in the short term.
As a result, if we experience delays in generating and recognizing revenue, our
quarterly operating results are likely to be seriously harmed. As we expand our
manufacturing capacity, we will incur expenses in one quarter relating to the
expansion and related yield issues that may not result in off-setting revenue
until a subsequent quarter. New product introductions can also result in a
mismatching of research and development expenses and sales and marketing
expenses that are incurred in one quarter with revenues that are not received
until a subsequent quarter when the new product is introduced. If growth in our
revenues does not outpace the increase in our expenses, our results of
operations could be seriously harmed.
Due to these and other factors, we believe that quarter-to-quarter
comparisons of our operating results will not be meaningful. You should not rely
on our results for one quarter as any indication of our future performance. It
is likely that in future quarters our operating results may be below the
expectations of public market analysts or investors. If this occurs, the price
of our common stock would likely decrease.
OUR POWERFILTER PRODUCT CURRENTLY REPRESENTS NEARLY ALL OF OUR REVENUES AND IF
WE ARE UNSUCCESSFUL IN COMMERCIALLY SELLING OUR POWERMUX PRODUCT, OUR REVENUES
WILL NOT GROW SIGNIFICANTLY
We currently offer only two products, PowerFilter and PowerMux. Sales of
our PowerFilter product accounted for 95% of our net revenue in the quarter
ended June 30, 1999 and 99% of our net revenue in each of the quarters ended
October 1, 1999 and December 31, 1999. We substantially depend on this product
for our near-term revenue. Most customers who have purchased PowerFilter
products from us to date have purchased them for evaluation purposes only and
may not choose to purchase any additional products for commercial use. Any
decline in the price of, or demand for, our PowerFilter product, or its failure
to achieve broad market acceptance, would seriously harm our business. In
addition, we believe that our future growth and a significant portion of our
future revenue will depend on the commercial success of our PowerMux product,
which to date has only been shipped for evaluation. If our target customers do
not widely adopt, purchase and successfully deploy our products, our revenues
will not grow significantly and our business will be seriously harmed.
WE RELY ON A LIMITED NUMBER OF CUSTOMERS, AND ANY DECREASE IN REVENUES FROM, OR
LOSS OF, THESE CUSTOMERS WITHOUT A CORRESPONDING INCREASE IN REVENUES FROM OTHER
CUSTOMERS WOULD HARM OUR OPERATING RESULTS
Our customer base is limited and highly concentrated. We began recognizing
revenues from sales of our products in the quarter ended June 30, 1999. Three
customers accounted for an aggregate of 94% of our net revenue in the quarter
ended June 30, 1999, an aggregate of 99% of our net revenue in the quarter ended
October 1, 1999 and an aggregate of 96% of our net revenue in the quarter ended
December 31, 1999. MCI Telecommunications and MCI Worldcom, collectively MCI
Worldcom, accounted for 92% of our net revenue in the quarter ended October 1,
1999 and 85% in the quarter ended December 31, 1999. We expect
8
<PAGE> 10
that the majority of our revenues will continue to depend on sales of our
products to a small number of customers.
If current customers do not continue to place significant orders, we may
not be able to replace these orders. In addition, any downturn in the business
of existing customers could result in significantly decreased sales to these
customers, which could seriously harm our revenues and results of operations.
Sales to any single customer may vary significantly from quarter to
quarter. Customers in the communications industry tend to order large quantities
of products on an irregular basis. They base these orders on a decision to
deploy their system in a particular geographic area and may not order additional
products until they make their next major deployment decision. This means that
customers who account for a significant portion of our net revenue in one
quarter may not place any orders in the succeeding quarter. These ordering
patterns can result in significant quarterly fluctuations in our operating
results.
WE MUST RAPIDLY EXPAND OUR MANUFACTURING CAPACITY OR WE WILL NOT BE ABLE TO
DELIVER OUR PRODUCTS TO OUR CUSTOMERS IN A TIMELY MANNER
We must devote significant resources in order to expand our manufacturing
capacity. We have no experience in rapidly increasing our manufacturing capacity
or in manufacturing products at high volumes, and we only commenced
manufacturing operations in the quarter ended June 30, 1999. We will be required
to hire, train and manage significant numbers of additional manufacturing
personnel in order to increase our production capacity. We also intend to have
some of our subcomponents and products manufactured by a third party contract
manufacturer located in China. Expanding our manufacturing capacity at different
facilities will be expensive and will require management's time. There are
numerous risks associated with rapidly increasing capacity, including:
- the inability to procure and install the necessary equipment;
- lack of availability of manufacturing personnel;
- difficulties in achieving adequate yields from new manufacturing lines;
and
- the inability to match future order volumes with capacity.
If we are unable to expand our manufacturing capacity in a timely manner or if
we do not accurately project demand, we will have excess capacity or
insufficient capacity, either of which will seriously harm our business.
Our planned manufacturing expansion and related capital expenditures are
being made in anticipation of a level of customer orders that may not be
realized or, if realized, may not be sustained over multiple quarters. If
anticipated levels of customer orders are not received, our gross margins will
decline and we will not be able to reduce our operating expenses quickly enough
to prevent a decline in our operating results.
BECAUSE WE EXPECT TO DEPEND ON A THIRD PARTY LOCATED IN CHINA TO MANUFACTURE
SUBCOMPONENTS AND PRODUCTS FOR US, WE MAY HAVE DIFFICULTIES OBTAINING A
SUFFICIENT AMOUNT OF HIGH QUALITY PRODUCTS, WHICH WOULD DELAY OUR ABILITY TO
FULFILL CUSTOMER ORDERS
We have entered into a five-year agreement with CMI, a California-based
company, under which a subsidiary of CMI, located in Tianjin, China,
manufactures optical subcomponents for us. CMI has a limited history of
manufacturing optical subcomponents. As a result, CMI may not meet our
technological or delivery requirements. Any interruption in the operations of
CMI could harm our ability to meet our scheduled product deliveries to our
customers, which could cause the loss of existing or potential customers. In
addition, the products that CMI builds for us may be insufficient in quality or
in quantity to meet our needs. The inability of CMI to provide us with adequate
supplies of high-quality products in the future could cause a delay in our
ability to fulfill customer orders while we obtain a replacement manufacturer
and could seriously harm our business.
CMI manufactures limited quantities of subcomponents for us at a small
facility in Tianjin. We expect CMI to manufacture a significant portion of our
subcomponents and products in the future. Although CMI is
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building a larger manufacturing facility in Tianjin, it will not be operational
until at least the quarter ending September 29, 2000. If this larger facility is
not completed on time, or at all, it may be more difficult to grow our business.
To successfully meet our overall production goals, we will also have to
coordinate effectively our operations in California and CMI's operations in
China. We have no experience in coordinating and managing production operations
that are located on different continents or in the transfer of manufacturing
operations from one facility to another. The geographic distance between our
headquarters in California and CMI's manufacturing facility in China will make
it difficult for us to manage the relationship and oversee operations there to
assure product quality and timely delivery. Our failure to successfully
coordinate and manage multiple sites or to transfer our manufacturing operations
could seriously harm our overall production.
Because CMI's manufacturing facility is located in China, CMI will be
subject to the risk of political instability in China and the possible
imposition of restrictive trade regulations and tariffs. We will also be exposed
to risks of foreign currency exchange rate fluctuations and lack of adequate
protection of intellectual property under Chinese law.
UNDER OUR LICENSE AGREEMENT WITH CMI, CMI CAN MANUFACTURE AND SELL OPTICAL
SUBCOMPONENTS BASED ON OUR TECHNOLOGY TO OUR POTENTIAL COMPETITORS, WHICH COULD
HARM OUR MARKET POSITION IN THE FUTURE
Under the agreement with CMI, we have granted licenses to CMI to make in
China and the United States, and to use and sell worldwide, the licensed
subcomponents. We also granted them a license to use some of our technical
information and manufacturing process know-how in China and the United States.
These licenses are exclusive in China and non-exclusive elsewhere. As a result,
CMI can manufacture and sell optical subcomponents based on our technology to
third parties, including our potential competitors. Furthermore, unless the
license is terminated, we cannot use an additional manufacturer for these
subcomponents in China.
BECAUSE WE DEPEND ON SINGLE OR LIMITED SOURCES OF SUPPLY WITH LONG LEAD TIMES
FOR SOME OF THE KEY COMPONENTS IN OUR PRODUCTS, WE COULD ENCOUNTER DIFFICULTIES
IN MEETING SCHEDULED PRODUCT DELIVERIES TO OUR CUSTOMERS, WHICH COULD CAUSE
CUSTOMERS TO CANCEL ORDERS
We currently purchase several key components used in our products from
single or limited sources of supply, including Nippon Sheet Glass, Hoya USA,
Inc., CMI, Sumitomo Corporation of America, Casix, Inc. and Browave Corporation.
These key components include filters, lenses and specialty glass. We have no
guaranteed supply arrangement with any of these suppliers and we typically
purchase our components through purchase orders. We may fail to obtain these
supplies in a timely manner in the future. Any interruption or delay in the
supply of any of these components, or the inability to obtain these components
from alternate sources at acceptable prices and within a reasonable amount of
time, would impair our ability to meet scheduled product deliveries to our
customers and could cause customers to cancel orders. Lead times for components
vary significantly and depend on numerous factors, including the specific
supplier, the size of the order, contract terms and market demand for a
component at a given time. For substantial increases in production levels,
suppliers may need longer-than-normal lead times and some may need at least six
months.
Furthermore, financial or other difficulties faced by these suppliers, or
significant changes in demand for these components, could limit the availability
of these components. In addition, a third party could acquire control of one or
more of our suppliers and cut off our access to raw materials or components.
Obtaining components from alternate suppliers is difficult because we must
qualify each new supplier, and this process is time-consuming and expensive.
OUR LENGTHY AND VARIABLE QUALIFICATION AND SALES CYCLE MAKES IT DIFFICULT TO
PREDICT THE TIMING OF A SALE OR WHETHER A SALE WILL BE MADE, WHICH MAY CAUSE US
TO HAVE EXCESS MANUFACTURING CAPACITY OR INVENTORY AND NEGATIVELY IMPACT OUR
OPERATING RESULTS
Customers typically expend significant efforts in evaluating and qualifying
our products and manufacturing process. This evaluation and qualification
process frequently results in a lengthy sales cycle, typically ranging from
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three to nine months and sometimes longer. While our customers are evaluating
our products and before they place an order with us, we may incur substantial
sales and marketing and research and development expenses, expend significant
management efforts, increase manufacturing capacity and order long-lead-time
supplies prior to receiving an order. Even after this evaluation process, it is
possible a potential customer will not purchase our products for deployment. In
addition, product purchases are frequently subject to unplanned processing and
other delays, particularly with respect to larger customers for which our
products represent a very small percentage of their overall purchase activity.
If we increase capacity and order supplies in anticipation of an order that
does not materialize, our gross margins will decline and we will have to carry
or write off excess inventory. Even if we receive an order, the additional
manufacturing capacity that we add to service the customer's requirements may be
underutilized in a subsequent quarter. Either situation could cause our results
of operations to be below the expectations of investors and public market
analysts, which could, in turn, cause the price of our common stock to decline.
Our long sales cycles, as well as the practice of companies in the
communications industry to sporadically place large orders with short lead
times, may cause our revenues and operating results to vary significantly and
unexpectedly from quarter to quarter.
IF WE FAIL TO PREDICT OUR MANUFACTURING REQUIREMENTS ACCURATELY, WE COULD INCUR
ADDITIONAL COSTS OR EXPERIENCE MANUFACTURING DELAYS, WHICH COULD CAUSE US TO
LOSE ORDERS OR CUSTOMERS AND RESULT IN LOWER REVENUES
We currently use a rolling 12-month forecast based primarily on our
anticipated product orders and our limited product order history to determine
our requirements for components and materials. We provide these forecasts to CMI
and use them internally as well. It is very important that we accurately predict
both the demand for our products and the lead time required to obtain the
necessary components and raw materials. Lead times for materials and components
that we order vary significantly and depend on factors such as the specific
supplier, the size of the order, contract terms and demand for each component at
a given time. If we underestimate our requirements, both our company and CMI may
have inadequate manufacturing capacity or inventory, which could interrupt
manufacturing of our products and result in delays in shipments and revenues. If
we overestimate our requirements, we could have excess inventory of parts. We
also may experience shortages of components from time to time, which also could
delay the manufacturing of our products and could cause us to lose orders or
customers.
IF WE DO NOT ACHIEVE ACCEPTABLE MANUFACTURING YIELDS IN A COST-EFFECTIVE MANNER
OR ACHIEVE SUFFICIENT PRODUCT RELIABILITY, THIS COULD DELAY PRODUCT SHIPMENTS TO
OUR CUSTOMERS OR REQUIRE US TO DEVELOP NEW MANUFACTURING PROCESSES, WHICH WOULD
IMPAIR OUR OPERATING RESULTS
The manufacture of our products involves complex and precise processes.
Changes in our manufacturing processes or those of our suppliers, or their
inadvertent use of defective materials, could significantly reduce our
manufacturing yields and product reliability. Because the majority of our
manufacturing costs are relatively fixed, manufacturing yields are critical to
our results of operations. Lower than expected production yields could delay
product shipments and impair our gross margins. We may not obtain acceptable
yields in the future.
In some cases, existing manufacturing techniques, which involve substantial
manual labor, may not allow us to cost-effectively meet our production goals so
that we maintain acceptable gross margins while meeting the cost targets of our
customers. We will need to develop new manufacturing processes and techniques
that will involve higher levels of automation to increase our gross margins and
achieve the targeted cost levels of our customers. We may not achieve
manufacturing cost levels that will fully satisfy customer demands.
Because we plan to introduce new products and product enhancements
regularly, we must effectively transfer production information from our product
development department to our manufacturing group and coordinate our efforts
with those of our suppliers to rapidly achieve volume production. If we fail to
effectively manage this process or if we experience delays, disruptions or
quality control problems in our manufacturing operations, our shipments of
products to our customers could be delayed.
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WE WILL LOSE SIGNIFICANT CUSTOMER SALES AND OPPORTUNITIES AND MAY NOT BE
SUCCESSFUL IF OUR CUSTOMERS DO NOT QUALIFY OUR PRODUCTS TO BE DESIGNED INTO
THEIR PRODUCTS AND SYSTEMS
In the communications industry, service providers and optical systems
manufacturers often undertake extensive qualification processes prior to placing
orders for large quantities of products such as ours, because these products
must function as part of a larger system or network. Once they decide to use a
particular supplier's product or component, these potential customers design the
product into their system, which is known as a design-in win. Suppliers whose
products or components are not designed in are unlikely to make sales to that
company until at least the adoption of a future redesigned system. Even then,
many companies may be reluctant to design entirely new products into their new
systems, as it could involve significant additional redesign efforts. If we fail
to achieve design-in wins in our potential customer's qualification process, we
will lose the opportunity for significant sales to that customer for a lengthy
period of time.
WE WILL NOT ATTRACT ORDERS AND CUSTOMERS OR WE MAY LOSE CURRENT ORDERS AND
CUSTOMERS AND WILL NOT BE SUCCESSFUL IN OUR INDUSTRY IF WE ARE UNABLE TO COMMIT
TO DELIVER SUFFICIENT QUANTITIES OF OUR PRODUCTS TO SATISFY MAJOR CUSTOMERS'
NEEDS
Communications service providers and optical systems manufacturers
typically require that suppliers commit to provide specified quantities of
products over a given period of time. If we are unable to commit to deliver
sufficient quantities of our products to satisfy a customer's anticipated needs,
we will lose the order and the opportunity for significant sales to that
customer for a lengthy period of time. We are just beginning to receive orders
for significant quantities of products while simultaneously increasing our
manufacturing capacity. We would be unable to pursue many large orders if we do
not have sufficient manufacturing capacity to enable us to commit to provide
customers with specified quantities of products.
IF OUR CUSTOMERS DO NOT QUALIFY OUR MANUFACTURING LINES FOR VOLUME SHIPMENTS,
OUR PRODUCTS MAY BE DROPPED FROM SUPPLY PROGRAMS AND OUR OPERATING RESULTS COULD
SUFFER
Customers generally will not purchase any of our products, other than
limited numbers of evaluation units, before they qualify our products, approve
our manufacturing process and approve our quality system. Our existing
manufacturing line, as well as each new manufacturing line, must pass through
various levels of approval with our customers. Customers may require that we be
registered under international quality standards, such as ISO 9001. Our products
may also have to be qualified to specific customer requirements. This customer
approval process determines whether the manufacturing line achieves the
customers' quality, performance and reliability standards. In order for CMI to
manufacture products or discrete components for us in the future, their
manufacturing line would also need to be qualified by our customers. Delays in
product qualification or ISO 9001 registration may cause a product to be dropped
from a long-term supply program and result in significant lost revenue
opportunity over the term of that program.
IF WE ARE UNABLE TO DEVELOP PRODUCTS AND PRODUCT ENHANCEMENTS THAT ACHIEVE
MARKET ACCEPTANCE, SALES OF OUR PRODUCTS WILL SUFFER AND WE WILL NOT BE
SUCCESSFUL
Our future success depends on our ability to anticipate market needs and
develop products that address those needs. Any failure to predict market needs
accurately or to develop new products or product enhancements in a timely manner
will substantially decrease market acceptance and sales of our products. In
addition, our products could quickly become obsolete as new technologies are
introduced and incorporated into new and improved products. In particular, we
anticipate that our PowerMux product, which incorporates our PowerFilter product
and additional functionality, will replace our PowerFilter product in most
applications. We must continue to develop state-of-the-art products and
introduce them in the commercial market quickly in order to be successful. We
plan to introduce our PowerShaper product, which is currently in the beta
testing stage, during the second half of the fiscal year ending June 30, 2000.
If the development of any future products takes longer than we anticipate, or if
we are unable to develop and introduce these products to the commercial market,
our revenues could suffer and we will not gain market share. Even if we are able
to develop and commercially introduce new products and enhancements, we cannot
assure you that the new products or enhancements will
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achieve widespread market acceptance. Any failure of PowerMux, PowerShaper or
our other future products to achieve market acceptance could significantly harm
our business.
WE MAY EXPERIENCE INCREASED COMPETITION FROM COMPANIES IN THE PHOTONIC PROCESSOR
MARKET AND IN THE OPTICAL SYSTEMS AND COMPONENT INDUSTRY, WHICH COULD CAUSE
REDUCED SALES LEVELS AND RESULT IN PRICE REDUCTIONS, REDUCED GROSS MARGINS OR
LOSS OF MARKET SHARE
The markets we are targeting are new and rapidly evolving, and we expect
these markets to become highly competitive in the future. While we do not have
any direct competitors in the photonic processor market today, we anticipate
that other companies will expand into our market in the future, and introduce
competitive products. We also face indirect competition from public and private
companies providing products that address the same optical network problems that
our products address. The development of alternative solutions to optical
transmission problems by competitors, particularly systems companies who also
manufacture components, could significantly limit our growth.
Some companies in the optical systems and component industry may compete
with us in the future, including Lucent Technologies, Nortel Networks, Alcatel,
Fujitsu, JDS Uniphase and E-Tek Dynamics. These are large public companies that
have longer operating histories and significantly greater financial, technical,
marketing and other resources than we have. As a result, these competitors are
able to devote greater resources to the development, promotion, sale and support
of their products. In addition, our competitors that have large market
capitalizations or cash reserves are much better positioned than we are to
acquire other companies in order to gain new technologies or products that may
displace our product lines. Any of these acquisitions could give our competitors
a strategic advantage. Many of our potential competitors have significantly more
established sales and customer support organizations than we do. In addition,
many of our competitors have much greater name recognition and have more
extensive customer bases, better developed distribution channels and broader
product offerings than our company. These companies can use their customer bases
and broader product offerings and adopt aggressive pricing policies to gain
market share. We expect to encounter potential customers that, due to existing
relationships with our competitors, are committed to the products offered by
these competitors. As a result, these potential customers may not consider
purchasing our products.
Existing and potential customers are also our potential competitors. These
customers may develop or acquire additional competitive products or technologies
in the future, which may cause them to reduce or cease their purchases from us.
In addition, customers who are also competitors may unfairly disparage our
products in order to gain a competitive advantage.
As a result of these factors, we expect that competitive pressures may
result in price reductions, reduced margins and loss of market share.
IF WE DO NOT SUBSTANTIALLY EXPAND OUR DIRECT AND INDIRECT SALES OPERATIONS, WE
MAY NOT BE ABLE TO INCREASE MARKET AWARENESS AND SALES OF OUR PRODUCTS AND OUR
REVENUES WILL SUFFER
Our products and services require a long, involved sales effort targeted at
several departments within our prospective customers' organizations. Therefore,
our sales effort requires the prolonged efforts of executive personnel and
specialized system and application engineers working together with dedicated
salespersons in making sales. Because we have a small number of dedicated
salespersons, we need to hire additional qualified sales personnel and system
and application engineers. Competition for these individuals is intense, and we
might not be able to hire the type and number of sales personnel and system and
application engineers we need.
In addition, we believe that our future success depends significantly on
our ability to establish relationships successfully with a variety of
distribution partners, such as original equipment manufacturers, value-added
resellers and distributors, both domestically and internationally. To date, we
have entered into agreements with two distributors in Japan. These distributors
also sell products that compete with our products. We cannot be certain that we
will be able to reach agreement with additional distribution partners on a
timely basis or at all, or that our distribution partners will devote adequate
resources to selling our
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products. Even if we enter into agreements with additional distribution
partners, they may not result in increased product sales.
If we are unable to expand our direct and indirect sales operations, we may
not be able to increase market awareness or sales of our products, which may
prevent us from increasing our revenues.
IF THE COMMUNICATIONS INDUSTRY DOES NOT ACHIEVE A RAPID AND WIDESPREAD
TRANSITION TO OPTICAL NETWORKS, OUR BUSINESS WILL NOT SUCCEED
The market for our products is relatively new. Future demand for our
products is uncertain and will depend to a great degree on the speed of the
widespread adoption of optical networks. If the transition occurs too slowly,
the market for our products and the growth of our business will be significantly
limited.
IF THE INTERNET DOES NOT CONTINUE TO EXPAND AS A WIDESPREAD COMMUNICATION AND
COMMERCE MEDIUM, DEMAND FOR OUR PRODUCTS MAY DECLINE SIGNIFICANTLY
Our future success depends on the continued growth of the Internet as a
widely-used medium for commerce and communication and the continuing demand for
increased bandwidth over communications networks. If the Internet does not
continue to expand as a widespread communication medium and commercial
marketplace, the need for significantly increased bandwidth across networks and
the market for optical transmission products may not develop. As a result, it
would be unlikely that our products would achieve commercial success.
OUR MARKET IS NEW AND IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGES AND
EVOLVING STANDARDS, AND IF WE DO NOT RESPOND IN A TIMELY MANNER, OUR PRODUCTS
WILL NOT ACHIEVE MARKET ACCEPTANCE
The communications market is characterized by rapid technological change,
frequent new product introductions, changes in customer requirements and
evolving industry standards. In developing our products, we have made, and will
continue to make, assumptions with respect to which standards will be adopted
within our industry. If the standards that are actually adopted are different
from those that we have chosen to support, our products may not achieve
significant market acceptance.
OUR PRODUCTS MAY HAVE DEFECTS THAT ARE NOT DETECTED UNTIL FULL DEPLOYMENT OF A
CUSTOMER'S SYSTEM, WHICH COULD RESULT IN A LOSS OF CUSTOMERS, DAMAGE TO OUR
REPUTATION AND SUBSTANTIAL COSTS
Our products are designed to be deployed in large and complex optical
networks and must be compatible with other components of the system, both
current and future. Our products can only be fully tested for reliability when
deployed in networks for long periods of time. Our customers may discover
errors, defects or incompatibilities in our products after they have been fully
deployed and operated under peak stress conditions. They may also have errors,
defects or incompatibilities that we find only after a system upgrade is
installed. If we are unable to fix errors or other problems, we could
experience:
- loss of customers;
- loss of or delay in revenues;
- loss of market share;
- loss or damage to our brand and reputation;
- inability to attract new customers or achieve market acceptance;
- diversion of development resources;
- increased service and warranty costs;
- legal actions by our customers; and
- increased insurance costs.
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IF WE FAIL TO EFFECTIVELY MANAGE OUR FINANCIAL AND MANAGERIAL CONTROLS,
REPORTING SYSTEMS AND PROCEDURES AS WELL AS EXPAND, TRAIN AND MANAGE OUR
WORKFORCE, OUR BUSINESS MAY NOT SUCCEED
We continue to expand the scope of our operations domestically and
internationally and have increased the number of our employees substantially. We
have grown from no revenue in the quarter ended March 31, 1999, $4.4 million in
the quarter ended October 1, 1999 to $6.5 million in the quarter ended December
31, 1999. At March 31, 1999, we had a total of 45 employees, at October 1, 1999,
we had a total of 132 employees and at December 31, 1999, we had 251 employees.
In addition, we plan to hire a significant number of employees over the next
several quarters. We currently operate facilities in Fremont, California and in
Richardson, Texas, and CMI has recently begun manufacturing subcomponents for us
in China. In addition, we have a sales office with a regional sales director in
Newtown, Pennsylvania. The growth in employees and in revenue, combined with the
challenges of managing geographically-dispersed operations, has placed, and our
anticipated growth in future operations will continue to place, a significant
strain on our management systems and resources. We expect that we will need to
continue to improve our financial and managerial controls, reporting systems and
procedures, and will need to continue to expand, train and manage our work force
worldwide.
WE DEPEND ON A SINGLE APPLICATION SERVICE PROVIDER FOR INFORMATION SYSTEMS AND
SERVICES, AND IF THERE IS A SERVICE INTERRUPTION, WE MAY HAVE DIFFICULTY IN
ACCESSING DATA THAT IS CRITICAL TO THE MANAGEMENT OF OUR BUSINESS
We rely on a single application service provider, Aristasoft Corporation,
to provide an Internet-based management information system and support for this
system. Aristasoft recently began providing information systems and services to
us on a regular basis and we are one of their few customers. All of our
financial records and ordering and data tracking information are stored on
Aristasoft's computer system and are only accessible over the Internet. The
Internet has suffered from delays and outages in the past, which could make it
difficult for us to access our data. From time to time, we have experienced
difficulties and delays in accessing our data. Lack of direct control over our
management information system and delays in obtaining information when needed
could harm our business.
We do not have an agreement with Aristasoft requiring it to provide
services to us for any specified period, and they could terminate their
relationship with us on short notice. If we needed to qualify a new application
service provider, we might be unable to do so on a timely basis, or at all. The
services are provided on application and database servers located at offsite
data facilities and accessed via communications links from our facility. We
cannot be certain that Aristasoft will be able to manage a scalable and reliable
information technology infrastructure to support the growth of our business. If
they stop providing services to us or if there is a service interruption, our
ability to process orders, manufacture products, ship products, prepare invoices
and manage our day-to-day financial transactions would be harmed, and our
results of operations would suffer.
WE DEPEND ON KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
CHANGING MARKET, AND IF WE ARE UNABLE TO HIRE ADDITIONAL PERSONNEL, OUR ABILITY
TO SELL OUR PRODUCTS COULD BE HARMED
Our future success depends upon the continued services of our executive
officers, particularly Walter Alessandrini, our Chief Executive Officer, and
Xiaofan (Simon) Cao, our Senior Vice President of Product Development, and other
key engineering, sales, marketing, manufacturing and support personnel. None of
our officers or key employees is bound by an employment agreement for any
specific term and these personnel may terminate their employment at any time. In
addition, we do not have "key person" life insurance policies covering any of
our employees.
We must hire a significant number of additional employees in the near
future, particularly engineering, sales and manufacturing personnel. Our ability
to continue to attract and retain highly skilled personnel will be a critical
factor in determining whether we will be successful in the future. Competition
for highly skilled personnel is intense, especially in the San Francisco Bay
Area. We may not be successful in attracting, assimilating or retaining
qualified personnel to fulfill our current or future needs. Our planned growth
will
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place a significant demand on our management and operational resources. Many of
the members of our management team have only been with us for a relatively short
period of time. For example, our Chief Executive Officer joined us in March
1999, and four of our eight current executive officers have joined us since
then. Failure of the new management team to work effectively together could
seriously harm our business.
IF WE BECOME SUBJECT TO UNFAIR HIRING CLAIMS, THESE CLAIMS COULD DIVERT THE
ATTENTION OF OUR MANAGEMENT AWAY FROM OUR OPERATIONS AND COULD CAUSE US TO INCUR
SUBSTANTIAL COSTS IN DEFENDING OURSELVES
Companies in our industry whose employees accept positions with competitors
frequently claim that their competitors have engaged in unfair hiring practices.
For instance, in December 1999, E-Tek Dynamics, Inc. filed a lawsuit against us.
E-Tek's complaint alleges that we have participated in the illegal recruiting of
E-Tek employees. Despite the fact that we believe this complaint is without
merit, we will incur costs in defending this lawsuit, including management time
and attention. We cannot assure you that we will not receive claims of this kind
in the future as we seek to hire qualified personnel or that those claims will
not result in litigation. We could incur substantial costs in defending
ourselves against these claims, regardless of their merits or outcomes. In
addition, defending ourselves from these claims could divert the attention of
our management away from our operations.
IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, THIS TECHNOLOGY COULD BE
MISAPPROPRIATED, WHICH WOULD MAKE IT DIFFICULT TO COMPETE IN OUR INDUSTRY
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
We cannot assure you that the 25 U.S. patent applications and four foreign
patent applications that we have filed will be approved, that any patents that
may issue will protect our intellectual property or that any patents issued will
not be challenged by third parties. Furthermore, other parties may independently
develop similar or competing technology or design around any patents that may be
issued to us. We use various methods to attempt to protect our intellectual
property rights. However, we cannot be certain that the steps we have taken will
prevent the misappropriation of our intellectual property, particularly in
foreign countries, such as China, where the laws may not protect our proprietary
rights as fully as in the United States.
IF NECESSARY LICENSES OF THIRD-PARTY TECHNOLOGY BECOME UNAVAILABLE TO US OR
BECOME VERY EXPENSIVE, WE MAY BECOME UNABLE TO DEVELOP NEW PRODUCTS AND PRODUCT
ENHANCEMENTS, WHICH WOULD PREVENT US FROM OPERATING OUR CURRENT BUSINESS
From time to time we may be required to license technology from third
parties to develop new products or product enhancements. We cannot assure you
that third-party licenses will be available to us on commercially reasonable
terms, if at all. The inability to obtain any third-party license required to
develop new products and product enhancements could require us to obtain
substitute technology of lower quality or performance standards or at greater
cost, either of which could prevent us from operating our business.
We license technology from Fujitsu that is critical to our PowerShaper
product. The license agreement is subject to termination upon the acquisition of
more than a 50% interest in us by certain major communications system suppliers.
Thus, if we are acquired by any of these specified companies, we will lose this
license. The existence of this license termination provision may have an
anti-takeover effect in that it would discourage those specified companies from
making a bid to acquire us.
WE COULD BECOME SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS,
WHICH COULD DIVERT MANAGEMENT ATTENTION, CAUSE US TO INCUR SIGNIFICANT COSTS AND
PREVENT US FROM SELLING OR USING THE CHALLENGED TECHNOLOGY
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. As a result of the
proliferation of the Internet and other networking technologies, there has been,
and we expect that there will continue to be, an increasing amount of this
litigation in our industry. Many companies in the high-technology industry
aggressively use their patent portfolios to bring
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infringement claims against their competitors. As a result, it is possible that
we may be a party to litigation in the future to protect our intellectual
property or as a result of an alleged infringement of others' intellectual
property. These claims and any resulting lawsuit, if successful, could subject
us to significant liability for damages and invalidation of our proprietary
rights. These lawsuits, regardless of their success, would likely be
time-consuming and expensive to resolve and would divert management time and
attention. Any potential intellectual property litigation also could force us to
do one or more of the following:
- stop selling, incorporating or using our products that use the challenged
intellectual property;
- obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all; or
- redesign the products that use the technology.
If we are forced to take any of these actions, our business may be
seriously harmed. Although we carry general liability insurance, our insurance
may not cover potential claims of this type or may not be adequate to indemnify
us for all liability that may be imposed.
We may in the future initiate claims or litigation against third parties
for infringement of our proprietary rights in order to determine the scope and
validity of our proprietary rights or the proprietary rights of competitors.
These claims could result in costly litigation and the diversion of our
technical and management personnel.
WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS THAT COULD PREVENT US
FROM SUCCESSFULLY MANUFACTURING, MARKETING AND DISTRIBUTING OUR PRODUCTS
INTERNATIONALLY
We intend to expand our international operations in the future, including
having some of our subcomponents manufactured in China. This expansion will
require significant management attention and financial resources to develop
successfully direct and indirect international sales and support channels and
manufacturing. We may not be able to establish or maintain international market
demand for our products. We currently have little or no experience in
manufacturing, marketing and distributing our products internationally.
In addition, international operations are subject to inherent risks,
including:
- greater difficulty in accounts receivable collection and longer
collection periods;
- difficulties and costs of staffing and managing foreign operations with
personnel who have expertise in optical network technology;
- unexpected changes in regulatory or certification requirements for
optical systems or networks;
- reduced protection for intellectual property rights in some countries,
including China, where some of our subcomponents will be manufactured;
and
- political and economic instability.
While we expect our international revenues and expenses to be denominated
predominantly in U.S. dollars, a portion of our international revenues and
expenses may be denominated in foreign currencies in the future. Accordingly, we
could experience the risks of fluctuating currencies and could choose to engage
in currency hedging activities.
IF WE ARE UNABLE TO RAISE ANY NEEDED ADDITIONAL CAPITAL, WE MAY NOT BE ABLE TO
GROW OUR BUSINESS, WHICH COULD LOWER THE VALUE OF YOUR INVESTMENT
The development and marketing of new products and the expansion of our
manufacturing facilities and associated support personnel will require a
significant commitment of resources. In addition, if the market for photonic
processors develops at a slower pace than we anticipate or if we fail to
establish significant market share and achieve a significantly increased level
of revenue, we may continue to incur significant operating losses and utilize
significant amounts of capital. If cash from available sources is insufficient,
or if cash is used
17
<PAGE> 19
for acquisitions or other unanticipated uses, we may need to raise additional
capital. We cannot be certain that additional capital will be available to us at
all, or that, if it is available, it will be on terms favorable to us. Any
inability to raise additional capital when we require it would seriously harm
our business. Any additional issuance of equity or equity-related securities
will be dilutive to our stockholders.
WE FACE A NUMBER OF UNKNOWN RISKS ASSOCIATED WITH YEAR 2000 PROBLEMS THAT COULD
RESULT IN CLAIMS AGAINST US OR IMPAIR THE USE OF OUR PRODUCTS BY OUR CUSTOMERS
Our products are generally integrated into larger systems involving
sophisticated hardware and software products supplied by other vendors. Our
customers' systems involve different combinations of third party products. We
cannot evaluate whether all of their products are year 2000 compliant. Despite
the passing of January 1, 2000, we may face claims based on year 2000 problems
in other companies' products or based on issues arising from the integration of
multiple products within the overall network. We may in the future be required
to defend our products in legal proceedings, which could be expensive regardless
of the merits of these claims.
Despite the passing of January 1, 2000, our suppliers, vendors,
distributors, customers or service providers could still experience year 2000
problems. If any year 2000 related failures occur, they could result in an
interruption in, or a failure of, our normal business activities or operations.
If a year 2000 problem occurs, it may be difficult to determine which party's
products have caused the problem. These failures could interrupt our operations
and damage our relationships with our customers. Due to the general uncertainty
inherent in the year 2000 problem with regard to our third party suppliers and
vendors, we are unable to determine at this time whether year 2000 failures
could harm our business.
Our customers' purchasing plans may have been and may continue to be
affected by year 2000 issues if they needed to expend significant resources to
fix their existing systems to become year 2000 compliant. This situation may
reduce funds available to purchase our products.
RISKS RELATED TO THE SECURITIES MARKETS AND THIS OFFERING
THERE MAY BE SALES OF A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK AS SOON AS 90
DAYS AFTER THIS OFFERING BY OUR STOCKHOLDERS, INCLUDING OUR EXECUTIVE OFFICERS
AND DIRECTORS, AND THESE SALES COULD CAUSE OUR STOCK PRICE TO FALL
Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future.
As of December 31, 1999, our executive officers, directors and
substantially all of our stockholders, who held an aggregate of 55,391,841
shares of our common stock, or over 98.0% of our total outstanding shares, had
executed lock-up agreements that prevent them from selling or otherwise
disposing of our common stock for a period of 180 days from the date of this
prospectus, without the prior written approval of Morgan Stanley & Co.
Incorporated. Assuming that this prospectus will be dated February 14, 2000,
these lock-up agreements will expire on August 12, 2000, and an aggregate of
46,147,818 shares will be eligible for sale, in some cases subject only to the
volume, manner of sale and notice requirements of Rule 144 under the Securities
Act.
Notwithstanding the 180-day lock-up period, 25% of the shares, or
13,847,960 shares, subject to these lock-up restrictions, including 3,644,690
shares held by our executive officers and directors, may be released from these
restrictions beginning 90 days from the assumed date of this prospectus, or May
14, 2000. This release will occur if the last reported sale price of our common
stock is at least two times the initial public offering price per share for 20
of the 30 trading days preceding the 90th day after the date of this prospectus.
Of these shares to be released on May 14, 2000, 11,315,945 will be eligible for
sale, in some cases subject only to the volume, manner of sale and notice
requirements of Rule 144.
18
<PAGE> 20
Sales of a substantial number of shares of our common stock after this
offering could cause our stock price to fall. In addition, the sale of these
shares could impair our ability to raise capital through the sale of additional
stock.
The 769,230 shares of common stock that we agreed to sell to MCI WorldCom
Venture Fund and Microsoft will be "restricted securities" and the one year
holding period for these shares will expire one year from the date of sale. We
anticipate that the date of sale will occur in February 2000. However, each of
MCI WorldCom Venture Fund and Microsoft may, beginning 180 days after the
completion of this offering, exercise their registration rights which will
enable them to sell all of their shares in the open market.
MANAGEMENT MAY APPLY THE PROCEEDS OF THIS OFFERING TO USES THAT DO NOT INCREASE
OUR PROFITS OR MARKET VALUE AND THIS MAY CAUSE THE VALUE OF YOUR STOCK TO
DECLINE
Our management will have considerable discretion in the application of the
net proceeds of this offering, and you will not have the opportunity, as part of
your investment decision, to assess whether the proceeds are being used
appropriately. The net proceeds may be used for corporate purposes that do not
increase our profitability or our market value. Pending application of the
proceeds, they may be placed in investments that do not produce income or that
lose value.
THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON STOCK AND A PUBLIC MARKET FOR OUR
SECURITIES MAY NOT DEVELOP OR BE SUSTAINED, WHICH COULD MAKE IT MORE DIFFICULT
FOR YOU TO SELL YOUR STOCK
Prior to this offering, you could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after this offering, and the market price might fall below the initial
public offering price. The initial public offering price may bear no
relationship to the price at which the common stock will trade subsequent to the
completion of this offering. The initial public offering price will be
determined based on negotiations between us and the representatives of the
underwriters, based on factors that may not be indicative of future market
performance.
INSIDERS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER US AFTER THIS OFFERING
AND COULD DELAY OR PREVENT A CHANGE IN OUR CORPORATE CONTROL, WHICH MAY
NEGATIVELY AFFECT YOUR INVESTMENT
We anticipate that our executive officers, directors and entities
affiliated with them will, in the aggregate, beneficially own approximately 88%
of our outstanding common stock following the completion of this offering. These
stockholders, if acting together, would be able to influence significantly all
matters requiring approval by our stockholders, including the election of
directors and the approval of mergers or other business combination
transactions.
INVESTORS WILL EXPERIENCE IMMEDIATE DILUTION AND YOUR INVESTMENT MAY BE
NEGATIVELY AFFECTED
The initial public offering price of our common stock is expected to be
substantially higher than the book value per share of our outstanding common
stock immediately after the offering. Accordingly, if you purchase our common
stock in this offering, you will incur immediate dilution of approximately
$12.28 in the book value per share of our common stock from the price you pay
for our common stock. This calculation assumes that you purchased our common
stock for $14.00 per share.
PROVISIONS OF OUR CHARTER DOCUMENTS, DELAWARE LAW AND A LICENSE WE HAVE WITH A
THIRD PARTY MAY HAVE ANTI-TAKEOVER EFFECTS THAT COULD PREVENT A CHANGE IN
CONTROL WHICH COULD NEGATIVELY AFFECT YOUR INVESTMENT
Provisions of Delaware law and of our amended and restated certificate of
incorporation and bylaws could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our stockholders. For a
further description of these provisions, see "Description of Capital Stock --
Delaware Law and Certain Provisions of Our Certificate of Incorporation and
Bylaws." In addition, if we are acquired by certain specified companies, our
license from Fujitsu would be subject to termination, which could discourage
those companies from making a bid to acquire us.
19
<PAGE> 21
WE EXPECT TO EXPERIENCE SIGNIFICANT VOLATILITY IN OUR STOCK PRICE, WHICH COULD
CAUSE YOU TO LOSE ALL OR PART OF YOUR INVESTMENT
We expect the market price of our common stock to fluctuate significantly
in response to a number of company specific factors, some of which are beyond
our control, including:
- quarterly variations in our operating results;
- changes in financial estimates by securities analysts;
- changes in market valuations of Internet-related companies;
- announcements by our competitors of new products or of significant
acquisitions, strategic partnerships or joint ventures;
- any loss by us of a major customer;
- additions or departures of key management or engineering personnel;
- any deviations in our net revenues or in losses from levels expected by
securities analysts;
- future sales of our common stock; and
- volume fluctuations, which are particularly common among highly volatile
securities of Internet-related companies.
20
<PAGE> 22
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties, and other factors that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "continue" or the negative of these terms or other
comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements. We
are under no duty to update any of the forward-looking statements after the date
of this prospectus to conform these statements to actual results.
CONCURRENT SALE OF STOCK TO CORPORATE INVESTORS
Concurrently with the completion of this offering, we will sell to
Microsoft Corporation and MCI WorldCom Venture Fund, an affiliate of MCI
WorldCom, Inc., an aggregate of 769,230 shares of our common stock for $13.00
per share. Both MCI WorldCom Venture Fund and Microsoft are entitled to
registration rights for these shares. See "Description of Capital
Stock -- Registration Rights."
21
<PAGE> 23
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 6,000,000 shares of
common stock we are offering, at an assumed initial offering price of $14.00 per
share, will be approximately $76.1 million, or $87.8 million if the underwriters
exercise their over-allotment option in full, after deducting estimated
underwriting discounts and commissions and after deducting estimated offering
expenses. The primary purposes of this offering are to obtain additional equity
capital, create a public market for our common stock and facilitate future
access to public markets.
We intend to use the net proceeds we receive from the offering for general
corporate purposes, including capital expenditures and working capital. Although
we may use a portion of the net proceeds to acquire technology or businesses
that are complementary to our business, there are no current plans in this
regard. Pending their use, we plan to invest the net proceeds in short-term,
interest-bearing, investment grade securities.
DIVIDEND POLICY
We have not paid any cash dividends since our inception and do not intend
to pay any cash dividends in the foreseeable future. Our credit agreements
prohibit the payment of dividends without prior approval of the lenders.
22
<PAGE> 24
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999.
The pro forma information reflects (1) the conversion of all shares of preferred
stock outstanding as of December 31, 1999 into 35,019,134 shares of common stock
on completion of this offering, (2) the exercise of warrants to purchase 337,500
shares of common stock at an exercise price of $4.00 and (3) the sale of 769,230
shares of common stock to two corporate investors at a price of $13.00 per share
for an aggregate of $9,999,990 in a private placement that will close
contemporaneously with this offering. The pro forma as adjusted information also
reflects our receipt of the net proceeds from the sale of the shares of common
stock in this offering, at an assumed initial public offering price of $14.00
per share, after deducting the estimated underwriting discounts and commissions
and estimated offering expenses.
The outstanding share information excludes:
- 3,401,427 shares of common stock issuable on exercise of outstanding
options as of December 31, 1999 with a weighted average exercise price of
$1.40 per share;
- 29,347 shares of common stock issuable upon exercise of an outstanding
warrant with an exercise price of $3.83 per share;
- 1,245,117 shares of stock available for future grants under our 1998
Stock Plan as of December 31, 1999 and an additional 7,500,000 shares of
stock reserved for issuance under our 1998 Stock Plan subsequent to
December 31, 1999; and
- 525,000 shares of stock to be reserved for issuance under our Employee
Stock Purchase Plan that will become effective upon the closing of this
offering.
- 300,000 shares of stock to be reserved for issuance under our 1999
Director Option Plan that will become effective upon the closing of this
offering.
You should read this table with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
the related notes. See "Management -- Employee and Director Benefit Plans."
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------- ---------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
Long-term obligations, excluding current portion......... $ 1,320 $ 1,320 $ 1,320
Redeemable convertible preferred stock, $.001 par value
per share, 38,100,000 shares authorized, 35,019,134
shares issued and outstanding, actual; no shares issued
and outstanding, pro forma and no shares authorized,
issued and outstanding, pro forma as adjusted............ 30,408 -- --
Other stockholders' equity (deficit):
Preferred stock, $.001 par value, none authorized,
issued and outstanding actual and pro forma;
10,000,000 shares authorized, no shares issued and
outstanding, pro forma as adjusted.................. -- -- --
Common stock, $.001 par value per share, 75,000,000
shares authorized, actual and pro forma, 300,000,000
shares authorized, pro forma as adjusted; 20,403,456
shares issued and outstanding, actual; 56,529,320
shares issued and outstanding, pro forma; 62,529,320
shares issued and outstanding, pro forma as
adjusted............................................ 20 57 63
Additional paid-in capital............................. 93,007 134,728 210,817
Notes receivable from stockholders..................... (2,633) (2,633) (2,633)
Deferred stock compensation............................ (50,689) (50,689) (50,689)
Accumulated deficit.................................... (50,203) (50,203) (50,203)
-------- -------- --------
Total other stockholders' equity (deficit).......... (10,498) 31,260 107,355
-------- -------- --------
Total capitalization.............................. $ 21,230 $ 32,580 $108,675
======== ======== ========
</TABLE>
23
<PAGE> 25
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the initial public offering price per share of
our common stock and the pro forma net tangible book value per share of our
common stock after this offering. We calculate pro forma net tangible book value
per share by dividing the net tangible book value, tangible assets less total
liabilities, by the number of outstanding shares of common stock.
Our pro forma net tangible book value at December 31, 1999, was $31.3
million, or $.55 per share, based on 56,529,320 shares of our common stock
outstanding after giving effect to the conversion of all outstanding shares of
our preferred stock into common stock upon the closing of this offering, the
exercise of warrants to purchase 337,500 shares of common stock at an exercise
price of $4.00 per share prior to this offering, and the sale of 769,230 shares
of common stock to two corporate investors at $13.00 per share, for an aggregate
of $9,999,990 in a private placement contemporaneously with this offering.
After giving effect to the sale of the 6,000,000 shares of common stock by
us at an assumed initial public offering price of $14.00 per share, less the
estimated underwriting discounts and commissions and our estimated offering
expenses, our pro forma net tangible book value at December 31, 1999, would be
$107.4 million, or $1.72 per share. This represents an immediate increase in the
pro forma net tangible book value of $1.17 per share to existing stockholders
and an immediate dilution of $12.28 per share to new investors purchasing shares
at the assumed initial public offering price of $14.00 per share. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $14.00
Pro forma net tangible book value per share at December
31, 1999............................................... $ .55
Increase per share attributable to new investors.......... 1.17
-----
Pro forma net tangible book value per share after this
offering.................................................. 1.72
------
Dilution per share to new investors in this offering........ $12.28
======
</TABLE>
The following table shows on a pro forma basis at December 31, 1999, after
giving effect to the conversion of all outstanding shares of our preferred stock
into an aggregate of 35,019,134 shares of common stock upon the closing of this
offering, the exercise of warrants to purchase 337,500 shares of common stock at
an exercise price of $4.00 per share prior to this offering, and the sale of
769,230 shares of common stock to two corporate investors at $13.00 per share,
for an aggregate of $9,999,990 in a private placement contemporaneously with
this offering. The table also shows the number of shares of common stock
purchased from us, the total consideration paid to us and the average price paid
per share by existing stockholders and by new investors purchasing common stock
in this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------ -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 56,529,320 90.4% $ 44,455,000 34.6% $ .79
New investors................ 6,000,000 9.6 84,000,000 65.4 14.00
---------- ----- ------------ ------
Total................... 62,529,320 100.0% $128,455,000 100.0%
========== ===== ============ ======
</TABLE>
The above information is based on shares outstanding as of December 31,
1999. It excludes 3,401,427 shares of common stock reserved for issuance upon
exercise of outstanding options at December 31, 1999 with a weighted average
exercise price of $1.40 per share and 29,347 shares of common stock issuable
upon exercise of an outstanding warrant with an exercise price of $3.83 per
share. It also excludes 8,745,117 shares available for issuance under our 1998
Stock Plan, including 7,500,000 shares authorized in January 2000, 1999 Employee
Stock Purchase Plan and 1999 Director Stock Option Plan. Assuming the exercise
of all options and warrants outstanding as of December 31, 1999, our pro forma
net tangible book value at December 31, 1999 would be $36.1 million, or $.60 per
share, which would represent an immediate increase in the pro forma net tangible
book value of $1.10 per share to existing stockholders and an immediate dilution
of $12.30 per share to new investors.
24
<PAGE> 26
SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read together
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the related notes
included elsewhere in this prospectus. The consolidated statement of operations
data set forth below for the period from October 24, 1997 (inception) to June
30, 1998, for the year ended June 30, 1999 and for the six months ended December
31, 1999 and the consolidated balance sheet data as of June 30, 1998, June 30,
1999 and December 31, 1999 have been derived from our consolidated financial
statements included elsewhere in this prospectus, which have been audited by
Ernst & Young LLP, independent auditors. In our opinion, all necessary
adjustments, consisting only of normal recurring adjustments, have been included
to present fairly the unaudited results when read in conjunction with the
consolidated audited financial statements and the related notes appearing
elsewhere in this prospectus. The historical results are not necessarily
indicative of results to be expected for any future period. For an explanation
of the determination of the shares used to compute net loss per share, see note
2 of notes to consolidated financial statements.
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
OCTOBER 24, 1997 ---------------------------
(INCEPTION) TO YEAR ENDED DECEMBER 31, DECEMBER 31,
JUNE 30, 1998 JUNE 30, 1999 1998 1999
---------------- ------------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenue.................................. $ -- $ 510 $ -- $ 10,916
Cost of revenue.............................. -- 531 -- 8,194
------- -------- -------- --------
Gross profit (loss)........................ -- (21) -- 2,722
Operating expenses:
Research and development................... 515 4,086 1,427 2,988
Sales and marketing........................ 125 956 265 1,676
General and administrative................. 131 723 244 2,129
Stock compensation......................... 362 3,464 673 15,697
------- -------- -------- --------
Total operating expenses................ 1,133 9,229 2,609 22,490
------- -------- -------- --------
Loss from operations......................... (1,133) (9,250) (2,609) (19,768)
Other income (expense), net.................. (4) 29 2 (26)
------- -------- -------- --------
Net loss..................................... (1,137) (9,221) (2,607) (19,794)
Preferred stock accretion.................... -- -- -- (20,051)
------- -------- -------- --------
Net loss attributable to common
stockholders............................... $(1,137) $ (9,221) $ (2,607) $(39,845)
======= ======== ======== ========
Basic and diluted net loss per common
share...................................... $ (7.20) $ (4.97) $ (4.14) $ (6.41)
Weighted-average shares used in computing
basic and diluted net loss per common
share...................................... 158 1,857 630 6,215
Pro forma basic and diluted net loss per
common share (unaudited)................... $ (.39) $ (1.02)
Weighted-average shares used in computing pro
forma basic and diluted net loss per common
share (unaudited).......................... 23,628 39,110
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF
------------------ DECEMBER 31,
1998 1999 1999
------ -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $2,874 $ 3,724 $ 14,379
Working capital............................................. 2,637 2,660 14,313
Total assets................................................ 3,339 6,816 28,152
Long-term obligations, excluding current portion............ 341 563 1,320
Redeemable convertible preferred stock...................... 3,529 10,357 30,408
Total other stockholders' equity (deficit).................. (805) (6,534) (10,498)
</TABLE>
25
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of operations together with "Selected Financial Data" and
our consolidated financial statements and related notes appearing elsewhere in
this prospectus. This discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions. The actual results
may differ materially from those anticipated in these forward-looking statements
as a result of certain factors, including, but not limited to, those presented
under "Risk Factors" and elsewhere in this prospectus.
OVERVIEW
Avanex designs, manufactures and markets fiber optic-based products, known
as photonic processors, which are designed to increase the performance of
optical networks. We were founded in October 1997, and through April 1999, we
were primarily engaged in research and development activities and in hiring
additional employees. A substantial portion of our operating expenses during
this period was related to the design and development of our photonic processors
and the testing of prototype designs. We began making volume shipments of our
initial product during the quarter ended October 1, 1999.
Our revenues currently are derived from sales of two products, PowerFilter
and PowerMux. We commenced shipments of our PowerFilter in April 1999. To date,
we have generated nearly all of our limited product revenues from sales of
PowerFilter to a limited number of customers. Sales of PowerFilter accounted for
95% of our net revenue in the quarter ended June 30, 1999 and 99% of our net
revenue in the quarter ended October 1, 1999 and the quarter ended December 31,
1999. We first shipped PowerMux in April 1999. In September 1999, we began
shipping beta test units of our PowerShaper product.
To date, we have generated a substantial portion of our revenues from a
limited number of customers. We have focused our initial sales and marketing
efforts primarily on large communications service providers and optical systems
manufacturers. In the fiscal year ended June 30, 1999, Osicom accounted for 33%
of our net revenue, MCI WorldCom accounted for 32% of net revenue and Hitachi
accounted for 29% of net revenue. Sales to MCI WorldCom accounted for 92% of our
total net revenue for the quarter ended October 1, 1999 and 85% of net revenue
for the quarter ended December 31, 1999. While we are seeking to diversify our
customer base, we anticipate that our operating results for any given period
will continue to depend on a small number of customers.
The market for photonic processors is new and evolving and the volume and
timing of orders are difficult to predict. A customer's decision to purchase our
products typically involves a commitment of its resources and a lengthy
evaluation and product qualification process. This initial evaluation and
product qualification process typically takes several months and includes
technical evaluation, integration, testing, planning and implementation into the
equipment design. Long sales and implementation cycles for our products, as well
as the practice of customers in the communications industry to sporadically
place large orders with short lead times, may cause our revenues, gross margins
and operating results to vary significantly and unexpectedly from quarter to
quarter.
We market and sell our products primarily through our direct sales and
marketing organization. To date, most of our direct sales have been in North
America. However, we have recently launched sales and marketing efforts
internationally through an independent sales representative in Italy and two
distributors in Japan.
We are engaged in continuing efforts to expand our manufacturing
capabilities. In November 1999, we moved from an approximately 14,000 square
foot facility to an approximately 54,000 square foot facility in Fremont,
California. We increased the number of our manufacturing employees from 36 as of
June 30, 1999 to 88 as of October 1, 1999 and to 163 as of December 31, 1999. In
addition, we have entered into a contract manufacturing relationship with CMI to
manufacture and supply fiber optic subcomponents from its manufacturing facility
in China. Currently, we perform manufacturing, final assembly, testing, quality
26
<PAGE> 28
assurance, manufacturing engineering, documentation control and repairs of our
products at our Fremont facility.
We generally recognize revenue when we ship products, some of which are
evaluation units, to our customers and there are no significant uncertainties
with respect to customer acceptance. Evaluation units consist of prototype units
sent to customers for evaluation. The customers have the right of return through
the end of the evaluation period. We recognize revenue on these shipments at the
end of the evaluation period if the units have not been returned. We accrue for
estimated warranty costs at the time related revenue is recognized. Currently,
all of our product sales provide for pricing and payment in U.S. dollars.
Our cost of revenue consists of raw material, direct labor and
manufacturing overhead. In addition, we rely on a single or limited source of
suppliers to manufacture some key components used in our products and, in the
past, the outsourcing of some subassemblies. A significant portion of our cost
of revenue is related to these temporary outsourcing arrangements.
Our gross margins will primarily be affected by the following factors:
- changes in our pricing policies and those of our competitors;
- mix of products sold;
- mix of sales channels through which our products are sold;
- mix of domestic and international sales;
- costs incurred in establishing additional manufacturing lines and
facilities; and
- changes in manufacturing volume.
We expect cost of revenue, as a percentage of revenue, to fluctuate from
period to period.
Research and development expenses consist primarily of salaries and related
personnel costs, fees paid to consultants and outside service providers,
non-recurring engineering charges and prototype costs related to the design,
development, testing, pre-manufacturing and enhancement of our products. We
expense our research and development costs as they are incurred. We believe that
research and development is critical to our strategic product development
objectives. We further believe that, in order to meet the changing requirements
of our customers, we will need to fund investments in several development
projects in parallel. As a result, we expect our research and development
expenses to increase in dollar amount in the future.
Sales and marketing expenses consist primarily of marketing, sales,
customer service and application engineering support, as well as costs
associated with promotional and other marketing expenses. We intend to expand
our direct and indirect sales operations substantially, both domestically and
internationally, in order to increase market awareness of our products. We
expect that sales and marketing expenses will increase substantially in dollar
amount over the next year as we hire additional sales and marketing personnel,
initiate additional marketing programs to support our products and establish
sales offices in additional domestic and international locations. We also expect
to significantly expand our customer service and support organization.
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, accounting, and human resources
personnel, allocated facilities, recruiting expenses, professional fees and
other corporate expenses. We expect general and administrative expenses to
increase in dollar amount as we add personnel and incur additional costs related
to the growth of our business and our operation as a public company.
Stock compensation expense is a result of us granting stock purchase rights
or stock options to our employees, directors or consultants with purchase or
exercise prices per share subsequently determined to be below the deemed fair
value per share of our common stock for accounting purposes at the dates of
purchase or grant. We are amortizing deferred stock compensation over the period
in which our right to repurchase restricted stock purchase rights lapse or over
the vesting period of the applicable options, which, in each case, is generally
a maximum of four years. We expect to record additional deferred stock
compensation expense for the quarter ended March 31, 2000.
27
<PAGE> 29
In connection with the sale of Series D preferred stock in September and
October 1999 to existing preferred stockholders, we recorded a non-cash charge
of $20.1 million for the six months ended December 31, 1999 to accrete the value
of the Series D preferred stock to its deemed fair value under applicable
accounting rules. This non-cash charge was recorded as an increase in
accumulated deficit with a corresponding credit to additional paid-in capital
and was recognized at the date of issuance, which was the period in which the
shares became eligible for conversion.
In connection with the sale of 769,230 shares of common stock to two
corporate investors, subject to completion of our initial public offering, we
will record an accretion charge equal to the difference between the initial
public offering price and $13.00 per share multiplied by 769,230 shares of
common stock.
Despite growing revenue, we have not been profitable for any quarter since
October 24, 1997 (inception). As of December 31, 1999, we had an accumulated
deficit of $50.2 million. These losses have resulted primarily from developing
our products, increasing manufacturing capacity, promoting brand recognition,
developing our sales channels, establishing our management team and amortizing
of deferred stock compensation. As of December 31, 1999, we had net operating
loss carryforwards for federal income tax purposes of approximately $9.0
million, which expire in years 2013 through 2020.
RESULTS OF OPERATIONS
Because we first began shipping our products in April 1999, we believe our
results of operations for the periods prior to that time are not meaningful, as
we were a development stage company. Our results of operations for these periods
primarily reflect research and development of our products.
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999
Net Revenue. Net revenue for the six months ended December 31, 1999 was
$10.9 million. One customer, MCI WorldCom, which placed a large order in July
1999, accounted for 88% of net revenue while revenues from the other large
customers remained relatively constant in dollar amount. We did not have any
revenue in the comparable period ended December 31, 1998.
Cost of Revenue. Cost of revenue for the six months ended December 31, 1999
was $8.2 million. Cost of revenue for the six months ended December 31, 1999 as
a percentage of net revenue was 75%. Because we had no revenue in the six months
ended December 31, 1999, we had no cost of revenue during that period.
Research and Development. Research and development expenses for the six
months ended December 31, 1999 were $3.0 million, or 27.4% of net revenue.
Research and development expenses for the six months ended December 31, 1998
were $1.4 million. The increase of $1.6 million over the comparable period in
1998 was primarily due to the $856,000 increase in personnel-related costs, the
$298,000 increase in prototype expenses for PowerMux and PowerShaper and costs
for other development projects and the $328,000 increase in professional
services. Research and development personnel increased by 54 employees from
December 31, 1998 to December 31, 1999. We expect our research and development
expenses to increase in the future.
Sales and Marketing. Sales and marketing expenses for the six months ended
December 31, 1999 were $1.7 million, or 15.4% of net revenue. Sales and
marketing expenses for the six months ended December 31, 1998 were $265,000. The
increase of $1.4 million over the comparable period in 1998 was due to the
$313,000 increase in sales and marketing personnel and related costs, the
$447,000 increase in commission expenses and the $630,000 increase in trade
show, advertising and other customer-related costs. We expect our sales and
marketing expenses to increase in absolute dollar amount, but to decline as a
percentage of net revenue, in the future to support our existing customers and
to acquire new customers.
General and Administrative. General and administrative expenses for the six
months ended December 31, 1999 were $2.1 million, or 19.5% of net revenue.
General and administrative expenses for the six months ended December 31, 1998
were $244,000. The increase of $1.9 million over the comparable period in 1998
was primarily due to the $632,000 increase in personnel and related costs and
the $506,000 increase in professional services for information systems, legal
and facilities management. Additionally, $298,000 of bad
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<PAGE> 30
debt provision was incurred in the six months ended December 31, 1999, while
none was incurred in the comparable period in 1998. We expect our general and
administrative expenses to increase in absolute dollar amount in the future, but
to decline as a percentage of net revenue.
Stock Compensation. Stock compensation expense for the six months ended
December 31, 1999 was $15.7 million, an increase of $15.0 million over the
comparable period in 1998. From inception through December 31, 1999, we have
expensed a total of $19.5 million of stock compensation, leaving an unamortized
balance of $50.7 million on our December 31, 1999 consolidated balance sheet.
This increase was due to additional employees and the granting of stock options
and stock purchase rights.
Other Income (Expense), Net. Other income (expense) for the six months
ended December 31, 1999 was $26,000 of expense as compared to $2,000 of income
for the comparable period in 1998. This was primarily due to interest expense
associated with borrowings under our line of credit. The expenses are offset by
higher interest income due to larger cash balances from the proceeds of our
preferred stock financing in September and October 1999.
YEARS ENDED JUNE 30, 1998 AND 1999
For ease of reference, we refer to the period from October 24, 1997
(inception) through June 30, 1998 as fiscal 1998 and to the fiscal year ended
June 30, 1999 as fiscal 1999.
Net Revenue. We did not recognize any revenue until the quarter ended June
30, 1999. Net revenue for fiscal 1999 was $510,000. In fiscal 1999, Osicom
accounted for 33% of net revenue, MCI WorldCom accounted for 32% of net revenue
and Hitachi accounted for 29% of net revenue.
Cost of Revenue. Cost of revenue for fiscal 1999 was $531,000. Cost of
revenue for fiscal 1999 included higher component and manufacturing costs
associated with our lower initial production volume, as well as overhead costs
that were spread over a relatively low number of units produced. As a percentage
of net revenue, cost of revenue for fiscal 1999 was 104%.
Research and Development. Research and development expenses for fiscal 1999
were $4.1 million, or 44% of total operating expenses. Research and development
expenses for fiscal 1998 were $515,000, or 45% of total operating expenses. The
increase in dollar amount in fiscal 1999 over fiscal 1998 was primarily due to
the significant increase in personnel and related costs, which amounted to an
increase of $855,000 over fiscal 1998, prototype expenses for PowerMux,
PowerShaper and a network testing model, which amounted to an increase of
$621,000 over fiscal 1998, and process development for PowerFilter, which
amounted to an increase of $1.7 million over fiscal 1998. Research and
development personnel at the end of fiscal 1999 increased by 18 employees over
the end of fiscal 1998.
Sales and Marketing. Sales and marketing expenses for fiscal 1999 were
$956,000, or 10% of total operating expenses. Sales and marketing expenses for
fiscal 1998 were $125,000, or 11% of total operating expenses. This increase in
dollar amount was primarily due to an increase in the number of sales and
marketing personnel, which increased to two employees from one employee over
fiscal 1998, sales commissions, which amounted to an increase of $195,000 over
fiscal 1998 when no sales commissions were paid, increased marketing expenses
and other customer-related costs, which amounted to an increase of $574,000 over
fiscal 1998 when no marketing expenses were incurred.
General and Administrative. General and administrative expenses for fiscal
1999 were $723,000, or 8% of total operating expenses. General and
administrative expenses for fiscal 1998 were $131,000, or 12% of total operating
expenses. This increase was primarily due to an increase in the number of
general and administrative personnel, which increased by four employees over
fiscal 1998, and increased legal, accounting, recruiting and facilities costs
incurred in connection with our growing business activities, which amounted to
an increase of $318,000 over fiscal 1998.
Stock Compensation. Stock compensation expense for fiscal 1999 was $3.5
million, or 38% of total operating expenses. Stock compensation expense for
fiscal 1998 was $362,000, or 32% of total operating
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<PAGE> 31
expenses. This increase was due to additional employees and additional grants of
stock options and stock purchase rights.
Other Income (Expense), Net. Other income (expense), net, consists
primarily of interest on our cash investments and interest expense related to
our financing obligations. Other income (expense) for fiscal 1999 was $29,000 in
income, as compared to $4,000 in expense for fiscal 1998. This was caused by an
increase in interest income due to larger cash balances resulting from the
proceeds from the sale of our preferred stock in private financings, which was
partially offset by interest charges on capital lease obligations and bank debt.
QUARTERLY RESULTS OF OPERATIONS
The following table presents our operating results for the last six
quarters. The information for each of these quarters is unaudited but has been
prepared on the same basis as the audited consolidated financial statements
appearing elsewhere in this prospectus. In the opinion of management, all
necessary adjustments, consisting only of normal recurring adjustments, have
been included to present fairly the unaudited quarterly results when read in
conjunction with the audited consolidated financial statements and the related
notes appearing elsewhere in this prospectus. These operating results are not
necessarily indicative of the results of any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, OCTOBER 1, DECEMBER 31,
1998 1998 1999 1999 1999 1999
------------- ------------ --------- -------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenue................... $ -- $ -- $ -- $ 510 $ 4,417 $ 6,499
Cost of revenue............... -- -- -- 531 3,431 4,763
------- ------- ------- ------- -------- --------
Gross profit (loss)........... -- -- -- (21) 986 1,736
Operating expenses:
Research and development.... 473 954 1,432 1,227 950 2,038
Sales and marketing......... 116 149 203 488 714 962
General and
administrative........... 132 112 150 329 614 1,515
Stock compensation.......... 323 350 746 2,045 6,107 9,590
------- ------- ------- ------- -------- --------
Total operating
expenses.......... 1,044 1,565 2,531 4,089 8,385 14,105
------- ------- ------- ------- -------- --------
Loss from operations.......... (1,044) (1,565) (2,531) (4,110) (7,399) (12,369)
Other income (expense), net... 7 (5) 21 6 (71) 45
------- ------- ------- ------- -------- --------
Net loss...................... (1,037) (1,570) (2,510) (4,104) (7,470) (12,324)
Preferred stock accretion..... -- -- -- -- (14,961) (5,090)
------- ------- ------- ------- -------- --------
Net loss attributable to
common stockholders......... $(1,037) $(1,570) $(2,510) $(4,104) $(22,431) $(17,414)
======= ======= ======= ======= ======== ========
</TABLE>
Net Revenue. Our first volume shipments of our initial product began in the
quarter ended October 1, 1999. Net revenue for the quarter ended June 30, 1999
was $510,000, for the quarter ended October 1, 1999 was $4.4 million and for the
quarter ended December 31, 1999 was $6.5 million. Net revenue increased
primarily due to the sales of our PowerFilter product to MCI WorldCom for
deployment in its network. We shipped products and evaluation units to five
customers in the quarter ended June 30, 1999, seven customers in the quarter
ended October 1, 1999 and 12 customers in the quarter ended December 31, 1999.
Evaluation units consist of prototype units sent to customers for evaluation.
The customers have the right of return through the end of the evaluation period.
We recognize revenue on these shipments at the end of the evaluation period if
the units have not been returned.
Cost of Revenue. Cost of revenue for the quarter ended June 30, 1999 was
$531,000, for the quarter ended October 1, 1999 was $3.4 million and for the
quarter ended December 31, 1999 was $4.8 million. As a percentage of net
revenue, cost of revenue for the quarter ended June 30, 1999 was 104%, compared
to 78% for the quarter ended October 1, 1999 and 73% for the quarter ended
December 31, 1999. This decrease in the
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cost of revenue as a percentage was primarily attributable to fixed
manufacturing costs being allocated over a larger revenue base and the decreased
cost of materials associated with the expansion of our manufacturing capacity to
produce subcomponents internally.
Research and Development. Research and development expenses have fluctuated
over the last six quarters. In each of the quarters ended September 30, 1998,
December 31, 1998 and March 31, 1999, research and development expenses
increased in absolute dollar amount primarily due to the increase in personnel
and related costs, prototype expenses for our PowerMux and PowerShaper products
and process development for our PowerFilter product. In each of the quarters
ended June 30, 1999 and October 1, 1999, research and development expenses
decreased in dollar amount due to the completion of a network testing model and
lower process development and prototyping costs for our PowerFilter product as
this product was gradually transitioned to manufacturing. In the quarter ended
December 31, 1999, research and development expenses increased in dollar amount
due to significant increases in personnel and related costs, the commencement of
manufacturing prototypes for PowerMux and development costs for the PowerShaper
and other projects.
Sales and Marketing. Sales and marketing expenses increased in each of the
last six quarters. These increases were primarily due to an increase in the
number of sales and marketing personnel, sales commissions, marketing expenses
and other customer-related costs.
General and Administrative. General and administrative expenses have
generally increased over the last six quarters. General and administrative
expenses increased in the quarters ended October 1, 1999, and December 31, 1999
primarily due to an increase in the number of personnel, costs related to the
move to a new and larger facility and costs related to building an
infrastructure for a public company, which includes increased legal, accounting,
recruiting and information systems costs.
Our revenues and operating results are likely to vary significantly from
quarter to quarter. A number of factors are likely to cause these variations,
including:
- fluctuations in demand for and sales of our products, which will depend
on the speed and magnitude of the transition to an all-optical network;
- cancellations of orders and shipment rescheduling;
- our ability to significantly expand our manufacturing capacity at our new
facility in Fremont, California, which commenced operations in November
1999;
- the ability of Concord Micro-Optics, Inc., or CMI, to timely produce and
deliver subcomponents from its facility in China in the quantity and of
the quality we require;
- the practice of companies in the communications industry to sporadically
place large orders with short lead times;
- competitive factors, including introductions of new products and product
enhancements by potential competitors, entry of new competitors into the
photonic processor market, including Lucent Technologies, Nortel Networks
and Fujitsu, and pricing pressures;
- our ability to develop, introduce, manufacture and ship new and enhanced
fiber optic products in a timely manner without defects;
- our ability to control expenses, particularly in light of our limited
operating history;
- availability of components for our products and increases in the price of
these components;
- mix of our products sold; and
- economic conditions specific to the communications and related
industries.
A high percentage of our expenses, including those related to
manufacturing, engineering, sales and marketing, research and development and
general and administrative functions, are essentially fixed in the short term.
As a result, if we experience delays in generating and recognizing revenue, our
quarterly operating results are likely to be seriously harmed. As we expand our
manufacturing capacity, we will incur expenses in
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one quarter relating to the expansion and related yield issues that may not
result in offsetting revenue until a subsequent quarter. New product
introductions can also result in a mismatching of research and development
expenses and sales and marketing expenses that are incurred in one quarter with
revenues that are not received until a subsequent quarter when the new product
is introduced. If growth in our revenues does not outpace the increase in our
expenses, our results of operations could be seriously harmed.
Due to these and other factors, we believe that quarter-to-quarter
comparisons of our operating results will not be meaningful. You should not rely
on our results for one quarter as any indication of our future performance. It
is likely that in future quarters our operating results may be below the
expectations of public market analysts or investors. If this occurs, the price
of our common stock would likely decrease.
LIQUIDITY AND CAPITAL RESOURCES
From inception on October 24, 1997 through December 31, 1999, we have
financed our operations primarily through private sales of approximately $30.4
million of convertible preferred stock. We have also financed our operations
through bank borrowings as well as through equipment lease financing. As of
December 31, 1999, we had outstanding equipment lease financing and bank
borrowings of $3.7 million.
At December 31, 1999, we had cash, cash equivalents and short-term
investments of $14.4 million, an increase from $3.7 million at June 30, 1999,
and $2.9 million at June 30, 1998. Most of the increase came from financing
activities, offset by cash used in operations and, to a lesser extent, the
purchase of equipment. The increase was primarily due to the receipt of $26.9
million in proceeds from the sale of preferred stock in February, September and
October 1999.
Cash used in operating activities was $590,000 in fiscal 1998, $5.4 million
in fiscal 1999 and $6.9 million for the six months ended December 31, 1999. The
increase was primarily due to the increase in our net loss from $1.1 million in
fiscal 1998, to $9.2 million in fiscal 1999, to $19.8 million for the six months
ended December 31, 1999, and, to a lesser extent, inventory purchases and
increased accounts receivable. This was offset in part by increased accounts
payable, accrued expenses and non-cash charges.
Cash used in investing activities was $301,000 in fiscal 1998, $2.8 million
in fiscal 1999 and $13.7 million for the six months ended December 31, 1999,
which was primarily used for the investment in marketable securities, production
equipment, research and development equipment, computers and facilities to
support the expansion of our operations.
We generated $3.8 million in cash from financing activities in fiscal 1998,
$7.1 million in fiscal 1999 and $21.1 million in the six months ended December
31, 1999, primarily from private sales of convertible preferred stock and
borrowings under revolving lines of credit. We financed capital purchases
primarily through leases or equipment credit lines. In addition, we had
capitalized lease obligations outstanding of $123,000 at June 30, 1998, $768,000
at June 30, 1999 and $1.8 million at December 31, 1999. In July 1999, we
obtained a revolving credit line from a financial institution, which allows for
maximum borrowings of up to $3.8 million at an interest rate equal to the prime
rate plus .75%. During the six months ended December 31, 1999, we drew down $2.2
million under this facility to pay off in full a $735,000 outstanding bank debt
and for working capital needs. This line of credit requires that we comply with
specified covenants.
As of December 31, 1999, we did not have any material commitments for
capital expenditures. However, we expect to incur capital expenditures as we
expand our manufacturing operations in the near future. Our capital requirements
also depend on market acceptance of our products, the timing and extent of new
product introductions and delivery, and the need for us to develop, market, sell
and support our products on a worldwide basis. From time to time, we may also
consider the acquisition of, or evaluate investments in, products and businesses
complementary to our business. Any acquisition or investment may require
additional capital. Although we believe that the net proceeds from this
offering, together with our current cash balances, will be sufficient to fund
our operations for at least the next 12 months, we cannot assure you that we
will not seek additional funds through public or private equity financing or
from other sources within this time frame or that additional funding, if needed,
will be available on terms acceptable to us, or at all. We cannot forecast our
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liquidity position for more than a 12-month period, given the growth of our
business, particularly during the last six months, and the emerging nature of
our market.
YEAR 2000 COMPLIANCE
Impact of the Year 2000 Computer Problem. The year 2000 computer problem
refers to the potential for system and processing failures of date-related data
as a result of computer-controlled systems using two digits rather than four to
define the applicable year. For example, computer programs that have
date-sensitive software may recognize a date represented as "00" as the year
1900 rather than the year 2000. Despite the passage of January 1, 2000, this
could still result in a system failure or miscalculation causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
State of Readiness of Our Products. The year 2000 problem does not directly
affect our passive optical products. However, our products are generally
integrated into larger networks involving sophisticated hardware and software
products supplied by other vendors. Each of our customers' networks involves
different combinations of third party products. We cannot evaluate whether all
of their products are year 2000 compliant. We may face disruption in our
business based on year 2000 problems in other companies' products or based on
issues arising from the integration of multiple products within the overall
network, although we have not experienced any year 2000 problems to date.
State of Readiness of Our Internal Systems. Our business may be affected by
year 2000 issues related to non-compliant internal systems developed by us or by
third-party vendors. We are in the process of implementing new enterprise
resource planning software, which we believe is year 2000 compliant. Although we
did not survey our third party vendors, we are not aware of any year 2000
problem relating to any of our material internal systems. We have not tested and
do not plan to test our systems for year 2000 compliance. We do not believe that
we have any significant systems that contain embedded chips that are not year
2000 compliant.
Our internal operations and business also depend upon the
computer-controlled systems of suppliers, customers, service providers and third
parties, including our Internet-based management information system. We believe
that, absent a systemic failure outside our control, such as a prolonged loss of
electrical or telephone service, year 2000 problems at these third parties will
not have a material impact on our operations.
If our suppliers, vendors, distributors, customers and service providers
fail to correct any year 2000 problems that may yet occur, these failures could
result in an interruption in, or a failure of, our normal business activities or
operations. If a year 2000 problem occurs, it may be difficult to determine
which party's products have caused the problem. These failures could interrupt
our operations and damage our relationships with our customers. Due to the
general uncertainty inherent in the year 2000 problem with regard to our third-
party suppliers and vendors, we continue to be unable to determine at this time
whether year 2000 failures could harm our business and our financial results.
Year 2000 issues may have affected and may continue to affect our
customers' purchasing plans if they need to expend significant resources to fix
their existing systems to become year 2000 compliant. This situation may reduce
funds available to purchase our products.
Cost. We do not anticipate that costs associated with remediating our
internal systems will be significant.
Risks. Although to date we have not experienced any year 2000 problems with
regard to our internal systems, any failure of our internal systems to be year
2000 compliant could temporarily prevent us from processing orders, issuing
invoices and developing products and could require us to devote significant
resources to correcting these problems. Due to the general uncertainty inherent
in the year 2000 computer problem, resulting from the uncertainty of the year
2000 readiness of third-party suppliers and vendors, we are unable to determine
at this time whether the consequences of year 2000 failures will have a material
impact on our business, results of operations or financial condition.
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Contingency Plans. We have not developed a contingency plan to address any
situation that may result if we are unable to solve our year 2000 issues, and we
do not anticipate the need to do so. If we are forced to use a contingency plan,
the failure to have one could harm our business.
Disclaimer. The discussion of our expectations relating to year 2000
compliance are forward-looking statements. Our ability to achieve year 2000
compliance and the level of associated incremental costs could be adversely
affected by, among other things, availability and cost of programming and
testing resources, third party suppliers' ability to modify software and other
unanticipated problems.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because we do
not currently hold any derivative instruments or engage in hedging activities,
we expect the adoption of SFAS No. 133 will not have a material impact on our
financial position, results of operations or cash flows. We will be required to
adopt SFAS No. 133 in fiscal 2001.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to financial market risk, including changes in interest rates
and marketable equity security prices, relates primarily to our investment
portfolio and outstanding debt obligations. We typically do not attempt to
reduce or eliminate our market exposure on our investment securities because a
substantial majority of our investments are in fixed-rate short-term securities.
We do not have any derivative financial instruments. Due to the short-term
nature of our investments, we believe that there is no material risk. In
addition, substantially all of our outstanding indebtedness is either fixed-rate
debt or short-term variable-rate debt. Therefore, no quantitative tabular
disclosures are required.
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BUSINESS
OVERVIEW
Avanex designs, manufactures and markets fiber optic-based products, known
as photonic processors, which are miniaturized, or micro-optic, devices that
perform optical signal processing and are designed to increase the performance
of optical networks. Our photonic processors offer communications service
providers and optical systems manufacturers greater levels of performance and
miniaturization, reduced complexity and increased cost-effectiveness as compared
to current alternatives. We believe photonic processors will enable the next
generation, all-optical network, which is necessary to support the increasing
demand for bandwidth. Our photonic processors enable communications service
providers and optical systems manufacturers to cost-effectively maximize the
capacity of optical networks. Our products are designed to optimize optical
network performance, provide a flexible, scalable and cost-effective optical
transport solution, and facilitate the deployment of next generation service and
applications such as virtual private networking and business-to-business
electronic commerce.
Our objective is to be the leading provider of innovative fiber optic-based
solutions that enable our customers to deploy and optimize fiber optic networks.
In order to achieve this objective, our strategy is to leverage our technology
leadership and expertise to develop new products and expand customer
relationships. We also intend to expand our manufacturing facilities, automate
our manufacturing processes and extend awareness of our brand. Our marketing
strategy is currently based on a push-pull approach in which we target optical
systems manufacturers and communications service providers. With our push
approach, we target optical systems manufacturers that can buy our products and
then resell them as part of their optical solutions. Using our pull approach, we
target communications service providers that can create demand for our products
by directly purchasing, or requiring that their systems incorporate, our
products. We believe this approach will drive demand for our products and help
enable the transition to the next-generation, all-optical network.
INDUSTRY BACKGROUND
INCREASE IN BANDWIDTH DEMAND
The proliferation of the Internet and the increase in activities such as
electronic commerce, the transmission of large data files, Internet-based
businesses and telecommuting have caused a significant increase in the volume of
traffic across the communications infrastructure. According to Ryan, Hankin &
Kent, a leading market research and consulting firm, Internet traffic will
increase from 350,000 terabytes, or trillions of bytes, per month at the end of
1999, to over 15 million terabytes per month in 2003. This market research
suggests that, at the end of 1999, the volume of Internet data traffic will have
surpassed the volume of voice traffic. With this increase in traffic,
communications vendors have focused on delivering improvements that provide more
network bandwidth and increased transmission speed. Consequently, the increase
in performance of communications networks, including the Internet, has attracted
new users, more applications and a greater demand for bandwidth. Thus, the need
for additional network capacity and performance has created a business
environment in which network improvements and increases in available bandwidth
are constantly matched by advances in the applications and services generating
this demand.
EVOLUTION OF THE OPTICAL NETWORK
The communications infrastructure was originally built for voice traffic.
This voice network was designed using circuit-switched technology that provides
each data stream, such as a telephone call between two points, with a dedicated
channel, or circuit, for the duration of the call. This approach is efficient
for voice communications, which are low bit, or data, rate transmission among
fixed geographic locations, and symmetrical, or involving the exchange of
relatively equal amounts of information between parties. The circuit-switched
network approach, however, is inefficient for pure data transmissions, which are
characterized by large bursts of data traffic followed by long periods of
silence. This inefficiency is heightened by the fact that data traffic is often
asymmetrical and among multiple geographic locations.
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In an effort to overcome the limitations of circuit-switched networks,
service providers have implemented various enhancements such as advanced
switching technology and equipment. In addition, the medium over which data
traffic is transmitted, or transport layer is being upgraded from electrical to
optical transmission. In contrast to electrical transmission over copper wires,
optical transmission technology transfers data in the form of pulses of light
along optical fibers, which are bundled together in fiber optic cable. Optical
transmission provides significantly greater quality and capacity than electrical
transmission.
Meeting the demand for bandwidth by deploying additional fiber optic cable
is both costly and complicated. Furthermore, the costs associated with laying
the cable underground and the purchasing of rights-of-way increase significantly
when the fiber optic cable is deployed in metropolitan areas. Therefore,
additional enhancements to the communications infrastructure have been
developed, including dense wavelength division multiplexing, or DWDM, which
greatly increases the capacity of the existing fiber optic infrastructure.
DWDM technology allows the transmission of data on different wavelength
channels, or a specified range of wavelengths, down the same optical fiber so
that at the destination, the different wavelength channels can be separated and
the different data streams extracted. As a result, DWDM technology can increase
the bandwidth of a single optical fiber by an amount equal to the number of
different wavelength channels that can be transmitted down the optical fiber.
However, current DWDM technology has limitations. One limitation is caused by
the fact that as the number of different wavelength channels traveling down the
same optical fiber increases, the closer the wavelengths will be to each other.
Because current light sources, such as lasers, emit light across an imprecise
wavelength range, the number of different wavelength channels that can be
transmitted down a single fiber is limited because these channels interfere with
one another, preventing extraction of the different data streams at the
destination. Another limitation results from the fact that different wavelengths
of light, which compose the wavelength channels, travel down the optical fiber
at different velocities and reach the destination at different times, making it
difficult to extract the data streams. This is known as chromatic dispersion,
and this effect increases with the distance the wavelength channels travel down
an optical fiber. Therefore, the distance a wavelength channel can travel down
an optical fiber is limited in current DWDM technologies.
Despite the improvements in the existing communications infrastructure,
such as the DWDM technology described above, we believe a transition to a
next-generation, all-optical network must occur in order to support increasing
bandwidth demand.
TECHNOLOGICAL CHALLENGES OF THE TRANSITION TO AN ALL-OPTICAL NETWORK
High Cost and Under-utilization of Available Bandwidth. In order to
optimize their investments in the existing fiber optic infrastructure, service
providers require a low-cost solution that allows a large number of wavelength
channels carrying data to travel simultaneously over the same optical fiber.
Although current DWDM technology provides a partial solution, this technology is
expensive and the number of wavelength channels that can be transmitted
simultaneously is relatively low. Additionally, current DWDM technology requires
that wavelength channels be transmitted with a large space between each channel.
Therefore, as depicted in the following diagram, bandwidth is under-utilized
because wavelength channels are not densely packed.
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OPTICAL SIGNAL
Total Available Bandwidth
[Optical Signal Diagram]
[At the top of the diagram is the caption "Optical Signal". Across the top of
the diagram is a horizontal line with arrows at each end. The label above the
line is "Total Available Bandwidth." Beneath this line are three vertical boxes,
each bearing the label "Wavelength Channel," with an arch over each box. Beneath
these boxes is a horizontal line with the label "Bandwidth" beneath each
"Wavelength Channel" box and the label "Unused Bandwidth" beneath the space
between the "Wave Channel" boxes, which are under the arches.]
By utilizing a greater portion of the available bandwidth for data transmission,
communications service providers can increase the efficiency of their optical
networks by placing a greater number of wavelength channels into a single
optical fiber.
The Necessity of Opto-electrical Conversion. Another technological
limitation of the current optical transmission system is the pervasiveness of
the process known as opto-electrical conversion. Opto-electrical conversion is
the conversion of the incoming optical signal into an electrical signal and back
into an outgoing optical signal. This conversion is required in order to
regenerate the signal to overcome the limitations of chromatic dispersion and
attenuation and in order to drop data from or add data to the composite optical
signal.
- Chromatic dispersion. Chromatic dispersion occurs because different
wavelengths of optical signals transmitted over a single optical fiber
travel at different velocities. Because these wavelengths travel at
different velocities, the resulting wavelength delays distort the signal
quality. This signal distortion can only be avoided by regenerating the
signal after it has travelled a short distance.
- Attenuation. As optical signals travel over fiber, the signals degenerate
and are eventually lost due to a phenomenon known as attenuation. As
communications service providers attempt to send signals over even longer
distances, the attenuation worsens, and the signal is lost. Therefore,
the signal requires regeneration after traveling a short distance.
- Adding or Dropping of Data. As composite optical signals are transmitted
across the network, it is often necessary to have some data dropped off
from or added to this signal at a given location. This process is known
as add/drop multiplexing and is required because composite optical
signals contains data with different destinations. In order to remove
data from or add data to a composite optical signal, that signal must be
converted to an electrical signal and then reconverted back to a
composite optical signal, even if that signal does not otherwise require
regeneration at that location.
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Opto-electrical conversion currently occurs at multiple points in the
network, and in different types of network equipment. This process is costly for
the following reasons:
- The equipment is specific to a particular bit rate, protocol and signal
format and therefore is neither scalable nor flexible enough to handle
other transmission speeds, protocols or signal formats.
- It requires expensive equipment throughout the network.
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- The equipment occupies valuable space.
- The equipment consumes significant electrical power and generates excess
heat.
These costs increase as more wavelength channels are added to a single
optical fiber in DWDM systems because each channel of a DWDM system must undergo
this conversion process. Thus, opto-electrical conversion presents one of the
most significant technological challenges of the current communications
infrastructure.
COST CHALLENGES OF THE TRANSITION TO AN ALL-OPTICAL NETWORK
Deploying an all-optical network is costly because optical products are
more expensive to manufacture and deploy than electrical equipment. The cost of
developing optical technology and products is high due to the infancy of the
technology and its related industry. Because of the emerging nature of the
industry, manufacturing yields are low, which also results in additional costs.
Furthermore, once a product is developed and manufactured, it is often too
bulky, complex and inflexible to be cost-effective.
DEPLOYMENT CHALLENGES OF THE TRANSITION TO AN ALL-OPTICAL NETWORK
Users of optical systems require miniaturized products because their
systems are often deployed in locations where space is limited. Few optical
product manufacturers have the ability to manufacture miniaturized, or
micro-optic, products that consistently meet standard specifications. In order
to develop an all-optical network, an optical solutions provider must understand
not only the optical systems, but also the network in which these optical
systems are to be deployed. Traditionally, the optical component manufacturers
have focused on developing optical packaging expertise while systems
manufacturers and service providers have focused on developing network
deployment and optical design expertise.
Despite the advances in optical technology, several challenges still exist,
which prevent the widespread deployment of existing optical solutions. As a
result of these limitations, the current network is a patchwork of various
solutions placed throughout the network operating on multiple protocols over
multiple layers on both optical and electrical signals.
THE AVANEX SOLUTION
Avanex designs, manufactures and markets fiber optic-based products, known
as photonic processors, which are designed to deliver increased performance,
miniaturization, scalability, reduced complexity and lower cost as compared to
current alternatives. Our solutions bring photonic processing capabilities to
the transport layer of the network and significantly reduce the need for
opto-electrical conversion. Unlike existing component technologies, our photonic
processors perform optical signal processing, or change the signal according to
predetermined algorithms. Our photonic processors also differ from conventional
optical systems in that they do not require software and electronics. We believe
our photonic processors enable service providers and optical systems
manufacturers to cost-effectively maximize the bandwidth of optical networks.
Our solutions provide the following key benefits:
Optimize Optical Network Performance. Our photonic processors are designed
to maximize the capacity of optical fiber and the efficiency and reliability of
optical transmission. Our photonic processors are designed to enable the
transmission of data at smaller spacings between wavelength channels, at higher
bit rates and across greater distances than currently available solutions. These
design features enable the use of greater fiber optic bandwidth for the
transport of data than can be delivered with alternative DWDM solutions
available today. We also enable variable chromatic dispersion compensation,
which minimizes transmission errors and increases the distance an optical signal
can travel before being regenerated.
Provide a Flexible and Scalable Solution. Applying our expertise in
networking design, we have developed solutions that are flexible, modular and
designed to be easily deployed into existing and future networks. Our solution
is scalable because our photonic processors are designed to work equally well in
small and large optical networks, as well as facilitate easy upgrading of an
optical system to a higher number of channels. Our photonic processors provide
functionality that accommodates existing protocols, including the
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telecommunications standard by which optical signals are transmitted down the
optical fiber using a common timing signal, known as synchronous optical
networks, or SONET, the standard by which Internet data are transferred down the
communication network, known as Internet protocol, or IP, and the standard by
which packets of data are transferred down a network at irregular intervals,
known as asynchronous transfer mode, or ATM. Our photonic processors are
designed to meet the demands placed on today's network, but can be easily
expanded to meet future demand.
Provide a Cost-Effective Optical Transport Solution. Our solutions are
designed to enable the transition to the next-generation, all-optical network
without the large capital investments or complex system design challenges
typically encountered in network deployment. The optical signal processing
capabilities of our photonic processors allow us to offer lower cost solutions
than those currently available. Through our micro-optic packaging, or
miniaturization, and integration, or the combination of multiple optical
components in a single package, our customers can use our products to optimize
the utilization of limited networking equipment space. Our photonic processors
also reduce the need for expensive opto-electrical conversion at numerous points
along the transmission path. In addition, our products are designed to be used
within the existing communications infrastructure as well as in the
next-generation, all-optical network, which protects existing infrastructure
investments and facilitates network development efforts.
Facilitate the Deployment of Next-Generation Services and Applications. Our
solutions bring processing capabilities for the first time to the transport
layer of the network. We believe these capabilities will enable our customers to
offer a new set of services and applications, including voice transmissions over
the Internet, virtual private networking and business-to-business e-commerce.
These new offerings could provide our customers with potential new revenue
streams and opportunities for further competitive differentiation.
THE AVANEX STRATEGY
Our objective is to be the leading provider of innovative, fiber
optic-based solutions that enable our customers to deploy and optimize fiber
optic networks. Key elements of our strategy include:
Leverage Technology Leadership and Expertise. We believe that we have a
unique combination of superior network design and system architecture knowledge
as well as advanced optical packaging technologies. We have filed 25 patent
applications in the United States and four patent applications internationally.
We intend to continue to focus our product development efforts on providing
fiber optic-based solutions that address the need for an unlimited number of
low-cost wavelengths, transported at very high data rates and at very long
distances. In developing new products, we intend to leverage our expertise in
designing solutions that are cost-effective, scalable and flexible. We plan to
increase our research and development efforts, including the expansion of The
Photonics Center, which is a 6,000 square foot customer demonstration and
testing facility in Richardson, Texas, as well as evaluate externally-developed
technology opportunities as they become available.
Expand Existing and Develop New Customer Relationships. We currently
provide our photonic processors to customers in the communications industry,
including communications service providers such as MCI WorldCom and optical
systems manufacturers such as Hitachi, Osicom and Cerent, which was recently
acquired by Cisco Systems. We intend to leverage our existing relationships with
these and other existing customers and develop new relationships with potential
customers in the service providers and optical systems manufacturers markets. We
also intend to provide a range of optical solutions that meet the demands of our
target markets.
Expand Sales and Marketing Efforts. Our marketing strategy is based on a
push-pull approach. With our pull approach, we target communications service
providers who can create demand for our products by purchasing our products
directly or by requiring that the systems they purchase incorporate our
products. With our push approach, we target optical systems providers who can
buy our products and then resell them as a part of their optical solutions. We
plan to expand our North American direct sales team, which will include customer
representatives, a technical sales force and application engineers. We intend to
expand our international presence by increasing both our direct sales force and
establishing relationships with international distributors.
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Expand Manufacturing Capabilities. We intend to continue to develop our
manufacturing and packaging expertise to enable us to consistently design,
develop and manufacture miniaturized, reliable and cost-effective products. We
intend to continue to invest in our manufacturing capabilities, as well as
expand our manufacturing facilities so that we can meet the needs of our target
markets. Our manufacturing is cell-based, or partitioned according to
similarities in responsibilities. We believe this type of manufacturing
organization allows us to expand our facilities more efficiently, both in terms
of cost and time. We are automating our testing process and plan to extend this
automation to other parts of the manufacturing process.
Enhance the Avanex Brand. We plan to enhance the Avanex brand throughout
the communications industry by engaging in a range of marketing programs to
position us as the leading provider of fiber optic-based solutions that power
the next generation, all-optical network. These activities will include
participation in industry conferences and trade shows, advertisements in print
publications, direct marketing and Internet-based marketing. We also plan to
build awareness through product demonstrations and customer education and
training at The Photonics Center.
TECHNOLOGY
Our optical signal processing technology is designed to solve the inherent
complexity of, and limitations on, bandwidth, speed and distance in conventional
network and long-haul optical transmission systems. Our products incorporate
several core optical technologies that we believe will enable the
next-generation, all-optical network. These include:
Integrated/Tuned Dielectric Filter. Integrated/tuned dielectric filter
technology allows certain wavelength channels, or optical signals, to pass
through multiple filters while reflecting unwanted optical signals. These
filters are used in DWDM systems to separate, or demultiplex, incoming optical
signals and combine, or multiplex, outgoing optical signals. These filters can
be tuned, or adjusted, to different frequencies, reducing the number of types of
filters needed in a DWDM system. This technology enables the placement of
multiple filters in a single package, reducing the size of the DWDM system and
signal loss.
Spectral Segmentation Technology. Traditional DWDM technology multiplexes
and demultiplexes wavelength channels individually. Our proprietary spectral
segmentation technology enables the multiplexing and demultiplexing of
wavelength channels in groups. This allows for more efficient and flexible
packaging and less degradation of the optical signal due to the need for fewer
subcomponents in the DWDM system. Our PowerMux product incorporates this
technology in the dense multiplexing and demultiplexing of wavelength channels
in a DWDM system.
Variable Chromatic Dispersion Compensation Technology. Chromatic dispersion
occurs because different wavelengths of optical signals transmitted over a
single optical fiber travel at different speeds. Chromatic dispersion
deteriorates the quality of optical signals in high bit rate transmission
systems. The farther the optical signal travels, the more it gets distorted. Our
dispersion compensation technology, utilized in our PowerShaper product,
corrects for chromatic dispersion by compensating for the differences in
wavelength speed. Our technology allows one single product to function across
multiple wavelength channels and can compensate, or correct for, different
levels of chromatic dispersion.
PRODUCTS
Our photonic processors are designed to increase the performance of optical
networks. Our photonic processors differ from full optical systems in that they
are micro-optics-based devices that do not require software and electronics.
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Our current product line consists of the PowerFilter, the PowerMux and the
PowerShaper. The following table sets forth these products as well as some of
our products in development and their capabilities:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION BENEFIT STATUS
------- ----------- ------- ------
<S> <C> <C> <C>
PowerFilter Integrated tunable wavelength - Reduced signal loss Shipping
filter multiplexer and
demultiplexer - Fewer types of filters
needed
PowerMux High density wavelength - Accommodates large number of Shipping
division multiplexer processor wavelength channels
- More efficient use of
bandwidth for data
transmission
- Low cost per wavelength
channel
PowerShaper Fixed and variable chromatic - Compact packaging Beta Testing
dispersion compensator
- Broadband chromatic
dispersion compensation
- Optimizes chromatic
dispersion compensation
PowerExchange Reconfigurable optical - Real time configuration of Beta Testing
add-drop multiplexer optical add-drop
multiplexing
SuperPowerShaper Variable chromatic slope - Extends the wavelength Beta Testing
dispersion compensator channels of high bit-rate
transmissions
</TABLE>
PowerFilter. One of the limitations of current optical filters is that too
much of the incoming optical signal is lost during the sequential filtering
process, a phenomenon known as insertion loss. Our PowerFilter technology is
designed to correct much of this inefficiency, increasing transmission distance
and improving system performance. The central piece of the filter technology is
a thin film dielectric filter-based device, which offers wavelength-tuning
capabilities. Wavelength tuning allows a single filter to filter multiple
wavelength channels. Our proprietary packaging schemes also consolidate filter
types and parts. This, in turn, provides an added advantage of cost savings on
materials.
PowerMux. PowerMux is a next generation DWDM product. It is capable of
multiplexing optical signals at smaller spacings between wavelength channels, at
higher bit rates and across greater distances than currently available
solutions. The PowerMux allows DWDM multiplexing and demultiplexing of optical
signals at the origin and destination of a transmission path, in addition to
offering optical add-drop multiplexing at any point in the transmission path,
known as OADM. We believe this product allows our customers to use more fiber
optic bandwidth for the transport of data than can be delivered with alternative
DWDM equipment available today.
PowerShaper. PowerShaper, currently in the beta testing stage, is a
broadband chromatic dispersion compensation processor and is specifically
designed to correct the inherent bandwidth and distance limitations in optical
transmission systems resulting from chromatic dispersion. The PowerShaper can
act as a fixed or variable dispersion compensator, which will permit system
providers to optimize their network for improved network performance.
PowerShaper is designed to correct for chromatic dispersion by reshaping the
individual optical signals at the receiving end of the optical fiber and
preventing them from mixing and corrupting the transmission data.
We cannot assure you that we will be able to successfully introduce or
market products that are currently in the beta testing stage and we are unable
to determine when these products will be marketable. We also
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cannot assure you that these products will achieve market acceptance. Please see
"Risk Factors -- If We Are Unable to Develop Products and Product Enhancements
That Achieve Market Acceptance, Sales of Our Products Will Suffer and We Will
Not Be Successful."
CUSTOMERS
Our target customer base includes communications service providers and
optical systems manufacturers. Customers who have placed orders for commercial
shipment include MCI WorldCom, Hitachi, Osicom, Lucent and Cerent, which
recently agreed to be acquired by Cisco Systems.
We began recognizing revenues from sales of our photonic processors in the
quarter ended June 30, 1999. In the fiscal year ended June 30, 1999, sales to
Osicom, MCI WorldCom and Hitachi accounted for 33%, 32%, and 29% of net revenue,
respectively. In the quarter ended October 1, 1999, sales to MCI WorldCom
accounted for 92% of net revenue, and in the quarter ended December 31, 1999,
accounted for 85% of net revenue. We expect that the majority of our revenues
will continue to depend on sales of our photonic processors to a small number of
customers.
MARKETING, SALES AND CUSTOMER SUPPORT
We are implementing a marketing strategy that is based on a push-pull
approach. Using the pull approach, we target communications service providers,
who can create demand for our products by purchasing our products directly or by
requiring that their systems incorporate our products. Using the push approach,
we target optical systems providers, who can buy our products and then resell
them as a part of their optical solutions. Our marketing efforts are centered
around demonstration and education of our products' performance at trade shows
and The Photonics Center, continued publicity through paid advertising and
direct mail and Internet-based communication and promotion.
We sell and market our products through a combination of direct sales and
country-specific distributors. Our direct sales organization currently consists
of one sales representative operating in the United States, three regional sales
directors operating in the western, central and eastern regions of the United
States, one manufacturer's representative in Italy and two distributors in
Japan. The sales organization is supported by three customer service
representatives and one sales analyst.
We focus our direct sales efforts on service providers and optical systems
manufacturers. The direct sales account managers cover the market on an assigned
account basis and work as a team with account-oriented systems engineers. We
also have application engineers that provide our customers with assistance on
the evolution of their networks as it relates to the deployment of our products.
These engineers help in defining the features that are required for our products
to be successful in specific applications.
In order to further our international sales objectives, we have established
relationships with two distributors in Japan. These distributors have expertise
in deploying complex telecommunications equipment in their markets and provide
basic support required by our international customers.
We believe that support services are essential to the successful
installation and ongoing support of our products. We deliver these services
directly to major customers and indirectly through our international
distributors. We currently have three people in customer service and support
located in our Fremont, California corporate headquarters.
THE PHOTONICS CENTER
To help market our technology and product performance and enable our
push-pull marketing strategy, we have established The Photonics Center in
Richardson, Texas, which is a leading-edge customer testing, demonstration and
training facility that enables deployment of our products in a simulated
network. As a result, we benefit from immediate feedback from our current and
potential customers about our photonic processors. The Photonics Center also
provides testing capabilities for the development of products and prototypes. In
addition, we believe that The Photonics Center shortens our products' evaluation
cycle with potential customers because they receive initial evaluation
information on our products before these products
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are shipped to the customer location for full testing and evaluation. This
initial information gives the potential customer a better understanding of the
product before delivery to their location, which we believe gives us an
advantage in the sales process.
MANUFACTURING
We currently manufacture all of our products in our Fremont, California
facility. We intend to devote significant resources to expanding our
manufacturing capacity and expect to continue to hire significant numbers of new
manufacturing employees.
The manufacturing of photonic processors requires the use of a highly
skilled manual workforce performing critical functions such as optical assembly,
optical alignment, soldering and component integration. We invest significant
resources in training and maintaining the quality of our manufacturing work
force. Furthermore, we developed proprietary automated testing equipment for
consistency in testing results and for efficiency. We also have grouped our
manufacturing operations into several product-specific or customer-specific
cells. We believe this provides a highly flexible and efficient operating
capability, and is designed to meet customer expectations for high volume
capacity, high quality and on-time delivery.
If we are unable to expand our manufacturing capacity on a timely basis to
meet demand or if we do not accurately project demand, we will have excess
capacity or insufficient capacity, either of which will seriously harm our
business.
We emphasize quality assurance throughout the entire supply-chain and
manufacturing processes. We also install stringent quality control processes and
procedures, including incoming material inspection, in-process testing and
outgoing inspection.
We have entered into a five-year agreement with CMI under which a
subsidiary of CMI, organized under the laws of the People's Republic of China,
manufactures optical subcomponents for us in limited quantities at a small
facility in Tianjin, China. They are building a new, larger manufacturing
facility in Tianjin, which will not be operational until at least the quarter
ending September 29, 2000. We cannot assure you that this larger facility will
be completed on time or at all. Under the agreement with CMI, we have granted
licenses to CMI to make in China and the United States, and to use and sell
worldwide, the licensed components. We also granted them a license to use some
of our technical information and manufacturing process know-how in China and the
United States. These licenses are exclusive in China and non-exclusive
elsewhere. As a result, CMI can manufacture and sell optical components based on
our technology to third parties, including our potential competitors.
We expect CMI to build a significant portion of our subcomponents and
products in the future. These activities will extend to full production and
include activities such as material procurement, assembly, test and control. We
will design, specify and monitor all of the tests that are required to meet our
quality standards. We believe this arrangement with CMI will allow us to operate
without dedicating additional space to these manufacturing operations and will
conserve the working capital that would otherwise be required for funding
additional inventory. See "Risk Factors -- Because We Expect to Depend on a
Third Party Located in China to Manufacture Subcomponents and Products for Us,
We May Have Difficulties Obtaining a Sufficient Amount of High Quality Products,
Which Would Delay Our Ability to Fulfill Customers Orders."
We currently purchase several key components used in our photonic
processors from single or limited sources of supply, including Nippon Sheet
Glass, Hoya USA, Inc., CMI, Sumitomo Corporation of America, Casix, Inc. and
Browave Corporation. These key components include filters, lenses and specialty
glass. We have no guaranteed supply arrangement with these suppliers. The
inability to obtain sufficient quantities of these components may result in
delays or reductions in product shipments, which would harm our business.
QUALITY
We have established a quality assurance plan to improve our company-wide
quality system to ensure that our customers' requirements are consistently met.
This system is based on the international standard
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ISO 9001. While we are not currently registered as ISO 9001 compliant, we are
currently working toward obtaining ISO 9001 registration, which we believe will
provide a further competitive strength.
PRODUCT DEVELOPMENT
We have assembled a team of engineers and prototype production operators
with significant experience in optics, data networking and communications. We
believe our engineering team possesses expertise in the areas of optics,
micro-optic design, network system design and system-level software design. Our
product development efforts focus on enhancing our first generation of photonic
processors, developing additional optical network products and continuing to
develop next generation technology to support the growth in network bandwidth
requirements.
As of December 31, 1999, we had 59 people in our product development group.
We have made, and will continue to make, a substantial investment in research
and development. Our research and development expenses totaled $515,000 for the
period from October 24, 1997 (inception) through June 30, 1998, $4.1 million for
the fiscal year ended June 30, 1999 and $3.0 million for the six months ended
December 31, 1999.
Our industry is characterized by very rapid technological change, frequent
new product introductions and enhancements, changes in customer demands and
evolving industry standards. While we have developed, and expect to continue to
develop, most new products and enhancements to existing products internally,
from time to time we may be required to license technology from third parties to
develop new products or product enhancements. These licenses may not be
available to us on commercially reasonable terms.
COMPETITION
The markets we are targeting are new and rapidly evolving, and we expect
these markets to become highly competitive in the future. While we do not have
any direct competitors in the photonic processor market today, we anticipate
that other companies will in the future expand into our markets and introduce
competitive products. We also face indirect competition from public and private
companies providing products that address the same fiber optic network problems
that our products address. The development of alternative solutions to optical
transmission problems by competitors, particularly systems companies who also
manufacture components, could significantly limit our growth.
Some companies in the optical systems and component industry may compete
with us in the future, including Lucent Technologies, Nortel Networks, Alcatel,
Fujitsu, JDS Uniphase and E-Tek Dynamics. These are large public companies that
have longer operating histories and significantly greater financial, technical,
marketing and other resources than we have. As a result, these competitors are
able to devote greater resources to the development, promotion, sale and support
of their products. In addition, our competitors that have large market
capitalizations or cash reserves are much better positioned than we are to
acquire other companies in order to gain new technologies or products that may
displace our product lines. Any of these acquisitions could give our competitors
a strategic advantage. Many of our potential competitors have significantly more
established sales and customer support organizations than we do. In addition,
many of our competitors have much greater name recognition and have more
extensive customer bases, better developed distribution channels and broader
product offerings than our company. These companies can leverage their customer
bases and broader product offerings and adopt aggressive pricing policies to
gain market share. We expect to encounter potential customers that, due to
existing relationships with our competitors, are committed to the products
offered by these competitors. As a result, these potential customers may not
consider purchasing our products.
Existing and potential customers are also our potential competitors. These
customers may develop or acquire additional competitive products or technologies
in the future, which may cause them to reduce or cease their purchases from us.
In addition, customers who are also competitors may unfairly disparage our
products in order to gain a competitive advantage.
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As a result of these factors, we expect that competitive pressures may
result in price reductions, reduced margins and loss of market share.
INTELLECTUAL PROPERTY
Our success and ability to compete depend substantially upon our internally
developed technology. We have filed 25 U.S. patent applications and four foreign
patent applications. Our engineering teams have significant expertise in
photonic, micro-optic and systems-level design.
While we rely on patent, copyright, trade secret and trademark law to
protect our technology, we also believe that factors such as the technological
and creative skills of our personnel, new product developments, frequent product
enhancements and reliable product maintenance are essential to establishing and
maintaining a technology leadership position. We cannot assure you that others
will not develop technologies that are similar or superior to our technology.
We license technology from Fujitsu that is critical to our PowerShaper
product, which we expect to introduce in the second half of the fiscal year
ending June 30, 2000. The license agreement requires us to pay a royalty to
Fujitsu in exchange for receiving a non-exclusive and non-transferable license
to use Fujitsu patents to make, use, lease or sell licensed products. The
license agreement expires, unless earlier terminated, when the last patent
expires. Currently, the latest issued patent under this agreement will expire on
October 10, 2017, and this license agreement will terminate on that date, unless
more patents are added under this license agreement. The license agreement is
subject to termination upon the acquisition of more than a 50% interest in us by
certain major communications system suppliers. Thus, if we are acquired by any
of these specified companies, we will lose this important license. The existence
of this license termination provision may have an anti-takeover effect in that
it would discourage those specified companies from making a bid to acquire us.
We generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and generally control access to
and distribution of our proprietary information. Despite these efforts to
protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology. Policing unauthorized use
of our products is difficult, and there can be no assurance that the steps taken
by us will prevent misappropriation of our technology, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as do
the laws of the United States.
Substantial litigation regarding intellectual property rights exists in the
networking industry, and we expect that optical communications products may be
increasingly subject to third-party infringement claims as the number of
competitors in our industry segments grows and the functionality of products in
different industry segments overlaps. In addition, we believe that many of our
competitors in the communications business have filed or intend to file patent
applications covering aspects of their technology on which they may claim our
technology infringes. We can not make any assurances that other third parties
will not claim infringement by us with respect to our products and our
associated technology. Any such claims, with or without merit, could be
time-consuming to defend, result in costly litigation, divert management's
attention and resources, cause product shipment delays or require us to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to us, if at all. A
successful claim of product infringement against us and failure or inability by
us to license the infringed or similar technology could seriously harm our
business. Although we carry general liability insurance, our insurance may not
cover potential claims of this type or may not be adequate to indemnify us for
all liability that may be imposed.
EMPLOYEES
As of December 31, 1999, we had 251 full-time employees, 59 of whom were
engaged in product development, 163 in manufacturing, six in quality, six in
sales, marketing, application support and customer service, and 17 in finance,
administration and operations. None of our employees are represented by a labor
union. We have not experienced any work stoppages and we consider our relations
with our employees to be good.
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Our future performance depends in significant part upon the continued
service of our key technical, sales and senior management personnel, none of
whom is bound by an employment agreement requiring service for any defined
period of time. The loss of the services of one or more of our key employees
could have a material adverse effect on our business, financial condition and
results of operations. Our future success also depends on our continuing ability
to attract, train and retain highly qualified technical, sales and managerial
personnel. Competition for these personnel is intense, particularly in the San
Francisco Bay Area where our headquarters are located, and we can not make any
assurances that we can retain our key personnel in the future.
FACILITIES
In September 1999, we leased one building in Fremont, California for our
corporate headquarters, totaling approximately 54,000 square feet, which
includes sales and marketing, research and development, administration and
manufacturing. This lease will expire in October 2009. Under the same lease, we
were granted a right of first refusal until April 2000, which we have exercised,
to lease an adjacent building, approximately 91,000 square feet, at a
predetermined rate. We also lease approximately 6,000 square feet of office
space in Richardson, Texas for sales and the operation of The Photonics Center.
This lease expires in February 2006.
LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings. On December
6, 1999, E-Tek Dynamics, Inc. filed a complaint against us in the Santa Clara
Superior Court alleging that we have participated in the illegal recruiting of
E-Tek employees. We believe that the complaint is without merit and we intend to
vigorously defend against it. We believe this complaint will not have a material
effect on our business.
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<PAGE> 49
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors as of December 31, 1999, are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Walter Alessandrini......... 52 President, Chief Executive Officer and Director
Xiaofan (Simon) Cao......... 36 Senior Vice President, Product Development and Director
Paul Jiang.................. 41 Vice President, Manufacturing and Vendor Management
Jessy Chao.................. 32 Vice President, Finance, and Chief Financial Officer
Anthony Florence............ 57 Vice President, Corporate Marketing and Investor Relations
Peter Maguire............... 49 Vice President, Worldwide Sales
James Pickering............. 58 Vice President, Quality
Margaret Quinn.............. 46 Vice President, Human Resources and Administration
Todd Brooks................. 39 Director
Vint Cerf................... 56 Director
Federico Faggin............. 58 Director
Michael Goguen.............. 35 Director
Seth Neiman................. 45 Director
Gregory Reyes, Jr........... 38 Director
Joel Smith.................. 54 Director
</TABLE>
Walter Alessandrini has served as one of our directors and as our President
and Chief Executive Officer since March 1999. Dr. Alessandrini was President and
Chief Executive Officer of Pirelli Cables and Systems North America LLC, a
manufacturer of cables and communications systems, from November 1996 to March
1999. From November 1990 to November 1996, he was President and Chief Executive
Officer of Union Switch & Signal Inc., a manufacturer of rail transportation
signaling and control systems. Dr. Alessandrini received a doctorate degree in
Mechanical Engineering from the University of Genoa, Italy.
Xiaofan (Simon) Cao, one of our co-founders, has served as one of our
directors since October 1997 and as our Senior Vice President, Product
Development since June 1998. He was our President and Chief Executive Officer
from October 1997 to June 1998. From October 1996 to October 1997, Dr. Cao
served as Vice President, Sales and Marketing of Oplink Communications, Inc., a
producer of components and modules for fiber optic networks. From May 1992 to
September 1996, Dr. Cao was a Senior Technical Service Manager for E-Tek
Dynamics, Inc., a producer of components and modules for fiber optic networks.
Dr. Cao received a B.S. degree in Physics from Zhongshan University, China, M.S.
degrees in Physics and Electrical Engineering from the University of Southern
California and Ph.D. degrees in Physics and Electrical Engineering from the
University of Southern California.
Paul Jiang, one of our co-founders, has served as our Vice President,
Manufacturing and Vendor Management since February 1998. Mr. Jiang was a Senior
Manager at E-Tek Dynamics, Inc. from January 1994 to January 1998. Mr. Jiang
received a B.S. degree in Optics from University of La Verne.
Jessy Chao, one of our co-founders, has served as our Vice President,
Finance and Chief Financial Officer since October 1999. He was our Director of
Finance and Business Operations from February 1998 to October 1999. Mr. Chao was
the Accounting and Finance Manager for E-Tek Dynamics, Inc. from September 1992
to January 1998. Mr. Chao received a B.S. degree in Accounting from San Jose
State University.
Anthony Florence has served as our Vice President, Corporate Marketing and
Investor Relations since November 1999. Mr. Florence was Vice President,
Corporate and Investor Relations, and Office of the Chairman at Ansaldo Signal
N.V., a company involved in the global signaling, automation and control systems
industry, from November 1996 to November 1999. From November 1993 to November
1996, Mr. Florence served as Vice President, Corporate Planning, Marketing and
Investor Relations for Union Switch &
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<PAGE> 50
Signal Inc. Mr. Florence received a B.A. degree in English from Wheeling College
and an M.A. degree in English from the University of Dayton.
Peter Maguire has served as our Vice President, Worldwide Sales since June
1999. Mr. Maguire was the Vice President, Sales for the IXC Market at Fujitsu
Network Communications, Inc., a manufacturer of fiber optic communication
equipment, from May 1999 to June 1999. From July 1992 to May 1999, he was Vice
President, Sales for Pirelli Cables and Systems North America LLC. Mr. Maguire
received a B.S. degree in Business Administration and an M.B.A. degree from
American States University.
James Pickering has served as our Vice President, Quality since September
1999. Mr. Pickering was Vice President, Quality at Etec Systems, Inc., a
manufacturer of semiconductor mask-making equipment, from March 1997 to
September 1999. From December 1989 to March 1997, he was Vice President,
Customer Satisfaction at Union Switch & Signal Inc. Mr. Pickering received a
B.S. degree in Industrial Technology from Northeastern University and an M.B.A.
degree from Babson College.
Margaret Quinn has served as our Vice President, Human Resources and
Administration since October 1999. Ms. Quinn was a principal at HRMQ, a human
resources consulting company, from January 1999 to October 1999. From August
1997 to January 1999, she was Director of International Customer Support at
Nellcor Puritan Bennett Incorporated, a manufacturer of respiratory monitoring
systems. Ms. Quinn served as a human resources consultant at Nellcor Puritan
Bennett from October 1996 to August 1997. Prior to that, Ms. Quinn served as the
Director of Human Resources for Cyrix Corporation, a manufacturer of
microprocessors, from April 1992 to May 1996. Ms. Quinn received a B.A. degree
in Spanish Literature from Mills College.
Todd Brooks has served on our board of directors since February 1998. Mr.
Brooks has been a general partner at the Mayfield Fund, a venture capital firm,
since February 1999. From April 1995 to January 1999, Mr. Brooks served as a
managing principal with JAFCO America Ventures, a venture capital firm. Mr.
Brooks also served as an equity research analyst for Franklin-Templeton Funds,
an investment corporation, from August 1993 to April 1995. Mr. Brooks currently
serves as a director of several private companies. Mr. Brooks received a B.S.
degree from Texas A&M University, M.S. degrees in Electrical Engineering and
Chemical Engineering from the University of California at Berkeley and an M.B.A.
degree from the Harvard Business School.
Vint Cerf has served on our board of directors since December 1999. Dr.
Cerf has served as the Senior Vice President for Internet Architecture and
Technology for MCI WorldCom Corporation, a telecommunications company, since
September 1998. From January 1996 to September 1998, Dr. Cerf was the Senior
Vice President for Internet Architecture and Engineering at MCI Communications
Corporation, a telecommunications company. Dr. Cerf was Senior Vice President
for Data Architecture at MCI Telecommunications Corporation, a
telecommunications company, from February 1994 to December 1995. Dr. Cerf
received a B.S. degree in Math from Stanford University, an M.S. degree in
Computer Science from the University of California, Los Angeles, and a Ph.D.
degree in Computer Science from the University of California, Los Angeles.
Federico Faggin has served on our board of directors since December 1999.
Dr. Faggin has served as Chairman of the board of directors of Synaptics, Inc.,
a creator of human interface technologies and products using neural networks and
mixed signal technologies, from January 1999 to the present. From 1986 to
January 1999, Dr. Faggin served as a director, President and Chief Executive
Officer of Synaptics. Dr. Faggin is also a director of Integrated Device
Technology, Inc., a producer of integrated circuits, GlobeSpan Inc., a producer
of DSL integrated circuits, and several other private companies. Dr. Faggin
received a doctorate degree in Physics from the University of Padua, Italy.
Michael Goguen has served on our board of directors since February 1998. He
has held various positions at Sequoia Capital, a venture capital firm, since
July 1996 and has been a general partner since July 1997. From May 1995 to July
1996, Mr. Goguen was a Director of Software at Bay Networks, Inc., a computer
network system provider. Prior to that, Mr. Goguen was a Director of Software at
Centillion Network Inc. a network equipment manufacturing company, from August
1994 to May 1995. Mr. Goguen currently serves as
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<PAGE> 51
a director of several private companies. Mr. Goguen received a B.S. degree in
Electrical Engineering from Cornell University and an M.S. degree in Electrical
Engineering from Stanford University.
Seth Neiman has served on our board of directors since February 1998. Since
August 1994, he has held various positions at Crosspoint Venture Partners, a
venture capital firm, and has been a general partner of Crosspoint since January
1996. Mr. Neiman is also a director of Brocade Communications Systems, Inc.,
Foundry Networks, Inc., and several private companies. Mr. Neiman received a
B.A. degree in Philosophy from Ohio State University.
Gregory Reyes, Jr. has served on our board of directors since December
1999. Mr. Reyes has served as a director and President and Chief Executive
Officer of Brocade Communications Systems, Inc., a developer of products for
storage area networks, from July 1998 to the present. From January 1994 to June
1998, Mr. Reyes served as President, Chief Executive Officer and Chairman of the
board of directors of Wireless Access, Inc., a wireless data communications
products company. Mr. Reyes has also served as a director of Proxim, Inc., a
wireless networking company, from April 1998 to the present. Mr. Reyes received
a B.S. in Business Administration from Saint Mary's College.
Joel Smith has served on our board of directors since December 1999. Mr.
Smith has served as the President of Bank of America East, a financial
institution, from October 1998 to the present. From July 1991 to October 1998,
Mr. Smith served as President of Nations Bank Carolinas, a financial
institution. Mr. Smith served on the board of directors of Ansaldo Signal, N.V.
from November 1996 to April 1999. Mr. Smith received a B.A. degree from the
University of the South in Sewanee, Tennessee.
BOARD OF DIRECTORS
Our board of directors currently consists of nine members. Upon completion
of this offering, our certificate of incorporation will provide for a classified
board of directors consisting of three classes of directors, each serving
staggered three-year terms. As a result, a portion of our board of directors
will be elected each year. To implement the classified structure, before the
consummation of the offering, three of the nominees to the board of directors
will be elected to a one-year term, three will be elected to two-year terms and
three will be elected to a three-year term. After that, directors will be
elected for three-year terms. Dr. Alessandrini and Messrs. Goguen and Reyes, Jr.
have been designated Class I Directors, whose terms expire at the 2000 annual
meeting of stockholders. Messrs. Cerf, Neiman and Brooks have been designated
Class II Directors, whose terms expire at the 2001 annual meeting of
stockholders. Dr. Cao and Messrs. Faggin and Smith have been designated the
Class III Directors, whose term expires at the 2002 annual meeting of
stockholders. This classification of the board of directors may delay or prevent
a change in control of our company or in our management. See "Description of
Capital Stock -- Delaware Law and Certain Provisions of Our Certificate of
Incorporation and Bylaws."
Our board of directors appoints our executive officers on an annual basis
to serve until their successors have been elected and qualified. There are no
family relationships among any of our directors or officers.
BOARD COMMITTEES
Compensation Committee. We established a compensation committee in April
1999. The compensation committee currently consists of Messrs. Brooks, Goguen
and Neiman. The compensation committee reviews and recommends to the board of
directors the compensation of all of our officers and directors, including stock
compensation and loans, and establishes and reviews general policies relating to
the compensation and benefits of our employees.
Audit Committee. We established an audit committee in December 1999. The
audit committee currently consists of Messrs. Faggin, Reyes, Jr. and Smith. The
audit committee reviews our internal accounting procedures and consults with and
reviews the services provided by our independent accountants.
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<PAGE> 52
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our compensation committee currently consists of Messrs. Brooks, Goguen and
Neiman. In December 1999, Dr. Alessandrini, our President and Chief Executive
Officer, resigned from the compensation committee. Other than Dr. Alessandrini,
none of the members of our compensation committee is currently or has been, at
any time since the time of our formation, one of our officers or employees. None
of our executive officers currently serves or in the past has served as a member
of the board of directors or compensation committee of any entity that has one
or more executive officers serving on our board or compensation committee. Mr.
Brooks is a general partner of the Mayfield Fund, a holder of approximately 9.3%
of our outstanding stock that has purchased shares of our Series C preferred
stock and Series D preferred stock. Mr. Goguen is a general partner of Sequoia
Capital, a holder of approximately 17.9% of our outstanding stock that has
purchased shares of our Series A preferred stock, Series B preferred stock,
Series C preferred stock and Series D preferred stock. Mr. Neiman is a partner
of Crosspoint Venture Partners, a holder of approximately 17.9% of our
outstanding stock that has purchased shares of our Series A preferred stock,
Series B preferred stock, Series C preferred stock and Series D preferred stock.
See "Certain Transactions." Prior to the formation of the compensation
committee, compensation decisions were made by our entire board of directors.
Dr. Alessandrini did not participate in decisions with respect to his
compensation.
DIRECTOR COMPENSATION
We do not currently compensate our directors in cash for their service as
members of the board of directors, although if expenses are incurred in
connection with attending board of directors and committee meetings these
expenses are reimbursed. Some of our non-employee directors have received grants
of options to purchase shares of our common stock. See "Principal Stockholders"
and "Certain Transactions -- Stock Option Grants to Certain Directors." Our 1999
Director Option Plan provides for the automatic grant of non-statutory stock
options to nonemployee directors. For further information regarding the
provisions of the 1999 Director Option Plan, see "-- Employee and Director
Benefit Plans."
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
The limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we will indemnify
our directors and officers and may indemnify our employees and other agents to
the fullest extent permitted by law. We believe that indemnification under our
bylaws covers at least negligence on the part of indemnified parties. Our bylaws
also permit us to secure insurance on behalf of any officer, director, employee
or other agent for any liability arising out of his or her actions in their
capacity as an officer, director, employee or other agent, regardless of whether
the bylaws would permit indemnification.
We have entered into agreements to indemnify our directors and executive
officers, in addition to the indemnification provided for in our bylaws. These
agreements, among other things, provide for indemnification for judgments,
fines, settlement amounts and expenses, including attorneys' fees incurred by
the director, or executive officer in any action or proceeding, including any
action by or in our right, arising out of the person's services as a director or
executive officer, any of our subsidiaries or any other company or enterprise to
which
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<PAGE> 53
the person provides services at our request. We believe that these provisions
and agreements are necessary to attract and retain qualified persons as
directors and executive officers.
The limitation on liability and indemnification provisions in our
certificate of incorporation and bylaws may discourage stockholders from
bringing a lawsuit against our directors for breach of their fiduciary duty and
may reduce the likelihood of derivative litigation against our directors and
officers, even though a derivative action, if successful, might otherwise
benefit us and our stockholders. A stockholder's investment in us may be
adversely affected to the extent we pay the costs of settlement or damage awards
against our directors and officers under these indemnification provisions.
At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees in which indemnification is sought, nor are
we aware of any threatened litigation that may result in claims for
indemnification.
EXECUTIVE COMPENSATION
The following table presents the compensation earned, awarded or paid for
services rendered to us in all capacities for the fiscal year ended June 30,
1999 by our Chief Executive Officer, our former acting Chief Executive Officer
and our three other most highly compensated executive officers who earned more
than $100,000 in salary and bonus during the fiscal year ended June 30, 1999. No
other executive officer earned more than $100,000 in salary and bonus during the
fiscal year ended June 30, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
ANNUAL COMPENSATION -----------------------------
----------------------------------- SECURITIES
OTHER ANNUAL RESTRICTED STOCK UNDERLYING
NAME AND PRINCIPAL POSITIONS SALARY BONUS COMPENSATION AWARDS OPTIONS
---------------------------- -------- ------- ------------ ---------------- ----------
<S> <C> <C> <C> <C> <C>
Walter Alessandrini........................ $ 74,038(1) $37,500(1) $ 26,604(2) $ --(3) --
President and Chief Executive Officer
Simon Cao.................................. 138,544 -- -- --(4) --
Senior Vice President, Product
Development
Paul Jiang................................. 125,381 -- -- --(5) --
Vice President, Manufacturing and Vendor
Management
Peter Maguire.............................. 1,904(6) 100,000(6) -- -- --
Vice President, Worldwide Sales
William Lanfri............................. --(7) -- -- --(7) 112,500
Former Acting Chief Executive Officer
</TABLE>
- ------------
(1) Dr. Alessandrini joined us in March 1999. He is currently compensated at an
annual salary of $275,000 with an annual performance-based bonus of
$150,000.
(2) Represents relocation expenses paid to Dr. Alessandrini through June 30,
1999.
(3) In April 1999, Dr. Alessandrini purchased 5,215,589 shares of restricted
stock at $.05 per share through June 30, 1999. These shares are subject to
our right of repurchase that lapses over four years and lapses as to
one-fourth of his shares on March 22, 2000, with the repurchase right
lapsing ratably monthly after that date. As of June 30, 1999, Dr.
Alessandrini held 5,215,589 shares of restricted common stock, which had an
aggregate fair market value of $521,559. Dividends, if any, paid on this
stock will be subject to the same escrow restrictions as the underlying
shares.
(4) In January 1998, Dr. Cao purchased 2,700,000 shares of restricted stock at
$.0007 per share. These shares are subject to our right of repurchase that
lapses over four years and lapsed as to one-fourth of his shares having
vested on January 13, 1999, with the repurchase right lapsing ratably
monthly after that date. As of June 30, 1999, Dr. Cao held 2,700,000 shares
of restricted common stock, which had an aggregate fair market value of
$270,000. Dividends, if any, paid on this stock will be subject to the same
escrow restrictions as the underlying shares.
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<PAGE> 54
(5) In February 1998, Mr. Jiang exercised an option to purchase 1,800,000 shares
of stock at $.0007 per share, subject to our right to repurchase any
unvested shares in the event of the termination of his employment. These
shares vest over four years with one-fourth of his shares having vested on
February 3, 1999 and the remaining shares vesting ratably monthly
thereafter. As of June 30, 1999, Mr. Jiang held 2,250,000 shares of
restricted common stock, which had an aggregate fair market value of
$225,000. Dividends, if any, paid on this stock will be subject to the same
escrow restrictions as the underlying shares.
(6) Mr. Maguire joined us on June 28, 1999 and received $1,904 in salary during
the fiscal year ended June 30, 1999. He is currently compensated at an
annual salary of $165,000. In connection with the start of his employment
with us, he received a $100,000 bonus. If he terminates his employment or if
we terminate his employment for cause, he must repay this bonus. However,
the amount of the bonus that must be repaid is reduced by $8,333 per full
month that he remains employed by us.
(7) Mr. Lanfri did not receive a salary during the fiscal year ended June 30,
1999. In August 1998, Mr. Lanfri exercised an option to purchase 341,101
shares of our common stock at an exercise price of $.02 per share, but the
unvested shares remained subject to our right of repurchase in the event of
the termination of his employment. In March 1999, Mr. Lanfri exercised an
option to purchase 112,500 shares of our common stock at an exercise price
of $.03 per share. As of June 30, 1999, and in connection with Mr. Lanfri's
resignation as our acting Chief Executive Officer in March 1999, Mr. Lanfri
held 415,703 shares of fully vested common stock, which had an aggregate
fair market value of $41,570. Dividends, if any, paid on this vested stock
will go to Mr. Lanfri. The remaining 37,899 shares of common stock subject
to repurchase have been repurchased by us at their original exercise price.
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows information regarding stock options granted
during the fiscal year ended June 30, 1999 to our Chief Executive Officer,
former acting Chief Executive Officer and three other most highly compensated
executive officers. Options were granted with an exercise price per share equal
to the fair market value of our common stock on the date of grant, as determined
by our board of directors. In determining the fair market value on the date of
each grant, our board of directors considered a number of factors, including our
operating results and financial condition as of the date of grant, key
developments affecting our business and, where relevant, the most recent price
at which we sold our preferred stock in financing transactions with independent
investors.
The potential realizable value is based on the assumption that our common
stock appreciates at the annual rate shown, compounded annually, from the date
of grant until the expiration of the ten-year term. These numbers are calculated
based on Securities and Exchange Commission requirements and do not reflect
projections or estimates of future stock price growth. Potential realizable
values are computed by:
- multiplying the number of shares of common stock underlying each option
by $14.00 per share, the assumed initial public offering price per share;
- assuming that the total stock value derived from that calculation
compounds at the annual 5% or 10% rate shown in the table for the entire
ten-year term of the option; and
- subtracting from that result the total option exercise price.
Actual gains, if any, on stock option exercises will be dependent on the
future performance of the common stock.
The percentage of total options granted is based on an aggregate of
1,069,050 options granted by us during the fiscal year ended June 30, 1999, to
our employees, including the executive officers listed in the table below. In
addition to the options granted during the fiscal year ended June 30, 1999, we
sold 10,206,690 shares of our common stock under restricted stock purchase
agreements during the fiscal year ended June 30, 1999. None of the executive
officers listed in the table below, other than William Lanfri, were issued
options to
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purchase our common stock in the fiscal year ended June 30, 1999. Dr.
Alessandrini purchased restricted shares of our common stock under the 1998
Stock Plan in the fiscal year ended June 30, 1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
------------------------------------------------------------- AT ASSUMED ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK APPRECIATION
SECURITIES OPTIONS GRANTED EXERCISE FOR OPTION TERM
UNDERLYING TO EMPLOYEES PRICE PER EXPIRATION --------------------------
NAME OPTIONS GRANTED DURING PERIOD SHARE DATE 5% 10%
---- --------------- --------------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Walter Alessandrini... -- -- $ -- -- $ -- $ --
Simon Cao............. -- -- -- -- -- --
Paul Jiang............ -- -- -- -- -- --
Peter Maguire......... -- -- -- -- -- --
William Lanfri........ 112,500 10.49% .03 12/07/08 2,562,134 4,081,769
</TABLE>
In December 1998, we granted Mr. Lanfri an option to purchase 112,500
shares of our common stock. This option vested ratably over three months
beginning on January 1, 1999. In March 1999, this option fully vested and Mr.
Lanfri exercised this option.
AGGREGATE OPTION EXERCISES DURING LAST FISCAL YEAR
The following table presents information concerning option exercises by our
Chief Executive Officer, former acting Chief Executive Officer and three other
most highly compensated executive officers for the fiscal year ended June 30,
1999. None of the executive officers listed in the table below held unexercised
options at June 30, 1999. For a list of purchases of restricted shares of our
common stock by the executive officers listed in the table below, please see
"Certain Transactions."
<TABLE>
<CAPTION>
SHARES ACQUIRED VALUE
NAME ON EXERCISE REALIZED
---- --------------- --------
<S> <C> <C>
Walter Alessandrini......................................... -- $ --
Simon Cao................................................... -- --
Paul Jiang.................................................. -- --
Peter Maguire............................................... -- --
William Lanfri.............................................. 415,702 7,043
</TABLE>
In June 1998, we granted Mr. Lanfri an option to purchase 341,101 shares of
our common stock. Of the shares subject to this option, 227,401 shares vested
ratably over six months beginning on August 1, 1998. The remaining 113,700
shares subject to this option were designated by our board of directors as
"bonus shares." The bonus shares either were to vest in one lump sum on July 1,
2004 or were to vest earlier at the sole discretion of our board of directors.
In August 1998, Mr. Lanfri exercised this option to purchase 341,101 shares of
our common stock, but the unvested shares remained subject to our right of
repurchase. Upon Mr. Lanfri's resignation as our acting Chief Executive Officer
in March 1999, our board of directors accelerated the lapsing of our right of
repurchase as to 75,801 shares of Mr. Lanfri's bonus shares and we repurchased
from him, at the original exercise price, the 37,899 shares that remained
subject to repurchase. See "-- Employment Agreements and Change-of-Control
Arrangements" for a description of Mr. Lanfri's employment agreement with us.
EMPLOYEE AND DIRECTOR BENEFIT PLANS
1998 STOCK PLAN
Our 1998 Stock Plan provides for the grant of incentive stock options to
employees, including officers and employee directors, and for the grant of
nonstatutory stock options and stock purchase rights to employees, directors and
consultants. The 1998 Stock Plan was adopted by our board of directors and
approved by our stockholders in January 1998. Our board of directors and
stockholders approved amendments to the 1998 Stock Plan to increase the number
of shares reserved under the 1998 Stock Plan in March 1999, July 1999, October
1999 and January 2000.
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<PAGE> 56
As of December 31, 1999, a total of 8,745,117 shares of our common stock
were available for future grant under the 1998 Stock Plan. This amount includes
amounts returned to the 1998 Stock Plan, and annual increases which will be
added to the 1998 Stock Plan, beginning on July 1, 2000, equal to the lesser of
6,000,000 shares, 4.9% of our outstanding shares or a lesser amount determined
by our board. The 1998 Stock Plan has 29,550,000 shares of our common stock
reserved for issuance, of which options to acquire 3,401,427 shares have been
issued and are outstanding as of December 31, 1999 and a total of 20,056,980
shares have been issued and are outstanding pursuant to the exercise of options
and stock purchase rights granted under the 1998 Stock Plan.
Administration. Our board of directors or a committee of our board of
directors administers the 1998 Stock Plan. The administrator of our 1998 Stock
Plan has the power to determine, among other things:
- the terms of the options or stock purchase rights granted, including the
exercise price of the option or stock purchase right;
- the number of shares subject to each option or stock purchase right;
- the exercisability of each option or stock purchase right; and
- the form of consideration payable upon the exercise of each option or
stock purchase right.
Options. The exercise price of all incentive stock options granted under
the 1998 Stock Plan must be at least equal to the fair market value of the
common stock on the date of grant. The exercise price of nonstatutory stock
options and stock purchase rights granted under the 1998 Stock Plan is
determined by the administrator, but with respect to nonstatutory stock options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Internal Revenue Code, the exercise price must be at least
equal to the fair market value of our common stock on the date of grant. With
respect to any participant who owns stock representing more than 10% of the
voting power of all classes of our outstanding capital stock, the exercise price
of any incentive stock option granted must be at least equal 110% of the fair
market value on the grant date and the term of the incentive stock option must
not exceed five years. The term of all other options granted under the 1998
Stock Plan may not exceed 10 years.
During any fiscal year, each optionee may be granted options to purchase a
maximum of 1,500,000 shares. In addition, in connection with an optionee's
initial employment with us, the optionee may be granted an option covering an
additional 4,500,000 shares.
Options granted under the 1998 Stock Plan must generally be exercised
within three months after the end of the optionee's status as an employee,
director or consultant of ours, or within 12 months after the optionee's
termination by death or disability, but in no event later than the expiration of
the option's term.
Transferability of Options. Options and stock purchase rights granted under
the 1998 Stock Plan are generally not transferable by the optionee, and each
option and stock purchase right is exercisable during the lifetime of the
optionee only by the optionee.
Stock Purchase Rights. In the case of stock purchase rights, unless the
administrator determines otherwise, the restricted stock purchase agreement
shall grant us a repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's employment or consulting relationship with us for
any reason, including death or disability. The purchase price for shares
repurchased under the restricted stock purchase agreement shall be the original
price paid by the purchaser and may be paid by cancellation of any indebtedness
of the purchaser to us. The repurchase option shall lapse at a rate determined
by the administrator.
Adjustments upon Merger or Asset Sale. The 1998 Stock Plan provides that in
the event of our merger with or into another corporation, or a sale of
substantially all of our assets, each option and stock purchase right shall be
assumed or an equivalent option substituted for by the successor corporation. If
the outstanding options and stock purchase rights are not assumed or substituted
for by the successor corporation, the optionees will become fully vested in and
have the right to exercise the options or stock purchase rights. If an option or
stock purchase right becomes fully vested and exercisable in the event of a
merger or sale of assets,
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the administrator must notify the optionee that the option or stock purchase
right is fully exercisable for a period of 15 days from the date of the notice,
and the option or stock purchase right will terminate upon the expiration of the
15-day period.
Amendment and Termination of the 1998 Stock Plan. The administrator will
have the authority to amend, suspend or terminate the 1998 Stock Plan, as long
as this action does not affect any shares of common stock previously issued and
sold or any option previously granted under the 1998 Stock Plan. Unless earlier
terminated, the 1998 Stock Plan will terminate automatically 10 years from the
date of obtaining stockholder approval of the amended plan in December 1999.
1999 EMPLOYEE STOCK PURCHASE PLAN
Our 1999 Employee Stock Purchase Plan was adopted by our board of directors
and approved by our stockholders in January 2000. A total of 525,000 shares of
our common stock has been reserved for issuance under the 1999 Employee Stock
Purchase Plan, plus automatic annual increases beginning on July 1, 2000 equal
to the lesser of 750,000 shares, 1% of the outstanding shares on that date or an
amount determined by our board of directors. As of the date of this prospectus,
no shares have been issued under the 1999 Employee Stock Purchase Plan.
Structure of the 1999 Employee Stock Purchase Plan. The 1999 Employee Stock
Purchase Plan, which is intended to qualify under Section 423 of the Internal
Revenue Code, contains consecutive, six-month offering periods. The offering
periods generally start on the first trading day on or after February 1st and
August 1st of each year, except for the first offering period, which commences
on the first trading day on or after the effective date of this offering and
ends on the last trading day on or before July 31, 2000.
Eligibility. Employees are eligible to participate if they are customarily
employed by us or any of our participating subsidiaries for at least 20 hours
per week and more than five months in any calendar year. However, employees may
not be granted an option to purchase stock under the 1999 Employee Stock
Purchase Plan if they either:
- immediately after grant, own stock representing 5% or more of the total
combined voting power or value of all classes of our capital stock; or
- hold rights to purchase stock under our employee stock purchase plans
which accrue at a rate which exceeds $25,000 worth of stock for each
calendar year.
Purchases. The 1999 Employee Stock Purchase Plan permits participants to
purchase our common stock through payroll deductions of up to 10% of the
participant's "compensation." Compensation is defined as the participant's base
straight time gross earnings and commissions, exclusive of payments for shift
premium, bonuses, incentive compensation, incentive payments and other
compensation. The maximum number of shares a participant may purchase during
each offering period is 3,000 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the 1999 Employee Stock Purchase Plan is generally 85% of the
lower of the fair market value of the common stock either:
- at the beginning of the offering period; or
- at the end of the offering period.
Participants may end their participation at any time during an offering
period, and they will be paid their payroll deductions to date. Participation
ends automatically upon termination of employment with us.
Transferability of Rights. Rights granted under the 1999 Employee Stock
Purchase Plan are not transferable by a participant other than by will, the laws
of descent and distribution or as otherwise provided under the 1999 Employee
Stock Purchase Plan.
Merger or Asset Sale. The 1999 Employee Stock Purchase Plan provides that,
in the event we merge with or into another corporation or if there is a sale of
substantially all of our assets, each outstanding option
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<PAGE> 58
may be assumed or substituted for by the successor corporation. If the successor
corporation refuses to assume or substitute for the outstanding options, the
offering period then in progress will be shortened and a new exercise date will
be set.
Amendment and Termination of the 1999 Employee Stock Purchase Plan. The
1999 Employee Stock Purchase Plan will terminate in 2009. Our board of directors
has the authority to amend or terminate the 1999 Employee Stock Purchase Plan,
except that no action may impair any outstanding rights to purchase stock under
the 1999 Employee Stock Purchase Plan.
1999 DIRECTOR OPTION PLAN
Non-employee directors are entitled to participate in our 1999 Director
Option Plan. The 1999 Director Option Plan was adopted by our board of directors
and approved by our stockholders in January 2000, but it will not become
effective until the date of this offering. The 1999 Director Option Plan has a
term of 10 years, unless terminated sooner by our board of directors. A total of
300,000 shares of our common stock have been reserved for issuance under the
1999 Director Option Plan, plus automatic annual increases beginning on January
1, 2001 equal to the lesser of 150,000 shares, .25% of the outstanding shares on
that date or an amount determined by our board of directors.
Option Grants. The 1999 Director Option Plan generally provides for an
automatic initial grant of an option to purchase 40,000 shares of our common
stock to each non-employee director on the date which the later of the following
events occur:
- the effective date of the 1999 Director Option Plan; or
- the date when a person first becomes a non-employee director.
A non-employee director who owns, either directly or indirectly, our
securities representing 1% or more of our total voting power will not receive an
initial grant under the 1999 Director Option Plan and will only be eligible for
a subsequent grant when his or her ownership percentage drops below 1% of our
total voting power.
After the initial grant, each non-employee director will automatically be
granted subsequent options to purchase 10,000 shares of our common stock each
year on the date of our annual stockholders' meeting, if on such date he or she
has served on our board of directors for at least six months. Each initial
option grant and each subsequent option grant shall have a term of 10 years.
Each initial option grant will vest as to 25% of the shares subject to the
option on each anniversary of its date of grant. Each subsequent option grant
will fully vest on the anniversary of its date of grant. The exercise price of
all options will be 100% of the fair market value per share of our common stock
on the date of grant.
Options granted under the 1999 Director Option Plan must be exercised
within three months of the end of the optionee's tenure as a director of the
Company, or within 12 months after such director's termination by death or
disability, but in no event later than the expiration of the option's 10 year
term.
Transferability of Options. No option granted under the 1999 Director
Option Plan is transferable by the optionee other than by will or the laws of
descent and distribution, and each option is exercisable, during the lifetime of
the optionee, only by the optionee.
Merger, Asset Sale and Change of Control. The 1999 Director Option Plan
provides that in the event of our merger with or into another corporation, or a
sale of substantially all of our assets, the successor corporation shall assume
each option or substitute an equivalent option. If outstanding options are not
assumed or substituted for by the successor corporation, each option will become
fully exercisable for a period of thirty days from the date our board of
directors notifies the optionee of the option's full exercisability, after which
period the option shall terminate. In the event of a change of control each
outstanding option will become fully vested and exercisable.
Amendment and Termination of the 1999 Director Option Plan. The
administrator will have the authority to amend, suspend or terminate the 1999
Director Option Plan, so long as no action affects any shares of common stock
previously issued and sold or any option previously granted under the 1999
Director
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Option Plan. Unless terminated sooner, the 1999 Director Option Plan will
terminate automatically 10 years from the effective date of the plan.
401(K) PLAN
In November 1998, we adopted the Avanex Corporation 401(k) Profit Sharing
Plan, or our 401(k) Plan, which covers all of our eligible employees who have
completed three months of service and have attained age 21. The 401(k) Plan
excludes from participation all collectively bargained and non-resident alien
employees. The 401(k) Plan is intended to qualify under Section 401(a) of the
Internal Revenue Code of 1986 and the 401(k) Plan trust is intended to qualify
under Section 501(a) of the Internal Revenue Code. All contributions to the
401(k) Plan by eligible employees or by us, and the investment earnings thereon
are not taxable to such employees until withdrawn, and any contributions we may
make are expected to be deductible by us when made. Our eligible employees may
elect to reduce their eligible compensation by up to 15%, subject to statutorily
prescribed limits, and to have such compensation reductions contributed on their
behalf to the 401(k) Plan. The 401(k) Plan permits, but does not require, us to
make matching contributions to the 401(k) Plan. To date, we have not made any
matching contributions.
EMPLOYMENT AGREEMENTS AND CHANGE-OF-CONTROL ARRANGEMENTS
From time to time, we have entered into employment agreements with our
executive officers, including the executive officers listed in the "Summary
Compensation Table."
Walter Alessandrini. In March 1999, Walter Alessandrini accepted our offer
of employment. The offer letter provides that Dr. Alessandrini is entitled to
receive an annual salary of $275,000 and a bonus of $150,000 during his first
year of employment, to be paid based on the achievement of performance-based
milestones. His employment with us is on an at-will basis. In connection with
this offer letter, in April 1999, Dr. Alessandrini purchased, at a price of $.05
per share, 5,215,589 shares of our common stock, under a restricted stock
purchase agreement. These shares are subject to a right of repurchase that
lapses over a four-year period and as to one-fourth of these shares on March 22,
2000, with the repurchase right lapsing ratably monthly after that date. Any
shares as to which the repurchase right has not lapsed are subject to repurchase
by us in the event of the termination of his employment.
The offer letter also provided that we would loan Dr. Alessandrini up to
$300,000 in connection with the purchase of a home. For further discussion of
this loan, please see "Certain Transactions -- Loans to Executive Officers." The
offer letter also provides that if we terminate his employment with us without
cause then he will receive six months of salary and bonus and our right to
repurchase his shares under this offer letter will lapse as to a number of
shares equal to the greater of:
- one-fourth of these shares, if he is terminated before March 22, 2000; or
- an additional one-eighth of these shares if he is terminated on or after
March 22, 2000.
In addition, the offer letter provides that if he cannot serve as our Chief
Executive Officer for any period of time due to a legal restraint or litigation
in connection with a Confidentiality and Non-Competition Agreement that he
entered into with his previous employer, Pirelli Cables and Systems North
America, LLC, then we shall pay him up to $100,000 in salary in monthly
installments for up to six months during the period that he is not serving as
our Chief Executive Officer.
In October 1999, Dr. Alessandrini purchased 521,559 shares of our common
stock, at a price of $.39 per share, under a restricted stock purchase
agreement. These shares are subject to a right of repurchase that lapses over a
four-year period and as to one-fourth of his shares on March 22, 2000 with the
repurchase right lapsing ratably monthly after that date. Each of the restricted
stock purchase agreements relating to these purchases provides that, upon a
change of control, the lapsing of our right of repurchase will be accelerated so
that at least 50% of the common stock purchased under each restricted stock
purchase agreement will not be subject to our right of repurchase. In addition,
upon an involuntary termination of his employment without cause, upon or within
12 months of a change of control, our right of repurchase will lapse as to all
of the common stock subject to repurchase under each of his restricted stock
purchase agreements.
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Simon Cao. On January 2, 1998, Simon Cao accepted our offer of employment.
Initially, Dr. Cao was entitled to receive an annual salary of $125,000. On
September 8, 1998, Dr. Cao agreed to amend his initial offer letter to increase
his annual salary to $140,000. In August 1999, our board of directors increased
his annual salary to $180,024. His employment with us is on an at-will basis. In
connection with this offer letter, in January 1998, Dr. Cao purchased, at a
price of $.0007 per share, 2,700,000 shares of our common stock, under a
restricted stock purchase agreement. These shares are subject to a right of
repurchase that lapses over a four-year period and lapsed as to one-fourth of
these shares on January 13, 1999 with the repurchase right lapsing ratably
monthly after that date.
In August 1999, Dr. Cao purchased, at a price of $.10 per share, 900,000
shares of our common stock and in October 1999 purchased, at a price of $.39 per
share, 1,020,726 shares of our common stock, in each case under a restricted
stock purchase agreement. These shares are subject to a right of repurchase that
lapses over a four-year period and lapses as to one-fourth of the shares
purchased in August 1999, on June 17, 2000 and as to one-fourth the shares
purchased in October 1999, on October 8, 2000. The repurchase right lapses
ratably monthly after these dates. Each of the restricted stock purchase
agreements relating to these purchases provide that, upon a change of control,
the lapsing of our repurchase right will be accelerated so that at least 50% of
the common stock purchased under each restricted stock purchase agreement will
not be subject to our right of repurchase. In addition, upon an involuntary
termination of his employment without cause, upon or within 12 months of a
change of control, our right of repurchase will lapse as to all of the common
stock subject to repurchase under each of his restricted stock purchase
agreements.
Paul Jiang. In January 1998, Paul Jiang accepted our offer of employment.
His offer letter provided that he was entitled to receive an annual salary of
$115,000. On September 8, 1998, Mr. Jiang agreed to amend his initial offer
letter to increase his annual salary to $126,500. In August 1999, our board of
directors increased his annual salary to $140,000. His employment with us is on
an at-will basis. In connection with this offer letter, in January 1998, Mr.
Jiang was granted an option to purchase 1,800,000 shares of our common stock, at
an exercise price of $.0007 per share, which he exercised in February 1998 under
a restricted stock purchase agreement. These shares are subject to a right of
repurchase that lapses over a four-year period and lapsed as to one-fourth of
these shares on February 3, 1999 with the purchase right lapsing ratably monthly
after that date.
In July 1999, Mr. Jiang purchased 450,000 shares of our common stock, at a
price of $.03 per share, under a restricted stock purchase agreement. These
shares are subject to a right of repurchase that lapses over a four year period
and lapsed as to one-fourth of the shares purchased on February 8, 1999 with the
purchase right lapsing ratably monthly after that date. In November 1999, Mr.
Jiang purchased 150,000 shares of our common stock, at a price of $2.67 per
share, under a restricted stock agreement. These shares are subject to a right
of repurchase that lapses over a four-year period and as to one-fourth of his
shares on November 22, 2000 with the repurchase right lapsing monthly after that
date. Each of the restricted stock purchase agreements relating to these
purchases provide that, upon a change of control, the lapsing of our repurchase
right will be accelerated so that at least 50% of the common stock purchased
under each restricted stock purchase agreement will not be subject to our right
of repurchase. In addition, upon an involuntary termination of his employment
without cause, upon or within 12 months of a change of control, our right of
repurchase will lapse as to all of the common stock subject to repurchase under
each of his restricted stock purchase agreements.
Peter Maguire. In June 1999, Peter Maguire accepted our offer of
employment. His offer letter provided that he is entitled to receive an annual
salary of $165,000 and a bonus of $100,000 during his first year of employment.
If he terminates his employment or if we terminate his employment for cause, he
must repay this bonus. However, the amount of the bonus that must be repaid is
reduced by $8,333 per full month that he remains employed by us. His offer
letter provided that he receives a sales commission, to be negotiated annually,
equal to .5% of our sales made by June 30, 2000. This commission will be paid
upon the collection of the sales and on a quarterly basis. His employment with
us is on an at-will basis.
In connection with this offer letter, in July 1999, Mr. Maguire purchased
at a price of $.10 per share, 825,000 shares of our common stock, under a
restricted stock purchase agreement. These shares are subject to a right of
repurchase that lapses over a four-year period and lapses as to one-fourth of
the shares on June 28, 2000 with the repurchase right lapsing ratably monthly
after this date. The restricted stock purchase
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agreement relating to this purchase provides that, upon a change of control, the
lapsing of our repurchase right will be accelerated so that at least 50% of the
common stock purchased under this restricted stock purchase agreement will not
be subject to our right of repurchase. In addition, upon an involuntary
termination of his employment without cause, upon or within 12 months of a
change of control, our right of repurchase will lapse as to all of the common
stock subject to repurchase under his restricted stock purchase agreement.
William Lanfri. In June 1998, William Lanfri entered into an employment
agreement with us to serve as our acting Chief Executive Officer. As
consideration for his services, Mr. Lanfri was granted an option to purchase
112,500 shares of our common stock, at a price of $.03 per share. These shares
vested ratably over a three-month period beginning on January 1, 1999. In March
1999, this option was fully vested and he purchased 112,500 shares of our common
stock.
In June 1998, Mr. Lanfri was granted an additional option to purchase
341,101 shares of our common stock. Of the shares subject to this option,
227,401 shares vested ratably over a six-month period beginning in August 1998.
The remaining 113,700 shares subject to this option were designated by our board
of directors as "bonus shares." The bonus shares either were to vest in one lump
sum on July 1, 2004 or were to vest earlier at the sole discretion of our board
of directors. Our board of directors intended to vest these bonus shares if Mr.
Lanfri met certain performance milestones. In August 1998, Mr. Lanfri exercised
this option to purchase 341,101 shares of our common stock, but unvested shares
remained subject to our right of repurchase upon termination of his employment.
Upon Mr. Lanfri's resignation as our acting Chief Executive Officer in March
1999, our board of directors accelerated the lapsing of our repurchase right as
to 75,801 shares of Mr. Lanfri's bonus shares and we repurchased from him the
remaining 37,899 shares of common stock that remained subject to repurchase.
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CERTAIN TRANSACTIONS
Since our inception in October 1997, there has not been, nor is there
currently proposed, any transaction or series of similar transactions to which
we were or are to be a party in which the amount involved exceeds $60,000, and
in which any director, executive officer, holder of more than 5% of our common
stock or any member of the immediate family of any of these people had or will
have a direct or indirect material interest other than compensation agreements
and other arrangements, which are described where required in "Management," and
the transactions described below.
SALES OF OUR COMMON STOCK AND PREFERRED STOCK
Common Stock. The following table summarizes the private placement
transactions in which we sold common stock to our directors, executive officers,
5% stockholders and persons and entities affiliated with them. The price per
share for each of the following common stock purchases was equal to the fair
market value of our common stock on the date of each purchase. In determining
the fair market value of our common stock, our board of directors, in each case,
took into consideration a number of factors, including our operating results and
financial condition at the time of each purchase, key developments affecting our
business and, where relevant, the most recent price of our preferred stock in
connection with financing transactions with independent investors.
<TABLE>
<CAPTION>
SHARES OF
DATES OF PRICE PER COMMON
PURCHASER PURCHASE SHARE STOCK
--------- --------- --------- ---------
<S> <C> <C> <C>
Walter Alessandrini.............................. 4/30/99* $ .05 5,215,589
10/8/99* .39 521,559
Simon Cao........................................ 1/13/98 .0007 2,700,000
8/4/99* .10 900,000
10/12/99 .39 1,020,726
Paul Jiang....................................... 2/4/98 .0007 1,800,000
7/22/99* .03 450,000
11/26/99* 2.67 150,000
Peter Maguire.................................... 8/4/99* .10 825,000
William Lanfri................................... 8/31/98 .013 341,102
3/31/99 .03 112,500
Jessy Chao....................................... 2/5/98 .0007 1,350,000
11/26/99* 2.67 150,000
James Pickering.................................. 10/1/99* .39 263,880
Anthony Florence................................. 11/19/99* 2.33 195,000
</TABLE>
- ------------
* The purchaser signed a secured full recourse promissory note as consideration
for this purchase. For a description of these promissory notes, please see
"-- Loans to Executive Officers."
Series A Preferred Stock. On February 10, 1998, we sold our Series A
preferred stock at a price of $.149 per share. Each share of Series A preferred
stock is convertible into one share of common stock. Purchasers included the
following directors, 5% stockholders and persons and entities affiliated with
them:
<TABLE>
<CAPTION>
SHARES OF SERIES A
PURCHASER PREFERRED STOCK
--------- ------------------
<S> <C>
Entities affiliated with Crosspoint Venture Partners...... 2,250,000
Entities affiliated with Sequoia Capital.................. 2,250,000
Entities affiliated with JAFCO America Ventures, Inc. .... 2,250,000
</TABLE>
Crosspoint Venture Partners is a holder of more than 5% of our stock. Seth
Neiman, one of our directors, is a partner of Crosspoint Venture Partners.
Sequoia Capital is a holder of more than 5% of our stock. Michael Goguen, one of
our directors, is a general partner of Sequoia Capital. JAFCO America Ventures,
Inc. is a holder of more than 5% of our stock.
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Series B Preferred Stock. On June 29, 1998, we sold Series B preferred
stock at a price of $.27 per share. Each share of Series B preferred stock is
convertible into one share of common stock. Purchasers included the following
directors, 5% stockholders and persons and entities affiliated with them:
<TABLE>
<CAPTION>
SHARES OF SERIES B
PURCHASER PREFERRED STOCK
--------- ------------------
<S> <C>
Entities affiliated with Crosspoint Venture Partners...... 3,127,500
Entities affiliated with Sequoia Capital.................. 3,127,500
Entities affiliated with JAFCO America Ventures, Inc...... 3,127,500
</TABLE>
Series C Preferred Stock. On February 19, 1999 and March 25, 1999, we sold
our Series C preferred stock, at a price of $.504 per share. Each share of
Series C preferred stock is convertible into one share of common stock.
Purchasers included the following officers, directors, 5% stockholders and
persons and entities affiliated with them:
<TABLE>
<CAPTION>
SHARES OF
SERIES C
DATES OF PREFERRED
PURCHASER PURCHASE STOCK
--------- -------- ---------
<S> <C> <C>
Entities affiliated with Crosspoint Venture
Partners............................................ 2/19/99 3,174,603
Entities affiliated with Sequoia Capital.............. 2/19/99 3,174,603
Entities affiliated with JAFCO America Ventures,
Inc. ............................................... 2/19/99 1,194,127
Entities affiliated with the Mayfield Fund............ 3/25/99 4,464,285
William Lanfri........................................ 2/19/99 588,000
</TABLE>
The Mayfield Fund is a holder of more than 5% of our stock. Todd Brooks,
one of our directors, is a general partner of the Mayfield Fund. William Lanfri
was our former acting Chief Executive Officer.
Series D Preferred Stock. On September 14, 1999 and October 15, 1999, we
sold our Series D preferred stock, at a price of $3.83 per share. Each share of
Series D preferred stock is convertible into one share of common stock.
Purchasers included the following officers, directors, 5% stockholders and
persons and entities affiliated with them:
<TABLE>
<CAPTION>
SHARES OF
SERIES D
DATES OF PREFERRED
PURCHASER PURCHASE STOCK
--------- -------- ---------
<S> <C> <C>
Entities affiliated with Crosspoint Venture
Partners............................................ 9/14/99 1,542,387
Entities affiliated with Sequoia Capital.............. 9/14/99 1,542,387
Entities affiliated with JAFCO America Ventures,
Inc. ............................................... 10/15/99 1,327,683
Entities affiliated with the Mayfield Fund............ 9/14/99 805,142
</TABLE>
EMPLOYMENT AGREEMENTS WITH FOUNDERS
We were founded in October 1997 by Simon Cao, Paul Jiang and Jessy Chao.
Jessy Chao. In February 1998, Jessy Chao accepted our offer of employment.
His offer letter provided that he was entitled to receive an annual salary of
$90,000. In September 1998, Mr. Chao agreed to amend his initial offer letter to
increase his annual salary to $99,000. His employment with us is on an at-will
basis. In connection with this offer letter, in February 1998, Mr. Chao was
granted an option to purchase 1,350,000 shares of our common stock, at an
exercise price of $.0007 per share, which he exercised in February 1998 under a
restricted stock purchase agreement. These shares are subject to a right of
repurchase that lapses over a four-year period and lapsed as to one-fourth of
these shares on February 3, 1999 with the repurchase right lapsing ratably
monthly after that date.
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In November 1999, Mr. Chao purchased 150,000 shares of our common stock, at
a price of $2.67 per share, under a restricted stock purchase agreement. These
shares are subject to a right of repurchase that lapses over a four-year period
and as to one-fourth of his shares on November 22, 1999 with the repurchase
right lapsing ratably monthly after that date. Each of the restricted stock
purchase agreements relating to these purchases provide that, upon a change of
control, the lapsing of our right of repurchase will be accelerated so that at
least 50% of the common stock purchased under each restricted stock purchase
agreement will not be subject to our right of repurchase. In addition, upon an
involuntary termination of his employment without cause, upon or within 12
months of a change of control our right of repurchase will lapse as to all of
the common stock subject to repurchase under his restricted stock purchase
agreements.
For a description of our employment agreements with Dr. Cao and Mr. Jiang,
please see "Employment Agreements and Change-of-Control Arrangements."
LOANS TO EXECUTIVE OFFICERS
Walter Alessandrini. In April 1999, in connection with Walter
Alessandrini's purchase of 5,215,589 shares of our common stock, we loaned Dr.
Alessandrini $278,165 under a secured full recourse promissory note with an
annual interest rate of 4.99% compounded semi-annually. Principal and interest
on the note become due and payable on April 30, 2003. The note also provides
that we may accelerate payment of the amounts outstanding under the loan in the
event he ceases to be an employee or consultant of ours.
In April 1999, in connection with his purchase of a home, we loaned Dr.
Alessandrini $300,000 under a secured full recourse loan with an annual interest
rate of 4.9%. Principal and interest on this note become due and payable on the
earlier of six months from that date on which he can sell shares of our common
stock for an amount equal to the principal and interest owed on the note, or the
termination of his employment with us.
In October 1999, in connection with Dr. Alessandrini's purchase of 521,559
shares of our common stock, we loaned Dr. Alessandrini $201,669 pursuant to a
secured full recourse promissory note which has an annual interest rate of 6.02%
compounded semi-annually. Principal and interest on the note become due and
payable on October 31, 2003. The note also provides that we may accelerate
payment of the amounts outstanding under the loan in the event he ceases to be
an employee or consultant of ours. The largest principal amount outstanding of
Mr. Alessandrini's loans during the fiscal year ended June 30, 1999 was $578,165
and the principal amount outstanding on December 31, 1999 was $779,834.
Simon Cao. In August 1999, in connection with Simon Cao's purchase of
900,000 shares of our common stock, we loaned Dr. Cao $90,000 under a secured
full recourse promissory note with an annual interest rate of 5.96% compounded
semi-annually. Principal and interest on the note were to become due and payable
on August 4, 2003. The note also provides that we may accelerate payment of the
amounts outstanding under the loan in the event he ceases to be an employee or
consultant of ours. In August 1999, in consideration for his continued
employment with us, we agreed to forgive 25% of the principal and accrued
interest under the note on each one-year anniversary of August 4, 1999 for so
long as Dr. Cao remains our employee as of each anniversary.
In October 1999, in connection with Dr. Cao's purchase of 1,020,726 shares
of our common stock, we loaned Dr. Cao $394,681 under a secured full recourse
promissory note with an annual interest rate of 6.02% compounded semi-annually.
Principal and interest on the note become due and payable on October 12, 2003.
The note also provides that we may accelerate payment of the amounts outstanding
under the loan in the event he ceases to be an employee or consultant of ours.
Dr. Cao had no principal amounts outstanding on his loans during the fiscal year
ended June 30, 1999. The principal amount outstanding on his loans on December
31, 1999 was $484,681.
Paul Jiang. In July 1999, in connection with Paul Jiang's purchase of
450,000 shares of our common stock, we loaned Mr. Jiang $11,700 under a secured
full recourse promissory note with an annual interest rate of 5.69% compounded
semi-annually. Principal and interest on the note were to become due and payable
on July 22, 2003. The note also provides that we may accelerate payment of the
amounts outstanding under the loan in the event he ceases to be an employee or
consultant of ours. In July 1999, in consideration for his
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<PAGE> 65
continued employment with us, we agreed to forgive 25% of the principal and
accrued interest under the note on each one-year anniversary of July 22, 1999
for so long as Mr. Jiang remains our employee as of each anniversary.
In November 1999, in connection with Mr. Jiang's purchase of 150,000 shares
of our common stock, we loaned Mr. Jiang $400,000 under a secured full recourse
promissory note with an annual interest rate of 6.2% compounded semi-annually.
Principal and interest on the note become due and payable on November 22, 2004.
The note also provides that we may accelerate payment of the amounts outstanding
under the loan in the event he ceases to be an employee or consultant of ours.
Mr. Jiang had no principal amounts outstanding on his loans during the fiscal
year ended June 30, 1999. The principal amount outstanding on his loans on
December 31, 1999 was $411,700.
Peter Maguire. In August 1999, in connection with Peter Maguire's purchase
of 825,000 shares of our common stock, we loaned him $82,500 under a secured
full recourse promissory note with an annual interest rate of 5.96% compounded
semi-annually. Principal and interest on the note become due and payable on
August 4, 2003. The note also provides that we may accelerate payment of the
amounts outstanding under the loan in the event he ceases to be an employee or
consultant of ours. Mr. Maguire had no principal amounts outstanding on his loan
during the fiscal year ended June 30, 1999. The principal amount outstanding on
his loan on December 31, 1999 was $82,500.
Jessy Chao. In November 1999, in connection with Jessy Chao's purchase of
150,000 shares of our common stock, we loaned Mr. Chao $400,000 under a secured
full recourse promissory note with an annual interest rate of 6.2% compounded
semi-annually. Principal and interest on the note become due and payable on
November 22, 2004. The note also provides that we may accelerate payment of the
amounts outstanding under the loan in the event he ceases to be an employee or
consultant of ours. Mr. Chao had no principal amounts outstanding on his loan
during the fiscal year ended June 30, 1999. The principal amount outstanding on
his loan on December 31, 1999 was $400,000.
James Pickering. In October 1999, in connection with James Pickering's
purchase of 263,880 shares of our common stock, we loaned him $102,034 under a
secured full recourse promissory note with an annual interest rate of 5.54%
compounded semi-annually. Principal and interest on the note become due and
payable on October 1, 2004. The note also provides that we may accelerate
payment of the amounts outstanding under the loan in the event he ceases to be
an employee or consultant of ours. Mr. Pickering had no principal amounts
outstanding on his loan during the fiscal year ended June 30, 1999. The
principal amount outstanding on his loan on December 31, 1999 was $102,034.
Anthony Florence. In November 1999, in connection with Anthony Florence's
purchase of 195,000 shares of our common stock, we loaned him $455,000 under a
secured full recourse promissory note with an annual interest rate of 5.99%
compounded semi-annually. Principal and interest on the note become due and
payable on November 19, 2004. The note also provides that we may accelerate
payment of the amounts outstanding under the loan in the event he ceases to be
an employee or consultant of ours.
In November 1999, in connection with Mr. Florence's employment offer, we
loaned Mr. Florence $125,000 under an unsecured full recourse promissory note
with an annual interest rate of 5.57%. Principal and interest on the note become
due and payable on the earliest of six months from that date on which he can
sell shares of our common stock for an amount equal to the principal and
interest owed on the note, or May 19, 2001, or the termination of Mr. Florence's
employment with us. Mr. Florence had no principal amounts outstanding on his
loans during the fiscal year ended June 30, 1999. The principal amount
outstanding on his loans on December 31, 1999 was $580,000.
STOCK OPTION GRANTS TO CERTAIN DIRECTORS
In December 1999, we granted to each of Vint Cerf, Federico Faggin, Gregory
Reyes, Jr. and Joel Smith options to purchase 40,000 shares of our common stock
at $3.34 per share. These options were granted under our 1998 Stock Plan. Each
of these options vests over a four year period with one-fourth of the shares
under each option vesting on December 10, 2000 and the remaining shares vesting
ratably monthly after that date.
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OTHER TRANSACTIONS
In June 1999, in connection with Peter Maguire beginning his employment
with us, we paid him a bonus of $100,000. This bonus must be repaid if he
voluntarily terminates his employment with us or we terminate his employment for
cause. The amount of the bonus that must be repaid in this event is reduced by
$8,333 per full month that he remains employed with us.
INDEMNIFICATION
We have entered into indemnification agreements with each of our directors
and officers. These indemnification agreements and our certificate of
incorporation and bylaws require us to indemnify our directors and officers to
the fullest extent permitted by Delaware law. Please see
"Management -- Limitations on Directors' Liability and Indemnification."
CONFLICT OF INTEREST POLICY
We believe that all transactions with affiliates described above were made
on terms no less favorable to us than could have been obtained from unaffiliated
third parties. Our policy is to require that a majority of the independent and
disinterested outside directors on our board of directors approve all future
transactions between us and our officers, directors, principal stockholders and
their affiliates. These transactions will continue to be on terms no less
favorable to us than we could obtain from unaffiliated third parties.
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<PAGE> 67
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of December 31, 1999, and as adjusted to
reflect the sale of common stock offered by this prospectus, by:
- each of the individuals listed in the "Summary Compensation Table;"
- each of our directors;
- each person, or group of affiliated persons, who is known by us to own
beneficially 5% or more of our common stock; and
- all current directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. As of December 31, 1999, other than Vint
Cerf, Federico Faggin, Gregory Reyes, Jr. and Joel Smith, no individual listed
in the table below owned any options or warrants to purchase any of our common
or preferred stock. Some of the shares held by our executive officers are
subject to our right of repurchase. For a description of this repurchase right,
please see "Management -- Employment Agreements and Change-of-Control
Arrangements" and "Certain Transactions."
Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, each stockholder named in the table has sole
voting and investment power with respect to the shares shown as beneficially
owned by them. This table also includes shares owned by a spouse as community
property. Percentage of ownership is based on 56,529,320 shares of common stock
outstanding on December 31, 1999 and 62,529,320 shares of common stock
outstanding after completion of this offering. This table assumes no exercise of
the underwriters' over-allotment option, gives effect to the conversion of all
outstanding shares of preferred stock, reflects the exercise of warrants to
purchase 337,500 shares of common stock prior to the closing of this offering
and the issuance of 769,230 shares of common stock to two corporate investors.
Unless otherwise indicated, the address of each of the individuals named below
is 40919 Encyclopedia Circle, Fremont, California 94538.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
NUMBER OF SHARES ----------------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OFFERING OFFERING
------------------------------------ ---------------- ----------- -----------
<S> <C> <C> <C>
5% STOCKHOLDERS
Entities affiliated with Crosspoint Venture
Partners(1)................................ 10,094,490 17.9% 16.1%
2925 Woodside Road
Woodside, CA 94062
Entities affiliated with Sequoia
Capital(2)............................ 10,094,490 17.9 16.1
3000 Sand Hill Road, Bldg. 4, Suite
280,
Menlo Park, CA 94025
Entities affiliated with JAFCO America
Ventures, Inc.(3)..................... 8,689,310 15.4 13.9
505 Hamilton Avenue, Suite 310
Palo Alto, CA 94301
Entities affiliated with the Mayfield
Fund(4)............................... 5,269,427 9.3 8.4
2800 Sand Hill Road, Suite 250
Menlo Park, CA 94025
</TABLE>
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<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
NUMBER OF SHARES ----------------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OFFERING OFFERING
------------------------------------ ---------------- ----------- -----------
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Walter Alessandrini(5)................... 5,711,648 10.1% 9.1%
Simon Cao................................ 3,608,226 6.4 5.8
Paul Jiang(6)............................ 2,160,000 3.8 3.5
Peter Maguire............................ 825,000 1.5 1.3
William Lanfri(7)........................ 890,401 1.6 1.4
Vint Cerf................................ -- * *
Todd Brooks(4)........................... 5,269,427 9.3 8.4
c/o the Mayfield Fund
2800 Sand Hill Road, Suite 250
Menlo Park, CA 94025
Federico Faggin.......................... -- * *
Michael Goguen(2)........................ 10,094,490 17.9 16.1
c/o Sequoia Capital
3000 Sand Hill Road, Bldg. 4, Suite
280
Menlo Park, CA 94025
Seth Neiman(1)........................... 10,094,490 17.9 16.1
c/o Crosspoint Venture Partners
2925 Woodside Road
Woodside, CA 94062
Gregory Reyes, Jr. ...................... -- * *
Joel Smith............................... -- * *
All directors and executive officers as a
group (15 persons).................... 40,537,561 71.7 64.8
</TABLE>
- ------------
* Less than 1% of the outstanding shares of common stock.
(1) Represents 8,552,103 shares held by Crosspoint Venture Partners 1997 and
1,542,387 shares held by Crosspoint Venture Partners LS 1999. The general
partner of Crosspoint Venture Partners 1997 is Crosspoint Associates 1997.
The general partner of Crosspoint Venture Partners LS 1999 is Crosspoint
Associates 1999. The general partners of Crosspoint Associates 1997 and
Crosspoint Associates 1999 are John Mumford, Rich Shapero, Robert Hoff, Don
Milder and Seth Neiman, one of our directors. Each of the general partners
of Crosspoint Associates 1997 and Crosspoint Associates 1999 disclaim
beneficial ownership of the shares held by Crosspoint Venture Partners 1997
and Crosspoint Venture Partners LS 1999, except to the extent of his
pecuniary interest in these shares.
(2) Represents 8,607,692 shares held by Sequoia Capital VII; 618,459 shares held
by Sequoia Capital Franchise Fund; 376,293 shares held by Sequoia Technology
Partners VII, a California Limited Partnership; 174,600 shares held by SQP
1997; 150,518 shares held by Sequoia International Partners; 98,211 shares
held by Sequoia 1997 LLC and 68,718 shares held by Sequoia Capital Franchise
Partners. SC VII-A Management LLC is the general partner of Sequoia Capital
VII, Sequoia Technology Partners VII and Sequoia International Partners. The
general partners of SC VII-A Management are Douglas Leone, Michael Moritz,
Mark Stevens and Thomas Stephenson. Each of the general partners of SC VII-A
Management LLC disclaim beneficial ownership of the shares held by Sequoia
Capital VII, Sequoia Technology Partners VII and Sequoia International
Partners, except to the extent of their pecuniary interest in these shares.
The general partner of Sequoia Capital Franchise Fund and Sequoia Capital
Franchise Partners is SCFF Management LLC. The general partners of SCFF
Management
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<PAGE> 69
LLC are Douglas Leone, Michael Moritz, Mark Stevens, Thomas Stephenson and
Michael Goguen, one of our directors. Each of the general partners of SCFF
Management LLC disclaim beneficial ownership of the shares held by Sequoia
Capital Franchise Fund and Sequoia Capital Franchise Partners, except to the
extent of his pecuniary interest in these shares.
(3) Represents 5,888,634 shares held by U.S. Information Technology No. 2
Investment Enterprise Partnership, 612,059 shares held by JAFCO Co., Ltd.,
215,234 shares held by JAFCO G6-(A) Investment Enterprise Partnership,
215,234 shares held by JAFCO G6-(B) Investment Enterprise Partnership,
215,234 shares held by JAFCO JS-3 Investment Enterprise Partnership and
215,234 held by JAFCO R-3 Investment Enterprise Partnership. The general
partners of U.S. Information Technology No. 2 Investment Enterprise
Partnership are JAFCO America Ventures, Inc., a California corporation, and
JAFCO Co., Ltd., a Japanese corporation. The general partner of JAFCO G6-(A)
Investment Enterprise Partnership, JAFCO G6-(B) Investment Enterprise
Partnership, JAFCO JS-3 Investment Enterprise Partnership and JAFCO R-3
Investment Partnership is JAFCO Co., Ltd.
(4) Represents 5,005,956 shares held by Mayfield IX and 263,471 shares held by
Mayfield Associates Fund IV. Mayfield IX Management LLC is the general
partner of Mayfield IX and Mayfield Associates Fund IV. The managing
directors of Mayfield IX Management LLC are Yogen K. Dalal, Kevin A. Fong,
A. Grant Heidrich, Mike J. Levinthal, Russell C. Hirsch, Wende S. Hutton,
George A. Pavlov, F. Gib Myers, Bill D. Unger and Van Van Auken. The
non-managing directors of Mayfield IX Management LLC are David J. Ladd,
Allen L. Morgan and Todd A. Brooks, one of our directors. Each of the
managing directors and non-managing directors of Mayfield IX Management LLC
disclaims beneficial ownership of the shares held by Mayfield IX and
Mayfield Associates Fund IV, except to the extent of his pecuniary interest
in these shares.
(5) Represents 5,258,648 shares held by Mr. Alessandrini individually; 225,000
shares held by the Walter Alessandrini Annuity Trust u/i dtd. November 22,
1999, of which Mr. Alessandrini is trustee and has voting and dispositive
power over; 225,000 shares held by the Anna Rita Alessandrini Annuity Trust
u/i dtd. November 22, 1999, of which Mr. Alessandrini is trustee and has
voting and dispositive power over; and 2,000 shares held by the Laura
Graziani-Trust 1999 u/i dtd. December 2, 1999, of which Mr. Alessandrini is
a trustee and has voting and dispositive power over.
(6) Represents 1,860,000 shares held by Mr. Jiang individually and 300,000
shares held by the Eric W.Z. Jiang Trust -- 1999 u/i dtd. October 22, 1999
of which he is a trustee and has voting and dispositive power over.
(7) Represents 632,401 shares held by Mr. Lanfri individually; 15,000 shares
held by the LMR Charitable Remainder Trust of which his wife is trustee and
has voting and dispositive power over; 15,000 shares held by the JAL
Charitable Remainder Trust of which Mr. Lanfri is trustee and has voting and
dispositive power over; and 228,000 shares held by Mr. Lanfri's wife.
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DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, we will be authorized to issue
300,000,000 shares of common stock, $.001 par value per share, and 10,000,000
shares of undesignated preferred stock, $.001 par value per share. The following
description of our capital stock does not purport to be complete and is subject
to and qualified by our certificate of incorporation and bylaws, which are
included as exhibits to the Registration Statement of which this prospectus
forms a part, and by the provisions of applicable Delaware law.
COMMON STOCK
As of December 31, 1999, there were 56,529,320 shares of common stock
outstanding, assuming the conversion of all outstanding shares of preferred
stock into common stock, which were held of record by approximately 141
stockholders, and assuming the exercise of warrants to purchase 337,500 shares
of common stock and the issuance of 769,230 shares of common stock to two
corporate investors prior to the closing of this offering.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably dividends, if any, as may be declared from time to
time by the board of directors out of funds legally available for that purpose.
See "Dividend Policy." In the event of our liquidation, dissolution or winding
up of Avanex, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior distribution
rights of preferred stock, if any, then outstanding. The common stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable, and the
shares of common stock to be issued upon the closing of this offering will be
fully paid and nonassessable.
PREFERRED STOCK
The board of directors has the authority, without action by our
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, any or all
of which may be greater than the rights of the common stock. The effect of the
issuance of any shares of preferred stock upon the rights of holders of the
common stock might include, among other things, restricting dividends on the
common stock, diluting the voting power of the common stock, impairing the
liquidation rights of the common stock and delaying or preventing a change in
control of Avanex without further action by the stockholders. We have no present
plans to issue any shares of preferred stock.
WARRANTS
At December 31, 1999, there were warrants outstanding to purchase a total
of 337,500 shares of common stock and a warrant outstanding to purchase a total
of 29,347 shares of Series D preferred stock. The warrant to purchase 29,347
shares of Series D preferred stock will remain outstanding after the completion
of this offering and will become exercisable to purchase an aggregate of 29,347
shares of common stock. It will expire on July 8, 2004, unless earlier
exercised.
REGISTRATION RIGHTS
The holders of 35,788,364 shares of common stock, as converted, and the
holder of a warrant to purchase 29,347 shares of common stock, as converted, or
their permitted transferees are entitled to certain rights with respect to
registration of the shares under the Securities Act at any time after 180 days
following the closing of this offering. Under the terms of the agreements
between us and the holders of the registrable securities, by written consent of
more than 50% of the registrable securities then outstanding, the holders may
require on two occasions that we, at our expense, file a registration statement
under the Securities Act, with respect to the registrable securities, provided
that at least 30% of the registrable securities would be included in the
proposed registration or the anticipated public offering price of the proposed
registration would be at least $15.0 million. In addition, the holders of at
least 30% of the registrable securities then outstanding, at any time
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<PAGE> 71
12 months after the closing of this offering and at our expense, may require
that we register their shares for public resale on Form S-3 or similar
short-form registration, provided that we are eligible to use Form S-3 or
similar short-form registration, and provided further that the value of the
securities to be registered is at least $1.0 million. Furthermore, in the event
we elect to register any of our shares of common stock after this offering for
purposes of effecting any public offering, the holders of registrable securities
are entitled, at our expense, to include their shares of common stock in the
registration, subject to the right of the underwriter to reduce the number of
shares proposed to be registered in view of market conditions.
In addition to the registration rights described above, Microsoft
Corporation and MCI WorldCom Venture Fund, at their own expense, are each
entitled to one demand registration for the 384,615 shares of common stock that
each of them are purchasing contemporaneously with this offering at any time
after 180 days following the closing of this offering.
DELAWARE LAW AND CERTAIN PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND
BYLAWS
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make it more difficult to acquire us by means of a tender offer, a
proxy contest or otherwise and the removal of incumbent officers and directors.
These provisions, summarized below, are expected to discourage certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of us to first negotiate with us. We believe
that the benefits of increased protection of our potential ability to negotiate
with the proponent of an unfriendly or unsolicited proposal to acquire or
restructure us outweigh the disadvantages of discouraging takeover or
acquisition proposals because, among other things, negotiation of these
proposals could result in an improvement of their terms.
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became an
interested stockholder, unless, with exceptions, the business combination or the
transaction in which the person became an interested stockholder is approved in
a prescribed manner. Generally, a business combination includes a merger, asset
or stock sale, or other transaction resulting in a financial benefit to the
interested stockholder. Generally, an interested stockholder is a person who,
together with affiliates and associates, owns, or within three years prior to
the determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. The existence of this provision would be expected to
have an anti-takeover effect with respect to transactions not approved in
advance by the board of directors, including discouraging attempts that might
result in a premium over the market price for the shares of common stock held by
stockholders.
Our certificate of incorporation and bylaws require that any action
required or permitted to be taken by our stockholders must be effected at a duly
called annual or special meeting of the stockholders and may not be effected by
a consent in writing. In addition, special meetings of our stockholders may be
called only by the board of directors or certain of our officers. Our
certificate of incorporation and bylaws also provide that, beginning upon the
closing of this offering, our board of directors will be divided into three
classes, with each class serving staggered three-year terms, and that certain
amendments of the certificate of incorporation and of the bylaws require the
approval of holders of at least 66.7% of the voting power of all outstanding
stock. These provisions may have the effect of deterring hostile takeovers or
delaying changes in control or management of Avanex.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is BankBoston, N.A.
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SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for our
common stock. Future sales of substantial amounts of common stock in the public
market could adversely affect the market price of the common stock.
Upon completion of this offering, we will have outstanding 62,529,320
shares of common stock, assuming the issuance of 6,000,000 shares of common
stock offered by us and no exercise of options outstanding and assuming no
exercise of the underwriters' over-allotment option and assuming the issuance of
769,230 shares of common stock to two corporate investors. All of the 6,000,000
shares sold in this offering will be freely tradable without restriction or
further registration under the Securities Act. If shares are purchased by our
"affiliates" as that term is defined in Rule 144 under the Securities Act, their
sales of shares would be subject to the limitations and restrictions that are
described below.
As of December 31, 1999, the remaining 56,529,320 shares of common stock
held by existing stockholders were issued and sold by us in reliance on
exemptions from the registration requirements of the Securities Act. Of these
shares, 55,391,841 shares will be subject to lock-up agreements, described
below, on the date of this prospectus. On the date of this prospectus, shares
not subject to the lock-up agreements described below may be eligible for sale
pursuant to Rules 144, 144(k) or 701. In addition, holders of stock options
could exercise such options and sell certain of the shares issued upon exercise
as described below.
<TABLE>
<CAPTION>
APPROXIMATE
SHARES ELIGIBLE
RELEVANT DATES FOR FUTURE SALE COMMENT
-------------- --------------- -------
<S> <C> <C>
On the date of this prospectus.......... 6,000,000 Freely tradable shares sold in this offering
180 days after the date of this All shares subject to lock-up released;
prospectus (assuming this prospectus shares salable under Rules 144, 144(k) and
will be dated February 14, 2000)........ 46,147,818 701
</TABLE>
Some of the shares in the table above, including shares held by executive
officers and directors, listed as not being salable until 180 days after the
date of this prospectus may become salable as soon as the 90th day after the
date of this prospectus as described under "-- Lock-up Agreements" below.
The 769,230 shares of common stock that we agreed to sell to MCI WorldCom
Venture Fund and Microsoft will be "restricted securities" and the one year
holding period for these shares will expire one year from the date of sale. We
anticipate that the date of sale will occur in February 2000. However, each of
MCI WorldCom Venture Fund and Microsoft may, beginning 180 days after the
completion of this offering, exercise their registration rights which will
enable them to sell all of their shares in the open market.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, 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:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 625,293 shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to other requirements regarding the
manner of sale, notice filing and the availability of current public information
about us.
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 such shares without complying with the manner of sale, notice
filing, 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.
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RULE 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchases shares from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of this offering is entitled to resell such shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with the holding period requirements or other restrictions contained in
Rule 701.
The Securities and Exchange Commission has indicated that Rule 701 will
apply to typical stock options granted by an issuer before it becomes subject to
the reporting requirements of the Securities Exchange Act, along with the shares
acquired upon exercise of such options, including exercises after the date of
this prospectus. Securities issued in reliance on Rule 701 are restricted
securities and, subject to the contractual restrictions described above,
beginning 90 days after the date of this prospectus, may be sold by persons
other than "affiliates," as defined in Rule 144, subject only to the manner of
sale provisions of Rule 144 and by "affiliates" under Rule 144 without
compliance with its one-year minimum holding period requirement.
STOCK OPTIONS
As of December 31, 1999, there were a total of 3,401,427 shares of common
stock subject to outstanding options under our 1998 Stock Plan, 169,717 of which
were vested, and all of which are subject to lock-up agreements. Immediately
after the completion of the offering, we intend to file registration statements
on Form S-8 under the Securities Act to register all of the shares of common
stock issued or reserved for future issuance under our 1998 Stock Plan, as
amended, our 1999 Director Stock Option Plan and our 1999 Employee Stock
Purchase Plan. On the date 180 days after the effective date of the offering, a
total of 591,917 shares of common stock subject to outstanding options will be
vested. After the effective dates of these registration statements, shares
purchased upon exercise of options granted under the 1998 Stock Plan, as
amended, 1999 Director Stock Plan and 1999 Employee Stock Purchase Plan and
would be available for resale in the public market.
LOCK-UP AGREEMENTS
Our officers, directors and substantially all of our stockholders, who hold
an aggregate of approximately 55,391,841 shares of our common stock, have
agreed, subject to limited exceptions, not to offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, or otherwise transfer
or dispose of, directly or indirectly, or enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the economic
consequences of ownership of any shares of common stock or any securities
convertible into or exercisable or exchangeable for shares of common stock for a
period of 180 days after the date of this prospectus, without the prior written
consent of Morgan Stanley & Co. Incorporated.
If the reported last sale price of the common stock on the Nasdaq National
Market is at least twice the initial public offering price per share for 20 of
the 30 trading days ending on the last trading day preceding the 90th day after
the date of this prospectus, 25% of the shares of our common stock, or
13,847,960 shares, subject to the 180-day restriction described above will be
released from these restrictions. The release of these shares will occur on the
later to occur of:
- the 90th day after the date of this prospectus if we make our first
post-offering public release of our quarterly or annual earnings results
during the period beginning on the eleventh trading day after the date of
this prospectus and ending on the day prior to the 90th day after the
date of this prospectus, or
- on the second trading day following the first public release of our
quarterly or annual results occurring on or after the 90th day after the
date of this prospectus, if we do not make our first post-offering public
release as described in the preceding clause.
Morgan Stanley & Co. Incorporated may in its sole discretion choose to
release any or all of these shares from these restrictions prior to the
expiration of either the 90- or 180-day period.
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<PAGE> 74
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Lehman Brothers Inc., FleetBoston
Robertson Stephens Inc. and U.S. Bancorp Piper Jaffray Inc. are acting as
representatives, have severally agreed to purchase, and we have agreed to sell
to them, severally the number of shares indicated below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
Lehman Brothers Inc. .......................................
FleetBoston Robertson Stephens Inc. ........................
U.S. Bancorp Piper Jaffray Inc. ............................
---------
Total............................................. 6,000,000
=========
</TABLE>
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from us and subject to prior sale. The underwriting
agreement provides that the obligations of the several underwriters to pay for
and accept delivery of the shares of common stock offered by this prospectus are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The underwriters are obligated to take and pay for all of the
shares of common stock offered by this prospectus, if any such shares are taken.
However, the underwriters are not required to take or pay for the shares covered
by the underwriters over-allotment option described below.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the initial public offering price listed on the
cover page of this prospectus and part to certain dealers at a price that
represents a concession not in excess of $ a share under the initial
public offering price. Any underwriter may allow, and such dealers may reallow,
a concession not in excess of $ a share to other underwriters or to
certain dealers. After the initial offering of the shares of common stock, the
offering price and other selling terms may from time to time be varied by the
representatives of the underwriters.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of 900,000
additional shares of common stock at the initial public offering price listed on
the cover page of this prospectus, less underwriting discounts and commissions.
The underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the shares of
common stock offered by this prospectus. To the extent this option is exercised,
each underwriter will become obligated, subject to limited conditions, to
purchase approximately the same percentage of additional shares of common stock
as the number listed next to the underwriter's name in the preceding table bears
to the total number of shares of common stock listed next to the names of all
underwriters in the preceding table. If the underwriters' option is exercised in
full, the total price to the public would be $ , the total
underwriters' discounts and commissions would be $ and total proceeds
to us would be $ .
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
We have filed an application for our common stock to be quoted on the
Nasdaq National Market under the symbol "AVNX."
Avanex and our directors, executive officers and substantially all of our
stockholders have agreed that, without the prior written consent of Morgan
Stanley & Co. Incorporated on behalf of the underwriters, it will not, during
the period ending 180 days after the date of this prospectus:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
73
<PAGE> 75
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock, whether
these shares or any such securities are then owned by the person or are
thereafter acquired, directly from us; or
- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of common
stock,
whether any transaction described above is to be settled by delivery of common
stock or such other securities, in cash or otherwise. This lock-up restriction
is subject, in specified circumstances, to earlier release. For a description of
the circumstances leading to this earlier release, please see "Shares Eligible
for Future Sale -- Lock-up Agreements."
The restrictions described in this paragraph do not apply to:
- the sale of shares to the underwriters;
- transactions by any person other than us relating to shares of common
stock or other securities acquired in open market transactions after the
completion of the offering of the shares.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering if the syndicate repurchases previously distributed
shares of common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above independent market
levels. The underwriters are not required to engage in these activities and may
end any of these activities at any time.
We and the underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to approximately 300,000 shares of common stock
offered by this prospectus to our directors, officers, employees, customers and
other business associates. There can be no assurance that any of the reserved
shares will be purchased. The number of shares of common stock available for
sale to the general public will be reduced to the extent these parties purchase
the reserved shares. Any reserved shares that are not so purchased will be
offered by the underwriters to the general public on the same basis as the other
shares offered by this prospectus.
On January 14, 2000, we agreed to sell 384,615 shares of common stock to
each of two corporate investors for $13.00 per share in a private placement.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the shares of
common stock. The initial public offering price for the shares of common stock
offered by this prospectus will be determined by negotiations between us and the
representatives of the underwriters. Among the factors to be considered in
determining the initial public offering price will be:
- our record of operations, our current financial position and future
prospects;
- the experience of our management;
- sales, earnings and certain of our other financial and operating
information in recent periods; and
- the price-earnings ratios, price-sales ratios, market prices of
securities and financial and operating information of companies engaged
in activities similar to ours.
The estimated initial public offering price range set forth on the cover page of
this preliminary prospectus is subject to change as a result of market
conditions and other factors.
74
<PAGE> 76
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Certain legal matters will be passed upon for the underwriters
by Fenwick & West LLP, Palo Alto, California. As of the date of this prospectus,
an investment partnership composed of certain current and former members of and
persons associated with Wilson Sonsini Goodrich & Rosati, Professional
Corporation, in addition to certain current individual members of Wilson Sonsini
Goodrich & Rosati, Professional Corporation, beneficially own an aggregate of
418,419 shares of Avanex common stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at June 30, 1998 and 1999, and December 31, 1999, for the
period from October 24, 1997 (inception) to June 30, 1998, for the year ended
June 30, 1999, and for the six months ended December 31, 1999, as set forth in
their reports. We have included our consolidated financial statements in the
prospectus and elsewhere in the registration statement in reliance on their
reports given upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
We filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act for the shares of common stock in
this offering. This prospectus does not contain all of the information in the
registration statement and the exhibits and schedule that were filed with the
registration statement. For further information with respect to us and our
common stock, we refer you to the registration statement and the exhibits and
schedule that were filed with the registration statement. Statements contained
in this prospectus about the contents of any contract or any other document that
is filed as an exhibit to the registration statement are not necessarily
complete, and we refer you to the full text of the contract or other document
filed as an exhibit to the registration statement. A copy of the registration
statement and the exhibits and schedule that were filed with the registration
statement may be inspected without charge at the public reference facilities
maintained by the Securities and Exchange Commission in Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and copies of all or any part of the
registration statement may be obtained from the SEC upon payment of the
prescribed fee. The Securities and Exchange Commission maintains a web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission. The address of the site is http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act and, in
accordance with the requirements of the Securities Exchange Act will file
periodic reports, proxy statements and other information with the Securities and
Exchange Commission. These periodic reports, proxy statements and other
information will be available for inspection and copying at the regional
offices, public reference facilities and web site of the Securities and Exchange
Commission referred to above.
75
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 77
AVANEX CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Financial Statements:
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statement of Other Stockholders' Equity
(Deficit)................................................. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 78
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Avanex Corporation
We have audited the accompanying consolidated balance sheets of Avanex
Corporation as of June 30, 1998 and 1999, and December 31, 1999, and the related
consolidated statements of operations, other stockholders' equity (deficit), and
cash flows for the period from October 24, 1997 (inception) to June 30, 1998,
the year ended June 30, 1999, and the six months ended December 31, 1999. 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. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Avanex
Corporation at June 30, 1998 and 1999, and December 31, 1999, and the
consolidated results of its operations and its cash flows for the period from
October 24, 1997 (inception) to June 30, 1998, the year ended June 30, 1999, and
the six months ended December 31, 1999, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
January 14, 2000
San Jose, California
F-2
<PAGE> 79
AVANEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
JUNE 30, EQUITY AT
------------------ DECEMBER 31, DECEMBER 31,
1998 1999 1999 1999
------- -------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................................... $ 2,874 $ 1,756 $ 2,219
Short-term investments.................................... -- 1,968 12,160
Accounts receivable (net of allowance for doubtful
accounts of $30 at June 30, 1999 and $328 December 31,
1999)................................................... -- 272 2,753
Inventories............................................... -- 626 2,693
Employee receivables and other current assets............. 37 468 1,410
------- -------- --------
Total current assets................................ 2,911 5,090 21,235
Property and equipment, net................................. 408 1,671 5,632
Other assets................................................ 20 55 1,285
------- -------- --------
Total assets........................................ $ 3,339 $ 6,816 $ 28,152
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term borrowings..................................... $ -- $ 735 $ 1,963
Accounts payable.......................................... 97 990 2,166
Accrued compensation and related expenses................. 66 242 306
Warranty provision........................................ -- 51 604
Other accrued expenses.................................... 44 207 1,309
Deferred revenue.......................................... -- -- 137
Current portion of capital lease obligations.............. 67 205 437
------- -------- --------
Total current liabilities........................... 274 2,430 6,922
Capital lease obligations................................... 56 563 1,320
Long-term debt.............................................. 285 -- --
Commitments
Redeemable convertible preferred stock, $0.001 par value,
38,100,000 shares authorized (none pro forma), issuable in
series (stated at liquidation preference):
Series A, 6,900,000 shares designated, 6,795,120 shares
issued and outstanding at June 30, 1998 and 1999 and
December 31, 1999 (none pro forma)...................... 1,010 1,010 1,010 $ --
Series B, 9,525,000 shares designated, 9,445,116 shares
issued and outstanding at June 30, 1998 and 1999 and
December 31, 1999 (none pro forma)...................... 2,519 2,519 2,519 --
Series C, 16,275,000 shares designated, no shares issued
and outstanding at June 30, 1998; 13,548,253 shares
issued and outstanding at June 30 and December 31, 1999
(none pro forma)........................................ -- 6,828 6,828 --
Series D, 5,400,000 shares designated, no shares issued
and outstanding at June 30, 1998 and 1999; 5,230,645
shares issued and outstanding at December 31, 1999 (none
pro forma).............................................. -- -- 20,051 --
------- -------- -------- --------
Total redeemable convertible preferred stock........ 3,529 10,357 30,408 --
Other stockholders' equity (deficit):
Preferred stock, $0.001 par value, none authorized, issued
and outstanding (10,000,000 shares authorized pro forma)
Common stock, $0.001 par value, 75,000,000 shares
authorized (300,000,000 shares pro forma); 7,050,000
shares issued and outstanding at June 30, 1998;
18,141,290 shares issued and outstanding at June 30,
1999 and 20,403,456 shares issued and outstanding at
December 31, 1999 (55,422,590 shares pro forma)......... 7 18 20 55
Additional paid-in capital................................ 2,105 14,483 93,007 123,380
Notes receivable from stockholders.......................... (6) (326) (2,633) (2,633)
Deferred compensation..................................... (1,774) (10,351) (50,689) (50,689)
Accumulated deficit....................................... (1,137) (10,358) (50,203) (50,203)
------- -------- -------- --------
Total other stockholders' equity (deficit).......... (805) (6,534) (10,498) $ 19,910
------- -------- -------- ========
Total liabilities and stockholders' equity
(deficit)......................................... $ 3,339 $ 6,816 $ 28,152
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 80
AVANEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 24, 1997 SIX MONTHS ENDED
(INCEPTION) TO YEAR ENDED ---------------------------
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1999 1998 1999
---------------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenue................................ $ -- $ 510 $ -- $ 10,916
Cost of revenue............................ -- 531 -- 8,194
------- ----------- -------- -----------
Gross profit (loss)........................ -- (21) -- 2,722
Operating expenses:
Research and development................. 515 4,086 1,427 2,988
Sales and marketing...................... 125 956 265 1,676
General and administrative............... 131 723 244 2,129
Stock compensation....................... 362 3,464 673 15,697
------- ----------- -------- -----------
Total operating expenses......... 1,133 9,229 2,609 22,490
------- ----------- -------- -----------
Loss from operations....................... (1,133) (9,250) (2,609) (19,768)
Interest income............................ -- 148 30 239
Interest expense........................... (4) (119) (28) (265)
------- ----------- -------- -----------
Net loss................................... (1,137) (9,221) (2,607) (19,794)
Preferred stock accretion.................. -- -- -- (20,051)
------- ----------- -------- -----------
Net loss attributable to common
stockholders............................. $(1,137) $ (9,221) $ (2,607) $ (39,845)
======= =========== ======== ===========
Basic and diluted net loss per common
share.................................... $ (7.20) $ (4.97) $ (4.14) $ (6.41)
======= =========== ======== ===========
Weighted-average shares used in computing
basic and diluted net loss per common
share.................................... 157,831 1,856,688 629,553 6,215,219
======= =========== ======== ===========
Pro forma basic and diluted net loss per
common share (unaudited)................. $ (0.39) $ (1.02)
=========== ===========
Weighted-average shares used in computing
pro forma basic and diluted net loss per
common share (unaudited)................. 23,627,581 39,109,946
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-4
<PAGE> 81
AVANEX CORPORATION
CONSOLIDATED STATEMENT OF OTHER STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM OCTOBER 24, 1997 (INCEPTION) TO DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOTES TOTAL
ADDITIONAL RECEIVABLE STOCKHOLDERS'
COMMON PAID-IN FROM DEFERRED ACCUMULATED EQUITY
STOCK CAPITAL SHAREHOLDERS COMPENSATION DEFICIT (DEFICIT)
------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of 2,700,000 shares of
common stock to founder......... $ 3 $ (1) $ -- $ -- $ -- $ 2
Issuance of 4,050,000 shares of
common stock upon exercise of
share purchase rights............. 4 5 (6) -- -- 3
Issuance of 300,000 shares of
common stock.................... -- 1 -- -- -- 1
Issuance costs associated with
issuance of preferred shares.... -- (36) -- -- -- (36)
Deferred compensation............. -- 2,136 -- (2,136) -- --
Amortization of deferred
compensation.................... -- -- -- 362 -- 362
Net loss.......................... -- -- -- -- (1,137) (1,137)
--- ------- ------- -------- -------- --------
Balance at June 30, 1998...... 7 2,105 (6) (1,774) (1,137) (805)
Issuance of 11,129,190 shares of
common stock upon exercise of
stock options and share purchase
rights.......................... 11 350 (342) -- -- 19
Issuance costs associated with
issuance of preferred shares.... -- (13) -- -- -- (13)
Repurchase of 37,899 shares of
common stock.................... -- -- -- -- -- --
Forgiveness of stockholders' notes
receivable...................... -- -- 22 -- -- 22
Issuance of common stock options
to consultants.................. -- 539 -- -- -- 539
Deferred compensation............. -- 11,502 -- (11,502) -- --
Amortization of deferred
compensation.................... -- -- -- 2,925 -- 2,925
Net loss.......................... -- -- -- -- (9,221) (9,221)
--- ------- ------- -------- -------- --------
Balance at June 30, 1999...... 18 14,483 (326) (10,351) (10,358) (6,534)
Issuance costs associated with
issuance of preferred shares.... -- (24) -- -- -- (24)
Issuance of 4,877,790 shares of
common stock upon exercise of
stock options and share purchase
rights.......................... 5 2,376 (2,340) -- -- 41
Repurchase of 2,615,625 shares of
common stock.................... (3) (32) 33 -- -- (2)
Issuance of warrants.............. -- 118 -- -- -- 118
Issuance of common stock options
to consultants.................. -- 3,707 -- -- -- 3,707
Preferred stock accretion......... -- 20,051 -- -- (20,051) --
Deferred compensation............. -- 52,328 -- (52,328) -- --
Amortization of deferred
compensation.................... -- -- -- 11,990 -- 11,990
Net loss.......................... -- -- -- -- (19,794) (19,794)
--- ------- ------- -------- -------- --------
Balance at December 31,
1999........................ $20 $93,007 $(2,633) $(50,689) $(50,203) $(10,498)
=== ======= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 82
AVANEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 24, 1997 SIX MONTHS ENDED
(INCEPTION) TO YEAR ENDED ---------------------------
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1998 1999 1998 1999
---------------- ---------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss........................................... $(1,137) $(9,221) $(2,607) $(19,794)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation..................................... 21 102 120 269
Amortization..................................... 12 278 30 480
Stock compensation expense....................... 364 3,464 673 15,756
Forgiveness of stockholders' notes receivable.... -- 22 -- --
Changes in operating assets and liabilities:
Accounts receivable............................ -- (272) -- (2,481)
Inventories.................................... -- (626) (274) (2,067)
Employee receivables and other current
assets....................................... (37) (431) (28) (942)
Other assets................................... (20) (35) (20) (1,171)
Accounts payable............................... 97 893 481 1,176
Accrued compensation and related expenses...... 66 176 (9) 64
Warranty provision............................. -- 51 -- 553
Other accrued expenses and deferred revenue.... 44 163 112 1,239
------- ------- ------- --------
Net cash used in operating activities.......... (590) (5,436) (1,522) (6,918)
INVESTING ACTIVITIES
Purchases of available-for-sale securities......... -- (3,968) -- --
Maturities of available-for-sale securities........ -- 2,000 -- --
Purchases of held-to-maturity securities........... -- -- -- (17,238)
Maturities of held-to-maturity securities.......... -- -- -- 7,046
Purchases of property and equipment................ (301) (863) (230) (3,494)
------- ------- ------- --------
Net cash used for investing activities....... (301) (2,831) (230) (13,686)
FINANCING ACTIVITIES
Payments on debt and capital lease obligations..... (17) (135) (16) (1,149)
Proceeds from issuance of convertible notes
payable.......................................... 50 -- -- --
Proceeds from short-term and long-term debt........ 285 450 450 2,150
Proceeds from issuance of common stock............. 4 19 -- 41
Repurchases of common stock........................ -- -- -- (2)
Net proceeds from issuance of preferred stock...... 3,443 6,815 -- 20,027
------- ------- ------- --------
Net cash provided by financing activities.... 3,765 7,149 434 21,067
------- ------- ------- --------
Net increase (decrease) in cash and cash
equivalents...................................... 2,874 (1,118) (1,318) 463
Cash and cash equivalents at beginning of period... -- 2,874 2,874 1,756
------- ------- ------- --------
Cash and cash equivalents at end of period......... $ 2,874 $ 1,756 $ 1,556 $ 2,219
======= ======= ======= ========
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS
Equipment acquired under capital leases............ $ 140 $ 780 $ 286 $ 1,216
======= ======= ======= ========
Conversion of notes payable to convertible
preferred stock.................................. $ 50 $ -- $ -- $ --
======= ======= ======= ========
Common stock issued for notes receivable........... $ 6 $ 342 $ 68 $ 2,340
======= ======= ======= ========
Preferred stock accretion.......................... $ -- $ -- $ -- $ 20,051
======= ======= ======= ========
Warrants issued in connection with securing a line
of credit........................................ $ -- $ -- $ -- $ 118
======= ======= ======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid...................................... $ 2 $ 117 $ 11 $ 206
======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 83
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Avanex Corporation (the "Company") was incorporated on October 24, 1997.
The Company manufactures and markets fiber optic-based products, known as
photonic processors, which are designed to increase the performance of optical
networks.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. Intercompany accounts and transactions have
been eliminated in consolidation.
UNAUDITED INTERIM CONSOLIDATED FINANCIAL INFORMATION
The accompanying consolidated financial statements and related notes for
the six months ended December 31, 1998 are unaudited, but include all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary for a fair presentation of its consolidated financial
position, operating results, and cash flows for the interim date and the period
presented. Results for the six months ended December 31, 1999 are not
necessarily indicative of results for the entire fiscal year or future periods.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ materially from
those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents. The
Company considers all highly liquid investments with original maturities of
greater than three months but less than one year when purchased to be short-term
investments. Cash equivalents at June 30, 1998 and 1999 and at December 31, 1999
consisted primarily of money market funds.
SHORT-TERM INVESTMENTS
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. Debt securities are classified as held-to-maturity when the Company has
the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost.
Debt securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are stated at fair value,
based upon quoted market prices of the securities, with the unrealized gains and
losses reported in a separate component of stockholders' equity.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization and interest on the securities
are included in interest income. The cost of securities sold is based on the
specific identification method.
Short-term investments at June 30, 1999 and December 31, 1999 consisted
primarily of commercial paper, are classified as available-for-sale and
held-to-maturity, respectively, and are carried at amortized cost.
F-7
<PAGE> 84
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
Gross unrealized gains and losses and realized gains and losses on securities
have not been significant to date. There have been no sales of short-term
investments to date.
CONCENTRATION OF CREDIT RISK
Financial instruments, which subject the Company to potential credit risk,
consist of demand deposit accounts, money market accounts, short-term
investments and trade receivables. The Company maintains its demand deposit
accounts, money market accounts and short-term investments primarily with one
financial institution. The Company invests its excess cash principally in debt
securities. To date, the Company has not incurred losses related to these
investments. The Company sells primarily to large communications vendors. The
Company extends reasonably short collection terms but does not require
collateral. The Company provides reserves for potential credit losses. The
Company has not experienced significant losses to date. Management believes the
financial risks associated with these financial instruments are minimal.
For the year ended June 30, 1999, three customers each individually
accounted for over 10% of net revenue, for an aggregate of approximately 94% of
net revenue. One customer, representing 29% of revenue for the year ended June
30, 1999, is located in Japan. Outstanding receivables from these customers
approximated 98% of total gross accounts receivable at June 30, 1999. For the
six months ended December 31, 1999, one customer individually accounted for
approximately 88% of net revenue. The outstanding receivable from this customer
approximated 71% of total gross accounts receivable at December 31, 1999.
International revenue was not significant for the six months ended December 31,
1999.
REVENUE RECOGNITION
The Company generally recognizes product revenue when the product has been
shipped and there are no significant uncertainties with respect to customer
acceptance. For evaluation units where the customer has the right of return
through the end of the evaluation period, the Company recognizes revenue on
these shipments at the end of the evaluation period if not returned. The Company
accrues for warranty costs at the time revenue is recognized.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided on the
straight-line method over the useful lives of the assets, generally two to five
years.
EQUIPMENT UNDER CAPITAL LEASES
The Company leases certain of its equipment and other fixed assets under
capital lease agreements. The assets and liabilities under capital leases are
recorded at the lesser of the present value of aggregate future minimum lease
payments, including estimated bargain purchase options, or the fair value of the
assets under lease. Assets under capital leases are amortized over the shorter
of the lease term or useful life of the assets.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
STOCK-BASED COMPENSATION
Effective in the period ended June 30, 1998, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("FAS 123"). In accordance with the provisions of
FAS 123, the Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB Opinion No. 25") and related
interpretations in
F-8
<PAGE> 85
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
accounting for its stock option grants and share purchase rights to employees.
Accordingly, deferred compensation is recognized for the difference between the
option price or share purchase right at the date of grant and the deemed fair
value of the Company's common shares at that date when the option or share
purchase right exercise price is less than the fair value of the common shares.
Such deferred compensation is amortized over the vesting period, generally a
maximum of four years. Option grants to all others are accounted for under the
fair value method prescribed by FAS 123.
INVENTORIES
Inventories consist of raw materials, work-in-process and finished goods
and are stated at the lower of cost or market. Cost is computed on a currently
adjusted standard basis (which approximates actual costs on a first-in,
first-out basis).
INCOME TAXES
The Company uses the liability method to account for income taxes as
required by Financial Accounting Standards Board (FASB) Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities. Deferred tax assets
and liabilities are measured using enacted tax rates and laws that will be in
effect when the differences are expected to reverse.
COMPREHENSIVE INCOME
The Company reports comprehensive income (loss) in accordance with the
FASB's Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income." The comprehensive net loss for the period ended June 30,
1998, the year ended June 30, 1999 and the six months ended December 31, 1999
does not differ from the reported net loss.
CONCENTRATIONS OF SUPPLY
The Company currently purchases several key parts and components used in
manufacture of its products from limited sources of supply.
CONCENTRATIONS OF SALES
The Company's PowerFilter product has accounted for substantially all of
the Company's net revenue for the year ended June 30, 1999 and the six months
ended December 31, 1999.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expenses
for the period ended June 30, 1998, the year ended June 30, 1999 and the six
months ended December 31, 1999 were none, $76,000 and $347,000, respectively,
and are included in sales and marketing expenses.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of long-term debt obligations is estimated based on current
interest rates available to the Company for debt instruments with similar terms,
degrees of risk, and remaining maturities. The carrying values of these
obligations approximate their fair values.
F-9
<PAGE> 86
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY (DEFICIT)
If the offering contemplated by this prospectus is consummated, all of the
preferred stock outstanding will automatically be converted into common stock.
Unaudited pro forma stockholders' equity (deficit) at December 31, 1999, as
adjusted for the assumed conversion of preferred stock based on the shares of
preferred stock outstanding at December 31, 1999, is set forth on the
consolidated balance sheet.
SEGMENT INFORMATION
The Company has adopted the FASB's Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information." The Company operates in one segment, to manufacture and market
photonic processors.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133), which will be effective for the
Company's fiscal year ending June 30, 2001. This statement establishes
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement also requires that changes in the derivative's fair
value be recognized in earnings unless specific hedge accounting criteria are
met. The Company has not evaluated the impact of FAS 133; however, it believes
the adoption of FAS 133 will not have a material effect on the consolidated
financial position, results of operations, or cash flows as the Company has not
entered into any derivative contracts.
2. NET LOSS PER SHARE
Basic and diluted net loss per common share has been computed using the
weighted-average number of shares of common stock outstanding during the period,
less the weighted-average number of shares of common stock that are subject to
repurchase. Pro forma basic and diluted net loss per common share, as presented
in the consolidated statements of operations, have been computed as described
above and also give effect, to the conversion of the convertible preferred stock
(using the if-converted method) from the original date of issuance. To date, the
Company has not had any issuances of shares or option grants for nominal
consideration as that term is used in the Securities and Exchange Commission's
Staff Accounting Bulletin No. 98.
On January 14, 2000, the Company's stockholders approved a three-for-two
stock split in the form of a stock dividend. Accordingly, all share and
per-share data for all prior periods presented have been restated to reflect
this event.
F-10
<PAGE> 87
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
The following table presents the calculation of basic and diluted net loss
per common share and pro forma basic and diluted net loss per common share (in
thousands, except share and per share amounts):
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
OCTOBER 24, 1997 YEAR ENDED ----------------------------
(INCEPTION) TO JUNE 30, DECEMBER 31, DECEMBER 31,
JUNE 30, 1998 1999 1998 1999
---------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net loss attributable to common
stockholders........................ $ (1,137) $ (9,221) $ (2,607) $ (39,845)
Basic and diluted:
Weighted-average shares of common
stock outstanding.............. 4,327,109 12,850,622 11,829,848 19,092,293
Less: weighted-average shares
subject to repurchase.......... (4,169,278) (10,993,934) (11,200,295) (12,877,074)
----------- ----------- ----------- -----------
Weighted-average shares used in
computing basic and diluted net
loss per common share............. 157,831 1,856,688 629,553 6,215,219
=========== =========== =========== ===========
Basic and diluted net loss per
common share...................... $ (7.20) $ (4.97) $ (4.14) $ (6.41)
=========== =========== =========== ===========
Pro forma unaudited:
Shares used above................. 1,856,688 6,215,219
Pro forma adjustment to reflect
weighted effect of the assumed
conversion of preferred
stock.......................... 21,770,893 32,894,727
----------- -----------
Weighted-average shares used in
computing pro forma basic and
diluted net loss per common
share.......................... 23,627,581 39,109,946
=========== ===========
Pro forma basic and diluted net
loss per common share.......... $ (0.39) $ (1.02)
=========== ===========
Potentially dilutive securities
excluded from computations
because they are
anti-dilutive.................. 5,643,602 2,676,300 1,074,750 3,578,925
=========== =========== =========== ===========
</TABLE>
3. CONSOLIDATED BALANCE SHEET DETAILS
Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------ DECEMBER 31,
1998 1999 1999
---- ---- ------------
<S> <C> <C> <C>
Raw materials............................................... $-- $364 $1,329
Work-in-process............................................. -- 219 1,364
Finished goods.............................................. -- 43 --
-- ---- ------
$-- $626 $2,693
== ==== ======
</TABLE>
F-11
<PAGE> 88
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
Property and Equipment
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------- DECEMBER 31,
1998 1999 1999
---- ------ ------------
<S> <C> <C> <C>
Software and computer equipment............................. $ 34 $ 211 $ 540
Equipment and machinery..................................... 344 1,713 5,427
Furniture and fixtures...................................... 63 160 827
---- ------ -------
441 2,084 6,794
Accumulated depreciation.................................... (33) (413) (1,162)
---- ------ -------
$408 $1,671 $ 5,632
==== ====== =======
</TABLE>
4. RELATED PARTY TRANSACTIONS
On May 20, 1999, the Company loaned $300,000 to an employee for the
purchase of a home. The promissory note, which bears interest at 4.9% per annum,
and accrued interest are payable in full to the Company on the earliest of (i)
six months from the date on which the employee can sell shares of the Company's
common stock for an amount equal to the principal and interest on the note, or
(ii) the termination of employment with the Company.
On November 19, 1999, the Company loaned $125,000 to an employee. The
promissory note, which bears interest at 5.57% per annum, and accrued interest
are payable in full to the Company on the earliest of (i) May 19, 2001, (ii) six
months from the date on which the employee can sell shares of the Company's
common stock for an amount equal to the principal and interest on the note, or
(iii) the termination of employment with the Company.
In connection with the exercise of certain stock options and share purchase
rights granted under the Company's stock option plan, the Company has received
promissory notes equal to the total exercise price of these stock options and
share purchase rights. These full recourse promissory notes, which bear interest
at 4.99% - 6.20% per annum, and accrued interest are payable in full to the
Company, generally four to five years from the date each of the promissory notes
was issued. Promissory notes for the exercise of certain stock options and share
purchase rights totaling $6,000, $326,000, and $2,633,000 were outstanding as of
June 30, 1998, June 30, 1999, and December 31, 1999. These notes are classified
as a reduction of other stockholders' equity (deficit).
5. COMMITMENTS
In September 1999, the Company entered into an operating lease for a new
corporate headquarters and manufacturing facility. The Company has the right of
first refusal on the purchase of the building until April 1, 2000. Upon the
expiration of the lease in October 2009, the Company has an option to extend the
lease term for an additional five year period.
The Company leases equipment under capital leases. Such leases include a
lease facility entered into during May 1999 which made available to the Company
up to $3,000,000 to finance equipment purchases at an interest rate of 14.9% per
annum. As of December 31, 1999, the Company had an outstanding obligation of
$1,101,000 under this facility. Subsequent to December 31, 1999, the Company
drew down an additional $1,545,000 on this lease facility.
F-12
<PAGE> 89
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
As of December 31, 1999, payments due under capital leases and future
minimum lease payments under noncancelable operating leases having initial terms
in excess of one year are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
Six months ending June 30, 2000............................. $ 351 $ 641
Year ending June 30,
2001...................................................... 667 1,219
2002...................................................... 717 1,091
2003...................................................... 527 1,109
2004...................................................... -- 1,143
Remaining Years........................................... -- 5,360
------ -------
Total minimum lease payments...................... 2,262 10,563
Amount representing interest................................ (505) --
------ -------
Present value of net minimum lease payments................. 1,757 $10,563
=======
Less current portion........................................ 437
------
Long-term portion........................................... $1,320
======
</TABLE>
At June 30, 1998 and 1999 and December 31, 1999, equipment amounting to
approximately $140,000, $920,000, and $2,136,000 respectively, was capitalized
under capital leases. Related accumulated amortization at June 30, 1998 and 1999
and December 31, 1999 amounted to approximately $12,000, $290,000, and $770,000
respectively. The lease agreements are payable in monthly installments through
February 2003, bearing interest at 12.00%-19.47% per annum, and are fully
secured by the related equipment.
The Company's rental expense under operating leases was approximately
$97,000 for the period from inception (October 24, 1997) through June 30, 1998,
$346,000 for the year ended June 30, 1999, and $466,000 for the six months ended
December 31, 1999.
6. FINANCING ARRANGEMENTS
In July 1999, the Company secured a revolving line of credit from a
financial institution, which allows maximum borrowings up to $3,750,000. The
revolving credit agreement terminates October 1, 2000, at which time all
outstanding principal and interest are due. The line bears interest at the prime
rate plus 0.75%. The Company has pledged all of its assets as collateral for
this line. At December 31, 1999, the Company had outstanding borrowings of
$1,963,000 against this line. This line of credit requires the Company to comply
with specified covenants.
In connection with this line of credit, the Company issued a warrant
agreement to the financial institution, which entitles the holder to purchase
29,347 shares of the Company's common stock with an aggregate purchase price
equal to $112,000, or approximately $3.83 per share. The warrants are
exercisable at anytime, and will expire upon the earlier of (i) the closing of
any acquisition of the Company or (ii) their expiration on July 8, 2004. The
value of the warrants was estimated using the Black-Scholes option pricing model
with the following assumptions: weighted-average risk-free interest rate of
5.5%, contractual life of 5 years, volatility of 0.75 and no dividend yield. The
fair value of this warrant was estimated to be $118,000 and is recorded as
deferred interest expense. This amount is being amortized to interest expense
over the term of the agreement.
This line of credit replaced a previous line of credit with another
financial institution under which the Company had borrowings outstanding as of
June 30, 1998 and 1999 of $285,000 and $735,000.
F-13
<PAGE> 90
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Series A, B, C, and D preferred stock have a liquidation preference of
$0.149, $0.267, $0.504, and $3.833 per share, respectively, plus all declared
but unpaid dividends. Series A, B, C, and D preferred shareholders are entitled
to noncumulative dividends at the rate of $0.011, $0.021, $0.040, and $0.192 per
share, per annum, respectively, when and if declared by the Board of Directors
and in preference and priority to common stock dividends. No dividends have been
declared or paid by the Company.
The holders of each share of Series A, B, C, and D preferred stock are
entitled to one vote for each share of common stock into which such share may be
converted. Currently, the preferred shareholders, voting as a separate class,
are entitled to elect three directors. The holders of Series A, B, C, and D
preferred stock have the right, at the option of the holder, at any time to
convert their shares into common stock on a one-for-one basis, subject to
adjustments for future dilution. Series A, B, C, and D preferred stock
automatically convert into common stock, at the then applicable conversion rate,
upon a public offering of the Company's common stock at a per share price of not
less than $2.67, with aggregate proceeds in excess of $10,000,000, or upon the
consent of the holders of a majority of the then outstanding shares of preferred
stock.
On December 31 of each year beginning December 31, 2004, at the option of a
majority of the preferred shareholders, a portion of the preferred stock must be
redeemed at the original purchase price. Additionally, in certain circumstances
upon the subsequent issuance of preferred stock, the Company may be required to
redeem a certain number of the preferred shares outstanding.
In connection with the issuance of the Series D preferred stock, the
Company recorded a non-cash charge of $20,051,000 during the six months ended
December 31, 1999 to accrete the value of the preferred stock to its fair value.
This non-cash charge was recorded as an increase in accumulated deficit with a
corresponding credit to additional paid-in capital and was recognized at the
date of issuance which was the period in which the shares became eligible for
conversion.
8. OTHER STOCKHOLDERS' EQUITY
Shares Issued to Founder
In January 1998, the Company issued 2,700,000 shares of stock to one of its
founders pursuant to a restricted stock purchase agreement which permits the
Company to repurchase the shares at the original sales price. These rights
expire at a rate of 25% after one year and 1/48 per month thereafter. At
December 31, 1999, 1,350,000 shares remained subject to repurchase under these
agreements.
Common Stock to be Issued
In January 2000, the Company entered into agreements to sell shares of
common stock in a private placement with two separate corporate investors. Each
corporate investor will acquire 384,165 shares of common stock at $13.00 per
share contemporaneously with the initial public offering.
Stock Option/Rights Plan
The Company adopted the 1998 Stock Plan (the "Option Plan"), under which
officers, employees, directors, and consultants may be granted Incentive Stock
Options ("ISOs") and Nonstatutory Stock Options ("NSOs") to purchase shares of
the Company's common stock.
The Option Plan permits ISOs and NSOs to be granted at an exercise price of
not less than 100% of the fair value on the date of grant as determined by the
Board of Directors. Options that expire (generally ten years from the grant
date) or are canceled are returned to the Option Plan. The term of the Option
Plan is ten years. Options may be granted with different vesting terms as
determined by the Board of Directors. The options generally vest 25% upon
completion of one year of service and 1/48 per month thereafter.
F-14
<PAGE> 91
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
Stock option activity under the Option Plan is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------
WEIGHTED-
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
--------- ---------
<S> <C> <C>
Balance at inception (October 24, 1997)..................... -- --
Options granted............................................. 348,602 $0.01
--------- -----
Balance at June 30, 1998.................................... 348,602 $0.01
Options granted........................................... 1,297,050 $0.03
Options exercised......................................... (618,602) $0.02
Options canceled.......................................... (38,250) $0.05
--------- -----
Balance at June 30, 1999.................................... 988,800 $0.05
--------- -----
Options granted........................................... 2,678,352 $1.84
Options exercised......................................... (116,625) $0.35
Options canceled.......................................... (149,100) $0.57
--------- -----
Balance at December 31, 1999................................ 3,401,427 $1.40
========= =====
</TABLE>
<TABLE>
<CAPTION>
OUTSTANDING
-------------------------------------------------- EXERCISABLE
WEIGHTED -------------------------------
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF AS OF 12/31/99 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/99 EXERCISE PRICE
EXERCISE PRICES -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$0.000 - $0.013 97,500 9.82 $0.001 92,969 $0.001
$0.027 - $0.027 809,400 9.02 $0.027 28,170 $0.027
$0.053 - $0.200 186,600 9.39 $0.090 45,000 $0.100
$0.387 - $0.387 657,975 9.76 $0.387 78,124 $0.387
$0.720 - $4.333 1,649,952 9.91 $2.858 120,000 $3.792
- --------------- --------- ---- ------ ------- ------
$0.000 - $4.333 3,401,427 9.63 $1.404 364,263 $1.347
</TABLE>
Under the Option Plan, the Company may also grant share purchase rights
either alone, in addition to, or in tandem with other awards granted under the
Option Plan and/or cash awards granted outside the Option Plan. Exercise of
these share purchase rights are made pursuant to restricted stock purchase
agreements containing provisions established by the Board of Directors. These
provisions give the Company the right to repurchase the shares at the original
sales price. This right expires at a rate determined by the Board of Directors,
generally at a rate of 25% after one year and 1/48 per month thereafter. During
the period from October 24, 1997 to June 30, 1998, the year ended June 30, 1999,
and the six months ended December 31, 1999, the Company issued 4,050,000 shares,
10,510,589 shares, and 4,761,165 shares under the Option Plan. Shares subject to
repurchase were 4,050,000 shares as of June 30, 1998, 11,730,902 shares as of
June 30, 1999, and 12,889,566 shares as of December 31, 1999. For the year ended
June 30, 1999 and the six months ended December 31, 1999, the Company
repurchased 37,899 shares and 2,615,625 shares under the Option Plan.
At December 31, 1999, 1,245,117 shares were available for future grant
under the Option Plan which was increased by an additional 7,500,000 shares in
January 2000. In addition, annual increases will be added to the 1998 Stock
Plan, beginning on July 1, 2000, equal to the least of (i) 6,000,000 shares,
(ii) 4.9% of the Company's outstanding shares, and (iii) a lesser amount
determined by the Company's Board of Directors.
The weighted-average deemed fair value of stock options and share purchase
rights granted during 1998 and 1999 was $0.19 and $1.51, respectively. At
December 31, 1999, the weighted-average deemed fair value of stock options and
share purchase rights granted from July 1, 1999 through December 31, 1999 was
$8.87.
F-15
<PAGE> 92
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
For the period from October 24, 1997 to June 30, 1998, the year ended June
30, 1999 and the six months ended December 31, 1999, the Company recorded
deferred stock compensation of $2,136,000, $11,502,000 and $52,328,000,
respectively, representing the difference between the exercise price and the
deemed fair value for accounting purposes of the Company's common stock on the
date such stock options and share repurchase rights were granted. The deemed
fair value was based on the Company's retrospective review of the primary
business factors underlying the value of our common stock on the dates such
grants were made, viewed in light of the Company's initial public offering and
the expected initial public offering price per share. For the period October 24,
1997 to June 30, 1998, the year ended June 30, 1999 and the six months ended
December 31, 1999, the Company recorded amortization of deferred stock
compensation of $362,000, $2,925,000 and $11,990,000, respectively. At December
31, 1999, the Company had $50,689,000 of remaining unamortized deferred
compensation. Such amount is included as a reduction of other stockholders'
equity (deficit) and is being amortized over the vesting period.
For the year ended June 30, 1999 and the six months ended December 31,
1999, the Company recorded stock compensation cost of $539,000 and $3,707,000,
respectively related to common stock options granted to consultants. The value
of the options was estimated using the Black-Scholes option pricing model with
the following assumptions: weighted-average risk free interest rate of 5.50%,
contractual life of ten years, volatility of 0.75 and no dividend yield.
Pro Forma Disclosures of the Effect of Stock-Based Compensation
Pro forma information regarding results of operations and net loss per
share is required by FAS 123, which also requires that the information be
determined as if the Company had accounted for its employee stock options and
share repurchase rights under the fair value method of FAS 123. The fair value
of these options and share repurchase rights was estimated at the date of grant
using the minimum value method with the following weighted-average assumptions:
<TABLE>
<CAPTION>
JUNE 30,
------------------ DECEMBER 31,
1998 1999 1999
------- ------- ------------
<S> <C> <C> <C>
Risk-free interest rate................................... 5.5% 5.5% 5.5%
Dividend yield............................................ -- -- --
Weighted-average expected life............................ 5 years 5 years 5 years
</TABLE>
The option valuation models were developed for use in estimating the deemed
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the option. Because the
Company's employee stock options have characteristics significantly different
from those of traded options and because changes in subjective input assumptions
can materially affect the deemed fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
For purposes of pro forma disclosures, the deemed fair value of the options
is amortized to expense over the options' vesting period. For the period from
October 24, 1997 (inception) to June 30, 1998, the year ended June 30, 1999, and
the six months ended December 31, 1999, the pro forma consolidated net loss
attributable to common stockholders was $(1,147,000), $(9,313,000) and
$(44,374,000), respectively, and the pro forma net loss per common share was
$(7.27), $(5.02) and $(7.14), respectively.
The pro forma impact of options on the consolidated net loss attributable
to common stockholders for the period from October 24, 1997 (inception) to June
30, 1998 and the year ended June 30, 1999 is not representative of the effects
on consolidated net income (loss) attributable to common stockholders for future
years, as future years will include the effects of additional stock option
grants.
F-16
<PAGE> 93
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
1999 Director Option Plan
In January 2000, the Company adopted, subject to completion of the
Company's initial public offering, the 1999 Director Option Plan (the "Director
Option Plan"). Non-employee directors are entitled to participate in the
Director Option Plan. A total of 300,000 shares of the Company's common stock
have been reserved for issuance under the Director Option Plan, plus automatic
annual increases beginning on July 1, 2000 equal to the least of (i) 150,000
shares, (ii) 0.25% of the outstanding shares on that date, and (iii) a lesser
amount determined by the Company's Board of Directors. The Director Option Plan
generally provides for an automatic initial grant of an option to purchase
40,000 shares of our common stock to each non-employee director on the date
which the later of the following events occur: the effective date of the
Director Option Plan; or the date when a person first becomes a non-employee
director. After the initial grant, each non-employee director will automatically
be granted subsequent options to purchase 10,000 shares of common stock each
year on the date of the Company's annual stockholders' meeting. Grants generally
shall have a term of 10 years. Each initial option grant will vest as to 25% of
the shares subject to the option on each anniversary of its date of grant. Each
subsequent option grant will fully vest on the anniversary of its date of grant.
The exercise price of all options will be 100% of the fair market value per
share of the Company's common stock on the date of grant.
1999 Employee Stock Purchase Plan
In January 2000, the Company adopted, subject to completion of the
Company's initial public offering, the 1999 Employee Stock Purchase Plan (the
"Stock Purchase Plan") for its employees. A total of 525,000 shares of the
Company's common stock has been reserved for issuance under the Stock Purchase
Plan, plus automatic annual increases beginning on July 1, 2000 equal to the
least of (i) 750,000 shares, (ii) 1% of the outstanding shares on that date, and
(iii) a lesser amount determined by the Company's Board of Directors. The Stock
Purchase Plan permits participants to purchase the Company's common stock
through payroll deductions of up to 10% of the participant's compensation. The
maximum number of shares a participant may purchase during each offering period
is 3,000 shares. The price of common stock purchased will be 85% of the lower of
the fair market value at the beginning of the offering period and the ending of
the offering period.
Warrants
In December 1998, the Company issued warrants to three individuals in
connection with founding the Company. Each warrant agreement entitles the holder
to purchase 112,500 shares of the Company's common stock with an aggregate
purchase price equal to $1,350,000. The warrants are exercisable at any time,
and the warrants will expire upon the earlier of (i) the closing of any
acquisition of the Company or initial public offering or (ii) their expiration
on December 31, 2003. The Company has reserved 337,500 shares of common stock in
the event of the exercise of these warrants.
Shares Reserved
Common stock reserved for future issuance is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
Option Plan................................................. 4,646,544
Reserved for warrants....................................... 366,847
Conversion of preferred stock............................... 35,019,134
----------
Total common stock reserved for future issuance... 40,032,525
==========
</TABLE>
F-17
<PAGE> 94
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
In January 2000, the Company reserved 7,500,000 additional shares for
future issuance under the Option Plan, and, in addition, reserved shares for
future issuance, subject to completion of its initial public offering, of
300,000 shares related to the 1999 Director Option Plan and 525,000 shares
related to the 1999 Employee Stock Purchase Plan.
9. 401(k) PLAN
The Company maintains a savings and retirement plan under Section 401(k) of
the Internal Revenue Code. All employees are eligible to participate on the
first day of the month following their hire date with the Company. Under the
plan, employees may contribute up to 15% of their pretax salaries per year but
not more than the statutory limits. The Company has not contributed to the plan.
10. INCOME TAXES
There has been no provision for U.S. federal, U.S. state or foreign income
taxes for any period as the Company has incurred operating losses since
inception for all jurisdictions.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------- DECEMBER 31,
1998 1999 1999
----- ------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................... $ 288 $ 2,330 $ 3,593
Stock option compensation.................................. -- 988 5,640
Other...................................................... 32 480 994
----- ------- -------
Total............................................ 320 3,798 10,227
Valuation allowance........................................ (320) (3,798) (10,227)
----- ------- -------
Net deferred tax assets.................................... $ -- $ -- $ --
===== ======= =======
</TABLE>
Realization of the deferred tax assets is dependent upon future earnings,
if any, the timing and amount of which are uncertain. Accordingly, the net
deferred tax assets have been fully offset by a valuation allowance. The
valuation allowance increased by $320,000, $3,478,000 and $6,429,000 in the
period ended June 30, 1998, the year ended June 30, 1999, and the six months
ended December 31, 1999.
As of December 31, 1999, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $8,982,000, which expire in
years 2013 through 2020. The Company also had net operating loss carryforwards
for state income tax purposes of approximately $8,993,000 expiring in the year
2006. Utilization of the Company's net operating loss may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code and similar state provisions. Such an annual
limitation could result in the expiration of the net operating loss before
utilization.
F-18
<PAGE> 95
[INSIDE BACK COVER]
[The inside back cover starts with the heading "Avanex Photonic Processors"
followed by the Avanex logo and the word "Avanex(TM)." Down the left hand side
of the page are photographs of a PowerFilter, a PowerMux and a PowerShaper. To
the right of the corresponding photograph of the product is the following text:
"PowerFilter(TM) Optical Multiplexer/Demultiplexer
Features:
o Tuning capability to accommodate different wavelengths
o Improved system performance
o Reduced signal loss
o Fewer types of filters needed
PowerMux(TM) High Density Wavelength Division Multiplexer Processors
Features:
o Accommodates large number of wavelength channels
o Efficient use of the available optical wavelength range
o Low cost per wavelength channel
PowerShaper(TM) Chromatic Dispersion Compensation Processor (In beta
test)
Features:
o Fixed or tunable dispersion compensation
o Compact packaging
o Dispersion compensation across a broad optical wavelength range"
There follows the subheading "The Photonics Center(TM)," with a photograph of a
person in front of a rack of optical equipment. To the right of the photograph
is the following text:
"The Photonics Center(TM) at Avanex provides:
o A leading-edge customer demonstration and training center
o A simulated optical network that demonstrates deployment of Avanex
optical process technology
o Testing capabilities for development of products or prototypes
o Application training for customers"]
<PAGE> 96
LOGO
<PAGE> 97
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Avanex Corporation in
connection with the sale of common stock being registered. All amounts are
estimates except the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 27,324.00
NASD filing fee............................................. $ 10,850.00
Nasdaq National Market listing fee.......................... $ 95,000.00
Printing and engraving costs................................ $ 200,000.00
Legal fees and expenses..................................... $ 500,000.00
Accounting fees and expenses................................ $ 525,000.00
Blue Sky fees and expenses.................................. $ 10,000.00
Directors and Officers Insurance............................ $ 620,000.00
Transfer Agent and Registrar fees........................... $ 10,000.00
Miscellaneous expenses...................................... $ 26,826.00
-------------
Total............................................. $2,025,000.00
=============
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
Article VIII of our amended and restated certificate of incorporation
provides for the indemnification of directors and officers to the fullest extent
permissible under Delaware law.
Article VI of our bylaws provides for the indemnification of officers,
directors and third parties acting on behalf of Avanex if such person acted in
good faith and in a manner reasonably believed to be in and not opposed to our
best interest, and, with respect to any criminal action or proceeding, the
indemnified party had no reason to believe his or her conduct was unlawful.
We have entered into indemnification agreements with our directors and
executive officers, in addition to indemnification provided for in our bylaws,
and intend to enter into indemnification agreements with any new directors and
executive officers in the future. The indemnification agreements may require us,
among other things, to indemnify our directors and officers against certain
liability that may arise by reason of their status or service as directors and
officers (other than liabilities arising from willful misconduct of a culpable
nature), to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified, and to obtain directors and
officers' insurance, if available on reasonable terms.
Reference is also made to Section 7 of the form of Underwriting Agreement
contained in Exhibit 1.1 hereto, indemnifying officers and directors of Avanex
against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since inception, we have issued unregistered securities to a limited number
of persons, as described below. None of these transactions involved any
underwriters, underwriting discounts or commissions, or any public offering, and
we believe that each transaction was exempt from the registration requirements
of the Securities Act by virtue of Section 4(2) thereof, Regulation D
promulgated thereunder or Rule 701 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
II-1
<PAGE> 98
legends were affixed to the share certificates and instruments issued in such
transactions. All recipients had adequate access, through their relationships
with us, to information about us.
(1) From inception through December 31, 1999, (the most recent practicable
date) we granted stock options and restricted stock purchase rights to
acquire an aggregate of 15,731,832 shares of our common stock at
prices ranging from $0.001 to $6.50 to employees, consultants and
directors pursuant to our 1998 Stock Plan, as amended.
(2) From inception through December 31, 1999, we issued an aggregate of
13,311,320 shares of our common stock to employees, consultants and
directors pursuant to the exercise of options and restricted stock
purchase rights granted under our 1998 Stock Plan, as amended, for
aggregate consideration of $2,444,671.54.
(3) On January 13, 1998, we sold 1,800,000 shares of common stock to an
employee in exchange for $1,000.00 in cash and $800.00 in transferred
technology.
(4) On February 10, 1998, we sold 4,530,080 shares of Series A Preferred
Stock for $0.223 per share to a group of private investors for an
aggregate purchase price of $1,010,208.
(5) On February 19, 1998, we granted a right to purchase an aggregate of
200,000 shares of common stock to a consultant in consideration for
past services rendered for an aggregate value of $1,000.00.
(6) On June 29, 1998, we sold 6,296,744 shares of Series B Preferred Stock
for $0.40 per share to a group of private investors for an aggregate
purchase price of $2,518,698.
(7) On December 31, 1998, we issued warrants to purchase 75,000 shares of
our common stock at an exercise price of $6.00 a share to each of
Simon Cao, Haiguang Lu, and Lee Wang.
(8) On February 19, 1999 and March 25, 1999, we sold 9,032,169 shares of
Series C Preferred Stock for $0.756 per share to a group of private
investors for an aggregate purchase price of $6,828,320.
(9) On July 8, 1999, in connection with a Revolving Credit and Security
Agreement, we issued a warrant to purchase 19,565 shares of Series D
Preferred Stock at an exercise price of $5.75 to Comerica
Incorporated.
(10) On September 14 and October 15, 1999, we sold 3,487,097 shares of
Series D Preferred Stock for $5.75 per share to a group of private
investors for an aggregate purchase price of $20,050,807.75.
(11) On October 8, 1999, we granted under our 1998 Stock Plan, as amended,
a right to purchase an aggregate of 4,000 shares of common stock to a
consultant in consideration of past services rendered for an aggregate
value of $2,320.00.
(12) On December 10, 1999, we granted under our 1998 Stock Plan, as
amended, rights to purchase an aggregate of 60,000 shares of common
stock to consultants in consideration of past services rendered for an
aggregate value of $300,000.00.
(13) On January 14, 2000 we agreed to sell 769,230 shares of common stock
to corporate investors for an aggregate purchase price of
$9,999,990.00.
For additional information concerning these equity investment transactions,
reference is made to the information contained under the caption "Certain
Transactions" in the form of prospectus included herein.
II-2
<PAGE> 99
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<C> <S>
1.1++ Form of Underwriting Agreement
2.1++ Agreement and Plan of Merger of Avanex Corporation (a
Delaware Corporation) and Avanex Corporation (a California
Corporation)
3.1++ Amended and Restated Certificate of Incorporation to be
filed , 2000
3.2++ Amended and Restated Bylaws of the Registrant
3.3++ Amended and Restated Certificate of Incorporation to be
filed after effectiveness of this Registration Statement
filed , 2000
4.1++ Specimen Common Stock Certificate
4.3++ Warrant to Purchase the Stock of the Registrant held by
Comerica Incorporated
4.4++ Warrants to Purchase the Stock of the Registrant held by Lee
Wang, Haiguang Lu, and Simin Cai
5.1++ Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1++ Form of Indemnification Agreement between Registrant and
each of its directors and officers
10.2++ 1998 Stock Plan, as amended, and forms of agreement
thereunder
10.3++ 1999 Employee Stock Purchase Plan
10.4++ 1999 Director Option Plan
10.5++ Founder's Stock Purchase Agreement between the Registrant
and Simon Xiaofan Cao dated January 13, 1998
10.6++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Walter Alessandrini dated October 8, 1999
10.7++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Walter Alessandrini dated March 26, 1999
10.8++ Form of Restricted Stock Purchase Agreement
10.8.1++ Stock Purchase Agreement, including Security Agreement and
Promissory Note, between the Registrant and Paul Shi-Qi
Jiang dated July 22, 1999
10.8.2++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Simon Xiaofan Cao dated August 4, 1999
10.8.3++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Peter Maguire dated August 4, 1999
10.8.4++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
James Pickering dated September 10, 1999
10.8.5++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Margaret Quinn dated October 8, 1999
10.8.6++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Simon Xiaofan Cao dated October 12, 1999
10.8.7++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Anthony Florence dated November 19, 1999
10.8.8++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Jessy Chao dated November 26, 1999
</TABLE>
II-3
<PAGE> 100
<TABLE>
<C> <S>
10.8.9++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Paul Shi-Qi Jiang dated November 26, 1999
10.8.10++ Stock Option Agreement, and accompanying exhibits, between
the Registrant and Jessy Chao dated February 3, 1998
10.8.11++ Stock Option Agreement, and accompanying exhibits, between
the Registrant and Paul Shi-Qi Jiang dated February 3, 1998
10.8.12 Form of Stock Option Agreements between the Registrant and
certain directors
10.8.13++ Schedule of directors receiving stock options of the
Registrant
10.9++ Series A Preferred, Series B Preferred and Series C
Preferred Stock Purchase Agreement dated February 10, 1998
10.10++ First Amended and Restated Series A Preferred, Series B
Preferred, and Series C Preferred Stock Purchase Agreement
dated February 19, 1999
10.11++ Series D Preferred Stock Purchase Agreement dated September
14, 1999
10.12++ Second Amended and Restated Co-Sale Agreement dated
September 14, 1999
10.12.1++ Second Amended and Restated Voting Agreement dated September
14, 1999
10.12.2++ Second Amended and Restated Shareholder Rights Agreement
dated September 14, 1999
10.13++ Revolving Credit and Security Agreement between Comerica
Bank-California and the Registrant dated July 8, 1999
10.14++ Quick Start Loan and Security Agreement between Silicon
Valley Bank and the Registrant dated February 17, 1998
10.15++ Senior Loan and Security Agreement No. 053-6193 between
Phoenix Leasing Incorporated and the Registrant dated
November 5, 1998
10.16++ Master Lease No. S7280 dated June 2, 1999, between Finova
Capital Corporation and the Registrant
10.17++ Security Agreement dated September 16, 1999 between Comerica
Bank-California and the Registrant
10.18++ Employment Letter between the Registrant and Walter
Alessandrini dated March 2, 1999
10.19++ Secured Promissory Note held by the Registrant for Walter
Alessandrini dated May 20, 1999 and amendment to the Secured
Promissory Note dated December 1, 1999
10.20++ Employment Letter between the Registrant and Simon Cao dated
January 2, 1998
10.21++ Employment Letter between the Registrant and Paul Jiang
dated January 2, 1998
10.22++ Employment Agreement between the Registrant and William
Lanfri dated July 1, 1998
10.23++ Employment Letter between the Registrant and Peter Maguire
dated June 18, 1999
10.24* Patent License Agreement between Fujitsu Limited and the
Registrant dated July 15, 1998
10.24.1* Letter clarifying the Patent License Agreement between
Fujitsu Limited and the Registrant dated July 1, 1998
10.25++ Lease between the Registrant and Stevenson Business Park LLC
for Building B of 40915 Encyclopedia Circle, Fremont,
California dated September 8, 1999
10.26++ Assignment of Sublease between Registrant and Pathnet for
405 International Parkway, Richardson, Texas dated September
17, 1998
10.26.1++ Sublease between KLA-Tencor Corporation and Pathnet, Inc.
for 405 International Parkway, Richardson, Texas dated
October 16, 1997
</TABLE>
II-4
<PAGE> 101
<TABLE>
<C> <S>
10.27++ Amendment to Sublease for 405 International Parkway,
Richardson, Texas dated January 1998
10.28++ Master Lease for 405 International Parkway, Richardson,
Texas dated January 1, 1990
10.29++ Intellectual Property Security Agreement between Registrant
and Comerica Bank-California dated July 8, 1999
10.30* License and Supply Agreement between Registrant and Concord
Micro-Optics, Inc. dated May 24, 1999
10.31* International Distributor Agreement between the Registrant
and Hakuto Co., Ltd. dated November 1999
10.32++ Professional Services Agreement between the Registrant and
AristaSoft Corporation dated July 7, 1999
10.33++ Cost Sharing Agreement between the Registrant and Avanex
Cayman dated December, 1999
10.34* International Distributor Agreement between the Registrant
and Sun Instruments dated December 20, 1999
10.35++ Subscription Agreement between the Registrant and Microsoft
Corporation dated January 14, 2000
10.36++ Subscription Agreement between the Registrant and MCI
Worldcom Venture Fund dated January 14, 2000
10.37++ Third Amended and Restated Shareholder Rights Agreement
dated January 14, 2000
21.1++ List of subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2++ Consent of Counsel (See Exhibit 5.1)
24.1++ Power of Attorney (See page II-7)
27.1++ Financial Data Schedule for six months ended December 31,
1999
27.2++ Financial Data Schedule for the year ended June 30, 1999
27.3++ Financial Data Schedule for the period from October 24, 1997
(inception) to June 30, 1998
</TABLE>
- -------------
* Confidential treatment requested.
++ Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the consolidated financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
We hereby undertake to provide to the Underwriters at the closing specified
in the Underwriting Agreement certificates in such denominations and registered
in such names as required by the Underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement 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
II-5
<PAGE> 102
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by 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.
We hereby undertake that:
(1) For purposes of determining any liability under the Securities
Act, 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 that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 103
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Fremont, State of
California, on the 31st day of January, 2000.
AVANEX CORPORATION
By: /s/ JESSY CHAO
------------------------------------
Jessy Chao
Vice President, Finance and
Chief Financial Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ WALTER ALESSANDRINI* President and Chief Executive January 31, 2000
- ------------------------------------------------ Officer (Principal Executive
Walter Alessandrini Officer) and Director
/s/ JESSY CHAO Vice President, Finance and Chief January 31, 2000
- ------------------------------------------------ Financial Officer (Principal
Jessy Chao Financial and Accounting Officer)
/s/ SIMON XIAOFAN CAO* Senior Vice President, Product January 31, 2000
- ------------------------------------------------ Development and Director
Simon Xiaofan Cao
/s/ TODD BROOKS* Director January 31, 2000
- ------------------------------------------------
Todd Brooks
/s/ MICHAEL GOGUEN* Director January 31, 2000
- ------------------------------------------------
Michael Goguen
/s/ SETH NEIMAN* Director January 31, 2000
- ------------------------------------------------
Seth Neiman
/s/ VINT CERF* Director January 31, 2000
- ------------------------------------------------
Vint Cerf
/s/ JOEL SMITH* Director January 31, 2000
- ------------------------------------------------
Joel Smith
/s/ FEDERICO FAGGIN* Director January 31, 2000
- ------------------------------------------------
Federico Faggin
/s/ GREGORY REYES, JR.* Director January 31, 2000
- ------------------------------------------------
Gregory Reyes, Jr.
*By: /s/ JESSY CHAO Attorney-in-fact January 31, 2000
------------------------------------------
Jessy Chao
</TABLE>
II-7
<PAGE> 104
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1++ Form of Underwriting Agreement
2.1++ Agreement and Plan of Merger of Avanex Corporation (a
Delaware Corporation) and Avanex Corporation (a California
Corporation)
3.1++ Amended and Restated Certificate of Incorporation to be
filed , 2000
3.2++ Amended and Restated Bylaws of the Registrant
3.3++ Amended and Restated Certificate of Incorporation to be
filed after effectiveness of this Registration Statement
filed , 2000
4.1++ Specimen Common Stock Certificate
4.3++ Warrant to Purchase the Stock of the Registrant held by
Comerica Incorporated
4.4++ Warrants to Purchase the Stock of the Registrant held by Lee
Wang, Haiguang Lu, and Simin Cai
5.1++ Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1++ Form of Indemnification Agreement between Registrant and
each of its directors and officers
10.2++ 1998 Stock Plan, as amended, and forms of agreement
thereunder
10.3++ 1999 Employee Stock Purchase Plan
10.4++ 1999 Director Option Plan
10.5++ Founder's Stock Purchase Agreement between the Registrant
and Simon Xiaofan Cao dated January 13, 1998
10.6++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Walter Alessandrini dated October 8, 1999
10.7++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Walter Alessandrini dated March 26, 1999
10.8++ Form of Restricted Stock Purchase Agreement
10.8.1++ Stock Purchase Agreement, including Security Agreement and
Promissory Note, between the Registrant and Paul Shi-Qi
Jiang dated July 22, 1999
10.8.2++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Simon Xiaofan Cao dated August 4, 1999
10.8.3++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Peter Maguire dated August 4, 1999
10.8.4++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
James Pickering dated September 10, 1999
10.8.5++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Margaret Quinn dated October 8, 1999
10.8.6++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Simon Xiaofan Cao dated October 12, 1999
10.8.7++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Anthony Florence dated November 19, 1999
10.8.8++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Jessy Chao dated November 26, 1999
</TABLE>
<PAGE> 105
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
10.8.9++ Restricted Stock Purchase Agreement, including Security
Agreement and Promissory Note, between the Registrant and
Paul Shi-Qi Jiang dated November 26, 1999
10.8.10++ Stock Option Agreement, and accompanying exhibits, between
the Registrant and Jessy Chao dated February 3, 1998
10.8.11++ Stock Option Agreement, and accompanying exhibits, between
the Registrant and Paul Shi-Qi Jiang dated February 3, 1998
10.8.12 Form of Stock Option Agreements between the Registrant and
certain directors
10.8.13++ Schedule of directors receiving stock options of the
Registrant
10.9++ Series A Preferred, Series B Preferred and Series C
Preferred Stock Purchase Agreement dated February 10, 1998
10.10++ First Amended and Restated Series A Preferred, Series B
Preferred, and Series C Preferred Stock Purchase Agreement
dated February 19, 1999
10.11++ Series D Preferred Stock Purchase Agreement dated September
14, 1999
10.12++ Second Amended and Restated Co-Sale Agreement dated
September 14, 1999
10.12.1++ Second Amended and Restated Voting Agreement dated September
14, 1999
10.12.2++ Second Amended and Restated Shareholder Rights Agreement
dated September 14, 1999
10.13++ Revolving Credit and Security Agreement between Comerica
Bank-California and the Registrant dated July 8, 1999
10.14++ Quick Start Loan and Security Agreement between Silicon
Valley Bank and the Registrant dated February 17, 1998
10.15++ Senior Loan and Security Agreement No. 053-6193 between
Phoenix Leasing Incorporated and the Registrant dated
November 5, 1998
10.16++ Master Lease No. S7280 dated June 2, 1999, between Finova
Capital Corporation and the Registrant
10.17++ Security Agreement dated September 16, 1999 between Comerica
Bank-California and the Registrant
10.18++ Employment Letter between the Registrant and Walter
Alessandrini dated March 2, 1999
10.19++ Secured Promissory Note held by the Registrant for Walter
Alessandrini dated May 20, 1999 and amendment to the Secured
Promissory Note dated December 1, 1999
10.20++ Employment Letter between the Registrant and Simon Cao dated
January 2, 1998
10.21++ Employment Letter between the Registrant and Paul Jiang
dated January 2, 1998
10.22++ Employment Agreement between the Registrant and William
Lanfri dated July 1, 1998
10.23++ Employment Letter between the Registrant and Peter Maguire
dated June 18, 1999
10.24* Patent License Agreement between Fujitsu Limited and the
Registrant dated July 15, 1998
10.24.1* Letter clarifying the Patent License Agreement between
Fujitsu Limited and the Registrant dated July 1, 1998
10.25++ Lease between the Registrant and Stevenson Business Park LLC
for Building B of 40915 Encyclopedia Circle, Fremont,
California dated September 8, 1999
10.26++ Assignment of Sublease between Registrant and Pathnet for
405 International Parkway, Richardson, Texas dated September
17, 1998
10.26.1++ Sublease between KLA-Tencor Corporation and Pathnet, Inc.
for 405 International Parkway, Richardson, Texas dated
October 16, 1997
</TABLE>
<PAGE> 106
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
10.27++ Amendment to Sublease for 405 International Parkway,
Richardson, Texas dated January 1998
10.28++ Master Lease for 405 International Parkway, Richardson,
Texas dated January 1, 1990
10.29++ Intellectual Property Security Agreement between Registrant
and Comerica Bank-California dated July 8, 1999
10.30* License and Supply Agreement between Registrant and Concord
Micro-Optics, Inc. dated May 24, 1999
10.31* International Distributor Agreement between the Registrant
and Hakuto Co., Ltd. dated November 1999
10.32++ Professional Services Agreement between the Registrant and
AristaSoft Corporation dated July 7, 1999
10.33++ Cost Sharing Agreement between the Registrant and Avanex
Cayman dated December, 1999
10.34* International Distributor Agreement between the Registrant
and Sun Instruments dated December 20, 1999
10.35++ Subscription Agreement between the Registrant and Microsoft
Corporation dated January 14, 2000
10.36++ Subscription Agreement between the Registrant and MCI
Worldcom Venture Fund dated January 14, 2000
10.37++ Third Amended and Restated Shareholder Rights Agreement
dated January 14, 2000
21.1++ List of subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2++ Consent of Counsel (See Exhibit 5.1)
24.1++ Power of Attorney (See page II-7)
27.1++ Financial Data Schedule for six months ended December 31,
1999
27.2++ Financial Data Schedule for the year ended June 30, 1999
27.3++ Financial Data Schedule for the period from October 24, 1997
(inception) to June 30, 1998
</TABLE>
- -------------
* Confidential treatment requested.
++ Previously filed.
<PAGE> 1
EXHIBIT 10.8.12
AVANEX CORPORATION
1998 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall
have the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
- --------------------
You have been granted an Option to purchase Common Stock of the
Company, subject to the terms and conditions of the Plan and this Option
Agreement, as follows:
<TABLE>
<S> <C>
Date of Grant December 10, 1999
Vesting Commencement Date December 10, 1999
Exercise Price per Share $5.00
Total Number of Shares Granted 26,667
Total Exercise Price $133,335.00
Type of Option: [ ] Incentive Stock Option
[X] Nonstatutory Stock Option
Term/Expiration Date: December 9, 2009
</TABLE>
Exercise and Vesting Schedule:
This Option shall be exercisable immediately in its entirety on or
after the Vesting Commencement Date, conditioned upon Optionee entering into a
Restricted Stock Purchase Agreement, substantially in the form attached hereto
as EXHIBIT C-1, with respect to any unvested Shares. The minimum number of
shares with respect to which an Option may be exercised in part at any time is
one thousand (1,000) unless the Option grants the right to purchase, or the
number of remaining shares subject to the Option, is fewer than one thousand
(1,000) shares. Notwithstanding the foregoing, the Option may not be exercised
more frequently than twice in any continuous twelve (12) month period; provided,
however, that the foregoing restriction shall not apply so as to prevent an
exercise following the Optionee's termination of employment as set forth in the
Option Agreement. The Shares subject to this Option shall vest and be released
from the Company's repurchase option as follows: Provided that Optionee
maintains a continuous status as a Service Provider of the Company, Optionee
shall vest and the Option shall be exercisable as to 12/48ths of
<PAGE> 2
the Shares on the one year anniversary of the Vesting Commencement Date and at
the rate of 1/48th of the Shares on the last day of each full calendar month
thereafter, provided that the Purchaser is a Service Provider of the Company as
of such date.
II. AGREEMENT
1. Grant of Option. The Plan Administrator of the Company hereby grants
to the Optionee named in the Notice of Grant (the "Optionee"), an option (the
"Option") to purchase the number of Shares set forth in the Notice of Grant, at
the exercise price per Share set forth in the Notice of Grant (the "Exercise
Price"), and subject to the terms and conditions of the Plan, which is
incorporated herein by reference. Subject to Section 14(c) of the Plan, in the
event of a conflict between the terms and conditions of the Plan and this Option
Agreement, the terms and conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option as
defined in Section 422 of the Code. Nevertheless, to the extent that it exceeds
the $100,000 rule of Code Section 422(d), this Option shall be treated as a
Nonstatutory Stock Option ("NSO").
2. Exercise of Option.
(a) Right to Exercise. This Option shall be exercisable during its term
in accordance with the Vesting Schedule set out in the Notice of Grant and with
the applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option shall be exercisable by delivery of
an exercise notice in the form attached as EXHIBIT A (the "Exercise Notice")
which shall state the election to exercise the Option, the number of Shares with
respect to which the Option is being exercised, and such other representations
and agreements as may be required by the Company. The Exercise Notice shall be
accompanied by payment of the aggregate Exercise Price as to all Exercised
Shares. This Option shall be deemed to be exercised upon receipt by the Company
of such fully executed Exercise Notice accompanied by the aggregate Exercise
Price.
No Shares shall be issued pursuant to the exercise of an Option unless
such issuance and such exercise complies with Applicable laws. Assuming such
compliance, for income tax purposes the Shares shall be considered transferred
to the Optionee on the date on which the Option is exercised with respect to
such Shares.
3. Optionee's Representations. In the event the Shares have not been
registered under the Securities Act of 1933, as amended, at the time this Option
is exercised, the Optionee shall, if required by the Company, concurrently with
the exercise of all or any portion of this Option, deliver to the Company his or
her Investment Representation Statement in the form attached hereto as EXHIBIT
B.
-2-
<PAGE> 3
4. Lock-Up Period. Optionee hereby agrees that, if so requested by the
Company or any representative of the underwriters (the "Managing Underwriter")
in connection with any registration of the offering of any securities of the
Company under the Securities Act, Optionee shall not sell or otherwise transfer
any Shares or other securities of the Company during the 180-day period (or such
other period as may be requested in writing by the Managing Underwriter and
agreed to in writing by the Company) (the "Market Standoff Period") following
the effective date of a registration statement of the Company filed under the
Securities Act. Such restriction shall apply only to the first registration
statement of the Company to become effective under the Securities Act that
includes securities to be sold on behalf of the Company to the public in an
underwritten public offering under the Securities Act. The Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such Market Standoff Period.
5. Method of Payment. Payment of the aggregate Exercise Price shall be
by any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash or check;
(b) consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan; or
(c) surrender of other Shares which, (i) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than six
(6) months on the date of surrender, and (ii) have a Fair Market Value on the
date of surrender equal to the aggregate Exercise Price of the Exercised Shares.
6. Restrictions on Exercise. This Option may not be exercised until
such time as the Plan has been approved by the shareholders of the Company, or
if the issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any Applicable
Law.
7. Non-Transferability of Option. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee. The terms of
the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
8. Term of Option. This Option may be exercised only within the term
set out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option.
9. Tax Consequences. Set forth below is a brief summary as of the date
of this Option of some of the federal tax consequences of exercise of this
Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE,
AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD
CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
-3-
<PAGE> 4
(a) Exercise of ISO. If this Option qualifies as an ISO, there will be
no regular federal income tax liability upon the exercise of the Option,
although the excess, if any, of the Fair Market Value of the Shares on the date
of exercise over the Exercise Price will be treated as an adjustment to the
alternative minimum tax for federal tax purposes and may subject the Optionee to
the alternative minimum tax in the year of exercise.
(b) Exercise of ISO Following Disability. If the Optionee ceases to be
an Employee as a result of a disability that is not a total and permanent
disability as defined in Section 22(e)(3) of the Code, to the extent permitted
on the date of termination, the Optionee must exercise an ISO within three
months of such termination for the ISO to be qualified as an ISO.
(c) Exercise of Nonstatutory Stock Option. There may be a regular
federal income tax liability upon the exercise of a Nonstatutory Stock Option.
The Optionee will be treated as having received compensation income (taxable at
ordinary income tax rates) equal to the excess, if any, of the Fair Market Value
of the Shares on the date of exercise over the Exercise Price. If Optionee is an
Employee or a former Employee, the Company will be required to withhold from
Optionee's compensation or collect from Optionee and pay to the applicable
taxing authorities an amount in cash equal to a percentage of this compensation
income at the time of exercise, and may refuse to honor the exercise and refuse
to deliver Shares if such withholding amounts are not delivered at the time of
exercise.
(d) Disposition of Shares. In the case of an NSO, if Shares are held
for at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal income tax purposes. In the case
of an ISO, if Shares transferred pursuant to the Option are held for at least
one year after exercise and of at least two years after the Date of Grant, any
gain realized on disposition of the Shares will also be treated as long-term
capital gain for federal income tax purposes. If Shares purchased under an ISO
are disposed of within one year after exercise or two years after the Date of
Grant, any gain realized on such disposition will be treated as compensation
income (taxable at ordinary income rates) to the extent of the difference
between the Exercise Price and the lesser of (1) the Fair Market Value of the
Shares on the date of exercise, or (2) the sale price of the Shares. Any
additional gain will be taxed as capital gain, short-term or long-term depending
on the period that the ISO Shares were held.
(e) Notice of Disqualifying Disposition of ISO Shares. If the Option
granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (1) the date two years after the Date of Grant, or (2) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in writing of such disposition. Optionee agrees that Optionee may be
subject to income tax withholding by the Company on the compensation income
recognized by the Optionee.
10. Lock-Up Period. Purchaser hereby agrees that if so requested by the
Company or any representative of the underwriters (the "Managing Underwriter")
in connection with any registration of the offering of any securities of the
Company under the Securities Act of 1933, as amended (the "Securities Act"),
Purchaser shall not sell or otherwise transfer any Shares or other securities of
the
-4-
<PAGE> 5
Company during the 180-day period (or such longer period as may be requested in
writing by the Managing Underwriter and agreed to in writing by the Company)
(the "Market Standoff Period") following the effective date of a registration
statement of the Company filed under the Securities Act; provided, however, that
such restriction shall apply only to the first registration statement of the
Company to become effective under the Securities Act that includes securities to
be sold on behalf of the Company to the public in an underwritten public
offering under the Securities Act. The Company may impose stop-transfer
instructions with respect to securities subject to the foregoing restrictions
until the end of such Market Standoff Period.
11. Entire Agreement; Governing Law. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by the internal substantive laws but not
the choice of law rules of California.
12. No Guarantee of Continued Service. OPTIONEE ACKNOWLEDGES AND AGREES
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH
THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Plan and represents that
he or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option. Optionee
further agrees to notify the Company upon any change in the residence address
indicated below.
OPTIONEE: AVANEX CORPORATION
Name: By:
------------------------ ------------------------
-5-
<PAGE> 6
EXHIBIT A
AVANEX CORPORATION
1998 STOCK PLAN
EXERCISE NOTICE
Avanex Corporation
40919 Encyclopedia Circle
Fremont, CA 94538
Attention: Secretary
1. Exercise of Option. Effective as of today, ________________
("Optionee") hereby elects to exercise Optionee's option to purchase
_____________ shares of the Common Stock (the "Shares") of Avanex Corporation
(the "Company") under and pursuant to the 1998 Stock Plan (the "Plan") and the
Stock Option Agreement granted December 10, 1999 (the "Option Agreement").
2. Delivery of Payment. Purchaser herewith delivers to the Company the
full purchase price of the Shares, as set forth in the Option Agreement.
3. Representations of Optionee. Optionee acknowledges that Optionee has
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.
4. Rights as Shareholder. Until the issuance of the Shares (as
evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company), no right to vote or receive dividends
or any other rights as a shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares shall be issued to
the Optionee as soon as practicable after the Option is exercised. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date of issuance except as provided in Section 11 of the Plan.
5. Company's Right of First Refusal. Before any Shares held by Optionee
or any transferee (either being sometimes referred to herein as the "Holder")
may be sold or otherwise transferred (including transfer by gift or operation of
law), the Company or its assignee(s) shall have a right of first refusal to
purchase the Shares on the terms and conditions set forth in this Section (the
"Right of First Refusal").
(a) Notice of Proposed Transfer. The Holder of the Shares shall
deliver to the Company a written notice (the "Notice") stating: (i) the Holder's
bona fide intention to sell or otherwise transfer such Shares; (ii) the name of
each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the
number of Shares to be transferred to each Proposed Transferee; and (iv) the
bona fide cash price or other consideration for which the Holder proposes to
transfer the
<PAGE> 7
Shares (the "Offered Price"), and the Holder shall offer the Shares
at the Offered Price to the Company or its assignee(s).
(b) Exercise of Right of First Refusal. At any time within thirty
(30) days after receipt of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (c)
below.
(c) Purchase Price. The purchase price ("Purchase Price") for the
Shares purchased by the Company or its assignee(s) under this Section shall be
the Offered Price. If the Offered Price includes consideration other than cash,
the cash equivalent value of the non-cash consideration shall be determined by
the Board of Directors of the Company in good faith.
(d) Payment. Payment of the Purchase Price shall be made, at the
option of the Company or its assignee(s), in cash (by check), by cancellation of
all or a portion of any outstanding indebtedness of the Holder to the Company
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within thirty (30) days after receipt of the Notice or in
the manner and at the times set forth in the Notice.
(e) Holder's Right to Transfer. If all of the Shares proposed in the
Notice to be transferred to a given Proposed Transferee are not purchased by the
Company and/or its assignee(s) as provided in this Section, then the Holder may
sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice, that any such sale or
other transfer is effected in accordance with any applicable securities laws and
that the Proposed Transferee agrees in writing that the provisions of this
Section shall continue to apply to the Shares in the hands of such Proposed
Transferee. If the Shares described in the Notice are not transferred to the
Proposed Transferee within such period, a new Notice shall be given to the
Company, and the Company and/or its assignees shall again be offered the Right
of First Refusal before any Shares held by the Holder may be sold or otherwise
transferred.
(f) Exception for Certain Family Transfers. Anything to the contrary
contained in this Section notwithstanding, the transfer of any or all of the
Shares during the Optionee's lifetime or on the Optionee's death by will or
intestacy to the Optionee's immediate family or a trust for the benefit of the
Optionee's immediate family shall be exempt from the provisions of this Section.
"Immediate Family" as used herein shall mean spouse, lineal descendant or
antecedent, father, mother, brother or sister. In such case, the transferee or
other recipient shall receive and hold the Shares so transferred subject to the
provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section.
(g) Termination of Right of First Refusal. The Right of First
Refusal shall terminate as to any Shares upon the first sale of Common Stock of
the Company to the general
-2-
<PAGE> 8
public pursuant to a registration statement filed with and declared effective by
the Securities and Exchange Commission under the Securities Act of 1933, as
amended.
6. Tax Consultation. Optionee understands that Optionee may suffer
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
7. Restrictive Legends and Stop-Transfer Orders.
(a) Legends. Optionee understands and agrees that the Company shall
cause the legends set forth below or legends substantially equivalent thereto,
to be placed upon any certificate(s) evidencing ownership of the Shares together
with any other legends that may be required by the Company or by state or
federal securities laws:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. THESE SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF
SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT. COPIES OF
THE AGREEMENT COVERING THE PURCHASE OF THESE SHARES AND RESTRICTING
THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY
THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE
CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION.
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN
ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE
SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE
COMPANY.
(b) Stop-Transfer Notices. Optionee agrees that, in order to ensure
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) Refusal to Transfer. The Company shall not be required (i) to
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.
8. Successors and Assigns. The Company may assign any of its rights
under this Agreement to single or multiple assignees, and this Agreement shall
inure to the benefit of the
-3-
<PAGE> 9
successors and assigns of the Company. Subject to the restrictions on transfer
herein set forth, this Agreement shall be binding upon Optionee and his or her
heirs, executors, administrators, successors and assigns.
9. Interpretation. Any dispute regarding the interpretation of this
Agreement shall be submitted by Optionee or by the Company forthwith to the
Administrator which shall review such dispute at its next regular meeting. The
resolution of such a dispute by the Administrator shall be final and binding on
all parties.
10. Lock-Up Period. Purchaser hereby agrees that if so requested by the
Company or any representative of the underwriters (the "Managing Underwriter")
in connection with any registration of the offering of any securities of the
Company under the Securities Act of 1933, as amended (the "Securities Act"),
Purchaser shall not sell or otherwise transfer any Shares or other securities of
the Company during the 180-day period (or such longer period as may be requested
in writing by the Managing Underwriter and agreed to in writing by the Company)
(the "Market Standoff Period") following the effective date of a registration
statement of the Company filed under the Securities Act; provided, however, that
such restriction shall apply only to the first registration statement of the
Company to become effective under the Securities Act that includes securities to
be sold on behalf of the Company to the public in an underwritten public
offering under the Securities Act. The Company may impose stop-transfer
instructions with respect to securities subject to the foregoing restrictions
until the end of such Market Standoff Period.
11. Governing Law; Severability. This Agreement is governed by the
internal substantive laws, but not the choice of law rules, of California.
12. Entire Agreement. The Plan and Option Agreement are incorporated
herein by reference. This Agreement, the Plan, the Option Agreement and the
Investment Representation Statement constitute the entire agreement of the
parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee.
Submitted by: Accepted by:
OPTIONEE: AVANEX CORPORATION
- ----------------------------------- By:
Name: ---------------------------------
------------------------------ Title:
------------------------------
Address: 40919 Encyclopedia Circle
Fremont, CA 94538
------------------------------------
Date Received
-4-
<PAGE> 10
EXHIBIT B
INVESTMENT REPRESENTATION STATEMENT
OPTIONEE:
--------------------------------
COMPANY: AVANEX CORPORATION
SECURITY: COMMON STOCK
AMOUNT: SHARES
----------------
DATE:
---------------------------------
In connection with the purchase of the above-listed Securities, the undersigned
Optionee represents to the Company the following:
(a) Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. Optionee is
acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").
(b) Optionee acknowledges and understands that the Securities
constitute "restricted securities" under the Securities Act and have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of Optionee's investment intent as expressed herein. In this connection,
Optionee understands that, in the view of the Securities and Exchange
Commission, the statutory basis for such exemption may be unavailable if
Optionee's representation was predicated solely upon a present intention to hold
these Securities for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the
market price of the Securities, or for a period of one year or any other fixed
period in the future. Optionee further understands that the Securities must be
held indefinitely unless they are subsequently registered under the Securities
Act or an exemption from such registration is available. Optionee further
acknowledges and understands that the Company is under no obligation to register
the Securities. Optionee understands that the certificate evidencing the
Securities will be imprinted with a legend which prohibits the transfer of the
Securities unless they are registered or such registration is not required in
the opinion of counsel satisfactory to the Company, a legend prohibiting their
transfer without the consent of the Commissioner of Corporations of the State of
California and any other legend required under applicable state securities laws.
(c) Optionee is familiar with the provisions of Rule 701 and Rule 144,
each promulgated under the Securities Act, which, in substance, permit limited
public resale of "restricted securities" acquired, directly or indirectly from
the issuer thereof, in a non-public offering subject to the
<PAGE> 11
satisfaction of certain conditions. Rule 701 provides that if the issuer
qualifies under Rule 701 at the time of the grant of the Option to the Optionee,
the exercise will be exempt from registration under the Securities Act. In the
event the Company becomes subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter (or
such longer period as any market stand-off agreement may require) the Securities
exempt under Rule 701 may be resold, subject to the satisfaction of certain of
the conditions specified by Rule 144, including: (1) the resale being made
through a broker in an unsolicited "broker's transaction" or in transactions
directly with a market maker (as said term is defined under the Securities
Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of
certain public information about the Company, (3) the amount of Securities being
sold during any three month period not exceeding the limitations specified in
Rule 144(e), and (4) the timely filing of a Form 144, if applicable.
In the event that the Company does not qualify under Rule 701 at the
time of grant of the Option, then the Securities may be resold in certain
limited circumstances subject to the provisions of Rule 144, which requires the
resale to occur not less than two years after the later of the date the
Securities were sold by the Company or the date the Securities were sold by an
affiliate of the Company, within the meaning of Rule 144; and, in the case of
acquisition of the Securities by an affiliate, or by a non-affiliate who
subsequently holds the Securities less than three years, the satisfaction of the
conditions set forth in sections (1), (2), (3) and (4) of the paragraph
immediately above.
(d) Optionee further understands that in the event all of the
applicable requirements of Rule 701 or 144 are not satisfied, registration under
the Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rules 144 or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk. Optionee understands that no assurances can be given that any
such other registration exemption will be available in such event.
Signature of Optionee:
-------------------------------------------
Date:
--------------------------------------
-2-
<PAGE> 12
EXHIBIT C-1
1998 STOCK PLAN
RESTRICTED STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made between ________________ (the "PURCHASER") and
Avanex Corporation, a California corporation (the "COMPANY") as of
________________, 2000.
RECITALS
(1) Pursuant to the exercise of the stock option granted to Purchaser
under the Company's 1998 Stock Plan and pursuant to the Stock Option Agreement
(the "OPTION AGREEMENT") dated December 10, 1999 by and between the Company and
Purchaser with respect to such grant, which Option Agreement is hereby
incorporated by reference, Purchaser has elected to purchase ____________ of
those shares which have not become vested under the vesting schedule set forth
in the Option Agreement ("UNVESTED SHARES"). The Unvested Shares and the shares
subject to the Option Agreement which have become vested are sometimes
collectively referred to herein as the "SHARES".
(2) As required by the Option Agreement, as a condition to Purchaser's
election to exercise the option, Purchaser must execute this Restricted Stock
Purchase Agreement, which sets forth the rights and obligations of the parties
with respect to Shares acquired upon exercise of the Option.
1. Repurchase Option.
(a) If Purchaser's Continuous Status as a Service Provider is
terminated for any reason, including for cause, death, and disability, the
Company shall have the right and option to purchase from Purchaser, or
Purchaser's personal representative, as the case may be, all of the Purchaser's
Unvested Shares as of the date of such termination at the price paid by the
Purchaser for such Shares (the "REPURCHASE OPTION").
(b) Upon the occurrence of such a termination, the Company may
exercise its Repurchase Option by delivering personally or by registered mail,
to Purchaser (or his transferee or legal representative, as the case may be),
within ninety (90) days of the termination, a notice in writing indicating the
Company's intention to exercise the Repurchase Option and setting forth a date
for closing not later than thirty (30) days from the mailing of such notice. The
closing shall take place at the Company's office. At the closing, the holder of
the certificates for the Unvested Shares being transferred shall deliver the
stock certificate or certificates evidencing the Unvested Shares, and the
Company shall deliver the purchase price therefor.
(c) At its option, the Company may elect to make payment for the
Unvested Shares to a bank selected by the Company. The Company shall avail
itself of this option by a notice
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in writing to Purchaser stating the name and address of the bank, date of
closing, and waiving the closing at the Company's office.
(d) If the Company does not elect to exercise the Repurchase Option
conferred above by giving the requisite notice within ninety (90) days following
the termination, the Repurchase Option shall terminate.
2. Transferability of the Shares; Escrow.
(a) Purchaser hereby authorizes and directs the secretary of the
Company, or such other person designated by the Company, to transfer the
Unvested Shares as to which the Repurchase Option has been exercised from
Purchaser to the Company.
(b) To ensure the availability for delivery of Purchaser's Unvested
Shares upon repurchase by the Company pursuant to the Repurchase Option under
Section 1, Purchaser hereby appoints the secretary, or any other person
designated by the Company as escrow agent, as Purchaser's attorney-in-fact to
sell, assign and transfer unto the Company, such Unvested Shares, if any,
repurchased by the Company pursuant to the Repurchase Option and shall, upon
execution of this Agreement, deliver and deposit with the secretary of the
Company, or such other person designated by the Company, the share certificates
representing the Unvested Shares, together with the stock assignment duly
endorsed in blank, attached hereto as EXHIBIT C-2. The Unvested Shares and stock
assignment shall be held by the secretary in escrow, pursuant to the Joint
Escrow Instructions of the Company and Purchaser attached as EXHIBIT C-3 hereto,
until the Company exercises its purchase right as provided in Section 1, until
such Unvested Shares are vested, or until such time as this Agreement no longer
is in effect. Upon vesting of the Unvested Shares, the escrow agent shall
promptly deliver to the Purchaser the certificate or certificates representing
such Shares in the escrow agent's possession belonging to the Purchaser, and the
escrow agent shall be discharged of all further obligations hereunder; provided,
however, that the escrow agent shall nevertheless retain such certificate or
certificates as escrow agent if so required pursuant to other restrictions
imposed pursuant to this Agreement.
(c) The Company, or its designee, shall not be liable for any act it
may do or omit to do with respect to holding the Shares in escrow and while
acting in good faith and in the exercise of its judgment.
(d) Transfer or sale of the Shares is subject to restrictions on
transfer imposed by any applicable state and federal securities laws. Any
transferee shall hold such Shares subject to all the provisions hereof and the
Exercise Notice executed by the Purchaser with respect to any Unvested Shares
purchased by Purchaser and shall acknowledge the same by signing a copy of this
Agreement.
3. Ownership, Voting Rights, Duties. This Agreement shall not affect in
any way the ownership, voting rights or other rights or duties of Purchaser,
except as specifically provided herein.
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4. Legends. The share certificate evidencing the Shares issued
hereunder shall be endorsed with the following legend (in addition to any legend
required under applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT
BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE
SECRETARY OF THE COMPANY.
5. Adjustment for Stock Split. All references to the number of Shares
and the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares which may be made by the Company after the date of this Agreement.
6. Notices. Notices required hereunder shall be given in person or by
registered mail to the address of Purchaser shown on the records of the Company,
and to the Company at their respective principal executive offices.
7. Survival of Terms. This Agreement shall apply to and bind Purchaser
and the Company and their respective permitted assignees and transferees, heirs,
legatees, executors, administrators and legal successors.
8. Section 83(b) Elections.
(a) Election for Unvested Shares Purchased Pursuant to Nonqualified
Stock Options. Purchaser hereby acknowledges that he or she has been informed
that, with respect to the exercise of a nonqualified stock option for Unvested
Shares, that unless an election is filed by the Purchaser with the Internal
Revenue Service and, if necessary, the proper state taxing authorities, WITHIN
30 DAYS of the purchase of the Shares, electing pursuant to Section 83(b) of the
Internal Revenue Code of 1986, as amended (the "Code") to be taxed currently on
any difference between the purchase price of the Shares and their fair market
value on the date of purchase, there will be a recognition of taxable income to
the Purchaser, measured by the excess, if any, of the fair market value of the
Shares, at the time the Company's Repurchase Option lapses over the purchase
price for the Shares. Purchaser represents that Purchaser has consulted any tax
consultant(s) Purchaser deems advisable in connection with the purchase of the
Shares or the filing of the Election under Section 83(b). A form of Election
under Section 83(b) is attached hereto as EXHIBIT C-4 for reference.
(b) Election for Unvested Shares Purchased Pursuant to Incentive
Stock Options. Purchaser hereby acknowledges that he or she has been informed
that, with respect to the exercise of an incentive stock option for Unvested
Shares, that unless an election is filed by the Purchaser with the Internal
Revenue Service WITHIN 30 DAYS of the purchase of the Shares, electing pursuant
to Section 83(b) of the Code to be taxed currently on any difference between the
purchase price of the Shares and their fair market value on the date of
purchase, there will be a recognition of income to the Purchaser, for
alternative minimum tax purposes, measured by the excess, if any, of the fair
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market value of the Shares, at the time the Company's Repurchase Option lapses
over the purchase price for the Shares. Purchaser represents that Purchaser has
consulted any tax consultant(s) Purchaser deems advisable in connection with the
purchase of the Shares or the filing of the Election under Section 83(b) and
similar tax provisions.
PURCHASER ACKNOWLEDGES THAT IT IS PURCHASER'S SOLE RESPONSIBILITY AND
NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF
PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON
PURCHASER'S BEHALF.
9. Representations. Purchaser has reviewed with his own tax advisors
the federal, state, local and foreign tax consequences of this investment and
the transactions contemplated by this Agreement. Purchaser is relying solely on
such advisors and not on any statements or representations of the Company or any
of its agents. Purchaser understands that he (and not the Company) shall be
responsible for his own tax liability that may arise as a result of this
investment or the transactions contemplated by this Agreement.
10. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with California law.
Purchaser represents that he has read this Agreement and is familiar
with its terms and provisions. Purchaser hereby agrees to accept as binding,
conclusive and final all decisions or interpretations of the Board upon any
questions arising under this Agreement.
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IN WITNESS WHEREOF, this Agreement is deemed made as of the date first
set forth above.
"COMPANY"
AVANEX CORPORATION
By:
------------------------------------
Title:
---------------------------------
"PURCHASER"
---------------------------------------
----------------
Address:
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EXHIBIT C-2
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, __________________________, hereby sell, assign
and transfer unto _______________________________________________ (__________)
shares of the Common Stock of Avanex Corporation standing in my name of the
books of said corporation represented by Certificate No. _____ herewith and do
hereby irrevocably constitute and appoint ________________ _________________ to
transfer the said stock on the books of the within named corporation with full
power of substitution in the premises.
This Stock Assignment may be used only in accordance with the
Restricted Stock Purchase Agreement between________________________ and the
undersigned dated ______________________.
Dated:
Signature:
------------------------------
INSTRUCTIONS: Please do not fill in any blanks other than the signature
line. The purpose of this assignment is to enable the Company to exercise its
"repurchase option," as set forth in the Agreement, without requiring additional
signatures on the part of the Purchaser.
<PAGE> 18
EXHIBIT 3
JOINT ESCROW INSTRUCTIONS
_______________________
Avanex Corporation
Judith M. O'Brien
Corporate Secretary
c/o Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
Dear Corporate Secretary:
As Escrow Agent for both Avanex Corporation (the "Company"), and the
undersigned purchaser of stock of the Company (the "Purchaser"), you are hereby
authorized and directed to hold the documents delivered to you pursuant to the
terms of that certain Restricted Stock Purchase Agreement ("Agreement") between
the Company and the undersigned, in accordance with the following instructions:
1. In the event the Company and/or any assignee of the Company
(referred to collectively for convenience herein as the "Company") exercises the
Company's repurchase option set forth in the Agreement, the Company shall give
to Purchaser and you a written notice specifying the number of shares of stock
to be purchased, the purchase price, and the time for a closing hereunder at the
principal office of the Company. Purchaser and the Company hereby irrevocably
authorize and direct you to close the transaction contemplated by such notice in
accordance with the terms of said notice.
2. At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Company or its
assignee, against the simultaneous delivery to you of the purchase price (by
cash, a check, or some combination thereof) for the number of shares of stock
being purchased pursuant to the exercise of the Company's repurchase option.
3. Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities.
<PAGE> 19
Subject to the provisions of this paragraph 3, Purchaser shall exercise all
rights and privileges of a shareholder of the Company while the stock is held by
you.
4. Upon written request of the Purchaser, but no more than once per
calendar year, unless the Company's repurchase option has been exercised, you
will deliver to Purchaser a certificate or certificates representing so many
shares of stock as are not then subject to the Company's repurchase option.
Within 120 days after cessation of Purchaser's continuous employment by or
services to the Company, or any parent or subsidiary of the Company, you will
deliver to Purchaser a certificate or certificates representing the aggregate
number of shares held or issued pursuant to the Agreement and not purchased by
the Company or its assignees pursuant to exercise of the Company's repurchase
option.
5. If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of the same to Purchaser and shall be discharged of all
further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as
are specifically set forth herein and may rely and shall be protected in relying
or refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties. You
shall not be personally liable for any act you may do or omit to do hereunder as
Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith,
and any act done or omitted by you pursuant to the advice of your own attorneys
shall be conclusive evidence of such good faith.
8. You are hereby expressly authorized to disregard any and all
warnings given by any of the parties hereto or by any other person or
corporation, excepting only orders or process of courts of law and are hereby
expressly authorized to comply with and obey orders, judgments or decrees of any
court. In case you obey or comply with any such order, judgment or decree, you
shall not be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
10. You shall not be liable for the outlawing of any rights under the
Statute of Limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
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11. You shall be entitled to employ such legal counsel and other
experts as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.
12. Your responsibilities as Escrow Agent hereunder shall terminate if
you shall cease to be an officer or agent of the Company or if you shall resign
by written notice to each party. In the event of any such termination, the
Company shall appoint a successor Escrow Agent.
13. If you reasonably require other or further instruments in
connection with these Joint Escrow Instructions or obligations in respect
hereto, the necessary parties hereto shall join in furnishing such instruments.
14. It is understood and agreed that should any dispute arise with
respect to the delivery and/or ownership or right of possession of the
securities held by you hereunder, you are authorized and directed to retain in
your possession without liability to anyone all or any part of said securities
until such disputes shall have been settled either by mutual written agreement
of the parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
15. Any notice required or permitted hereunder shall be given in
writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States Post Office, by registered or certified mail with
postage and fees prepaid, addressed to each of the other parties thereunto
entitled at the following addresses or at such other addresses as a party may
designate by ten days' advance written notice to each of the other parties
hereto.
COMPANY: Avanex Corporation
40919 Encyclopedia Circle
Fremont, CA 94538
PURCHASER: ________________
________________
________________
ESCROW AGENT: Avanex Corporation
Judith M. O'Brien
Corporate Secretary
c/o Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
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16. By signing these Joint Escrow Instructions, you become a party
hereto only for the purpose of said Joint Escrow Instructions; you do not become
a party to the Agreement.
17. This instrument shall be binding upon and inure to the benefit of
the parties hereto, and their respective successors and permitted assigns.
18. These Joint Escrow Instructions shall be governed by, and construed
and enforced in accordance with, the laws of the State of California.
AVANEX CORPORATION
By:
--------------------------------------
Title:
-----------------------------------
PURCHASER:
------------------------------------------
ESCROW AGENT:
------------------------------------------
Judith M. O'Brien
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EXHIBIT C-4
ELECTION UNDER SECTION 83(b)
OF THE INTERNAL REVENUE CODE OF 1986
The undersigned taxpayer hereby elects, pursuant to the provisions of Sections
55-56 and 83(b) of the Internal Revenue Code of 1986, as amended, to include in
taxpayer's gross income or alternative minimum taxable income for the current
taxable year, as compensation taxable to taxpayer in connection with the
taxpayer's receipt of the property described below:
NAME: TAXPAYER: ________________ SPOUSE:
ADDRESS:
IDENTIFICATION NO.: TAXPAYER: SPOUSE:
TAXABLE YEAR:
2. The property with respect to which the election is made is described as
follows: ________ shares (the "Shares") of the Common Stock of Avanex
Corporation (the "Company").
3. The date on which the property was transferred is: ____________.
4. The property is subject to the following restrictions:
The Shares may not be transferred and are subject to forfeiture under
the terms of an agreement between the taxpayer and the Company. These
restrictions lapse upon the satisfaction of certain conditions
contained in such agreement.
5. The fair market value at the time of transfer, determined without
regard to any restriction other than a restriction which by its terms
will never lapse, of such property is: $_______________
6. The amount paid for such property is: $_______________
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
The undersigned understands that the foregoing election may not be revoked
except with the consent of the Commissioner.
Dated: --------------------------------------
-------------------- Taxpayer
The undersigned spouse of taxpayer joins in this election.
Dated: --------------------------------------
-------------------- Spouse of Taxpayer
<PAGE> 1
EXHIBIT 10.24
September 13, 1999
Mr. Walter Alessandrini
Chief Executive Officer
Avanex Corporation
42501 Albrae Street
Fremont, CA 94538
USA
Re: Patent License Agreement on VIPA between Fujitsu Limited and Avanex
Corporation
Dear Mr. Alessandrini:
Fujitsu Limited acknowledges that, as of September 13, 1999, the Conditions
Precedent in Section 2 of the above Patent License Agreement have been fulfilled
for dispersion compensator and the patent license for the same has been granted
to Avanex Corporation.
I appreciate your business.
Sincerely,
/s/ Yasuo Nagai
Yasuo Nagai
General Manager
Photonic Technology Development Division
Fujitsu Limited
4-1-1 Kamikodanaka, Nakahara-ku
Kawasaki, 211-8588
Japan
<PAGE> 2
PATENT LICENSE AGREEMENT
THIS AGREEMENT is made and entered into by and between FUJITSU LIMITED, a
corporation of Japan, having its registered office at 4-1-1 Kamikodanaka,
Nakahara-ku, Kawasaki, Kanagawa, 211-88, Japan (hereinafter referred to as
"FUJITSU"), and AVANEX Corporation, a corporation of the State of California,
having its principal office at 42501 Albrae Street, Fremont, CA 94538, USA.
(hereinafter referred to as "AVANEX").
WITNESSETH
WHEREAS, FUJITSU owns patents in certain countries of the world with respect to
LICENSED PRODUCTS (defined below); and
WHEREAS, AVANEX desires to acquire licenses under such FUJITSU's patents; and
WHEREAS, FUJITSU is willing to grant such licenses to AVANEX.
NOW, THEREFORE, in consideration of the mutual covenants and premises contained
herein, the parties hereto agree as follows:
Section 1. DEFINITIONS
1.1 "SUBSIDIARY(IES)" shall mean any corporation, company or other entity more
than fifty percent (50%) of whose voting stock or other similar interests are
owned or controlled by AVANEX, directly or indirectly, as of EFFECTIVE DATE
(defined below) and thereafter so long as such ownership or control exists.
1.2 "LICENSED PRODUCTS" shall mean the following items (1) and (2):
(1) Wavelength multiplexer/demultiplexer devices which consist of the VIPA
element.
(2) Chromatic dispersion compensator devices which consist of the VIPA element
and a mirror.
1.3 "LICENSED PATENTS" shall mean all the patents issued under the following
patent applications and their divisions, continuations and
continuation-in-parts, and all reissues of any of the foregoing patents:
(a) US Serial Number 08/685,362, filed on July 24, 1996, "Virtually imaged
phased array as a wavelength demultiplexer", and its corresponding Japanese
Patent, filing number 07-190535, filed on July 26, 1995, and its corresponding
European Patents
(b) US Serial Number 08/802,767, filed on February 21, 1997, "Optical component
wherein either an optical field distribution of received light or an optical
field distribution of a propagation mode of a receiving waveguide has a
double-hump shape", and its corresponding Japanese Patent, filing number
08-66718, filed on March 22, 1996, and its corresponding European Patents
(c) US Serial Number 08/806,856, filed on February 26, 1997, "Compensator which
experiences thermal expansion to compensate for changes in optical distance
through a transparent material:, and its corresponding Japanese Patent, filing
number 08-66717, filed on March 22, 1996, and its corresponding European Patents
(d) US Serial Number 08/796,842, filed on February 7, 1997, "Optical apparatus
which uses a virtually imaged phased array to produce chromatic dispersion",
and its corresponding Japanese and European Patents
(e) US Serial Number 08/910,251, filed on August 13, 1997, "Optical apparatus
which uses a virtually imaged phased array to produce chromatic dispersion",
and its corresponding Japanese and European Patents
(f) US Serial Number 08/948,945, filed on October 10, 1997, "Apparatus which
include a virtually imaged phased array (VIPA) in combination with a wavelength
splitter to demultiplex a wavelength division multiplex (WDM) light, and its
corresponding Japanese and European Patents
1.4 "LICENSED TERRITORIES" shall mean the countries in which LICENSED PATENTS
are in existence.
1.5 "EFFECTIVE DATE" shall mean the date when all of the conditions of Section 2
are satisfied.
1.6 "DESIGN INFORMATION" shall mean the structural design information of
LICENSED PRODUCTS, which includes design parameters and parts design sheets, but
does not include the assembling know-how. FUJITSU can freely use this DESIGN
INFORMATION for its own use.
Section 2. CONDITIONS PRECEDENT AND EFFECTIVENESS OF AGREEMENT
The license pursuant to Section 3 below shall become available only after all of
the following conditions preceding have fulfilled for each LICENSED PRODUCT:
(a) Development by AVANEX of DESIGN INFORMATION used for LICENSED PRODUCTS in
accordance with the specifications which will be given by FUJITSU to AVANEX, no
later than one (1) month from the day when this agreement is signed by both
parties, pursuant to a separate confidential agreement. AVANEX shall perform
such development for FUJITSU with the first priority before manufacturing
LICENSED PRODUCTS for customers other than FUJITSU.
(b) DESIGN INFORMATION is given to FUJITSU with [*] charge.
Section 3. GRANTS OF LICENSES
3.1 FUJITSU hereby grants for the term of this Agreement to AVANEX, subject to
the
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* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 3
conditions under Section 4 below, a non-exclusive and non-transferable license,
without the right to sublicense, under LICENSED PATENTS to make or have made
LICENSED PRODUCTS and to use, lease, sell, offer to sell, import or otherwise
dispose of such LICENSED PRODUCTS in LICENSED TERRITORIES.
3.2 The license granted to AVANEX hereunder shall also extend to any of
SUBSIDIARY provided that AVANEX shall cause SUBSIDIARIES to assume the same
obligations as imposed on AVANEX hereunder.
Section 4. LICENSES FEE
4.1 In consideration of the license set forth in Section 3 above, AVANEX shall,
beginning on the EFFECTIVE DATE and to the extent that AVANEX and SUBSIDIARIES
manufacture, have manufactured, use, lease, sell, offer to sell, import or
otherwise dispose of LICENSED PRODUCTS under this Agreement, pay to FUJITSU a
running royalty of [*] of all NET SALES AMOUNT (hereinafter defined) of all
LICENSED PRODUCTS which are made or had made, and used, leased, sold, imported
or otherwise disposed of by AVANEX and SUBSIDIARIES in LICENSED TERRITORIES.
4.2 For the purpose of this Agreement, "NET SALES AMOUNT" shall mean the total
of the arm's length selling prices of LICENSED PRODUCTS at which distributors,
dealers, customers and users of AVANEX or SUBSIDIARIES paid, but the following
items may be excluded; normal discounts actually granted, insurance fees and
packing and transportation charges as invoiced separately to customers, and
duties and sales taxes actually incurred and paid by AVANEX or SUBSIDIARIES. If
LICENSED PRODUCTS are used, leased, imported or otherwise disposed of by AVANEX
or SUBSIDIARY, or sold by AVANEX or SUBSIDIARY not on arm's length basis, the
selling prices used in calculating NET
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* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 4
SALES AMOUNT shall be the average arm's length selling prices during the past
[*] for the same or similar LICENSED PRODUCTS sold by AVANEX or SUBSIDIARIES to
third party customers.
Section 5. PAYMENTS, REPORTS, RECORDS AND TAX
5.1 The running royalty set forth in Section 4.1 above shall be computed and
paid to FUJITSU by AVANEX within thirty (30) days after the end of each quarter
ending on March 31st, June 30th, September 30th and December 31st.
5.2 AVANEX shall, at the time of each payment of the running royalty under
Section 5.1 above, furnish to FUJITSU a royalty report in suitable form prepared
by Chief Financial Officer of AVANEX, which shall describe sales (including use,
lease, import or other disposition) quantity and gross sales price of LICENSED
PRODUCTS, any deduction from and/or adjustments to the gross sales price as
provided in Section 4.2 above, NET SALES AMOUNT, royalty amount, tax withheld
and royalty remitted. AVANEX shall, within sixty (60) days after the end of each
calendar year, also furnish to FUJITSU a royalty compliance report certified by
an outside Certified Public Accountant, for the period of the year.
5.3 The first royalty report and payment shall be made with respect to all
LICENSED PRODUCTS made or had made, and used, leased, sold, import or otherwise
disposed of by AVANEX and SUBSIDIARIES in LICENSED TERRITORIES from EFFECTIVE
DATE to the last day of the quarterly period next ending.
5.4 Payment hereunder shall be made without deductions of taxes, assessments or
other charges of any kind which may be imposed on FUJITSU by the Government of
the United States of America or any political subdivision thereof with respect
to any amounts due to FUJITSU pursuant to this Agreement, and such taxes,
assessments or other charges shall be paid by AVANEX. However, income taxes or
taxes of similar nature imposed on FUJITSU by the Government of the United
States of America or any other political subdivision thereof and paid by AVANEX
for the account of FUJITSU shall be deductible from the payment to FUJITSU to
the extent that such taxes are allowable as a credit against taxes imposed on
FUJITSU by the Government of Japan. To assist FUJITSU in obtaining such credit,
AVANEX shall furnish FUJITSU with such evidence as may be required by taxing
authorities of the Government of Japan to establish that any such taxes have
been paid.
5.5 If AVANEX fails to make any payment stipulated in this Agreement within the
time specified herein, AVANEX shall pay an interest of fifteen percent (15%) per
year on the unpaid balance payable from the due date until fully paid. The
foregoing payment of interest shall not affect FUJITSU's right to terminate this
Agreement in accordance with Section 7.2 below.
5.6 Any payment from AVANEX to FUJITSU hereunder shall be made by means of
telegraphic transfer remittance in U.S. Dollars to the following bank account of
FUJITSU, and notice of the payment shall be sent by AVANEX to FUJITSU's address
set forth in Section 8.6 below:
The Dai-Ichi Kangyo Bank, Ltd., Head Office, Tokyo, Japan
Account No. 011-1-167829
Section 6. ACCOUNTING AND AUDIT
With respect to the running royalty set forth in Section 4.1 above, AVANEX shall
keep full, clear and accurate records and accounts for LICENSED PRODUCTS subject
to royalty for a period of three (3) years. FUJITSU shall have the right through
a person(s) appointed by FUJITSU to audit, not more than once in each calendar
year and during normal business hours, all such records and accounts to the
extent necessary to verify that no underpayment has been made by AVANEX
hereunder. Such audit shall be conducted at FUJITSU's own expense, provided that
if any discrepancy or error exceeding five percent (5%) of the money actually
due is found through the audit, the cost of the audit shall be born by AVANEX.
Section 7. TERM AND TERMINATION
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7.1 This Agreement shall become effective on EFFECTIVE DATE and shall, unless
earlier terminated pursuant to Sections 7.2 or 7.3 below, continue until the
last to expire of LICENSED PATENTS.
7.2 In the event of a breach of this Agreement by one party hereto, and if such
breach is not corrected within ninety (90) days after written notice complaining
thereof is received by such party, the other party may terminate this Agreement
forthwith by written notice to that effect to such party.
7.3 FUJITSU shall also have the right to terminate this Agreement forthwith by
giving written notice of termination to AVANEX at any time, upon or after:
(a) the filing by AVANEX of a petition in bankruptcy or insolvency; or
(b) any adjudication that AVANEX is bankrupt or insolvent; or
(c) the filing by AVANEX of any legal action or document seeking reorganization,
readjustment or arrangement of AVANEX's business under any law relating to
bankruptcy or insolvency; or
(d) the appointment of receiver for all or substantially all of the property of
AVANEX; or
(e) the making by AVANEX of any assignment for the benefit of creditors; or
(f) the institution of any proceedings for the liquidation or winding up of
AVANEX's business or for the termination of its corporate charter; or
(g) the assignment to third party of all or substantially all of the assets of
AVANEX; or
(h) important change in controlling ownership of AVANEX; or
(i) any activity or assistance by AVANEX or SUBSIDIARIES of challenging the
validity of any LICENSED PATENTS or restricting the scope thereof.
7.4 In the event of termination of this Agreement by FUJITSU pursuant to
Sections 7.2 or 7.3 above, the licenses granted hereunder to AVANEX and
SUBSIDIARIES shall automatically terminate when AVANEX received or deemed to be
received such termination notice hereunder. AVANEX shall pay the amount of the
running royalty accrued on or before the date of termination within thirty (30)
days thereafter.
Section 8. NEW PATENTS
A new patent derived from any improvement over inventions covered by the
LICENSED PATENTS:
(i) is owned by FUJITSU and the non-exclusive license shall be granted to AVANEX
at a reasonable royalty, if invention is made solely by FUJITSU. Detailed terms
and conditions for such license shall be separately agreed upon between the
parties.
(ii) is owned by AVANEX and the non-exclusive license shall be granted to
FUJITSU at a reasonable royalty, if invention is made solely by AVANEX. Detailed
terms and conditions for such license shall be separately agreed upon between
the parties. However, the non-exclusive license for a patent for which the
invention is made within [*] after the day when this agreement is signed by both
parties shall be royalty free.
(iii) is owned jointly by FUJITSU and AVANEX, if invention is made by FUJITSU
and AVANEX. Each party shall be free to practice and use such jointly owned
patent on a world-wide, non-exclusive basis without accounting to and
royalty-free to the-other party. Each party shall be free to license jointly
owned patent to SUBSIDIARIES but licenses to third parties may be granted only
upon the other party's prior consent, which may not be unreasonably withheld.
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Section 9. SAMPLE PRODUCT
Upon the conditions Section 2(a) and Section 2(b) have been fulfilled for each
LICENSED PRODUCT, AVANEX shall sell 3 sets of LICENSED PRODUCT's samples to
FUJITSU, if FUJITSU wishes to purchase. Such product's samples shall be made
based on DESIGN INFORMATION given to FUJITSU and their performance shall be in
accordance with the specifications set forth in Section 2(a). The purchase shall
be with a separate purchase order.
Section 10. MISCELLANEOUS
10.1 The parties hereto shall keep the terms and conditions of this Agreement
(except the existence of this Agreement) confidential and shall not divulge the
same or any part thereof to any third party except:
(i) with the prior written consent of the other party; or
(ii) to any governmental body having jurisdiction to request and to read the
same; or
(iii) as otherwise may be required by law or legal process; or
(iv) to legal counsel representing either party; or
(v) as required for review by the competent authorities of the Japanese or the
U.S. Government.
10.2 The construction and performance of this Agreement shall be governed by and
shall be subject to the laws of Japan.
10.3 The parties hereto shall use their best efforts to resolve by mutual
agreement any disputes, controversies or differences which may arise from,
under, out of or in connection with this Agreement. If any such disputes,
controversies or differences cannot be settled between the parties hereto, they
shall be finally settled by arbitration in Tokyo, Japan under the Rules of
International Chamber of Commerce and by three (3) arbitrators appointed in
accordance with the said Rules. The award rendered by the arbitrators shall be
final and binding upon the parties hereto. Judgment upon the award may be
entered into any court having jurisdiction thereof.
10.4 Any failure of either party to enforce, at any time or for any period of
time, any of the provisions of this Agreement shall not be construed as a waiver
of such provisions or of the right of such party thereafter to enforce such
provisions.
10.5 If any term, clause or provision of this Agreement shall be judged by the
competent authority to be invalid, the validity of any other term, clause or
provision shall not be affected; and such invalid term, clause or provision
shall be deemed deleted from this Agreement.
10.6 All notices required or permitted to be given hereunder shall be sent in
writing by certified or registered airmail, or facsimile (with a confirmation
letter thereof) to the address specified below or to such changed address as may
have been previously specified in writing by the addressed party:
If to FUJITSU: FUJITSU LIMITED
4-1-1 Kamikodanaka, Nakahara-ku
Kawasaki-shi, Kanagawa, 211-8588, Japan
Attention: General Manager, Industry Relations Division I (H043)
Facsimile No. +81-44-754-8503
If to AVANEX: AVANEX Corporation
42501 Albrae Street, Fremont, CA 94538, USA
Attention: Dr. Simon Cao, President
Facsimile No. +1-510-360-0689
<PAGE> 7
Unless otherwise proven, each such notice given by either party hereto shall be
deemed to have been received by the other party on the fourteenth (14th) day
following the mailing date or on the second (2nd) day following the facsimile
date.
10.7 FUJITSU shall keep DESIGN INFORMATION disclosed by AVANEX confidential
against any third party However, the obligations on FUJITSU set out in this
Section 10.7 do not apply in respect of information:
(a) which is at any time in the public knowledge otherwise than through act or
failure to act on the part of FUJITSU; or
(b) which was known to FUJITSU before its receipt of the same from AVANEX,
without obligations of confidentiality; or
(c) which is at any time rightfully received by FUJITSU from any third party
without obligations of confidentiality; or
(d) which is at any time developed by FUJITSU independently of confidential
information.
The obligations set out in this Section 10.7 shall continue to bind FUJITSU for
[*] after the disclosure of DESIGN INFORMATION.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed in duplicate on the date below written.
FUJITSU LIMITED AVANEX Corporation
By: /s/ Yasuo Nagai By: /s/ Simon Cao
Name: Yasuo Nagai Name: SIMON CAO
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Title: General Manager Title: President
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Date: 7/9/98 Date: 7/15/98
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Agreement on New Patents
This Agreement entered into as of August 26, 1998 by and between Fujitsu
Limited, a corporation of Japan, having an address at 4-1-1, Kamikodanaka,
Nakahara-ku, Kawasaki, Kanagawa, 211, Japan (hereinafter referred to as
"Fujitsu"), and Avanex Corporation, a corporation of the State of California,
having an address at 42501 Albrae Street, Fremont, CA 94538 (hereinafter
referred to as "Avanex").
WHEREAS, Fujitsu and Avanex have executed a PATENT LICENSE AGREEMENT in July,
1998, regarding the VIPA technologies.
WHEREAS, Fujitsu and Avanex are willing to have Technical Discussions between
the people from both parties regarding the VIPA technologies and other optics
technologies.
NOW, THEREFORE, both Fujitsu and Avanex agree that all patents produced directly
from the Technical Discussions stated above, regardless of whether the patents
are related to the VIPA technologies or not, are subject to the conditions in
the above mentioned PATENT LICENSE AGREEMENT, Section 8. NEW PATENTS.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day above
written.
Fujitsu Limited Avanex Corporation
/s/Hideki Isono /s/ Simon Cao
Hideki Isono Simon Cao
Manager President and CEO
Photonic Devices Development Dept.
<PAGE> 1
EXHIBIT 10.24.1
July 1, 1998
Dr. Simon Cao
President
Avanex Corporation
42501 Albrae Street
Fremont, CA 94538
USA
Re: Patent License Agreement for the VIPA related devices between Fujitsu
Limited and Avanex Corporation
Dear Dr. Cao:
With regard to Section 7.3(h) of the agreement, Fujitsu Limited understands that
this term is defined as below.
"important change in controlling ownership of AVANEX" means acquisition of more
than half of Avanex Corporation by one of the major telecom system suppliers.
The major telecom system suppliers are defined as [*].
Sincerely,
/s/ Hideki Isono
Hideki Isono
Manager
Photonic Devices Development Dept.
Fujitsu Limited
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EXHIBIT 10.30
AVANEX CORPORATION
LICENSE AND SUPPLY AGREEMENT
This License and Supply Agreement (the "Agreement") is made and entered
into by and between Avanex Corporation, a California corporation with principal
offices at 42501 Albrae Street, Fremont, California 94538 ("Avanex"), and
Concord Micro-Optics, Inc. a California corporation with principal offices at
_____________________________ ("CMI"). The parties hereby agree as follows:
1. Scope. In order to avoid repetitive negotiations, this Agreement
shall apply to all purchase orders placed by Avanex and accepted by CMI (or the
JV Co., as defined below) during the Term (as defined below) for the Products
described in Exhibit A attached hereto ("Product(s)"), as such Exhibit may be
amended from time to time to add products upon the mutual agreement of the
parties. This Agreement shall apply to all current or future divisions,
subsidiaries, affiliates, locations and operations of Avanex, wherever located.
It is acknowledged and agreed by the parties that as soon as practicable after
the execution of this Agreement, CMI will establish and control a Sino-foreign
joint venture company in Tianjin, China (the "JV Co.") organized under the laws
of the People's Republic of China ("PRC") and that CMI shall, within ten (10)
days of the establishment of the JVCo, cause the JV Co. to execute, and its
board of directors to ratify, the Acknowledgment and Agreement, in the form set
out in Exhibit B attached hereto, pursuant to which the JV Co. shall become a
party hereto. CMI and the JV Co. shall be jointly and severally liable for all
obligations of CMI contained herein.
2. Term. The term of this Agreement shall commence upon execution of
this Agreement by Avanex and CMI (the "Effective Date") and shall continue for
five (5) years (the "Initial Term"). Subject to a maximum aggregate of ten (10)
years), this Agreement shall be automatically renewed for additional one (1)
year period (the "Extended Term") unless either party gives written notice of
termination at least sixty (60) days before the end of the Initial Term or any
anniversary thereof or unless sooner terminated in accordance with the
provisions hereof (collectively the "Extended Term"). "Term" shall mean the
Initial Term and the Extended Term, if applicable.
3. Terms and Conditions.
(a) This Agreement contains the exclusive terms and conditions
which apply to all purchases, notwithstanding any purchase order, acknowledgment
or other business forms transmitted by CMI, the JV Co. or Avanex. All CMI and JV
Co. acknowledgments and invoices must reference this Agreement and the
applicable Avanex purchase order.
(b) This Agreement does not constitute a purchase order.
Purchases hereunder shall be made only by Avanex's purchase orders issued by
Avanex's purchasing department. Avanex shall be liable under this Agreement only
for those Products covered by such purchase orders. CMI agrees to provide
Avanex with complete access to the JV Co.'s cost accounting books and records
relating to Avanex during normal business hours, to prepare reports reasonably
requested by Avanex, and to take all other reasonable actions to assist Avanex
in performing Avanex's accounting responsibilities under U.S. generally
accepted accounting principles.
4. Products and Prices.
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(a) The Products covered by this Agreement and the prices for
such Products are as specified in Exhibit A. Prices are set forth in United
States Dollars.
(b) CMI represents that to the best of its knowledge this
Agreement does not violate provisions of the Robinson-Patman Act.
(c) [*]
(d) The prices set forth in Exhibit A are inclusive of any and
all applicable taxes including any PRC and U.S. federal, state and local VAT
sales, use and like taxes and any such applicable taxes shall be detailed on
CMI's invoice. If Avanex complies with the U.S. statutory resale tax certificate
requirements of states where appropriate, no sales, use or like taxes shall be
included in the price.
(e) The parties agree that any new or modified Products will be
priced based upon assumed volumes and complexity factors employed in the pricing
model of that Product that most closely resembles the new or modified Products
to be priced.
5. F.O.B. Point. Unless otherwise specifically provided on the face of
the purchase order, Products shall be delivered on an F.O.B. destination basis
to the Avanex's designated plant in Fremont, California, at which time title
shall pass to Avanex. CMI shall insure and ship such items at Avanex's expense.
Orders which are to be drop shipped to Avanex's customers will be designated on
the purchase order as F.O.B. CMI, at CMI's manufacturing facility. Avanex will
specify carrier, insurer and freight terms.
6. Invoices.
(a) Upon shipment of Products ordered, CMI will submit to Avanex
an invoice showing invoice number and date, remit to address, the purchase order
number, Avanex part number and revision, quantity of each Product, unit prices,
each applicable tax and extended totals.
(b) Avanex shall pay each invoice by the later of:
(i) Payment Due Date which is defined as thirty (30)
days after the receipt of invoice, or
(ii) thirty (30) days after receipt of the shipment.
7. Ordering and Delivery.
(a) Avanex shall provide CMI with a non-binding rolling twelve
(12) month forecast on a [*] basis of the quantity of each Product desired.
Actual Avanex orders shall be submitted by telecopier or in writing on Avanex's
standard purchase order form and shall
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specify the purchase order number, Avanex part number for each Product, quantity
of Product desired, the locations to which the Product is to be delivered, and
the date or dates desired for delivery of the ordered Product to such locations.
(b) CMI agrees to accept each order for the full quantity of
Product ordered. After receipt of an order from Avanex, CMI shall notify Avanex
within seventy-two (72) hours if CMI cannot meet the desired delivery date(s)
and will propose alternative delivery date(s). If, within seven (7) business
days after notification of any proposed alternative delivery date(s), Avanex
does not notify CMI of Avanex's rejection of CMI's alternative delivery date(s),
or otherwise reach agreement with CMI on the agreed delivery date, then the
order shall be considered confirmed with the alternative delivery date(s)
becoming the agreed delivery date. CMI's failure to so notify Avanex shall
constitute CMI's agreement to Avanex's desired delivery date(s), which will then
become the agreed delivery date. CMI shall send Avanex a formal written
acknowledgment of each Avanex purchase order within five (5) business days. All
delivery dates and the terms "deliver" and "delivery" as used herein, shall
refer to delivery to Avanex's designated plant in Fremont, California, or in the
instance of any order to be drop shipped to Avanex's customer, delivery by CMI
to the freight carrier specified in such order, or if no carrier is specified,
to the carrier selected by CMI.
(c) Notwithstanding anything set forth above to the contrary,
all Avanex requested delivery dates providing the minimum number of business
days lead time specified in Exhibit A of this Agreement for a Product (the "Lead
Time") shall be the Agreed delivery date. The Lead Time set forth on Exhibit A
may be adjusted by CMI: (i) upon thirty (30) days written notice with respect to
increases in Lead Times; or immediately upon written notice to Avanex with
respect to decreases in Lead Times. CMI agrees to use its best efforts to
minimize the Lead Times set forth on Exhibit A.
(d) CMI shall meet the agreed delivery dates and understands
that time is of the essence with respect to its performance of its obligations
hereunder. CMI agrees that its obligations to use its best efforts include an
obligation to diligently monitor its performance against its delivery
obligations hereunder and agrees that any failure to perform such monitoring
obligations shall constitute a material default of this Agreement.
(e) CMI agrees to maintain safety stock of component parts for
the quantities of Products set forth on Exhibit C hereto as amended by Avanex
from time to time by written notice to CMI.
(f) Certain long lead time components (the "Long Lead
Components") are set forth on Exhibit D. Avanex shall update Exhibit D from time
to time by written notice to CMI. CMI agrees to use Avanex's forecast of
Products volumes and its material planning system to calculate the quantities of
such Long Lead Components which should be ordered in advance of Avanex's
issuance of a purchase order for Products hereunder in order for CMI to meet the
Lead Times set forth on Exhibit A. CMI shall prepare a report setting forth the
quantities of such Long Lead Components which must be ordered, the quantities
already on order in advance of Avanex's issuance of purchase orders.
8. Avanex Requested Changes.
(a) Avanex may, at any time, make changes in writing to any of
the following:
(i) applicable drawings, designs or specifications,
(ii) method of shipment or packing, and
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(iii) place of delivery.
If the change causes an increase in the cost or the time required by CMI for
performance of any purchase order issued under this Agreement and CMI so
notifies Avanex in writing, then if Avanex wishes such change to be made, an
equitable adjustment will be made in the price or delivery schedule or both and
the Agreement and/or any applicable purchase order will be modified accordingly
in writing. With respect to rework orders, the parties shall negotiate in good
faith to determine the price of such changes. Claims by CMI for adjustment due
to an Avanex change order must be made within fifteen (15) days from the date of
CMI's receipt of the change order; such period may be extended upon the written
approval of Avanex.
(a) If Avanex decides to cancel any definitive purchase order,
Avanex must give CMI forty-five (45) days' notice before CMI's committed
delivery date. If the time period remaining between the then current date and
CMI's committed delivery date for a Product is less than forty-five (45) days,
Avanex must pay CMI [*] of the canceled amount.
(b) If the time period remaining between the then current date
and CMI's committed delivery date for a Product is more than forty-five (45)
days, then Avanex may with respect to each purchase order and at no charge make
any changes to delivery dates and unit quantities for such Product.
9. Over Shipments. Avanex will pay only for maximum quantities ordered,
unless Avanex has issued a change order authorizing an over shipment prior to
such delivery by CMI.
10. Early Shipments and Late Shipments. For Products delivered five (5)
or more days before or seven (7) or more days after the agreed delivery date,
Avanex may:
(a) Return such Products to CMI (or to the JV Co., as the case
may be) freight collect,
(b) Accept such Products with payment based upon the agreed
delivery date and not the date of receipt by Avanex, or
(c) In the event of late shipments, charge CMI (or the JV Co.,
as the case may be) a late delivery fee equal to [*] of the agreed delivery
amount for each full week of delay.
11. Modifications to Agreed Delivery Dates. CMI shall at all times use
its best efforts to deliver the unit quantity of Products to be delivered to
Avanex on the agreed delivery date. If, after employing such best efforts, CMI
first determines that it will be unable to deliver the unit quantity of Products
to be delivered to Avanex on the Agreed delivery date, then CMI shall notify
Avanex within twenty-four hours of such determination, and the parties will
negotiate in good faith new agreed delivery date, predicated on CMI's continued
use of such best efforts, for such Product(s). Any partial deliveries resulting
from such re-scheduling shall be separately invoiced by CMI and paid for by
Avanex without regard to subsequent deliveries.
12. [*] to Capacity; Scarce Material.
(a) CMI grants to Avanex [*] with respect to the JV Co.'s
capacity to manufacture Products and fill purchase orders. Avanex shall be
entitled to exercise [*] if at all, upon submission to CMI of every [*]
forecast, but in no event more than [*] times per year, measured from the date
Avanex first exercises [*]. CMI covenants to use its best efforts to produce the
Products efficiently and in significant quantity.
(b) In the event that any material is in such short supply such
that CMI is unable to fill Avanex's orders for Products in full ("Scarce
Material"), at a minimum CMI agrees to allocate Scarce Material to Avanex and
to utilize any materials in short supply to make Products under whichever of
the following formulas would allocate to Avanex the greatest amount of Scarce
Material:
(i) In the proportion of Avanex's orders for Products
containing such Scarce Material to all of CMI's customers' orders for product
containing such Scarce Material for the month in question;
(ii) In the proportion of Avanex's forecast for Products
containing such Scarce Material to all of CMI's customers' forecasts for
products containing such Scarce Material for the month in question; or
(iii) The most favorable allocation formula which CMI
utilizes with any other customer.
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13. Packing, Shipping Documents and Markings.
(a) Shipping materials and practices must meet or exceed general
industry standards and must be adequate to protect the Products from damage,
contamination, or degradation during shipment and during unpacking at the
destination. Electrostatic Discharge (ESD) protection must extend to
intermediate container level. Intermediate containers shall contain no loose
packing materials or Styrofoam.
(b) Shipments of Product having multiple date codes at the
intermediate container level must have the unit containers organized to afford
easy identification and separation, Therefore:
(i) unit containers may not contain mixed date
codes;
(ii) intermediate containers may not contain more
than two (2) date codes; and
(iii) shipments may not contain more than five (5)
date codes.
(c) Intermediate containers shall be marked with a label on the
end listing:
(i) CMI's name, part number, part description;
(ii) total quantity of Product in the container, date
code(s) by quantity; and
(iii) Avanex's part number and purchase order number
(d) The maximum acceptable weight for the shipping container is
45 pounds. Skids or pallets must be used with containers that are unsuitable for
manual handling.
14. Acceptance and Quality.
(a) Avanex may inspect the Products, materials and components
held by JV Co. for Avanex at JV Co.'s facilities during JV Co.'s regular
business hours. Avanex and its representatives shall observe all reasonable
security and handling measures of the JV Co. while on JV Co.'s premises.
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(b) CMI covenants to Avanex that Products sold to Avanex will
meet or exceed Avanex's product qualification requirements. Subject to the
provisions of Section 14(f) below, CMI will provide the following types of
quality inspections in accordance with its own published manual and, when
applicable, Avanex provided specifications, drawings and other such
documentation:
(i) incoming material inspections;
(ii) in-process inspections;
(iii) vendor control; and
(iv) final inspection.
(c) CMI may not make parts substitutions without the prior
written approval of Avanex. CMI shall direct all such requests for parts
substitutions to Avanex's Contract Administrator, as set forth below.
(d) Avanex may inspect, and based upon the results of such
inspection, reject or accept Products delivered hereunder in a reasonable period
of time. Any Products rejected shall be returned to CMI (or JV Co.) upon
Avanex's receipt of a return materials authorization ("RMA") for such return.
CMI shall issue RMA numbers within two (2) business days. Avanex shall return
Products in the original shipping container, if possible; otherwise Avanex shall
use a similar shipping container and such container shall be marked with the RMA
number. CMI shall repair or replace such rejected Products within five (5)
business days. With respect to Products to be repaired or replaced, the date
determined in the prior sentence shall be deemed an Agreed Delivery Date for
purposes of this Agreement, subject to modification in accordance with Section
11 hereof.
(e) Personnel designated by Avanex may freely communicate with
designated personnel of CMI (or JV Co.) with respect to technical assistance and
exchanges of information. Avanex's designated personnel shall, as reasonable,
provide technical assistance and answer questions for JV Co. personnel from time
to time, provided, however, that such communication shall not permit CMI to
deviate from any of its obligations under this Agreement.
15. End of Term Orders. Purchase orders placed by Avanex prior to the
termination of this Agreement for which the Agreed delivery date are after the
termination of this Agreement but not more than sixty (60) days after the end of
this Agreement shall continue to be governed by the terms and conditions of the
Agreement.
16. [Intentionally Omitted]
17. [Intentionally Omitted]
18. Risk of Loss or Damage. CMI shall be responsible for any loss or
damage to Product due to CMI's failure to properly preserve, package, or handle
the Product. In addition, notwithstanding any prior inspection, and only with
respect to Products delivered to Avanex's designated plant in Fremont,
California: (i) CMI will bear all risk of loss, damage or destruction to the
ordered Products until delivery to Avanex; and (ii) CMI will also bear the risk
of loss with respect to any Products rejected by Avanex and returned to CMI,
except that Avanex will be responsible for any damage to rejected or unaccepted
Product occasioned by the willful misconduct or negligence of its employees
acting within the scope of their employment.
19. Import/Export and Product Licenses.
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(a) CMI shall provide all information under its control which is
necessary or useful for Avanex to obtain any export or import licenses required
for Avanex to ship or receive Product(s), including, but not limited to, U.S.
customs certificates of delivery, affidavits of origin, and U.S. Federal
Communications Commissions identifier, if applicable.
(b) With respect to Product(s), each party shall comply with
export laws enacted by its respective government, and the regulations
thereunder.
(c) CMI shall be solely responsible for obtaining any and all
licenses required for production of Products in China, and CMI covenants to use
its best efforts to obtain such licenses in a prompt manner. CMI shall be
responsible for submitting executed versions of this Agreement to the relevant
government authorities in the PRC for approval under the Regulations of the
People's Republic of China for the Administration of Technology Import Contracts
and for registration under the Provisional Measures for the Administration of
Trade in Connection with the Import of Technology and Equipment. CMI shall
promptly deliver to Avanex satisfactory evidence that the approval and
registration have been obtained.
20. New Process Inclusion. CMI agrees to keep Avanex informed of any new
process(es) or improvements to existing process(es) involved in the production
of Products.
21. Qualification. CMI shall ensure that all Products delivered
hereunder meet Avanex's Product and test specifications as set forth in Exhibit
E and the Bellcore standard, as applicable. CMI shall ensure that the JV Co.
shall receive ISO 9002 certification within [*] months of its establishment, but
in no event later than [*]. CMI shall also ensure that the JV Co. complies with
all PRC law in its operations including, without limitation, the Labor Law of
the PRC and other employment regulations.
22. Correlation. At Avanex's option, correlation of test
programs/procedures between Avanex and CMI shall be completed prior to Avanex's
first customer shipment ("FCS") of an Avanex product containing Product. In the
event of a conflict between test results, Avanex's test method, programs and
analysis shall prevail. Details and specific procedures of the correlation plan
between Avanex and CMI will be as mutually defined and agreed to by the parties.
23. Programs and Services. It is the intention of the parties hereto to
negotiate in good faith and to enter into an agreement for the programs and
services described hereunder.
(a) Avanex wishes to develop with CMI a Dock to Stock Program.
Such program shall be designed to supply Avanex with Products that meets
established quality levels and to eliminate incoming inspection.
(b) Avanex wishes to develop with CMI a Just In Time delivery
program ("JIT"). The JIT shall be designed to supply Avanex with the Products at
the time at which Avanex requires such Products so as to reduce the inventory
which Avanex and/or CMI are required to retain in order to meet Avanex's
Products needs.
24. CMI's Communication and Report to Avanex. CMI shall establish an
information infrastructure that allows Avanex freely assess the JV Co's cost,
production and inventory information via electronic data exchange as soon as CMI
commences production for Avanex. CMI shall prepare and deliver to Avanex a
Quarterly Report containing the following information for each Product by
ordering location:
(a) Product;
(b) quantity ordered during the quarter;
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(c) total quantity shipped;
(d) date of each shipment with quantity, dollar amount, ship to;
and
(e) quantity on back order.
Such Quarterly Reports shall be delivered to Avanex within thirty (30) days
after the end of each calendar quarter during the term of this Agreement.
25. Transfer of Information. In connection with this Agreement, Avanex
shall provide CMI with information necessary to produce the Products. Such
information transfer shall take place in the manner set forth in Exhibit F
attached hereto. CMI acknowledges that all information to be transferred to it
by Avanex pursuant to this Section 25 is Proprietary and Confidential
Information (as defined below) of Avanex subject to the obligations of
Confidentiality in Section 26.
26. Confidential Information.
(a) CMI acknowledges that information which Avanex may disclose
to CMI (or JV Co.) in a tangible form marked "Confidential," "Proprietary" (or
with similar legend), or that is disclosed orally and confirmed in writing as
confidential within a reasonable time, comprises proprietary and confidential
information of Avanex ("Confidential Information"). In addition, Confidential
Information shall include all designs, engineering details, schematics,
drawings, and specifications developed by CMI (or JV Co.) with respect to the
Products. If Confidential Information is orally disclosed it shall be identified
as such at the time of disclosure and a confirmation of the confidential nature
of the information shall be sent to the CMI (or JV Co.) within thirty (30) days
after the disclosure.
(b) CMI agrees not to use Confidential Information or disclose,
distribute or disseminate such Confidential Information to any third person
except as expressly permitted under this Agreement or as expressly agreed in
writing by Avanex. CMI agrees to restrict access to such Confidential
Information to those employees, contractors or consultants of CMI or JV Co. who
have agreed to be bound by and have duly executed a Confidentiality Undertaking
in the form set forth in Exhibit G. CMI shall not use such materials at a
location other than at the JV Co.'s registered address in Tianjin, China without
Avanex's prior written consent. CMI agrees to establish adequate internal
safeguards and otherwise use reasonable care in restricting the use and
dissemination of any Confidential Information in order to protect against its
unauthorized use or disclosure to any third party. CMI shall exercise the same
degree of care to prevent unauthorized use or disclosure of the Confidential
Information to others as it takes to preserve and safeguard its own confidential
information, but in any event, no less than a reasonable degree of care.
(c) CMI (or JV Co.) shall be permitted to disclose to any
government, regulatory authority or court, any Confidential Information if CMI
(or JV Co.) is required by law or judicial decree to do so for the express
purposes of obtaining their approval to make Licensed Products in the PRC. Such
disclosure shall not constitute a breach of this Agreement provided that CMI
promptly notifies Avanex when such obligation of disclosure arises to enable CMI
to seek an appropriate protective order and to make known to the said
government, regulatory authority or court the proprietary nature of the
Confidential Information to be disclosed and to make any applicable claim of
confidentiality prior to the disclosure being made and provided CMI has first
informed Avanex of any requirement that exists in Chinese laws, regulations or
judicial decrees for that government, regulatory authority or court to make
further disclosures of the information to any third party.
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(d) CMI shall be relieved of this obligation of confidentiality
to the extent any Avanex information:
(i) was in the public domain at the time it was
disclosed or has become in the public domain through no fault of CMI;
(ii) CMI can prove was known to CMI, without
restriction, at the time of disclosure as shown by the files of the CMI in
existence at the time of disclosure;
(iii) is disclosed by CMI with the prior written
approval of Avanex;
(iv) CMI can prove was independently developed by CMI
without any use of the Confidential Information and by employees or other agents
of (or independent contractors hired by) CMI who have not had access to any
Confidential Information; or
(v) becomes known to CMI, without restriction, from a
source other than Avanex without breach of this Agreement by CMI and otherwise
not in violation of Avanex's rights.
(e) CMI acknowledges that breach of the confidentiality
obligation would cause irreparable harm to Avanex, the extent of which would be
difficult to ascertain. Accordingly, CMI agrees that Avanex may seek immediate
injunctive relief in the event of breach of the confidentiality obligation by
CMI or JV Co.
(f) Within seventy-five (75) business days after termination of
this Agreement, CMI shall promptly return all tangible materials containing such
Confidential Information to Avanex. Concurrently with the return of such
materials, CMI agrees to confirm in writing that all materials containing
Confidential Information have been returned to Avanex by CMI.
27 License, Intellectual Property Rights
(a) For so long as this license remains in effect under PRC law,
Avanex hereby grants to CMI and JV Co. (i) a [*] restrictive, nontransferable,
license with no right to sublicense under which CMI may (A) make Licensed
Products (as set forth on Exhibit H) in the PRC (excluding the Hong Kong SAR,
Macau, and Taiwan) and in the United States and use and sell Licensed Products
worldwide, and (ii) use the Licensed Information (as set forth on Exhibit H) in
China and the United States. This license shall be exclusive with respect to the
manufacture of Licensed Products in the PRC (excluding the Hong Kong SAR, Macau,
and Taiwan) and the use of Licensed Information in the PRC (excluding the Hong
Kong SAR, Macau, and Taiwan), but shall be nonexclusive with respect to all
other rights and purposes and territories. The parties agree that until the [*]
of this Agreement (unless earlier terminated), each party shall provide the
other party information related to any revision or improvement of Licensed
Products or Licensed Information.
(b) Notwithstanding the foregoing, Avanex retains for itself all
proprietary and intellectual property rights including all patent rights in and
to all designs, engineering details, schematics, drawings, specifications and
other similar data and Confidential Information which:
(i) pertain to the Products; and are
(ii) provided to CMI or JV Co. under this Agreement or
developed by CMI or JV Co. for Avanex. CMI hereby assigns to Avanex all
proprietary and intellectual
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property rights, including all patent rights, in and to such designs,
engineering details, schematics, drawings, specifications and other similar data
and Confidential Information. Avanex shall have the sole right to file any
patent applications thereon. CMI agrees to cooperate with Avanex and take all
reasonable additional actions and execute such agreements, instruments, and
documents as may be necessary or desirable to perfect Avanex's ownership
interests in accordance with the intent of this Section 27(b), including, but
not limited to, the execution of necessary and appropriate instruments of
assignment.
(c) Any such information and materials which Avanex may furnish
to CMI (or JVCo) shall be in CMI's (or JV Co.'s) possession pursuant only to a
restrictive, nontransferable, nonexclusive license with no right to sublicense
under which CMI may use such information and materials solely for the purposes
of manufacturing, operating, servicing and repairing the Products for Avanex's
purposes pursuant to this Agreement. Within seventy-five (75) business days
after termination of this Agreement, CMI shall promptly return all tangible
materials containing such Confidential Information to Avanex. Concurrently with
the return of such materials, CMI agrees to confirm in writing that all
materials containing Confidential Information have been returned to Avanex by
CMI.
(d) CMI shall inform Avanex in writing immediately upon becoming
aware of any use, suspected use, of the Licensed Information, or any party of
it, by any other party. In the event of any actual, any threatened or potential
litigation against Avanex alleging infringement of a third party's patent or any
other rights of such third party arising from the use of the Licensed
Information, CMI shall give immediate written notice to Avanex. Avanex shall
bear all legal and economic responsibilities for defending or otherwise dealing
with such actual or threatened litigation and CMI shall in a timely manner
provide Avanex with all assistance as may be reasonably requested by Avanex from
time to time. CMI agrees not to be involved in any discussions with any third
party relating to nor to take any steps relating to or to compromise any
litigation or threatened or potential litigation relating to the Licensed
Information, without the prior written consent of Avanex.
28. Documentation Reproduction
Subject to CMI's strict compliance with Sections 26 and 27 of
this Agreement, CMI may reproduce documentation, including Confidential
Information, in the performance of its obligations under this Agreement.
29. Avanex-unique Components. Except in accordance with Section 27, CMI
will not ship any Product that is developed by, in conjunction with, or in
accordance with specifications from Avanex ("Avanex-unique Components"), to any
third party without the express, prior written consent of Avanex.
30. Inventions.
(a) All discoveries, improvements and inventions, whether or not
patentable, conceived or first reduced to practice, as those terms are used
before the U.S. Patent and Trademark Office, in the performance of this
Agreement by Avanex personnel shall be the sole and exclusive property of Avanex
and Avanex shall retain any and all rights to file any patent applications
thereon.
(b) Subject to the provisions of Section 27(b) hereof, all
discoveries, improvements and inventions conceived or first reduced to practice,
as those terms are used before the U.S. Patent and Trademark Office, whether or
not patentable, in the performance of this Agreement by CMI's personnel shall be
the sole and exclusive property of CMI and CMI shall retain any and rights to
file any patent applications thereon.
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(c) Subject to the provisions of Section 27(b) hereof, all
discoveries, improvements and inventions conceived or first reduced to practice,
as those terms are used before the U.S. Patent and Trademark Office, whether or
not patentable, in the performance of this Agreement jointly by CMI personnel
and Avanex personnel (the "Joint Inventions"), shall be the property jointly of
CMI and Avanex, each party having [*] interest therein. Each party shall be
entitled to use, exploit, transfer, and grant licenses with respect to its
interest in Joint Inventions without notice or accounting to the other party.
31. CMI's Process Changes. CMI agrees that it will not invoke any
changes in process, design or method of manufacturing that might affect form,
fit or function of the Products, including without limitation, changes in
performance, maintenance procedures, interchangeability, interconnectability,
reliability or manufacture compatibility of Products during the term of this
Agreement without Avanex's prior written consent. CMI further agrees that any
contemplated changes in process or method of manufacturing will be submitted to
Avanex in writing, (the original notification to be provided to the
Administrator and copies to Avanex personnel as may be required), in sufficient
time to enable Avanex a reasonable opportunity in which to evaluate such
changes. If said design change, in Avanex's opinion, necessitates evaluation by
Avanex of compatibility with Avanex's systems, CMI, upon request from Avanex,
will provide Avanex prototype units of Product for evaluation. Such design
change, once approved by Avanex, shall cause the revision level of the Product
to be rolled. CMI WILL NOT IMPLEMENT SUCH CHANGES WITHOUT THE PRIOR WRITTEN
CONSENT OF AVANEX.
32. Discontinuance or Reduction of Production of a Product. CMI may
reduce or discontinue its production of a Product upon [*] prior written notice
to Avanex, so long as CMI does not offer such Product to any other of its
customers after it stops offering such Product to Avanex. Within sixty (60) days
after receipt by Avanex of written notice of such discontinuance ("Notice
Date"), Avanex may place and CMI shall accept all orders unless otherwise
precluded by any law, regulation, court judgment, order or permit, for delivery
over a [*] period following Notice Date with respect to any Product adversely
affected by such Product discontinuance. As a material inducement to entering
into this Agreement, CMI represents to Avanex that after diligent inquiry CMI is
aware of no Product or process involved in the production of any Product which
violates any law, regulation, judgment, order or permit.
33. Safety Standards and Legal Compliance.
(a) CMI will use its best efforts to provide information,
participate in inspections and perform all other actions reasonably requested by
Avanex to receive and/or maintain safety certifications by governmental
agencies, to the extent required or applicable.
(b) CMI agrees to notify Avanex of any post-sale warnings,
retrofits or recalls which CMI implements with respect to any suppliers,
materials, and processes that are used by or for, or included in the Product(s).
(c) CMI will promptly notify Avanex with respect to any matter
to which CMI receives or develops knowledge with respect to the safe and
reliable operation of the Product(s).
34. Insurance. During the Term of this Agreement, CMI, at its sole cost
and expense, shall carry and maintain insurance adequate to cover its
manufacturing operations, product liability (naming Avanex as loss payee) and
its other obligations under this Agreement. CMI shall provide Avanex with a
Certificate of Insurance stating that such insurance policies are in full force
and effect. CMI shall require its insurer(s) to give Avanex thirty (30) days
written notice before the policy or policies are canceled or materially altered.
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35. Warranty.
(a) CMI represents and warrants to Avanex that for a period of
[*] from the quality assurance date stamped on each Product delivered hereunder,
all Products delivered: (i) are new, unused, will be free from defects in
workmanship and manufacture; and (ii) will conform to the product and test
specifications incorporated by reference in Exhibit D and the Bellcore
standards, as applicable. CMI shall assign to Avanex any warranties with respect
to material. CMI MAKES NO OTHER REPRESENTATIONS OR WARRANTIES, EXPRESS OR
IMPLIED WITH RESPECT TO PRODUCT(S), AND EXPRESSLY DISCLAIMS ANY IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. All
warranties run to the benefit of Avanex. Avanex's approval of CMI's materials
will not relieve CMI of any warranties.
(b) Defective or non-conforming Products shall be returned to
CMI (or JV Co.) upon Avanex's receipt of a RMA for such return. CMI shall issue
RMA numbers within two (2) business days. Avanex shall return Products in the
original shipping container, if possible, otherwise Avanex shall use a similar
shipping container and such container shall be marked with the RMA number. CMI
shall repair or replace such rejected Products within five (5) business days.
With respect to Products to be repaired or replaced, the date determined in the
prior sentence shall be deemed an Agreed Delivery Date for purposes of this
Agreement, subject to modification in accordance with Section 11 hereof.
(c) CMI shall not unreasonably withhold its approval of Avanex's
offer to correct itself, or to reimburse a third party to correct, the defective
or non-conforming Products and charge CMI with the cost of such correction.
(d) Any repaired or replaced Products shall be subject to the
warranty set forth above. Out of warranty service shall be provided at CMI's
standard terms, conditions, and rates.
(e) Subject to Avanex's rights with respect to Section 35(c) and
Section 36 hereof such repair or replacement shall be Avanex's exclusive remedy
and CMI's sole liability for any breach of the warranty set forth in this
Section.
36. Indemnification and Hold Harmless. Subject to the limitations
provided in Section 39 of this Agreement, in connection with the transactions
contemplated by this Agreement CMI agrees to indemnify and hold Avanex harmless
from and against any claims, actions, losses, damages, costs and expenses
(including without limitation, reasonable attorneys' fees) arising from any of
the following:
(a) breach or violation of any import or export laws of China or
the United States;
(b) breach of any representation or warranty made by CMI in this
Agreement;
(c) claim brought by any third party that CMI's (or the JV
Co.'s) (i) manufacture of Products or Licensed Products or (ii) use of the
Licensed Technology, violates any intellectual property rights of such party or
another third party; or
(d) claim brought by any third party against Avanex for any
loss, damage, cost, expense or liability arising from defects in the Products
manufactured by CMI (or the JV Co.).
37. Cancellation for CMI's Default.
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(a) Avanex may, at any time prior to delivery, by written
notice, cancel this Agreement in whole or in part, or any purchase order issued
hereunder if, in Avanex's good faith opinion, CMI has:
(i) failed to make delivery of Product on an Agreed
Delivery Date as such date may be modified under Section 11 hereof;
(ii) other than as provided in the previous clause,
failed to replace or correct defective items in accordance with the provisions
of Sections 14 or 35 above;
(iii) failed to provide adequate assurance of
performance within five (5) business days of having received Avanex's notice of
a failure by CMI to make progress under this Agreement so as to endanger
performance in accordance with its terms;
(iv) becomes bankrupt or insolvent, suffers a receiver
to be appointed or makes an assignment for the benefit of creditors; or
(v) is in material default of any obligations, except as
set forth in Section 37(a)(i), (ii), (iii) and (iv), above, under this
Agreement, and such default is not cured within thirty (30) days of Avanex's
notice of such default.
(b) If this Agreement or any purchase order under this Agreement
is canceled for CMI's default, Avanex may, in addition to all legal and
equitable remedies that may be available to Avanex, procure upon such terms and
in such manner as Avanex may deem appropriate, goods or services similar or
substantially similar to those canceled. CMI will then be liable to Avanex for
any excess costs occasioned thereby.
(c) If all or a portion of this Agreement or any purchase order
is canceled for CMI's default, Avanex may, in addition to all other remedies
that may be available to Avanex, require CMI to transfer title and to deliver to
Avanex, in the manner and to the extent directed by Avanex, provided that Avanex
pays for such property pursuant to Section 37(e), below:
(i) any completed items not yet delivered; and/or
(ii) any partially completed items and materials that
CMI (or JV Co.) has produced or acquired for the performance of the terminated
portion.
(d) CMI will, upon direction of Avanex, protect and preserve the
property listed in this Section that is in the possession of CMI or JV Co.
Nothing in this Section 37 is intended to excuse CMI from proceeding with any
uncanceled portion of this Agreement or purchase order(s) under this Agreement.
(e) Avanex will pay CMI the following amounts for property for
which title has been transferred and delivery completed under Section 37(c),
and/or for any services performed under Section 37(d), above:
(i) the contract price for any completed Products or
services rendered in accordance with this Agreement;
(ii) the actual costs incurred by CMI which are properly
allocable under recognized commercial accounting practices to the terminated
portion of this Agreement, plus a fair and reasonable profit on such costs (as
reasonably agreed to by the parties) with respect to partially completed
Products and materials that CMI has produced or acquired for the performance of
the terminated portion of this Agreement. With respect to work in progress, if
it
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appears that CMI would have sustained a loss on the order, no profit will be
allowed, and an adjustment will be made reducing the amount of the settlement to
reflect the indicated rate of loss; or
(iii) the reasonable costs incurred by CMI in protecting
property in which Avanex has or may acquire an interest under this Section 37.
(f) Payments made under this Section 37 may not exceed the
aggregate price specified in this Agreement or purchase order(s) under this
Agreement less payments otherwise made or to be made. Any amounts payable for
property lost, damaged, stolen or destroyed prior to delivery to Avanex will be
excluded from amounts otherwise payable to CMI under this Section 37.
(g) Both parties agree to negotiate in good faith the settlement
of any dispute that may arise under this Agreement. Pending settlement of any
dispute, CMI agrees to continue to fabricate and deliver Products under the
terms of this Agreement as directed by Avanex.
38. Termination for Convenience.
(a) At any time for convenience, Avanex may terminate work under
this Agreement in whole or in part, by [*] written notice to CMI specifying the
extent to which performance of work is terminated and the time at which such
termination becomes effective. Upon such termination, CMI will to the extent and
at the times specified by Avanex, stop all work under this Agreement or purchase
order under this Agreement, place no further orders for materials to complete
the work, assign to Avanex all CMI's interests under terminated subcontracts and
orders, settle all claims thereunder after obtaining Avanex's approval, protect
all property in which Avanex has or may acquire an interest, and transfer title
and make delivery to Avanex of all articles, materials, work in process, and
other things held or acquired by CMI in connection with the terminated portion
of this Agreement. CMI will proceed promptly to comply with Avanex's
instructions respecting each of the foregoing without awaiting settlement or
payment of its termination claim. Within thirty (30) days after such
termination, CMI may submit to Avanex its written claim for termination charges,
in the form and with the certifications prescribed by Avanex. Failure to submit
such a claim within thirty days will constitute an unconditional and absolute
waiver of all claims and a release of all Avanex's liability arising out of the
termination. The parties may agree upon the amount to be paid CMI for such
termination. If they fail to agree, Avanex will pay CMI the following amounts:
(i) the contract price for any completed Products or
services rendered in accordance with this Agreement;
(ii) the actual costs incurred by CMI which are properly
allocable under recognized commercial accounting practices to the terminated
portion of this Agreement, plus a fair and reasonable profit on such costs (as
reasonably agreed to by the parties) with respect to partially completed
Products and materials that CMI has produced or acquired for the performance of
the terminated portion of this Agreement. With respect to work in progress, if
it appears that CMI would have sustained a loss on the order, no profit will be
allowed, and an adjustment will be made reducing the amount of the settlement to
reflect the indicated rate of loss; or
(iii) the reasonable costs incurred by CMI in making
settlement and in protecting property in which Avanex has or may acquire an
interest.
(b) Payments made under this Section 38 may not exceed the
aggregate price specified in this Agreement or purchase order(s) under this
Agreement less payments otherwise
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made or to be made. Any amounts payable for property lost, damaged, stolen or
destroyed prior to delivery to Avanex will be excluded from amounts otherwise
payable to CMI under this Section 38.
(c) Cancellation by Avanex under this Section 38 of any purchase
order shall not excuse CMI's performance with respect to any other Agreement or
Purchase order.
39. LIMITATION OF LIABILITY. IN NO EVENT WILL EITHER AVANEX OR CMI OR JV
CO. BE LIABLE FOR ANY SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES ARISING OUT
OF THIS AGREEMENT, WHETHER UNDER THEORY OF CONTRACT, TORT (INCLUDING
NEGLIGENCE), PRODUCT LIABILITY OR OTHERWISE, EVEN IF ADVISED OF THE POSSIBILITY
OF SUCH DAMAGES AND EVEN IF SUCH DAMAGES COULD HAVE BEEN REASONABLY FORESEEN.
NOTWITHSTANDING THE FOREGOING, NOTHING IN THIS AGREEMENT IS MEANT TO ALTER THE
RIGHTS OR REMEDIES OF EITHER PARTY AGAINST THE OTHER PARTY IN ANY ACTION IN LAW
OR EQUITY BROUGHT BY A THIRD PARTY WITH REGARD TO ANY CLAIM MADE BY SUCH THIRD
PARTY.
40. Force Majeure. Neither party shall be liable for any delay or
failure in performance hereunder caused by acts of God or other causes beyond
the parties' control and without fault or negligence. In the event CMI fails to
deliver Product due to such causes, Avanex may suspend this Agreement in whole
or in part for the duration of the delaying cause, and at Avanex's option, buy
the Products elsewhere and deduct from any purchase order to CMI the quantity so
purchased. CMI shall resume performance under this Agreement immediately after
the delaying cause ceases and, at Avanex's option, extend the Initial Term
and/or Term for a period equivalent to the length of time the excused delay
endured.
41. Equal Opportunity. The "Equal Opportunity Clause" set forth in 41
C.F.R. section 60-1.4(a), the clause labeled "Affirmative Action of Disabled
Veterans and Veterans of the Vietnam Era" set forth in 41 C.F.R. section
60-250.4 and the clause labeled "Affirmative Action for Handicapped Workers" set
forth in 41 C.F.R. section 60-741.4 are hereby incorporated by reference and all
references in such clauses to "the contractor" shall be deemed to be references
to CMI.
42. Government Contracts. If any purchase order under this Agreement is
issued for any purpose that is either directly or indirectly connected with the
performance of a prime contract with the U.S. government or a subcontract
thereunder, the terms that the Federal Acquisition Regulations or other
appropriate regulations required to be inserted in contracts or subcontracts,
except for those terms pertaining to cost and pricing data and cost accounting
standards, will be deemed to apply to any purchase order under this Agreement.
CMI will promptly notify Avanex if CMI becomes, or with the passage of time will
become, ineligible to perform contracts or subcontracts under U.S. Federal
Acquisition Regulations. Avanex shall use its best efforts to notify CMI of any
provision that is so passed on.
43. Survival. Notwithstanding the termination or expiration of the
Initial Term of this Agreement or any Extended Term thereof, it is acknowledged
and agreed that those rights and obligations which by their nature are intended
to survive such expiration or earlier termination shall survive including,
without limiting the foregoing, following Sections: 26, 27(b) and (c), 28, 29,
30, 35, 39, 44, 45, 47 and 48, for a period of ten (10) years. All obligations
to return information and materials shall survive the termination of this
Agreement.
44. Relationship of Parties.
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(a) Neither party shall have, or shall represent that it has,
any power, right or authority to bind the other party, or to assume or create
any obligation or responsibility, express or implied, on behalf of the other
party or in the other party's name.
(b) Nothing stated in this Agreement shall be construed as
constituting CMI (or JV Co.) and Avanex as partners, joint venturers, or as
creating the relationships of employer and employee, franchiser and franchisee,
master and servant, or principal and agent.
45. Publicity. Neither Avanex or CMI shall publicize or disclose the
existence or terms and conditions of this Agreement, or any transactions
hereunder, without the express, prior written consent of the other, except as
may be required under the rules and regulations of the United States Securities
Exchange Commission.
46. Administration.
(a) Avanex and CMI shall each assign an individual to administer
this Agreement throughout this term:
Avanex's Administrator shall be:
Mr. Jessy Chao
Avanex Corporation
42501 Albrae Street
Fremont, California 94538
(510) 360-0693
CMI's Administrator shall be:
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(b) Each party shall inform the Administrator of the other in
writing of a change of Administrator or such Administrator's address or
telephone number.
(c) Any notice required or permitted to be given under this
Agreement shall be given in writing and shall be addressed to Avanex or CMI, as
the case may be, at the address set forth above or at such other address as may
be given in writing and: (i) by airmail, postage prepaid, certified mail, return
receipt requested; (ii) transmitted by facsimile with a confirming copy
immediately mailed thereafter; or (iii) delivered by a messenger or overnight
delivery service.
47. General. This Agreement and all of its referenced Exhibits, which
are incorporated herein by reference as if set forth in full, together with all
purchase orders, but not the preprinted terms and conditions thereof, constitute
the entire agreement between the parties with respect to the subject matter
hereof and supersede all prior proposals, negotiations and communications, oral
or written, between the parties with respect to the subject matter hereof. No
deviation from these provisions shall be binding unless in writing and signed by
an authorized representative of the party to be charged.
Except as specifically set forth herein, all rights and remedies
conferred under this Agreement or by any other instrument or law shall be
cumulative and may be exercised singularly or concurrently. Failure by either
party to enforce any provision shall not be deemed a waiver of future
enforcement of that or any other provision. In the event that any portion of
this
16
<PAGE> 17
Agreement shall be held to be unenforceable, the remaining portions of this
Agreement shall remain in full force and effect and the parties shall negotiate
substitute provisions for those provisions held to be unenforceable that most
nearly effect the parties intent in entering into this Agreement. In the event
any provisions of this Agreement shall be held unenforceable against the JV Co.
under PRC law, CMI shall nevertheless be obligated to perform such obligation
unless the same shall be unenforceable under California law.
48. Governing Law and Dispute Resolution. This Agreement is entered into
at Fremont, California and shall be governed by and construed in accordance with
the laws of the State of California, USA, except that body of law of California
law concerning conflicts of law. Any dispute, controversy or claim arising out
of or relating to this Agreement shall be finally and exclusively resolved by
submission to a single arbitrator in San Francisco, California in accordance
with the commercial arbitration rules of the American Arbitration Association.
The prevailing party shall be entitled to reasonable attorneys' fees and costs.
The arbitrator shall set a limited time period and establish procedures designed
to reduce the cost and time for discovery while allowing the parties an
opportunity, adequate in the sole judgment of the arbitrator, to discover
relevant information from the opposing parties about the subject matter of the
dispute. The arbitrator shall rule on motions to compel or limit discovery and
shall have the authority to impose sanctions, including attorneys' fees and
costs, to the same extent as a court of competent law or equity, should the
arbitrator determine that the discovery was refused or objected to without
substantial justification. The arbitrator shall have the authority to grant any
equitable and legal remedies that would be available in any judicial proceeding
instituted under California substantive law to resolve a dispute. Any award
issued by the arbitrator shall be final and binding on the parties and
enforceable against them. Any award issued against the JV Co. shall be
enforceable by any competent court having jurisdiction over the JV Co. in
accordance with the terms of the NEW YORK (UN) CONVENTION FOR THE RECOGNITION,
AND ENFORCEMENT OF FOREIGN ARBITRAL AWARDS.
49. Assignments.
(a) The rights, duties and obligations of CMI (or JV Co.) under
this Agreement may not be assigned in whole or in part by operation of law or
otherwise without the prior express written consent of Avanex, and any attempted
assignment of any rights, duties or obligations hereunder without such consent
shall be null and void. This Agreement shall be binding on the parties and their
respective successors and permitted assigns.
(b) Avanex shall not assign its rights duties and obligations
under this Agreement without the prior written approval of CMI, which approval
CMI shall not unreasonably withhold, provided, however, that Avanex may assign
this Agreement without the prior written approval of CMI to a person or entity
into which Avanex has merged or which has otherwise succeeded to all or
substantially all of its business and assets, and which has assumed in writing
or by operation of law its obligations under this Agreement.
50. Exhibits. The following is the list of Exhibits which are attached
hereto and hereby incorporated into this Agreement by reference:
A. Product Description, Production Pricing and Lead Times
B. Form of Acknowledgement and Agreement
C. Safety Stock
D. Long Lead Components
E. Product and Test Specifications
F. Method of Information Transfer
G. Confidentiality Undertaking
17
<PAGE> 18
H. Licensed Products and Licensed Information
51. Language. For purposes of submission of this Agreement to the
relevant PRC authorities, this Agreement may be translated into Chinese. Such a
transaction shall be for this purpose only and the English text shall be only
the authoritative and binding text.
52. CMI Board Seat. During the period that this Agreement is in effect,
CMI shall offer Avanex the option of appointing its designee to the board of
directors of the CMI and the JV Co.
IN WITNESS WHEREOF, the parties have caused this Agreement to executed
by their duly authorized representatives.
Accepted for Avanex:
AVANEX CORPORATION
By: /s/ Walter Alessandrini
Name: Walter Alessandrini
-------------------
Title: CEO
---
Date: 5/8/1999
--------
Accepted for CMI:
CONCORD MICRO-OPTICS, INC.
By: /s/ Jeanette J. Zhou
Name: Jeanette J. ZHOU
----------------
Title: CEO
---
Date: 05/24/99
--------
18
<PAGE> 19
Exhibit A
Products:
[*]
Price:
The prices for the Products shall be based on the JV Co.'s direct manufacturing
costs plus a markup subject to good faith negotiations and agreement between
the parties, and shall be reviewed [*]. CMI shall guarantee Avanex a [*]
discount to the lowest prices at which it offers Products to third parties. CMI
shall use reasonable commercial efforts to continually reduce the unit pricing
and discount pricing of the Products.
Avanex shall be allowed the full benefit of any and all lower prices, after
giving effect to Avanex's [*] discount, contained in any other agreement that
may hereafter be entered into by CMI. CMI shall notify Avanex immediately of
any such lower prices, and shall make the same available to Avanex at [*]
discount for as long as such prices are made available to such other similar
customers.
CMI shall allow Avanex to review its JV Co.'s production cost information, if
requested by Avanex. Avanex shall have the right to demand a refund or credit
toward future purchases if it finds any price discrepancy. [*] shall be [*]
responsible for all costs and expenses relating to an inspection of cost
information, including travel, lodging and meals.
Lead Times:
To be determined on a product-by-product basis.
- ----------
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 20
Exhibit B
Form of
Acknowledgment and Agreement
to the Terms of the
Avanex Corporation License and Supply Agreement
______________________________, a Sino-foreign joint venture organized and
existing under the laws of the People's Republic of China, with a principal
place of business at Tianjin, People's Republic of China ("JV Co."), hereby
agrees to fully comply with all obligations of Concord Micro-Options, Inc.
("CMI") as set out under the Avanex Corporation License and Supply Agreement
(the "Agreement"), entered into between Avanex Corporation and CMI and duly
executed by said parties on ___________, 1999, including without limitation the
provisions relating to protection of Confidential Information set forth in
Section 26 of the Agreement.
JV Co. acknowledges receipt of an executed copy of the Agreement and agrees to
deliver an executed original of this Acknowledgment and Agreement to Avanex
within seven (7) days after the execution hereof.
Accepted for JV Co. by its duly authorized legal representative:
By:
----------------------------------
Name:
--------------------------------
Title: Legal Representative
-------------------------------
Date:
--------------------------------
<PAGE> 21
Exhibit C
Safety Stock:
To be determined subsequently.
<PAGE> 22
Exhibit D
Long Lead Components:
[*]
- ----------
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 23
Exhibit E
Product and test Specifications:
[To be provided subsequently by Avanex]
<PAGE> 24
Exhibit F
Method of Information Transfer:
Avanex will furnish two copies, in the English language, of the Licensed
Information to CMI, to the extent such information exists in tangible form.
Avanex will provide [*] engineers and/or technicians dispatched by CMI up to [*]
hours of theoretical and practical training at Avanex's facilities. The parties
shall make a good faith effort to ensure that this training shall be adequate to
ensure that qualified CMI engineers and technicians can manufacture, at Avanex's
facilities, samples of the Licensed Products that meet current standards.
Upon the reasonable request of CMI, Avanex will dispatch one engineer or
technician for up to two weeks to inspect the production process at MCI's
facility and to provide further training.
If CMI requires further training or consultation beyond the above allowable
time, CMI will pay Avanex at [*] per hour per trainer.
CMI shall be solely responsible for all costs and expenses relating to the
travel, lodging and meals for the purpose of technical transfer.
- ----------
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 25
Exhibit G
Confidentiality Undertaking
In consideration of my employment and/or the continuance of my employment by the
JV Co. [or engagement by the JV Co. in the event of a consultant], I hereby
undertake to Avanex Corporation ("Avanex"), which has provided certain
Confidential Information (as defined below) to the JV Co. as follows:
1. I hereby recognize that unpublished patentable or unpatentable items of
technical or non-technical information such as, but not limited to,
materials, tooling, equipment, designs, processes, formulae, projects,
products, costs, financial data, software programs and subroutines,
source and object code, algorithms, trade secrets, designs, technology,
know-how, processes, data, ideas, techniques, utility models,
inventions, works of authorship, formulas, business and product
development plans, customer lists, research or development, production,
manufacturing and engineering processes, prices and pricing structures,
marketing and sales information, product lines and any information and
materials relating thereto, or which is received in confidence by or for
the JV Co. or used by Avanex in its business constitute valuable trade
secrets or confidential information (referred to hereafter collectively
as "Confidential Information") which are the property of Avanex and I
agree not to disclose or use the same other than in the business of the
JV Co. Specifically, I agree:
(a) not to, directly or indirectly, disclose or make available to
anyone or use outside of the JV Co. during and after my
employment, any Confidential Information without the prior
written consent of an authorized official of Avanex;
(b) to safeguard all Confidential Information at all times so it is
not exposed to, or taken by, unauthorized persons, and when
entrusted to me will exercise my best efforts to assure its
safe-keeping;
(c) upon termination of my employment, to deliver all materials,
including personal notes and reproductions relating to the JV
Co. or Avanex business in my possession or control, with full
understanding that compensation and benefits may be withheld if
I fail to comply; and
(d) to prevent any non-employees from viewing those portions of the
JV Co. plant on which any Confidential Information is in use
without the prior express written consent of an authorized
official of Avanex.
2. With respect to all work done by me in relation to the JV Co., I hereby
agree that all right, title and interest in and to all ideas which I
have conceived or may conceive and all inventions, improvements or
discoveries which I have made or may make, whether
<PAGE> 26
conceived or made during working hours or otherwise and whether alone or
jointly with others, are the sole property of the JV Co. or Avanex (as
they have agreed between them). With respect to all patent conceptions
and implementing projects, I also agree that during and after
termination of my employment, I and my heirs or representatives, shall,
as requested, assist in the preparation and execution of all patent
applications and other instruments, as well as execute all requested
assignments and do all other things which Avanex deems necessary to
obtain or to maintain Chinese, and foreign patents and to protect Avanex
rights and interests.
- ---------------------------- --------- -------------------------------------
Name of Employee/Consultant Date Signature of Employee/Consultant
ACCEPTED BY OFFICER OF THE JV CO. ON BEHALF OF AVANEX
By:
----------------------------------
Title:
-------------------------------
Date:
--------------------------------
<PAGE> 27
Exhibit H
Licensed Products:
[*]
Licensed Information:
Technical information and manufacturing process deemed by Avanex (in its
discretion) to be necessary or desirable for the production of the Licensed
Products
- ----------
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 1
EXHIBIT 10.31
INTERNATIONAL DISTRIBUTOR AGREEMENT
This International Distributor Agreement (the "Agreement") is made and entered
into this ___ day of November, 1999, by and between Avanex Corporation, a
corporation duly organized and existing under the laws of California, having its
principal place of business at 40919 Encyclopedia Circle, Fremont, California
94538 (hereinafter referred to as "Manufacturer") and Hakuto Co., Ltd., a
corporation duly organized and existing under the laws of Japan, having its
principal place of business at 1-13, Shinjuku 1-chome, Shinjuku-ku, Tokyo
160-8910, Japan (hereinafter referred to as "Hakuto" or "Distributor"),
WITNESSETH:
WHEREAS, Manufacturer is engaged in the business of the manufacture of various
photonic processors including the Products hereinafter defined; and
WHEREAS, Hakuto is engaged in the business of the sale and marketing of
merchandise throughout the world, including products similar or related to the
Products of Manufacturer; and
WHEREAS, Hakuto is desirous of being appointed distributor of the Products in
the Territory hereinafter defined.
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein
contained, Manufacturer and Hakuto do hereby agree the terms and conditions set
forth below:
1. Distributorship, Products and Territory
1.01 Distributorship. Manufacturer hereby grants to Hakuto during the term of
this Agreement the non-exclusive right to sell the Products in the Territory all
in accordance with the terms and conditions herein set forth. Distributor shall
pursue aggressive sales policies and procedures to realize the maximum sales
potential for the Products in the Territory. Manufacturer reserves the right to
market its products directly to the House Accounts set forth on Exhibit A.
1.02 Products. The term Products as used herein shall refer to the equipment set
forth on Exhibit B attached hereto and made a part hereof, as well as all
accessories, attachments, spare parts and renewal parts therefor. Manufacturer
shall have the right to modify, alter, improve, change or discontinue any or all
of the Products covered by this Agreement but only upon [*] prior written notice
to Hakuto. In the event Manufacturer manufactures any new or additional products
similar to or related to the Products hereunder, said products, at the option of
Hakuto, shall be added to the Products covered by this Agreement.
1.03 Territory. Territory shall have the meaning set forth in Exhibit C.
1.04 Conflict of Interest. Distributor warrants to Manufacturer that it does not
currently represent or promote any lines or products that compete with the
Products. During the term of this Agreement, Distributor shall not, without
Manufacturer's prior written consent, represent, promote or otherwise try to
sell within the Territory any lines or products that, in Manufacturer's
judgment, compete with the Products covered by this Agreement.
2. Orders and Shipment
2.01 Order and Acceptance. Before accepting order from its customers, Hakuto
shall place written order inquiry for the Products with Manufacturer on Hakuto's
standard order inquiry form setting forth the quantity of Products, the
specifications therefor, and the desired delivery date. Manufacturer shall use
its reasonable best efforts to notify Distributor of the acceptance or rejection
of an order inquiry and of the assigned delivery date for accepted orders within
five (5) days after receipt of the order inquiry. Upon acceptance of the order
inquiry by the Manufacturer, Hakuto shall place written orders for the Products
with Manufacturer on Hakuto's standard purchase order form setting forth the
quantity of Products, the specifications therefor, and the desired delivery date
as agreed by Manufacturer. To facilitate Manufacturer's production scheduling,
Distributor shall submit purchase orders to Manufacturer at least sixty (60)
days prior to the first day of the requested month of delivery. No order shall
be binding upon Manufacturer until accepted by Manufacturer in writing, and
Manufacturer shall have no liability to Distributor with respect to purchase
orders that are not accepted. No partial shipment of an order shall constitute
the acceptance of the entire order, absent the written acceptance of such entire
order. Manufacturer shall use its reasonable best efforts to deliver Products at
the times specified
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* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 2
either in its quotation or in its written acceptance of Distributor's purchase
orders. The Products sold to Hakuto by Manufacturer shall be shipped F.O.B. (as
defined in Section 2319 of the California Uniform Commercial Code)
Manufacturer's factory at Fremont, CA to the destination in the Territory
designated by Hakuto in the purchase order, unless otherwise agreed by the
parties. Hakuto will supply a [*] rolling forecast throughout the agreement.
2.02 Reservation of Title. Title to and all risks of loss or damage of the
Products shipped to Hakuto from Manufacturer shall be subject to full payment of
the Purchase Price therefor. Until such full payment, the Product shall remain
the property of Manufacturer. For all Products to which Manufacturer retains
title, Distributor shall (i) carry full insurance on the Products throughout the
time they are in Distributor's possession and (ii) segregate those Products from
other products in Distributor's inventory.
2.03 Terms of Purchase Orders. Distributor's purchase orders submitted to
Manufacturer from time to time with respect to Products to be purchased
hereunder shall be governed by the terms of this Agreement, and nothing
contained in any such purchase order shall in any way modify such terms of
purchase or add any additional terms or conditions.
2.04 Import and Export Requirements. Distributor shall, at its own expense, pay
all import and export licenses and permits, pay customs charges and duty fees,
and take all other actions required to accomplish the export and import of the
Products purchased by Distributor. Distributor understands that Manufacturer is
subject to regulation by agencies of the U.S. government, including the U.S.
Department of Commerce, which prohibit export or diversion of certain technical
products to certain countries. Distributor warrants that it will comply in all
respects with the export and re-export restrictions set forth in the export
license for every Product shipped to Distributor.
3. Price and Terms of Payment
3.01 Prices. The difference between Distributor's purchase price and
Distributor's selling price to its customers shall be Distributor's sole
remuneration for sale of the Products. The initial prices for Manufacturer's
Products shall be delivered by Manufacturer to Distributor within a reasonable
time after the date of this Agreement. Said price shall be subject to change by
Manufacturer from time to time by [*] days' prior written notice to Hakuto;
provided, however, that no such price change shall affect purchase orders
accepted by Manufacturer prior to notification of Hakuto of the price change by
Manufacturer. Hakuto shall pay all freight, insurance, taxes, duty and customs,
and any other charges associated with transportation after shipment and import
of the Products.
3.02 Terms of Payment. Unless otherwise agreed by the parties, payment shall be
made by Hakuto separately for each purchase order accepted by Manufacturer.
Payment by Hakuto to Manufacturer for Products shall be made by cash remittance
within thirty (30) days from the invoice date.
3.03 Currency. Currency for payments covered by this Agreement shall be in U.S.
Dollars.
3.04 Taxes. Distributor's Purchase Price does not include any federal, state or
local taxes that may be applicable to the Products. When Manufacturer has the
legal obligation to collect such taxes, the appropriate amount shall be added to
Distributor's invoice and paid by Distributor unless Distributor provides
Manufacturer with a valid tax exemption certificate authorized by the
appropriate taxing authority.
4. Marketing and Advertising
4.01 Hakuto's Undertaking. Hakuto shall exert best efforts to vigorously promote
the sale of the Products in the Territory during the term of this Agreement and
to develop a market demand for the same in the Territory. Hakuto shall advertise
the Products throughout the Territory in appropriate advertising media and in a
manner insuring proper and adequate publicity for the Products. Hakuto will
ensure the translation into the Japanese language of the following: the
leaflets, catalogues, technical literatures and maintenance manuals. Hakuto
shall participate training program offered by Manufacturer. Hakuto shall
maintain a sales organization which can be best utilized for the promotion of
the sales of the Products and shall have the right, at its own discretion, to
appoint a sub-dealer or sub-dealers to exploit the Products. The prices at which
the Products are resold in the Territory shall be at the sole discretion of
Hakuto. Hakuto shall provide a rolling [*] forecast at [*] basis.
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* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 3
4.02 Manufacturer's Undertaking. Manufacturer shall, from time to time, make
available to Hakuto free of charge advertising materials for the marketing of
the Products, such as pamphlets, leaflets, calendars, catalogues, posters, and
the like. Manufacturer shall also provide Hakuto free of charge service manuals,
parts lists and any other servicing information as may be currently available to
Manufacturer.
4.03 Fairs and Exhibitions. Hakuto agrees to participate in fairs and
exhibitions to exploit the Products in the Territory. The cost of the fairs or
exhibitions and displays and the responsibility therefor shall be discussed by
the parties prior to the fair or exhibition.
5. [Intentionally Left Blank].
6. Warranty to Distributor's Customers
6.01 Distributor shall pass on to its customers Manufacturer's standard limited
warranty for the Products, including the limitations set forth in 6.02 and 6.03
below. Manufacturer warranty shall state that the Products shall be free from
defects in design, materials and workmanship for a period of twelve (12) months
after the date of customer's acceptance. Manufacturer shall replace free of
charge all Products or parts found to be defective during said period. Hakuto
will supply the manpower to detect the faulty parts, and replace it with the new
one supplied by Manufacturer. Manufacturer further warrants that all the
Products shall meet the technical specifications of applicable governmental
authorities of Japan. Manufacturer shall be responsible for and shall pay all
transportation charges for the return of defective Products or parts thereof,
and all transportation charges for the replacement Products or parts thereof.
Manufacturer shall supply Hakuto free of charge replacement parts necessary for
the after-sale warranty servicing performed by Hakuto and Manufacturer shall
provide to Hakuto for replacement parts necessary for post-warranty servicing at
a reasonable price. This warranty is contingent upon proper use of a Product in
the application for which it was intended and does not cover Products that were
modified without Manufacturer's approval or that were subjected by the customer
to unusual physical or electrical stress.
6.02 No Other Warranty. EXCEPT FOR THE EXPRESS WARRANTY SET FORTH ABOVE,
MANUFACTURER GRANTS NO OTHER WARRANTIES, EXPRESS OR IMPLIED, BY STATUTE OR
OTHERWISE, REGARDING THE PRODUCTS, THEIR FITNESS FOR ANY PURPOSE, THEIR QUALITY,
THEIR MERCHANTABILITY, OR OTHERWISE.
6.03 Limitation of Liability. MANUFACTURER'S LIABILITY UNDER THE WARRANTY SHALL
BE LIMITED TO A REFUND OF THE CUSTOMER'S PURCHASE PRICE. IN NO EVENT SHALL
MANUFACTURER BE LIABLE FOR THE COST OF PROCUREMENT OF SUBSTITUTE GOODS BY THE
CUSTOMER OR FOR ANY SPECIAL, CONSEQUENTIAL OR INCIDENTAL DAMAGES FOR BREACH OF
WARRANTY.
7. [Intentionally Left Blank]
<PAGE> 4
8. Report
Hakuto agrees to furnish to Manufacturer quarterly reports regarding sales to
customers or to prospective customers in the Territory.
9. Intellectual Property Rights
9.01 Property Rights. Distributor agrees that Manufacturer owns all right,
title, and interest in the product lines that include the Products and in all of
Manufacturer's patents, trademarks, trade names, inventions, copyrights,
know-how, and trade secrets relating to the design, manufacture, operation or
service of the Products. The use by Distributor of any of these property rights
is authorized only for the purposes herein set forth, and upon termination of
this Agreement for any reason such authorization shall cease.
9.02 Sale Conveys no Right to Manufacture or Copy. The Products are offered for
sale and are sold by Manufacturer subject in every case to the condition that
such sale does not convey any license, expressly or by implication, to
manufacture, duplicate or otherwise copy or reproduce any of the Products.
Distributor shall take appropriate steps with its customers, as Manufacturer may
request, to inform them of and assure compliance with the restrictions.
9.03 Confidentiality. Distributor acknowledges that by reason of its
relationship to Manufacturer hereunder it will have access to certain
information and materials concerning Manufacturer's business, plans, customers,
technology, and products that are confidential and of substantial value to
Manufacturer, which value would be impaired if such information were disclosed
to third parties. Distributor agrees that it will not use in any way for its own
account or the account of any third party, nor disclose to any third party, any
such confidential information revealed to it by Manufacturer. Distributor shall
take every reasonable precaution to protect the confidentiality of such
information. Upon request by Distributor, Manufacturer shall advise whether or
not it considers any particular information or materials to be confidential.
Distributor shall not publish any technical description of the Products beyond
the description published by Manufacturer (except to translate that description
into appropriate languages for the Territory). In the event of termination of
this Agreement, there shall be no use or disclosure by Distributor of any
confidential information of Manufacturer, and Distributor shall not manufacture
or have manufactured any devices, components or assemblies utilizing any of
Manufacturer's confidential information. Distributor expressly consents to
Manufacturer's use of Distributor's name in promotional materials and other
documents delivered to government agencies and otherwise.
9.04 Trademarks and Trade Names.
(a) Use. During the term of this Agreement, Distributor shall
have the right to indicate to the public that it is an authorized distributor of
Manufacturer's Products and to advertise within the Territory such Products
under the trademarks, marks, and trade names that Manufacturer may adopt from
time to time ("Manufacturer's Trademarks"). Distributor shall not alter or
remove any Manufacturer's Trademark applied to the Products at the factory.
Except as set forth in this Section 9.04, nothing contained in this Agreement
shall grant to Distributor any right, title or interest in Manufacturer's
Trademarks. At no time during or after the term of this Agreement shall
Distributor challenge or assist others to challenge Manufacturer's Trademarks or
the registration thereof or attempt to register any trademarks, marks or trade
names confusingly similar to those of Manufacturer.
(b) Approval of Representations. All representations of
Manufacturer's Trademarks that Distributor intends to use shall first be
submitted to Manufacturer for approval (which shall not be unreasonably
withheld) of design, color, and other details or shall be exact copies of those
used by Manufacturer. If any of Manufacturer's Trademarks are to be used in
conjunction with another trademark on or in relation to the Products, then
Manufacturer's mark shall be presented equally legibly, equally prominently, and
of greater size than the other but nevertheless separated from the other so that
each appears to be a mark in its own right, distinct from the other mark.
9.05 Patent, Copyright and Trademark Indemnity.
(a) Indemnification. Distributor agrees that Manufacturer has
the right to defend, or at its option to settle, and Manufacturer agrees, at its
own expense, to defend or at its option to settle, any claim, suit or proceeding
brought against Distributor or its customer on the issue of infringement of any
United States or Japan patent, copyright or trademark by the Products sold
hereunder or the use thereof, subject to the limitations hereinafter set forth.
Manufacturer shall have sole control of any such action or settlement
negotiations, and Manufacturer agrees to pay, subject to the limitations
hereinafter set forth, any final judgment entered against Distributor or its
customer on such issue in any such suit or proceeding defended by Manufacturer.
Distributor agrees that Manufacturer at its sole
<PAGE> 5
option shall be relieved of the foregoing obligations unless Distributor or its
customer notifies Manufacturer promptly in writing of such claim, suit or
proceeding and gives Manufacturer authority to proceed as contemplated herein,
and, at Manufacturer's expense, gives Manufacturer proper and full information
and assistance to settle and/or defend any such claim, suit or proceeding. If
the Products, or any part thereof, are, or in the opinion of Manufacturer may
become, the subject of any claim, suit or proceeding for infringement of any
United States or Japan patent, copyright or trademark, or if it is
adjudicatively determined that the Products, or any part thereof, infringe any
United States or Japan patent, copyright or trademark, or if the sale or use of
the Products, or any part thereof, is, as a result, enjoined, then Manufacturer
may, at its option and expense either: (i) procure for Distributor and its
customers the right under such patent, copyright or trademark to sell or use, as
appropriate, the Products or such part thereof; or (ii) replace the Products, or
part thereof, with other suitable Products or parts; or (iii) suitably modify
the Products, or part thereof; or (iv) if the use of the Products, or part
thereof, is prevented by injunction, remove the Products, or part thereof, and
refund the aggregate payments paid therefor by Distributor, less a reasonable
sum for use and damage. Manufacturer shall not be liable for any costs or
expenses incurred without its prior written authorization.
(b) Limitation. Notwithstanding the provisions of Subsection
9.05(a) above, Manufacturer assumes no liability for (i) infringements covering
completed equipment or any assembly, circuit, combination, method or process in
which any of the Products may be used but not covering the Products when used
alone; (ii) trademark infringements involving any marking or branding not
applied by Manufacturer or involving any marking or branding applied at the
request of Distributor; or (iii) infringements involving the modification or
servicing of the Products, or any part thereof, unless such modification or
servicing was done by Manufacturer.
(c) Entire Liability. The foregoing provisions of this Section
9.05 state the entire liability and obligations of Manufacturer and the
exclusive remedy of Distributor and its customers, with respect to any alleged
infringement of patents, copyrights, trademarks or other intellectual property
rights by the Products or any part thereof.
10. Relationship of Parties
The relationship between Manufacturer and Hakuto shall not be that of a
principal and an agent, but shall be that of a seller and purchaser, each acting
as an independent contractor. Hakuto shall have no right or authority to incur,
assume or create, in writing or otherwise, any warranty, liability, or
obligation of any kind, express or implied, in the name of or on behalf of
Manufacturer.
11. Assignment
Neither party shall assign, transfer or otherwise dispose of this Agreement or
any of its rights or obligations hereunder in whole or in part to any
individual, firm or corporation without the prior written consent of the other
party.
12. Term of Agreement
12.01 Term and Renewal This Agreement shall become effective on the date
mentioned above, remain effective for a period of one (1) year and shall
thereafter be automatically renewed from year to year unless terminated by
either party giving to the other ninety (90) days' written notice prior to the
expiration of the term or renewal term of this Agreement.
13. Events of Termination
13.01 Cancellation In addition to the right of termination set forth in
paragraph 12.01, either party may cancel this Agreement as follows:
(a) Termination for Convenience. This Agreement may be cancelled
by either party for any reason or no reason, whether or not extended beyond the
first year, by giving the other party written notice [*] in advance. If
Manufacturer terminates this Agreement under the provisions of this Subsection
13.01(a) and 12.01, then Manufacturer shall, at Distributor's option, repurchase
Distributor's then-current inventory at the lower of the current Purchase Price
or Distributor's original Purchase Price and shall bear all shipping costs for
the return to Manufacturer of that inventory.
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(b) Bankruptcy etc. By either party immediately and without
prior written notice to the other party in the event that proceedings in
bankruptcy or insolvency are instituted by or against the other party, or a
receiver is appointed, or if any substantial part of the assets of the other
party is the object of attachment, sequestration or other type of comparable
proceeding, and such proceeding is not vacated or terminated within thirty (30)
days after its commencement or institution;
(c) Default. By either party immediately if one party defaults
in the performance of any of the provisions of this Agreement and does not cure
the default within thirty (30) days after receipt of written notice given by the
other party; or
(d) Licenses. By either party immediately if either party is
unable to obtain or renew any permit, license, patent or other governmental
approval necessary to carry on the business contemplated under this Agreement.
13.02 Fulfillment of Orders upon Termination. Upon termination of this Agreement
for other than Distributor's breach, Manufacturer shall continue to fulfill,
subject to the terms of Sections 2 and 3 above, all orders accepted by
Manufacturer prior to the date of termination.
13.03 Return of Materials. All trademarks, trade names, patents, copyrights,
designs, drawings, formulas or other data, photographs, samples, literature, and
sales aids of every kind shall remain the property of Manufacturer. Within
thirty (30) days after the termination of this Agreement, Distributor shall
prepare all such items in its possession for shipment, as Manufacturer may
direct, at Manufacturer's expense. Distributor shall not make, use, dispose of
or retain any copies of any confidential items or information which may have
been entrusted to it. Effective upon the termination of this Agreement,
Distributor shall cease to use all trademarks, marks, and trade names of
Manufacturer. Notwithstanding the foregoing, Distributor may use all trade
marks, marks, and tradename of Manufacturer in connection with the sales of
Distributor's remaining inventory of Manufacturer's products within 90 days from
the date of termination.
13.04 Limitation on Liability. In the event of termination by either party in
accordance with any of the provisions of this Agreement, neither party shall be
liable to the other, because of such termination, for compensation,
reimbursement or damages on account of the loss of prospective profits or
anticipated sales or on account of expenditures, inventory, investments, leases
or commitments in connection with the business or goodwill of Manufacturer or
Distributor. Termination shall not, however, relieve either party of obligations
incurred prior to the termination.
13.05 Survival of Certain Terms. The provisions of Sections 2.02, 2.04, 3.02, 6,
9, 10, 13, 14, 15, 16, 17, 18, 19 and 20 shall survive the termination of this
Agreement for any reason. All other rights and obligations of the parties shall
cease upon termination of this Agreement.
<PAGE> 7
14. LIMITATION ON LIABILITY.
MANUFACTURER'S LIABILITY ARISING OUT OF THIS AGREEMENT AND/OR SALE OF THE
PRODUCTS SHALL BE LIMITED TO THE AMOUNT PAID BY THE CUSTOMER FOR THE PRODUCTS.
IN NO EVENT SHALL MANUFACTURER BE LIABLE FOR COSTS OF PROCUREMENT OF SUBSTITUTE
GOODS. IN NO EVENT SHALL MANUFACTURER BE LIABLE TO DISTRIBUTOR OR ANY OTHER
ENTITY FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL, OR INDIRECT DAMAGES, HOWEVER
CAUSED, ON ANY THEORY OF LIABILITY.
15. Entire Agreement
This Agreement, the exhibits and duly executed addenda thereto constitute the
entire agreement between the parties hereto and supersede all previous
negotiations, agreements and commitments in respect thereto, and shall not be
released, discharged, changed or modified in any manner, except by instruments
signed by duly authorized officers or representatives of each of the parties
hereto.
16. Governing Law
The validity and interpretation of this Agreement and each clause and part
thereof shall be governed by the laws of California without regards to conflict
or laws principles.
17. Arbitration
All disputes, controversies or differences arising between the parties hereto,
out of or in relation to or in connection with this Agreement, or the breach
thereof, which cannot be amicably settled by the parties, shall be referred to
arbitration in accordance with the Commercial Arbitration Rules of the Japan
Commercial Arbitration Association and the decision of such arbitration
proceeding shall be binding and conclusive upon the parties hereto. Arbitration
shall be conducted in Tokyo, Japan. The expense of any such arbitration shall be
borne equally by the parties.
18. Separability of Provisions
A judicial or administrative declaration in any jurisdiction on the invalidity
of any one or more of the provisions hereof shall not invalidate the remaining
provisions of this Agreement in that jurisdiction, nor shall such declaration
have any effect on the validity or interpretation of this Agreement outside of
that jurisdiction.
19. Waiver of Compliance
Any failure by any party hereto to enforce at any time, any term or condition
under this Agreement shall not be considered a waiver of that party's right
thereafter to enforce each and every term and condition of this Agreement.
20. Notices
All notices and other communications in connection with this Agreement shall be
in writing and shall be sent to the respective parties at the following
addresses, or to such other addresses as may be designated by the parties in
writing from time to time by postage prepaid registered or certified mail or
electronic mail, facsimile or other reliable method of transmission:
To Manufacturer: Avanex Corporation
40919 Encyclopedia Circle
Fremont, California 94538
U.S.A.
Attention: Jessy Chao
Phone: (510) 897-4188
Fax: (510) 897-0189
To Hakuto: Hakuto Co. Ltd.
<PAGE> 8
C.P.O. Box 25
Tokyo 100-8691
Japan
Attention:
Phone:
Fax:
21. Force Majeure. Nonperformance of either party shall be excused to the extent
that performance is rendered impossible by strike, fire, flood, governmental
acts or orders or restrictions, failure of suppliers, or any other reason where
failure to perform is beyond the reasonable control of and is not caused by the
negligence of the nonperforming party.
22. Counterparts. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original and all of which together shall
constitute one instrument.
<PAGE> 9
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their respective duly authorized representatives.
Avanex Corporation Hakuto Co., Ltd.
By: /s/ WALTER ALESSANDRINI By: /s/ SHIGEO TAKAYAMA
--------------------------------- ---------------------------------
Walter Alessandrini Shigeo Takayama
Title: President and CEO Title: President
------------------------------ ------------------------------
Date: Date:
------------------------------ ------------------------------
<PAGE> 10
EXHIBITS
EXHIBIT A HOUSE ACCOUNTS
[*]
EXHIBIT B PRODUCTS
All current Avanex products offered by Avanex as of the date of this
Agreement; provided however, that Avanex has the right, upon [*] days'
prior written notice, to exclude all products that perform [*].
EXHIBIT C TERRITORY
The Territory shall include the [*] on a [*] basis; provide however,
that Distributor shall not sell Products to any account in [*] without
the prior written approval of Manufacturer. Distributor shall have the
[*] right to sell the Products to [*] in [*]. Distributor shall not have
the right to sell the Products to [*].
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<PAGE> 1
EXHIBIT 10.34
INTERNATIONAL DISTRIBUTOR AGREEMENT
This International Distributor Agreement (the "Agreement") is made and entered
into this 20th day of December, 1999, by and between Avanex Corporation, a
corporation duly organized and existing under the laws of California, having its
principal place of business at 40919 Encyclopedia Circle, Fremont, California
94538 (hereinafter referred to as "Manufacturer") and Sun Instruments, a
corporation duly organized and existing under the laws of Japan, having its
principal place of business at Shinsho-Bldg. 1-4-2, Minami-Yukigaya, Ohtu-ku,
Tokyo, 145-0066, Japan (hereinafter referred to as "Sun" or "Distributor"),
WITNESSETH:
WHEREAS, Manufacturer is engaged in the business of the manufacture of various
photonic processors including the Products hereinafter defined; and
WHEREAS, Sun is engaged in the business of the sale and marketing of merchandise
throughout the world, including products similar or related to the Products of
Manufacturer; and
WHEREAS, Sun is desirous of being appointed distributor of the Products in the
Territory hereinafter defined.
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein
contained, Manufacturer and Sun do hereby agree the terms and conditions set
forth below:
1. Distributorship, Products and Territory
1.01 Distributorship. Manufacturer hereby grants to Sun during the term of this
Agreement the non-exclusive right to sell the Products in the Territory all in
accordance with the terms and conditions herein set forth. Distributor shall
pursue aggressive sales policies and procedures to realize the maximum sales
potential for the Products in the Territory. Manufacturer reserves the right to
market its products directly to the House Accounts set forth on Exhibit A.
1.02 Products. The term Products as used herein shall refer to the equipment set
forth on Exhibit B attached hereto and made a part hereof, as well as all
accessories, attachments, spare parts and renewal parts therefor. Manufacturer
shall have the right to modify, alter, improve, change or discontinue any or all
of the Products covered by this Agreement but only upon [*] prior written notice
to Sun. In the event Manufacturer manufactures any new or additional products
similar to or related to the Products hereunder, said products, at the option of
Sun, shall be added to the Products covered by this Agreement.
1.03 Territory. Territory shall have the meaning set forth in Exhibit C.
1.04 Conflict of Interest. Distributor warrants to Manufacturer that it does not
currently represent or promote any lines or products that compete with the
Products. During the term of this Agreement, Distributor shall not, without
Manufacturer's prior written consent, represent, promote or otherwise try to
sell within the Territory any lines or products that, in Manufacturer's
judgment, compete with the Products covered by this Agreement.
2. Orders and Shipment
2.01 Order and Acceptance. Before accepting order from its customers, Sun shall
place written order inquiry for the Products with Manufacturer on Sun's standard
order inquiry form setting forth the quantity of Products, the specifications
therefor, and the desired delivery date. Manufacturer shall use its reasonable
best efforts to notify Distributor of the acceptance or rejection of an order
inquiry and of the assigned delivery date for accepted orders within five (5)
days after
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<PAGE> 2
receipt of the order inquiry. Upon acceptance of the order inquiry by the
Manufacturer, Sun shall place written orders for the Products with Manufacturer
on Sun's standard purchase order form setting forth the quantity of Products,
the specifications therefor, and the desired delivery date as agreed by
Manufacturer. To facilitate Manufacturer's production scheduling, Distributor
shall submit purchase orders to Manufacturer at least sixty (60) days prior to
the first day of the requested month of delivery. No order shall be binding upon
Manufacturer until accepted by Manufacturer in writing, and Manufacturer shall
have no liability to Distributor with respect to purchase orders that are not
accepted. No partial shipment of an order shall constitute the acceptance of the
entire order, absent the written acceptance of such entire order. Manufacturer
shall use its reasonable best efforts to deliver Products at the times specified
either in its quotation or in its written acceptance of Distributor's purchase
orders. The Products sold to Sun by Manufacturer shall be shipped F.O.B. (as
defined in Section 2319 of the California Uniform Commercial Code)
Manufacturer's factory at Fremont, CA to the destination in the Territory
designated by Sun in the purchase order, unless otherwise agreed by the parties.
Sun will supply [*] rolling forecast throughout the agreement.
2.02 Reservation of Title. Title to and all risks of loss or damage of the
Products shipped to Sun from Manufacturer shall be subject to full payment of
the Purchase Price therefor. Until such full payment, the Product shall remain
the property of Manufacturer. For all Products to which Manufacturer retains
title, Distributor shall (i) carry full insurance on the Products throughout the
time they are in Distributor's possession and (ii) segregate those Products from
other products in Distributor's inventory.
2.03 Terms of Purchase Orders. Distributor's purchase orders submitted to
Manufacturer from time to time with respect to Products to be purchased
hereunder shall be governed by the terms of this Agreement, and nothing
contained in any such purchase order shall in any way modify such terms of
purchase or add any additional terms or conditions.
2.04 Import and Export Requirements. Distributor shall, at its own expense, pay
all import and export licenses and permits, pay customs charges and duty fees,
and take all other actions required to accomplish the export and import of the
Products purchased by Distributor. Distributor understands that Manufacturer is
subject to regulation by agencies of the U.S. government, including the U.S.
Department of Commerce, which prohibit export or diversion of certain technical
products to certain countries. Distributor warrants that it will comply in all
respects with the export and re-export restrictions set forth in the export
license for every Product shipped to Distributor.
3. Price and Terms of Payment
3.01 Prices. The difference between Distributor's purchase price and
Distributor's selling price to its customers shall be Distributor's sole
remuneration for sale of the Products. The initial prices for Manufacturer's
Products shall be delivered by Manufacturer to Distributor within a reasonable
time after the date of this Agreement. Said price shall be subject to change by
Manufacturer from time to time by [*] days' prior written notice to Sun;
provided, however, that no such price change shall affect purchase orders
accepted by Manufacturer prior to notification of Sun of the price change by
Manufacturer. Sun shall pay all freight, insurance, taxes, duty and customs, and
any other charges associated with transportation after shipment and import of
the Products.
3.02 Terms of Payment. Unless otherwise agreed by the parties, payment shall be
made by Sun separately for each purchase order accepted by Manufacturer. Payment
by Sun to Manufacturer for Products shall be made by cash remittance within
thirty (30) days from the invoice date.
3.03 Currency. Currency for payments covered by this Agreement shall be in U.S.
Dollars.
3.04 Taxes. Distributor's Purchase Price does not include any federal, state or
local taxes that may be applicable to the Products. When Manufacturer has the
legal obligation to collect such taxes, the appropriate
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<PAGE> 3
amount shall be added to Distributor's invoice and paid by Distributor unless
Distributor provides Manufacturer with a valid tax exemption certificate
authorized by the appropriate taxing authority.
4. Marketing and Advertising
4.01 Sun's Undertaking. Sun shall exert best efforts to vigorously promote the
sale of the Products in the Territory during the term of this Agreement and to
develop a market demand for the same in the Territory. Sun shall advertise the
Products throughout the Territory in appropriate advertising media and in a
manner insuring proper and adequate publicity for the Products. Sun will ensure
the translation into the Japanese language of the following: the leaflets,
catalogues, technical literatures and maintenance manuals. Sun shall participate
training program offered by Manufacturer. Sun shall maintain a sales
organization which can be best utilized for the promotion of the sales of the
Products and shall have the right, at its own discretion, to appoint a
sub-dealer or sub-dealers to exploit the Products. The prices at which the
Products are resold in the Territory shall be at the sole discretion of Sun. Sun
shall provide a rolling [*] forecast at [*] basis.
4.02 Manufacturer's Undertaking. Manufacturer shall, from time to time, make
available to Sun free of charge advertising materials for the marketing of the
Products, such as pamphlets, leaflets, calendars, catalogues, posters, and the
like. Manufacturer shall also provide Sun free of charge service manuals, parts
lists and any other servicing information as may be currently available to
Manufacturer.
4.03 Fairs and Exhibitions. Sun agrees to participate in fairs and exhibitions
to exploit the Products in the Territory. The cost of the fairs or exhibitions
and displays and the responsibility therefor shall be discussed by the parties
prior to the fair or exhibition.
5. [Intentionally Left Blank].
6. Warranty to Distributor's Customers
6.01 Distributor shall pass on to its customers Manufacturer's standard limited
warranty for the Products, including the limitations set forth in 6.02 and 6.03
below. Manufacturer warranty shall state that the Products shall be free from
defects in design, materials and workmanship for a period of twelve (12) months
after the date of customer's acceptance. Manufacturer shall replace free of
charge all Products or parts found to be defective during said period. Sun will
supply the manpower to detect the faulty parts, and replace it with the new one
supplied by Manufacturer. Manufacturer further warrants that all the Products
shall meet the technical specifications of applicable governmental authorities
of Japan. Manufacturer shall be responsible for and shall pay all transportation
charges for the return of defective Products or parts thereof, and all
transportation charges for the replacement Products or parts thereof.
Manufacturer shall supply Sun free of charge replacement parts necessary for the
after-sale warranty servicing performed by Sun and Manufacturer shall provide to
Sun for replacement parts necessary for post-warranty servicing at a reasonable
price. This warranty is contingent upon proper use of a Product in the
application for which it was intended and does not cover Products that were
modified without Manufacturer's approval or that were subjected by the customer
to unusual physical or electrical stress.
6.02 No Other Warranty. EXCEPT FOR THE EXPRESS WARRANTY SET FORTH ABOVE,
MANUFACTURER GRANTS NO OTHER WARRANTIES, EXPRESS OR IMPLIED, BY STATUTE OR
OTHERWISE, REGARDING THE PRODUCTS, THEIR FITNESS FOR ANY PURPOSE, THEIR QUALITY,
THEIR MERCHANTABILITY, OR OTHERWISE.
6.03 Limitation of Liability. MANUFACTURER'S LIABILITY UNDER THE WARRANTY SHALL
BE LIMITED TO A REFUND OF THE CUSTOMER'S PURCHASE PRICE. IN NO EVENT SHALL
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<PAGE> 4
MANUFACTURER BE LIABLE FOR THE COST OF PROCUREMENT OF SUBSTITUTE GOODS BY THE
CUSTOMER OR FOR ANY SPECIAL, CONSEQUENTIAL OR INCIDENTAL DAMAGES FOR BREACH OF
WARRANTY.
7. [Intentionally Left Blank]
8. Report
Sun agrees to furnish to Manufacturer quarterly reports regarding sales to
customers or to prospective customers in the Territory.
9. Intellectual Property Rights
9.01 Property Rights. Distributor agrees that Manufacturer owns all right,
title, and interest in the product lines that include the Products and in all of
Manufacturer's patents, trademarks, trade names, inventions, copyrights,
know-how, and trade secrets relating to the design, manufacture, operation or
service of the Products. The use by Distributor of any of these property rights
is authorized only for the purposes herein set forth, and upon termination of
this Agreement for any reason such authorization shall cease.
9.02 Sale Conveys no Right to Manufacture or Copy. The Products are offered for
sale and are sold by Manufacturer subject in every case to the condition that
such sale does not convey any license, expressly or by implication, to
manufacture, duplicate or otherwise copy or reproduce any of the Products.
Distributor shall take appropriate steps with its customers, as Manufacturer may
request, to inform them of and assure compliance with the restrictions.
9.03 Confidentiality. Distributor acknowledges that by reason of its
relationship to Manufacturer hereunder it will have access to certain
information and materials concerning Manufacturer's business, plans, customers,
technology, and products that are confidential and of substantial value to
Manufacturer, which value would be impaired if such information were disclosed
to third parties. Distributor agrees that it will not use in any way for its own
account or the account of any third party, nor disclose to any third party, any
such confidential information revealed to it by Manufacturer. Distributor shall
take every reasonable precaution to protect the confidentiality of such
information. Upon request by Distributor, Manufacturer shall advise whether or
not it considers any particular information or materials to be confidential.
Distributor shall not publish any technical description of the Products beyond
the description published by Manufacturer (except to translate that description
into appropriate languages for the Territory). In the event of termination of
this Agreement, there shall be no use or disclosure by Distributor of any
confidential information of Manufacturer, and Distributor shall not manufacture
or have manufactured any devices, components or assemblies utilizing any of
Manufacturer's confidential information. Distributor expressly consents to
Manufacturer's use of Distributor's name in promotional materials and other
documents delivered to government agencies and otherwise.
9.04 Trademarks and Trade Names.
(a) Use. During the term of this Agreement, Distributor shall
have the right to indicate to the public that it is an authorized distributor of
Manufacturer's Products and to advertise within the Territory such Products
under the trademarks, marks, and trade names that Manufacturer may adopt from
time to time ("Manufacturer's Trademarks"). Distributor shall not alter or
remove any Manufacturer's Trademark applied to the Products at the factory.
Except as set forth in this Section 9.04, nothing contained in this Agreement
shall grant to Distributor any right, title or interest in Manufacturer's
Trademarks. At no time during or after the term of this Agreement shall
Distributor challenge or assist others to challenge Manufacturer's Trademarks or
the registration thereof or attempt to register any trademarks, marks or trade
names confusingly similar to those of Manufacturer.
(b) Approval of Representations. All representations of
Manufacturer's Trademarks that Distributor intends to use shall first be
submitted to Manufacturer for approval (which shall not be unreasonably
withheld) of design, color, and other details or shall be exact copies of those
used by Manufacturer. If any of Manufacturer's Trademarks are to be used in
conjunction with another trademark on or in relation to the
<PAGE> 5
Products, then Manufacturer's mark shall be presented equally legibly, equally
prominently, and of greater size than the other but nevertheless separated from
the other so that each appears to be a mark in its own right, distinct from the
other mark.
9.05 Patent, Copyright and Trademark Indemnity.
(a) Indemnification. Distributor agrees that Manufacturer has
the right to defend, or at its option to settle, and Manufacturer agrees, at its
own expense, to defend or at its option to settle, any claim, suit or proceeding
brought against Distributor or its customer on the issue of infringement of any
United States or Japan patent, copyright or trademark by the Products sold
hereunder or the use thereof, subject to the limitations hereinafter set forth.
Manufacturer shall have sole control of any such action or settlement
negotiations, and Manufacturer agrees to pay, subject to the limitations
hereinafter set forth, any final judgment entered against Distributor or its
customer on such issue in any such suit or proceeding defended by Manufacturer.
Distributor agrees that Manufacturer at its sole option shall be relieved of the
foregoing obligations unless Distributor or its customer notifies Manufacturer
promptly in writing of such claim, suit or proceeding and gives Manufacturer
authority to proceed as contemplated herein, and, at Manufacturer's expense,
gives Manufacturer proper and full information and assistance to settle and/or
defend any such claim, suit or proceeding. If the Products, or any part thereof,
are, or in the opinion of Manufacturer may become, the subject of any claim,
suit or proceeding for infringement of any United States or Japan patent,
copyright or trademark, or if it is adjudicatively determined that the Products,
or any part thereof, infringe any United States or Japan patent, copyright or
trademark, or if the sale or use of the Products, or any part thereof, is, as a
result, enjoined, then Manufacturer may, at its option and expense either: (i)
procure for Distributor and its customers the right under such patent, copyright
or trademark to sell or use, as appropriate, the Products or such part thereof;
or (ii) replace the Products, or part thereof, with other suitable Products or
parts; or (iii) suitably modify the Products, or part thereof; or (iv) if the
use of the Products, or part thereof, is prevented by injunction, remove the
Products, or part thereof, and refund the aggregate payments paid therefor by
Distributor, less a reasonable sum for use and damage. Manufacturer shall not be
liable for any costs or expenses incurred without its prior written
authorization.
(b) Limitation. Notwithstanding the provisions of Subsection
9.05(a) above, Manufacturer assumes no liability for (i) infringements covering
completed equipment or any assembly, circuit, combination, method or process in
which any of the Products may be used but not covering the Products when used
alone; (ii) trademark infringements involving any marking or branding not
applied by Manufacturer or involving any marking or branding applied at the
request of Distributor; or (iii) infringements involving the modification or
servicing of the Products, or any part thereof, unless such modification or
servicing was done by Manufacturer.
(c) Entire Liability. The foregoing provisions of this Section
9.05 state the entire liability and obligations of Manufacturer and the
exclusive remedy of Distributor and its customers, with respect to any alleged
infringement of patents, copyrights, trademarks or other intellectual property
rights by the Products or any part thereof.
10. Relationship of Parties
The relationship between Manufacturer and Sun shall not be that of a principal
and an agent, but shall be that of a seller and purchaser, each acting as an
independent contractor. Sun shall have no right or authority to incur, assume or
create, in writing or otherwise, any warranty, liability, or obligation of any
kind, express or implied, in the name of or on behalf of Manufacturer.
11. Assignment
Neither party shall assign, transfer or otherwise dispose of this Agreement or
any of its rights or obligations hereunder in whole or in part to any
individual, firm or corporation without the prior written consent of the other
party.
12. Term of Agreement
<PAGE> 6
12.01 Term and Renewal. This Agreement shall become effective on the date
mentioned above, remain effective for a period of one (1) year and shall
thereafter be automatically renewed from year to year unless terminated by
either party giving to the other ninety (90) days' written notice prior to the
expiration of the term or renewal term of this Agreement.
13. Events of Termination
13.01 Cancellation. In addition to the right of termination set forth in
paragraph 12.01, either party may cancel this Agreement as follows:
(a) Termination for Convenience. This Agreement may be cancelled by either party
for any reason or no reason, whether or not extended beyond the first year, by
giving the other party written notice [*] in advance. If Manufacturer terminates
this Agreement under the provisions of this Subsection 13.01(a) and 12.01, then
Manufacturer shall, at Distributor's option, repurchase Distributor's
then-current inventory at the lower of the current Purchase Price or
Distributor's original Purchase Price and shall bear all shipping costs for the
return to Manufacturer of that inventory.
(b) Bankruptcy etc. By either party immediately and without
prior written notice to the other party in the event that proceedings in
bankruptcy or insolvency are instituted by or against the other party, or a
receiver is appointed, or if any substantial part of the assets of the other
party is the object of attachment, sequestration or other type of comparable
proceeding, and such proceeding is not vacated or terminated within thirty (30)
days after its commencement or institution;
(c) Default. By either party immediately if one party defaults
in the performance of any of the provisions of this Agreement and does not cure
the default within thirty (30) days after receipt of written notice given by the
other party; or
(d) Licenses. By either party immediately if either party is
unable to obtain or renew any permit, license, patent or other governmental
approval necessary to carry on the business contemplated under this Agreement.
13.02 Fulfillment of Orders upon Termination. Upon termination of this Agreement
for other than Distributor's breach, Manufacturer shall continue to fulfill,
subject to the terms of Sections 2 and 3 above, all orders accepted by
Manufacturer prior to the date of termination.
13.03 Return of Materials. All trademarks, trade names, patents, copyrights,
designs, drawings, formulas or other data, photographs, samples, literature, and
sales aids of every kind shall remain the property of Manufacturer. Within
thirty (30) days after the termination of this Agreement, Distributor shall
prepare all such items in its possession for shipment, as Manufacturer may
direct, at Manufacturer's expense. Distributor shall not make, use, dispose of
or retain any copies of any confidential items or information which may have
been entrusted to it. Effective upon the termination of this Agreement,
Distributor shall cease to use all trademarks, marks, and trade names of
Manufacturer. Notwithstanding the foregoing, Distributor may use all trade
marks, marks, and tradename of Manufacturer in connection with the sales of
Distributor's remaining inventory of Manufacturer's products within 90 days from
the date of termination.
13.04 Limitation on Liability. In the event of termination by either party in
accordance with any of the provisions of this Agreement, neither party shall be
liable to the other, because of such termination, for compensation,
reimbursement or damages on account of the loss of prospective profits or
anticipated sales or on account of expenditures, inventory, investments, leases
or commitments in connection with the business or goodwill of Manufacturer or
Distributor. Termination shall not, however, relieve either party of obligations
incurred prior to the termination.
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13.05 Survival of Certain Terms. The provisions of Sections 2.02, 2.04, 3.02, 6,
9, 10, 13, 14, 15, 16, 17, 18, 19 and 20 shall survive the termination of this
Agreement for any reason. All other rights and obligations of the parties shall
cease upon termination of this Agreement.
<PAGE> 8
14. LIMITATION ON LIABILITY
MANUFACTURER'S LIABILITY ARISING OUT OF THIS AGREEMENT AND/OR SALE OF THE
PRODUCTS SHALL BE LIMITED TO THE AMOUNT PAID BY THE CUSTOMER FOR THE PRODUCTS.
IN NO EVENT SHALL MANUFACTURER BE LIABLE FOR COSTS OF PROCUREMENT OF SUBSTITUTE
GOODS. IN NO EVENT SHALL MANUFACTURER BE LIABLE TO DISTRIBUTOR OR ANY OTHER
ENTITY FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL, OR INDIRECT DAMAGES, HOWEVER
CAUSED, ON ANY THEORY OF LIABILITY.
15. Entire Agreement
This Agreement, the exhibits and duly executed addenda thereto constitute the
entire agreement between the parties hereto and supersede all previous
negotiations, agreements and commitments in respect thereto, and shall not be
released, discharged, changed or modified in any manner, except by instruments
signed by duly authorized officers or representatives of each of the parties
hereto.
16. Governing Law
The validity and interpretation of this Agreement and each clause and part
thereof shall be governed by the laws of California without regards to conflict
or laws principles.
17. Arbitration
All disputes, controversies or differences arising between the parties hereto,
out of or in relation to or in connection with this Agreement, or the breach
thereof, which cannot be amicably settled by the parties, shall be referred to
arbitration in accordance with the Commercial Arbitration Rules of the Japan
Commercial Arbitration Association and the decision of such arbitration
proceeding shall be binding and conclusive upon the parties hereto. Arbitration
shall be conducted in Tokyo, Japan. The expense of any such arbitration shall be
borne equally by the parties.
18. Separability of Provisions
A judicial or administrative declaration in any jurisdiction on the invalidity
of any one or more of the provisions hereof shall not invalidate the remaining
provisions of this Agreement in that jurisdiction, nor shall such declaration
have any effect on the validity or interpretation of this Agreement outside of
that jurisdiction.
19. Waiver of Compliance
Any failure by any party hereto to enforce at any time, any term or condition
under this Agreement shall not be considered a waiver of that party's right
thereafter to enforce each and every term and condition of this Agreement.
20. Notices
All notices and other communications in connection with this Agreement shall be
in writing and shall be sent to the respective parties at the following
addresses, or to such other addresses as may be designated by the parties in
writing from time to time by postage prepaid registered or certified mail or
electronic mail, facsimile or other reliable method of transmission:
To Manufacturer: Avanex Corporation
40919 Encyclopedia Circle
<PAGE> 9
Fremont, California 94538
U.S.A.
Attention: Jessy Chao
Phone: (510) 897-4272
Fax: (510) 897-4189
To Sun: Sun Instruments, Inc.
----------------------
----------------------
Japan
Attention: Toshiro Kasai
Phone:
Fax:
21. Force Majeure. Nonperformance of either party shall be excused to the extent
that performance is rendered impossible by strike, fire, flood, governmental
acts or orders or restrictions, failure of suppliers, or any other reason where
failure to perform is beyond the reasonable control of and is not caused by the
negligence of the nonperforming party.
22. Counterparts. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original and all of which together shall
constitute one instrument.
<PAGE> 10
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their respective duly authorized representatives.
Avanex Corporation Sun Instruments
By: By:
------------------------- --------------------------------
Walter Alessandrini Toshiro Kasai
Title: President and CEO Title: President
--------------------- ------------------------
Date: Date:
--------------- ---------------
<PAGE> 11
EXHIBITS
EXHIBIT A HOUSE ACCOUNTS
[*]
EXHIBIT B PRODUCTS
All current Avanex products offered by Avanex as of the date of this
Agreement; provided however, that Avanex has the right, upon [*] days'
prior written notice, to exclude all products that perform [*].
EXHIBIT C TERRITORY
The Territory shall include the [*] on a [*] basis; provide however,
that Distributor shall not sell Products to any account in [*] without
the prior written approval of Manufacturer. Distributor shall have the
[*] right to sell the Products to [*] in [*]. Distributor shall not
have the right to sell the Products to [*].
- --------
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 14, 2000, included in Amendment No. 4 to the
Registration Statement (Form S-1 No. 333-92097), and related prospectus of
Avanex Corporation for the registration of shares of its common stock.
Our audits also included the financial statement schedule of Avanex
Corporation listed in Schedule II. The schedule is the responsibility of the
Company's management. Our responsibility is to express our opinion based on our
audits. In our opinion, the financial statement schedule referenced to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth herein.
Ernst & Young LLP
San Jose, California
January 31, 2000
