<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 6, 2000
REGISTRATION NO. 333-31396
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NEW FOCUS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA
(PRIOR TO REINCORPORATION)
DELAWARE 3674 33-0404910
(AFTER REINCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
(STATE OR OTHER JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
</TABLE>
2630 WALSH AVENUE
SANTA CLARA, CALIFORNIA 95051-0905
(408) 980-8088
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
KENNETH E. WESTRICK
PRESIDENT AND CHIEF EXECUTIVE OFFICER
2630 WALSH AVENUE
SANTA CLARA, CALIFORNIA 95051-0905
(408) 980-8088
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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<S> <C>
JUDITH M. O'BRIEN, ESQ. NORA L. GIBSON, ESQ.
ALISANDE M. ROZYNKO, ESQ. LAURA M. DE PETRA, ESQ.
MARGO M. EAKIN, ESQ. LORA D. BLUM, ESQ.
EDWARD F. VERMEER, ESQ. BROBECK PHLEGER & HARRISON LLP
WILSON SONSINI GOODRICH & ROSATI ONE MARKET, SPEAR STREET TOWER
PROFESSIONAL CORPORATION SAN FRANCISCO, CALIFORNIA 94105
650 PAGE MILL ROAD (415) 442-0900
PALO ALTO, CA 94304
(650) 493-9300
</TABLE>
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, 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,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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- ------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1)(2) REGISTRATION FEE(3)
- ------------------------------------------------------------------------------------------------------------
Common Stock, $0.001 par value.............................. $86,250,000 $22,770
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes shares which the underwriters have the option to purchase to cover
over-allotments, if any.
(2) Estimated solely for the purpose of Rule 457(o) of the Securities Act of
1933 solely for the purpose of computing the amount of the registration fee.
(3) A registration fee of $22,770 was paid in connection with the initial filing
on March 1, 2000.
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 SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MARCH 6, 2000
Shares
[NEW FOCUS LOGO]
NEW FOCUS, INC.
Common Stock
------------------
Prior to this offering, there has been no public market for our common
stock. The initial public offering price of our common stock is expected to be
between $ and $ per share. We applied to have our common stock
quoted on The Nasdaq Stock Market's National Market under the symbol "NUFO."
The underwriters have an option to purchase a maximum of additional shares
to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 7.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS NEW FOCUS
----------------- ----------------- -----------------
<S> <C> <C> <C>
Per Share...................................... $ $ $
Total.......................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about
, 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON
CHASE H&Q
DAIN RAUSCHER WESSELS
U.S. BANCORP PIPER JAFFRAY
THE DATE OF THIS PROSPECTUS IS , 2000.
<PAGE> 3
[INSIDE FRONT COVER]
The inside front cover page of the prospectus starts with the heading "Smart
Optics for Networks." To the right of the heading is the New Focus logo with
the name of the company next to it.
Underneath it is the text that reads "Fiber optic products that enable
next-generation optical networks with:" below this text are 5 bullet points
that read
"Increased channel counts
Higher data rates
Longer reach lengths
New services
Cost-effectiveness"
Under the bullet points is a diagram of a typical optical network containing
DWDM terminals represented by blue boxes with text "DWDM Terminal" on them,
routers represented by white cylinders with text "ROUTERS" on them and fiber
amplifiers with text "Fiber Amplifiers" next to them represented by small
rectangular green boxes. These elements in the network are connected by red and
black lines representing fiber optic interconnections.
Underneath this diagram are 5 circles each containing a photograph of a New
Focus product. Under the first circle is text "Fiber Amplifier Products", under
the second "Wavelength Management Products", under the third "High-Speed
Opto-Electronics", under the fourth "Tunable Laser Modules" and under the fifth
"Advanced Photonic Tools". From each of these circles is a black dotted line
that goes to the network element in which each of these products are used.
[INSIDE BACK COVER]
The inside back cover page of the prospectus at the top has the New Focus logo
with the name of the company next to it.
To the right of the entire page are 5 photographs of New Focus products. To the
left of each of photograph is text describing the product.
The first product has the heading "Fiber Amplifier Products". Under this
heading are 4 bullet points that read
"For advanced fiber amplifiers
Extended wavelength range for more channels
Low loss and high pump power for longer reach
Compact size"
The second product has the heading "Wavelength Management Products". Under this
heading are 4 bullet points that read
"For management of many channels
Efficient processing of densely packed channels
Requires no active cooling
Flexibility for enabling new services"
The third product has the heading "High-Speed Opto-Electronics". Under this
heading are 3 bullet points that read
"For connecting network equipment within a site
High data rate of 10 Gbps
Compact, efficient and cost-effective"
The fourth product has the heading "Tunable Laser Modules". Under this heading
are 4 bullet points that read
"For testing fiber optic products
Rapid and precise for high throughput
Rugged and reliable design"
The fifth product has the heading "Advanced Photonic Tools". Under this heading
is 1 bullet point that reads
"Enables development and manufacturing of next-generation fiber optic products"
<PAGE> 4
------------------
TABLE OF CONTENTS
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PAGE
----
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PROSPECTUS SUMMARY.................... 3
RISK FACTORS.......................... 7
SPECIAL NOTE REGARDING FORWARD-
LOOKING STATEMENTS.................. 19
USE OF PROCEEDS....................... 20
DIVIDEND POLICY....................... 20
CAPITALIZATION........................ 21
DILUTION.............................. 22
SELECTED CONSOLIDATED FINANCIAL
DATA................................ 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 24
</TABLE>
<TABLE>
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PAGE
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BUSINESS.............................. 32
MANAGEMENT............................ 45
CERTAIN TRANSACTIONS.................. 55
PRINCIPAL STOCKHOLDERS................ 58
DESCRIPTION OF CAPITAL STOCK.......... 60
SHARES ELIGIBLE FOR FUTURE SALE....... 62
UNDERWRITING.......................... 64
NOTICE TO CANADIAN RESIDENTS.......... 66
LEGAL MATTERS......................... 67
EXPERTS............................... 67
ADDITIONAL INFORMATION................ 67
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.......................... F-1
</TABLE>
------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
<PAGE> 5
PROSPECTUS SUMMARY
The following summary highlights information we present more fully
elsewhere in this prospectus. This prospectus contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in the forward-looking statements as a result
of factors described under the heading "Risk Factors" and elsewhere in this
prospectus.
NEW FOCUS, INC.
We design, manufacture and market innovative fiber optic products for
next-generation optical networks under the Smart Optics for Networks brand. We
leverage our ten years of experience in developing advanced photonics tools and
opto-electronic products to enable networking solutions with increased channel
counts, higher data rates, longer reach lengths and new services, and which
reduce overall network cost of ownership. Our high performance products are
compact, consume less power and are designed to be manufacturable in high
volumes. Our products include fiber amplifier products, wavelength management
products, high-speed opto-electronics, tunable laser modules and advanced
photonics tools. We sell our products to over 50 customers including Alcatel
USA, Avanex Corporation, Corning Incorporated, Corvis Corporation, Lucent
Technologies, Nortel Networks Corporation and Qtera Corporation (a wholly-owned
subsidiary of Nortel Networks).
The increase in data traffic, coupled with demand for enhanced services and
improved connection times, has increased demand for high-bandwidth
communications networks. Network service providers have had difficulty in
meeting this increased demand due to significant constraints of the existing
communications infrastructure, which was originally designed to carry only voice
traffic. To alleviate this bottleneck, network service providers are
increasingly deploying next-generation optical networks. Next-generation optical
networks will depend on systems and components that enable extremely long reach,
high data rates, increased channel counts and new services at a low network cost
of ownership. The optical networking market is one of the fastest growing
portions of the telecommunications market. Ryan, Hankin & Kent estimates that
the market for fiber optic components was approximately $6.6 billion in 1999 and
is expected to grow to over $22.5 billion by 2003.
Our Smart Optics for Networks products enable systems providers to meet the
dynamic demands of next-generation optical networks. Our fiber amplifier
products are widely deployed in dense wavelength division multiplexing, or DWDM,
networks to enable the transmission of an increased amount of information at
very high speeds over extended distances. Our wavelength management products
enable network equipment providers to increase the number of channels
transmitted and to accurately, efficiently and reliably manage a vast number of
optical signals. We offer high-speed opto-electronic products that enable
interconnections between equipment in a network service provider's site at 10
gigabits per second. Our high performance tunable laser modules enable rapid
development, manufacturing and testing of fiber optic components and systems. We
also offer advanced photonics tools that enable network service and equipment
providers to develop their next-generation products. These products leverage our
core competencies for a variety of optical networking applications.
We are committed to designing and manufacturing high quality products that
have been thoroughly tested for reliability and performance. We perform
extensive in-house testing to industry accepted Telcordia, or Bellcore,
standards and have also been recommended for ISO-9001 quality certification. Our
in-house manufacturing capabilities include optical assembly, integration and
testing of our fiber optic products and advanced photonics tools. To meet the
growing demand for our products, we are continuing to expand our manufacturing
capacity while leveraging our capabilities in rapid prototyping, automation,
proprietary tools and processes.
3
<PAGE> 6
Our objective is to be the leading provider of innovative, fiber optic
products that enable our customers to deploy and optimize next-generation
optical networks. Key elements of our strategy include:
- leveraging our position as a leading market innovator;
- focusing our research and development efforts on continuing to broaden
our product offerings;
- collaborating with leading innovative systems companies;
- continuing to expand manufacturing capacity and improve process
efficiency; and
- pursuing strategic acquisitions.
We were incorporated in April 1990 in California. We intend to
reincorporate in Delaware prior to the completion of this offering. Our
principal executive offices are located at 2630 Walsh Avenue, Santa Clara,
California 95051, and our telephone number is (408) 980-8088. Our web site is
located at "www.newfocus.com." Information contained on our web site does not
constitute a part of this prospectus.
"New Focus," our logo, and "Smart Optics for Networks" are some of the
trademarks, trade names or service marks that we use. This prospectus contains
other trademarks and trade names of our company and other entities.
4
<PAGE> 7
THE OFFERING
Common stock offered.................. shares
Common stock to be outstanding after
this offering......................... shares
Use of proceeds....................... General corporate purposes, including
working capital, capital
expenditures, and potential
acquisitions.
Proposed Nasdaq National Market
symbol................................ NUFO
The total number of outstanding shares of our common stock is as of
December 31, 1999, and excludes:
- 9,239,000 shares issuable upon exercise of outstanding stock options as
of December 31, 1999, with a weighted average exercise price of $0.41 per
share;
- 5,882,000 shares reserved for future issuance under our stock option,
executive option and employee stock purchase plans, including amounts
authorized for issuance subsequent to December 31, 1999; and
- 140,000 shares of common stock issuable upon exercise of an outstanding
warrant at an exercise price of $1.00 per share.
Except as otherwise indicated, information in this prospectus:
- reflects the 2-for-1 stock split of our common and preferred stock in
October 1999 and the 2-for-1 stock split of our common and preferred
stock in February 2000 (all share and per share amounts have been
restated to reflect the stock splits), see note 8 of notes to
consolidated financial statements regarding these stock splits;
- assumes the exercise of warrants to purchase 121,140 shares of common
stock at an exercise price of $1.20 per share prior to this offering;
- reflects the conversion of the 41,939,144 outstanding shares of our
preferred stock into 41,939,144 shares of common stock immediately prior
to the closing of this offering; and
- assumes no exercise of the underwriters' over-allotment option.
5
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
You should be aware that we recently changed our fiscal year end to
December 31. Our previous fiscal years ended March 31. Fiscal year 1999 refers
to the twelve-month period ended March 31, 1999. Fiscal year 1998 refers to the
twelve-month period ended March 31, 1998.
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<CAPTION>
NINE-MONTH
PERIOD
FISCAL YEAR ENDED MARCH 31, ENDED
-------------------------------------------- DECEMBER 31,
1996 1997 1998 1999 1999
----------- ------- ------- ------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net revenues.......................... $10,394 $10,543 $15,482 $17,285 $18,101
Cost of net revenues.................. 5,095 5,946 8,186 9,225 12,525
Gross profit.......................... 5,299 4,597 7,296 8,060 5,576
Operating income (loss)............... 678 (1,449) 27 (4,666) (7,594)
Net income (loss)..................... 457 (1,661) (286) (4,971) (7,677)
Historical net income (loss) per
share:
Basic(1)............................ $ 0.45 $ (1.52) $ (0.25) $ (2.18) $ (3.11)
======= ======= ======= ======= =======
Diluted(1).......................... $ 0.02 $ (1.52) $ (0.25) $ (2.18) $ (3.11)
======= ======= ======= ======= =======
Weighted average shares:
Basic(1)......................... 1,011 1,096 1,148 2,284 2,468
======= ======= ======= ======= =======
Diluted(1)....................... 18,768 1,096 1,148 2,284 2,468
======= ======= ======= ======= =======
Pro forma net loss per share:
Basic and diluted (1)............... $ (0.24)
=======
Weighted average shares(1).......... 32,223
=======
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<CAPTION>
DECEMBER 31, 1999
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED(2)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $28,067 $
Working capital........................................... 29,026
Total assets.............................................. 44,852
Long term debt, less current portion...................... 368
Total stockholders' equity................................ 35,013
</TABLE>
- -------------------------
(1) See note 10 of notes to consolidated financial statements for an explanation
of the determination of the number of shares used in completing per share
data.
(2) The pro forma as adjusted amounts above give effect to the sale of shares of
common stock in this offering at an assumed initial public offering price of
$ per share, less estimated underwriting discounts and commissions and
estimated offering expenses.
6
<PAGE> 9
RISK FACTORS
This offering and any investment in our common stock involves 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.
RISKS RELATED TO OUR FINANCIAL RESULTS
WE HAVE A HISTORY OF LOSSES AND EXPECT TO CONTINUE TO INCUR NET LOSSES FOR THE
FORESEEABLE FUTURE.
We incurred net losses of $7.7 million for the nine-month period ended
December 31, 1999, $5.0 million for our fiscal year ended March 31, 1999, and
$286,000 for our fiscal year ended March 31, 1998. As of December 31, 1999, we
had an accumulated deficit of $15.5 million. We may not be able to sustain the
recent growth in our revenues, and we may not realize sufficient revenues to
achieve or maintain profitability. We also expect to incur significant product
development, sales and marketing and administrative expenses, and, as a result,
we will need to generate increased revenues to achieve profitability. Even if we
achieve profitability, given the competition in, and the evolving nature of, the
optical networking market, we may not be able to sustain or increase
profitability on a quarterly or annual basis. As a result, we will need to
generate significantly higher revenues while containing costs and operating
expenses if we are to achieve profitability.
WE HAVE A HISTORY OF QUARTERLY AND ANNUAL FLUCTUATIONS IN OUR NET REVENUES AND
OPERATING RESULTS AND EXPECT THESE FLUCTUATIONS TO CONTINUE, WHICH MAY RESULT IN
VOLATILITY IN OUR STOCK PRICE.
Our quarterly and annual net revenues and operating results have varied
significantly in the past and are likely to vary significantly in the future. A
number of factors, many of which are outside of our control, are likely to cause
these variations, including:
- fluctuations in demand for, and sales of, our products;
- timing or cancellations of customer orders and shipment scheduling;
- the ability of our customers to sell their products that incorporate our
products;
- our ability to significantly expand our manufacturing capacity, in
particular our facility in Shenzhen, China, which is expected to commence
operations during 2000;
- the ability of our suppliers and subcontractors to timely produce and
deliver components and parts including sole or limited source components
in the quantity and quality desired and at the prices we have budgeted;
- our ability to develop, introduce, manufacture and ship new and enhanced
products in a timely manner without defects;
- introductions of new products and product enhancements by our
competitors, entry of new competitors into our market, pricing pressures
and other competitive factors;
- the rate of adoption of optical networks as an alternative to existing
networking systems;
- our ability to control expenses;
- the potential obsolescence of our inventory; and
- costs related to acquisitions of technology or businesses.
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 any quarter as an indication of our future performance. Our
operating results in future quarters may be below public market analysts' or
investors' expectations, which would likely cause the price of our common stock
to fall.
7
<PAGE> 10
WE HAVE ONLY RECENTLY BEGUN SELLING FIBER OPTIC PRODUCTS TO THE
TELECOMMUNICATIONS INDUSTRY, AND WE MAY NOT ACCURATELY PREDICT OUR REVENUES FROM
THESE PRODUCTS, WHICH COULD CAUSE QUARTERLY FLUCTUATIONS IN OUR NET REVENUES AND
RESULTS OF OPERATIONS AND MAY RESULT IN VOLATILITY OR A DECLINE IN OUR STOCK
PRICE.
We have only recently begun selling our fiber optic products to the
telecommunications industry, and we have only begun to generate revenues
associated from the sale of these products since March 1999. Because we have
only recently begun to sell these products, we may be unable to accurately
forecast our revenues from sales of these products, and we have limited
meaningful historical financial data upon which to plan future operating
expenses. Many of our expenses are fixed in the short term, and we may not be
able to quickly reduce spending if our revenue is lower than we project. Major
new product introductions will also result in increased operating expenses in
advance of generating revenues, if any. Therefore, net losses in a given quarter
could be greater than expected. We may not be able to address the risks
associated with limited operating history in an emerging market and our business
strategy may not be sustainable. Failure to accurately forecast our revenues and
future operating expenses could seriously harm our business, financial condition
and results of operations.
SALES TO ANY SINGLE CUSTOMER MAY VARY SIGNIFICANTLY FROM QUARTER TO QUARTER,
WHICH MAY CAUSE OUR OPERATING RESULTS TO FLUCTUATE.
Customers in our industry tend to order large quantities of products on an
irregular basis. 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 may result in significant quarterly
fluctuations in our revenues and operating results.
If current customers do not continue to place significant orders, we may
not be able to replace these orders with orders from new customers. None of our
current customers have any minimum purchase obligations, and they may stop
placing orders with us at any time, regardless of any forecast they may have
previously provided. The loss of any of our key customers or a significant
reduction in sales to those customers could significantly reduce our net
revenues. Any downturn in the business of existing customers could significantly
decrease sales of our products to these customers, which could seriously harm
our revenues and results of operations.
RISKS RELATED TO THE OPTICAL NETWORKING INDUSTRY
IF THE INTERNET DOES NOT CONTINUE TO EXPAND AND OPTICAL NETWORKS ARE NOT
DEPLOYED TO SATISFY THE INCREASED BANDWIDTH REQUIREMENTS AS WE ANTICIPATE, THE
DEMAND FOR OUR PRODUCTS MAY NOT INCREASE SUFFICIENTLY, AND OUR BUSINESS MAY
SUFFER.
Our future success depends on the continued growth of the Internet as a
widely-used medium for commerce and communications, the continuing increase in
the amount of data transmitted over communications networks, or bandwidth, and
the growth of optical networks to meet the increased demand for bandwidth. If
the Internet does not continue to expand as a widespread communications medium
and commercial marketplace, the need for significantly increased bandwidth
across networks and the market for optical networking products may not continue
to develop. Future demand for our products is uncertain and will depend to a
great degree on the continued growth and upgrading of optical networks. If this
growth does not continue, sales of our products may decline and our business and
results of operations will be harmed.
THE OPTICAL NETWORKING MARKET IS NEW AND UNPREDICTABLE AND CHARACTERIZED BY
RAPID TECHNOLOGICAL CHANGES AND EVOLVING STANDARDS, AND IF THIS MARKET DOES NOT
DEVELOP AND EXPAND AS WE ANTICIPATE, OUR BUSINESS WILL SUFFER.
The optical networking market is new and characterized by rapid
technological change, frequent new product introductions, changes in customer
requirements and evolving industry standards. Because this market is new, it is
difficult to predict its potential size or future growth rate. Widespread
adoption of
8
<PAGE> 11
optical networks is critical to our future success. Potential end-user customers
who have invested substantial resources in their existing copper lines or other
systems may be reluctant or slow to adopt a new approach, like optical networks.
Our success in generating net revenues in this emerging market will depend on,
among other things:
- maintaining and enhancing our relationships with our customers;
- the education of potential end-user customers and network service
providers about the benefits of optical networks; and
- our ability to accurately predict and develop our products to meet
industry standards.
If we fail to address changing market conditions, our business and
operating results will be harmed.
IF WE CANNOT INCREASE OUR SALES VOLUMES, REDUCE OUR COSTS OR INTRODUCE HIGHER
MARGIN PRODUCTS TO OFFSET ANTICIPATED REDUCTIONS IN THE AVERAGE SELLING PRICE OF
OUR PRODUCTS, OUR OPERATING RESULTS WILL SUFFER.
We have experienced decreases in the average selling prices of some of our
products. We anticipate that as products in the optical networking market become
more commoditized, the average selling price of our products may decrease in the
future in response to competitive pricing pressures, new product introductions
by us or our competitors or other factors. If we are unable to offset the
anticipated decrease in our average selling prices by increasing our sales
volumes or product mix, our net revenues and gross margins will decline. In
addition, to maintain our gross margins, we must continue to reduce the
manufacturing cost of our products. Further, as average selling prices of our
current products decline, we must develop and introduce new products and product
enhancements with higher margins. If we cannot maintain our gross margins, our
business could be seriously harmed.
RISKS RELATED TO OUR BUSINESS
IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS MAY NOT SUCCEED.
Our ability to successfully offer our products and implement our business
plan in a rapidly evolving market requires an effective planning and management
process. We continue to expand the scope of our operations domestically and
internationally and have increased the number of our employees substantially in
the past year. At March 31, 1999, we had a total of 144 employees and at January
31, 2000, we had a total of 390 employees. In addition, we plan to hire a
significant number of employees over the next few quarters. We currently operate
facilities in Santa Clara, California and Madison, Wisconsin and are in the
process of establishing additional manufacturing facilities in San Jose,
California, Middleton, Wisconsin and Shenzhen, China. The growth in employee
headcount 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 continue
to expand, train and manage our work force worldwide. The failure to effectively
manage our growth could harm our operating results.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP AND SUCCESSFULLY INTRODUCE
NEW AND ENHANCED PRODUCTS THAT MEET THE NEEDS OF OUR CUSTOMERS.
Our future success depends on our ability to anticipate our customers'
needs and develop products that address those needs. Introduction of new
products and product enhancements will require that we effectively transfer
production processes from research and development to manufacturing and
coordinate our efforts with those of our suppliers to rapidly achieve volume
production. If we fail to effectively transfer production processes, develop
product enhancements or introduce new products that meet the
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needs of our customers as scheduled, our net revenues may be reduced and our
business may be harmed. Some of the risks associated with the development and
sales of our products include:
- the evolving and unpredictable nature of the telecommunications industry;
- the uncertain rate of growth in usage and acceptance of optical networks;
- the uncertain demand for our new telecom products; and
- increased competition in the fiber optic components market for optical
networking systems.
COMPETITION MAY INCREASE, WHICH COULD CAUSE REDUCED SALES LEVELS AND RESULT IN
REDUCED GROSS MARGINS OR LOSS OF MARKET SHARE.
Competition in the optical networking market in which we compete is
intense. We face competition from public companies, such as, E-Tek Dynamics, JDS
Uniphase Corporation, Lucent Technologies and Nortel Networks Corporation. Many
of the large public companies with which we compete 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 than we can to the development, promotion, sale and support of
their products. In addition, several of our competitors have large market
capitalizations, or cash reserves, and 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, more extensive
customer bases, better developed distribution channels and broader product
offerings than we have. These companies can leverage their customer bases and
broader product offerings and adopt aggressive pricing policies to gain market
share. Additional competitors may enter the market, and we are likely to compete
with new companies in the future. 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 of the foregoing factors, we
expect that competitive pressures may result in price reductions, reduced
margins and loss of market share. For a more detailed discussion of our
competition, see "Business -- Competition."
WE HAVE LIMITED PRODUCT OFFERINGS, AND OUR BUSINESS MAY SUFFER IF DEMAND FOR
THESE PRODUCTS DECLINES OR FAILS TO DEVELOP AS WE EXPECT.
We derive a substantial portion of our net revenues from a limited number
of products. Specifically, in the nine-month period ended December 31, 1999, we
derived more than 15% of our net revenues from our tunable laser module
products. We expect that net revenues from these products will continue to
account for a substantial portion of our total net revenues for the foreseeable
future. Continued and widespread market acceptance of these products is critical
to our future success. We cannot assure you that our current products will
achieve market acceptance at the rate at which we expect, or at all, which could
harm our business and financial results.
WE MUST EXPAND SUBSTANTIALLY OUR DIRECT AND INDIRECT SALES OPERATIONS IN ORDER
TO INCREASE MARKET AWARENESS AND SALES OF OUR PRODUCTS.
Our products and services require a long, involved sales effort targeted at
several key departments within our prospective customers' organizations.
Therefore, our sales effort requires the prolonged efforts of executive
personnel and specialized systems and applications engineers working together
with a small number of dedicated salespersons. Currently, our sales and
marketing organization is limited. We will need to grow our sales force in order
to increase market awareness and sales of our products. Competition for these
individuals is intense, and we might not be able to hire the kind and number of
sales personnel and applications engineers we need. 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 would prevent us from increasing our
revenues.
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OUR PRODUCTS ARE COMPLEX AND MAY CONTAIN DEFECTS THAT ARE NOT DETECTED UNTIL
FULL DEPLOYMENT OF THE CUSTOMER'S SYSTEM, WHICH COULD INCREASE OUR COSTS AND
REDUCE OUR REVENUES.
Some of our products are designed to be deployed in large and complex
optical networks. Because of the nature of these products, they can only be
fully tested for reliability when deployed in networks for long periods of time.
Our fiber optic products may contain undetected defects when first introduced or
as new versions are released. Our customers may discover defects in our products
after they have been fully deployed and operated under peak stress conditions.
In addition, our products are combined with products from other vendors. As a
result, should problems occur, it may be difficult to identify the source of the
problem. If we are unable to fix defects or other problems, we could experience,
among other things:
- loss of customers;
- damage to our brand reputation;
- failure to attract new customers or achieve market acceptance;
- diversion of development and engineering resources; and
- legal actions by our customers.
The occurrence of any one or more of the foregoing factors could seriously
harm our business, financial condition and results of operations.
THE LONG SALES CYCLES FOR OUR PRODUCTS MAY CAUSE REVENUES AND OPERATING RESULTS
TO VARY FROM QUARTER TO QUARTER.
The timing of our revenue is difficult to predict because of the length and
variability of the sales and implementation cycles for our products. We do not
generally recognize revenue until a product has been shipped to a customer, all
significant vendor obligations have been performed and collection is considered
probable. Customers often view the purchase of our products as a significant and
strategic decision. As a result, customers typically expend significant effort
in evaluating, testing and qualifying our products and manufacturing process.
This customer evaluation and qualification process frequently results in a
lengthy initial sales cycle of up to one year or more. In addition, some of our
customers require that our products be subjected to Telcordia, or Bellcore,
qualification testing, which can take up to nine months or more. 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
to customize our products to the customer's needs. We may also expend
significant management efforts, increase manufacturing capacity and order long
lead time components or materials prior to receiving an order. Even after this
evaluation process, a potential customer may not purchase our products. Because
of the evolving nature of the optical networking market, we cannot predict the
length of these sales and development cycles. As a result, these long sales
cycles may cause our revenues and operating results to vary significantly and
unexpectedly from quarter to quarter.
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 and other key engineering, sales, marketing, manufacturing and support
personnel. None of our officers or key employees are bound by an employment
agreement for any specific term and these individuals 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 2000,
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. Many of the members
of our management team have only been with us for a relatively short period of
time. For example, our chief
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financial officer joined us in February 2000. Failure of the new management team
to work effectively together could seriously harm our business.
ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL
CONDITION.
We have in the past made strategic acquisitions of intellectual property
and anticipate that in the future, as part of our business strategy, we will
continue to make strategic acquisitions of complementary companies, products or
technologies. In the event of any future acquisitions, we could:
- issue stock that would dilute our current stockholders' percentage
ownership;
- incur debt;
- assume liabilities; or
- incur expenses related to in-process research and development,
amortization of goodwill and other intangible assets.
These acquisitions also involve numerous risks, including:
- problems combining the acquired operations, technologies or products;
- unanticipated costs or liabilities;
- diversion of management's attention from our core business;
- adverse effects on existing business relationships with suppliers and
customers;
- risks associated with entering markets in which we have no or limited
prior experience; and
- potential loss of key employees, particularly those of the acquired
organizations.
We cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire in the
future, which may harm our business.
WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL SALES THAT COULD HARM OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
For the quarter ended December 31, 1999, 19% of our net revenues were from
international sales. We plan to increase our international sales activities. Our
international sales will be limited if we cannot establish relationships with
international distributors, establish additional foreign operations, expand
international sales channel management, hire additional personnel and develop
relationships with international service providers. Even if we are able to
successfully continue international operations, we may not be able to maintain
or increase international market demand for our products. Our international
operations are subject to a number of risks, including:
- greater difficulty in accounts receivable collection and longer
collection periods;
- difficulties and costs of staffing and managing foreign operations;
- the impact of recessions in economies outside the United States;
- unexpected changes in regulatory requirements;
- certification requirements;
- reduced protection for intellectual property rights in some countries;
- potentially adverse tax consequences; 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
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the future. Accordingly, we could experience the risks of fluctuating currencies
and could choose to engage in currency hedging activities.
RISKS RELATED TO MANUFACTURING OUR PRODUCTS
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.
We currently manufacture substantially all of our products in our
facilities located in Santa Clara, California. We plan to devote significant
resources to expand our manufacturing capacity at this facility and initiate
manufacturing at our facilities in San Jose, California, Middleton, Wisconsin
and Shenzhen, China, which will be costly and will require management time. We
could experience difficulties and disruptions in the manufacture of our products
while we transition to these new facilities, which could prevent us from
achieving timely delivery of products and could result in lost revenues. There
are numerous risks associated with rapidly increasing capacity, including the
inability to procure and install the necessary capital equipment, the shortage
of raw materials we use in our products, the lack of availability of
manufacturing personnel to work in our facility, the difficulties in achieving
adequate yields from new manufacturing lines and the inability to predict future
order volumes. We may experience delays, disruptions, capacity constraints or
quality control problems in our manufacturing operations, and, as a result,
product shipments to our customers could be delayed, which would negatively
impact our revenues, competitive position and reputation. 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. For a more detailed discussion about our
manufacturing, see "Business -- Manufacturing."
OUR PLANS TO BEGIN MANUFACTURING OPERATIONS IN CHINA SUBJECT US TO CERTAIN RISKS
INHERENT IN DOING BUSINESS IN CHINA, WHICH MAY HARM OUR BUSINESS.
We have a manufacturing facility located in Shenzhen, China that we expect
to become operational in 2000. This facility may be adversely affected by
changes in the laws and regulations of the People's Republic of China, such as
those relating to taxation, import and export tariffs, environmental
regulations, land use rights, property and other matters. Our manufacturing
facility in Shenzhen, China is located in a premise, on land leased from China's
government by a third party under land use certificates and agreements with
terms of 50 years. We lease our manufacturing facility from this third party
under a lease agreement that will expire in November 2002, subject to our option
to renew for an additional three-year period. Our assets and facility located in
China are subject to the laws and regulations of China and our results of
operations in China are subject to the economic and political situation there.
We believe that our operations in Shenzhen, China are in compliance with
China's applicable legal and regulatory requirements. However, there can be no
assurance that China's central or local governments will not impose new,
stricter regulations or interpretations of existing regulations which would
require additional expenditures. China's economy differs from the economies of
many countries in such respects as structure, government involvement, level of
development, growth rate, capital reinvestment, allocation of resources,
self-sufficiency, rate of inflation and balance of payments position, among
others. In the past, China's economy has been primarily a planned economy
subject to state plans. Since 1978, China's government has been reforming its
economic and political systems. Such reforms have resulted in significant
economic growth and social change. We can not assure you that China's policies
for economic reforms will be consistent or effective. Our results of operations
and financial position may be harmed by changes in the political, economic or
social conditions in China.
We plan to export substantially all the products manufactured at our
facility in Shenzhen, China. Accordingly, upon application to and approval by
the relevant government authorities, we will not be subject to certain of
China's taxes and are exempt from customs duties on imported components or
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materials and exported products. We are also required to pay income tax in
China, subject to certain tax holidays. We can not assure you that we will not
become subject to other taxes in China or will not be required to pay customs
duties in the future. In the event that we are required to pay taxes in China or
customs duties, our results of operations could be materially and adversely
affected.
To successfully meet our overall production goals, we will have to
coordinate and manage effectively between our facilities in the United States
and in China. We have no experience in coordinating and managing production
facilities that are located on different continents or in the transfer of
manufacturing operations from one facility to another. Our failure to
successfully coordinate and manage multiple sites on different continents or to
transfer our manufacturing operations could seriously harm overall production.
IF WE FAIL TO ACCURATELY FORECAST COMPONENT AND MATERIAL REQUIREMENTS FOR OUR
MANUFACTURING FACILITIES, WE COULD INCUR ADDITIONAL COSTS OR EXPERIENCE
MANUFACTURING DELAYS.
We use rolling forecasts based on anticipated product orders to determine
our component requirements. It is very important that we accurately predict both
the demand for our products and the lead times required to obtain the necessary
components and materials. Lead times for components and materials that we order
vary significantly and depend on factors such as specific supplier requirements,
the size of the order, contract terms and current market demand for such
components. Lead times vary significantly and depend on numerous factors,
including the specific supplier, the size of the order, contract terms and
market demand for components or materials at a given time. For substantial
increases in production levels, some suppliers may need six months or more lead
time. If we overestimate our component and material requirements, we may have
excess inventory, which would increase our costs. If we underestimate our
component and material requirements, we may have inadequate inventory, which
could interrupt our manufacturing and delay delivery of our products to our
customers. Any of these occurrences would negatively impact our business and
operating results.
WE DEPEND ON SINGLE OR LIMITED SOURCE SUPPLIERS FOR SOME OF THE KEY COMPONENTS
AND MATERIALS IN OUR PRODUCTS, WHICH MAKES US SUSCEPTIBLE TO SUPPLY SHORTAGES OR
PRICE FLUCTUATIONS THAT COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
We currently purchase several key components and materials used in the
manufacture of our products from single or limited source suppliers. For
example, we purchase a specialized type of garnet crystal from Mitsubishi, the
world's only commercial supplier of this type of garnet crystal. In addition,
Conet is our sole supplier of critical components used in several of our
products. We typically purchase our components and materials through purchase
orders and we have no guaranteed supply arrangements with any of these
suppliers. We may fail to obtain these supplies in a timely manner in the
future. We may experience difficulty identifying alternative sources of supply
for certain components used in our products. We would experience further delays
from evaluating and testing the products of these potential alternative
suppliers. Furthermore, financial or other difficulties faced by these suppliers
or significant changes in demand for these components or materials could limit
the availability. Any interruption or delay in the supply of any of these
components or materials, or the inability to obtain these components and
materials 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.
IF WE DO NOT ACHIEVE ACCEPTABLE MANUFACTURING YIELDS OR SUFFICIENT PRODUCT
RELIABILITY, OUR ABILITY TO SHIP PRODUCTS TO OUR CUSTOMERS COULD BE DELAYED AND
OUR REVENUES MAY SUFFER.
The manufacture of our products involves complex and precise processes.
Changes in our manufacturing processes or those of our suppliers, or the use of
defective components or materials, could significantly reduce our manufacturing
yields and product reliability. Our manufacturing costs are relatively fixed,
and, thus, manufacturing yields are critical to our results of operations. We
have experienced problems related to product yields in the past, which resulted
in delays of customer shipments and lost revenue. We may experience similar
problems in the future, which could result in lower than expected production
yields, delayed product shipments and impaired gross margins. In some cases,
existing
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manufacturing techniques involve substantial manual labor. In addition, we may
experience manufacturing delays and reduced manufacturing yield upon introducing
new products to our manufacturing lines. In order to maintain our gross margins,
we may need to develop new, more cost-effective manufacturing processes and
techniques, and if we fail to do so, our gross margins may be adversely
affected.
IF OUR CUSTOMERS DO NOT QUALIFY OUR MANUFACTURING LINES FOR VOLUME SHIPMENTS,
OUR OPERATING RESULTS COULD SUFFER.
Generally, customers do not purchase our products, other than limited
numbers of evaluation units, prior to qualification of the manufacturing line
for volume production. Our existing manufacturing lines, as well as each new
manufacturing line, must pass through varying levels of qualification with our
customers. Customers may require that we be registered under international
quality standards, such as ISO 9001. This customer qualification process
determines whether our manufacturing lines meet the customers' quality,
performance and reliability standards. If there are delays in qualification of
our products, our customers may drop the product from a long-term supply
program, which would result in significant lost revenue opportunity over the
term of that program.
RISKS RELATED TO OUR INTELLECTUAL PROPERTY
WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, WHICH WOULD SERIOUSLY
HARM OUR ABILITY TO USE OUR PROPRIETARY TECHNOLOGY TO GENERATE REVENUE.
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 our patent applications will be approved, that any
patents that may issue will protect our intellectual property or that any issued
patents will not be challenged by third parties. Other parties may independently
develop similar or competing technology or design around any patents that may be
issued to us. We cannot be certain that the steps we have taken will prevent the
misappropriation of our intellectual property, particularly in foreign countries
where the laws may not protect our proprietary rights as fully as in the United
States. For a more detailed discussion about our intellectual property, see
"Business -- Intellectual Property."
WE ARE CURRENTLY DEFENDING A CLAIM THAT WE HAVE INFRINGED KAIFA'S INTELLECTUAL
PROPERTY RIGHTS, AND IF WE ARE UNSUCCESSFUL IN DEFENDING THIS CLAIM, WE MAY HAVE
TO EXPEND A SUBSTANTIAL AMOUNT OF RESOURCES TO MAKE OUR PRODUCTS NON-INFRINGING
AND MAY HAVE TO PAY A SUBSTANTIAL AMOUNT IN DAMAGES.
Kaifa Technology, Inc., recently acquired by E-Tek Dynamics, Inc., filed a
complaint against us in December 1999 in the United States District Court,
alleging, among other things, that we have infringed some of their intellectual
property rights. We cannot be certain that we will be successful in our defense.
If we are unsuccessful in defending this action, any remedies awarded to Kaifa
may harm our business. Furthermore, defending this action will be costly and
divert management's attention regardless of whether we successfully defend the
action. On February 23, 2000, we filed a motion to dismiss Kaifa's complaint and
joined one of our employees named in the complaint in filing another motion to
dismiss Kaifa's complaint. On the same date, certain of our employees named in
the complaint also filed a motion to dismiss Kaifa's complaint. These motions
are scheduled to be heard on March 31, 2000. For more information about current
legal proceedings, see "Business -- Legal Proceedings."
WE COULD BECOME SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS,
WHICH COULD SERIOUSLY HARM OUR BUSINESS.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. We are currently
defending a claim alleging that we are violating a third party's intellectual
property rights. In the future, we may be a party to litigation 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
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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 to protect these rights or 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. For more information about
current legal proceedings, see "Business -- Legal Proceedings."
NECESSARY LICENSES OF THIRD-PARTY TECHNOLOGY MAY NOT BE AVAILABLE TO US OR MAY
BE VERY EXPENSIVE.
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 seriously harm our business, financial condition and
results of operations.
RESIDUAL YEAR 2000 ISSUES MAY DISRUPT OUR OPERATIONS, SUBJECT US TO LIABILITIES
AND COSTS AND AFFECT THE TIMING OF OUR REVENUES.
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, software programs that have time-sensitive components may recognize a
date represented as "00" as the year 1900 rather than the year 2000. In
addition, programs may fail to recognize February 29, 2000, as a leap year date
as a result of an exception to the calculation of leap years that will occur in
the year 2000 and otherwise occurs only once every 400 years. This problem could
result in miscalculations, data corruption, system failures or disruptions of
operations.
Because our components are used in connection with products designed and
manufactured by others, residual Year 2000 problems affecting these products
could cause our products to fail. If residual Year 2000 problems cause the
failure of any of the technology, software or systems used with our products, we
could lose customers, suffer significant disruptions in our business, lose
revenues and incur substantial liabilities and expenses. We could also become
involved in costly litigation resulting from Year 2000 problems. This could
seriously harm our business, financial condition and results of operations.
RISKS RELATED TO THIS OFFERING
WE MAY NEED ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAILABLE, AND OUR ABILITY TO
GROW MAY BE LIMITED AS A RESULT.
We believe that the net proceeds of this offering, together with our
existing cash balances, credit facilities and cash flow expected to be generated
from future operations, will be sufficient to meet our capital requirements at
least through the next 12 months. However, we may be required, or could elect,
to seek additional funding prior to that time. The development and marketing of
new products and the
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expansion of our manufacturing facilities and associated support personnel and
our sales and marketing organizations will require a significant commitment of
resources. In addition, if the market for our products develops at a slower pace
than anticipated, or if we fail to establish significant market share and
achieve a meaningful 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 for acquisitions or other
unanticipated uses, we may need additional capital. In the event we are required
to raise additional funds, we may not be able to do so on favorable terms, or at
all. Further, if we issue new equity securities, stockholders may experience
additional dilution or the new equity securities may have rights, preferences or
privileges senior to those of existing holders of common stock. If we cannot
raise funds on acceptable terms, we may not be able to develop or enhance our
products, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements. Any inability to raise additional
capital when we require it would seriously harm our business.
THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON STOCK, AND A PUBLIC MARKET FOR OUR
SECURITIES MAY NOT DEVELOP OR BE SUSTAINED.
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 upon 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.
Upon completion of this offering, our executive officers, directors and
principal stockholders who hold 5% or more of the outstanding common stock and
their affiliates will beneficially own, in the aggregate, approximately %
of our outstanding common stock. As a result, these stockholders will be able to
exercise significant control over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions, which could delay or prevent an outside party from acquiring or
merging with us. For a full presentation of the equity ownership of these
stockholders, see "Principal Stockholders."
INVESTORS IN OUR COMMON STOCK WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL
DILUTION.
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
$ 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 $ per share. For additional information on this calculation, see
"Dilution."
PROVISIONS OF OUR CHARTER DOCUMENTS, DELAWARE LAW AND CHANGE OF CONTROL
AGREEMENTS MAY HAVE ANTI-TAKEOVER EFFECTS THAT COULD PREVENT A CHANGE IN
CONTROL.
Provisions of our certificate of incorporation and bylaws may discourage,
delay or prevent a merger or acquisition that a stockholder may consider
favorable. These provisions include:
- authorizing our board of directors to issue preferred stock without
stockholder approval;
- providing for a classified board of directors with staggered, three-year
terms;
- prohibiting cumulative voting in the election of directors;
- requiring super-majority voting to effect significant amendments to our
certificate of incorporation and bylaws;
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- eliminating the ability of stockholders to call special meetings;
- prohibiting stockholder actions by written consent; and
- establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
Certain provisions of Delaware law also may discourage, delay or prevent
someone from acquiring or merging with us, which may cause the market price of
our common stock to decline. See "Description of Capital Stock -- Delaware Law
and Certain Provisions of Our Certificate of Incorporation and Bylaws." In
addition, we have a change of control agreement with one of our officers and
option agreements with certain officers which have change of control provisions,
which may discourage, delay or prevent someone from acquiring or merging with
us. For more information about the change of control agreement, see
"Management -- Employment and Change of Control Agreements."
THERE MAY BE SALES OF A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK AFTER THIS
OFFERING THAT 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. 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. You should read
"Shares Eligible for Future Sale" for a full discussion of the shares that may
be sold in the public market in the future.
WE EXPECT TO EXPERIENCE VOLATILITY IN OUR SHARE PRICE, WHICH COULD NEGATIVELY
AFFECT YOUR INVESTMENT, AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR
ABOVE THE INITIAL PUBLIC OFFERING PRICE.
This initial public offering price may vary from the market price of our
common stock after the offering. If you purchase shares of common stock, you may
not be able to resell those shares at or above the initial public offering
price. The market price of our common stock may fluctuate significantly in
response to a number of factors, some of which are beyond our control,
including:
- quarterly variations in operating results;
- changes in financial estimates by securities analysts;
- changes in market valuations of other optical networking companies;
- announcements by us or our competitors of new products or of significant
technical innovations, contracts, acquisitions, strategic partnerships or
joint ventures;
- any loss of a major customer;
- additions or departures of key personnel;
- any deviations in net revenues or in losses from levels expected by
securities analysts; and
- future sales of common stock or other securities.
In addition, the stock market has experienced extreme volatility that has often
been unrelated to the performance of particular companies. These market
fluctuations may cause our stock price to fall regardless of our performance.
18
<PAGE> 21
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," contains forward-looking statements
within the meaning of the federal securities laws that relate to future events
or our future financial performance. 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 the forward-looking statements. These risks
and other factors include those listed under "Risk Factors" and elsewhere in
this prospectus. 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. In addition, these forward-looking
statements include, but are not limited to, statements regarding the following:
- anticipated development and release of new products;
- anticipated sources of future revenues;
- the expansion of our manufacturing capacity;
- anticipated expenditures for research and development, sales and
marketing and general and administrative expenses; and
- the adequacy of our capital resources to fund our operations.
These statements are only predictions. In evaluating these statements, you
should specifically consider various factors, including the risks outlined under
"Risk Factors."
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.
19
<PAGE> 22
USE OF PROCEEDS
We expect to receive net proceeds of approximately $ million from
the sale of the shares of common stock or approximately $
million if the underwriters' over-allotment option is exercised in full, at an
assumed initial public offering price of $ per share, after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us.
We intend to use the net proceeds from this offering primarily for general
corporate purposes, including working capital and capital expenditures. The
amounts we actually expend for working capital and other purposes may vary
significantly and will depend on a number of factors, including the amount of
our future revenues and other factors described under "Risk Factors."
Accordingly, our management will retain broad discretion in the allocation of
the net proceeds of this offering. We may also use a portion of the net proceeds
to acquire products, technologies or businesses that are complementary to our
current and future business and product lines. From time to time, we engage in
discussions with companies regarding potential acquisitions; however we
currently have no material commitments or agreements with respect to any
acquisition. Pending use of the net proceeds of this offering, we intend to
invest the net proceeds in interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future.
20
<PAGE> 23
CAPITALIZATION
The following table sets forth our actual capitalization as of December 31,
1999:
- on an actual basis;
- on a pro forma basis to give effect to the conversion of 41,939,144
shares of preferred stock into 41,939,144 shares of common stock
automatically upon completion of this offering; and
- on pro forma as adjusted basis to give effect to the sale of
shares of common stock at an assumed initial public offering price of
$ per share (less underwriting discounts and commissions and
estimated offering expenses payable by us), the conversion of 41,939,144
shares of preferred stock into 41,939,144 shares of common stock
automatically upon completion of this offering and assumes the exercise
of warrants to purchase 121,140 shares of common stock at an exercise
price of $1.20 per share prior to this offering.
You should read this table in conjunction with our consolidated financial
statements and the accompanying notes to our consolidated financial statements,
Selected Consolidated Financial Data and Management's Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, less current portion...................... $ 368 $ 368 $
Stockholders' equity:
Preferred stock, $0.001 par value: 44,083,326
authorized, 41,939,144 issued and outstanding
(actual); 44,083,326 authorized, no shares issued and
outstanding (pro forma); 10,000,000 authorized, no
shares issued and outstanding (pro forma as
adjusted)............................................ 42 --
Common stock, $0.001 par value: 80,000,000 authorized,
2,578,824 issued and outstanding (actual); 80,000,000
authorized, 44,517,968 issued and outstanding (pro
forma); 250,000,000 authorized, shares issued
and outstanding (pro forma as adjusted).............. 2 44
Additional paid-in capital................................ 51,168 51,168
Deferred compensation..................................... (689) (689)
Accumulated deficit....................................... (15,510) (15,510)
-------- -------- ----
Total stockholders' equity......................... 35,013 35,013
-------- -------- ----
Total capitalization............................... $ 35,381 $ 35,381 $
======== ======== ====
</TABLE>
The total number of outstanding shares of our common stock is as of
December 31, 1999, and excludes:
- 9,239,000 shares issuable upon exercise of outstanding stock options as
of December 31, 1999, with a weighted average exercise price of $0.41 per
share;
- 5,882,000 shares reserved for future issuance under our stock option,
executive option and employee stock purchase plans, including amounts
authorized for issuance subsequent to December 31, 1999; and
- 140,000 shares of common stock issuable upon exercise of an outstanding
warrant at an exercise price of $1.00 per share.
21
<PAGE> 24
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 common
stock after this offering. Our pro forma net tangible book value as of December
31, 1999, including proceeds of $145,000 from the assumed exercise of warrants
to purchase 121,140 shares of common stock prior to this offering, was
$35,082,000 or $0.79 per share of common stock. Pro forma net tangible book
value per share was calculated by dividing the sum of total assets less
liabilities, less intangible assets by the total number of common shares
outstanding at December 31, 1999, and the assumed conversion of 41,939,144
shares of preferred stock into 41,939,144 shares of common stock and the
issuance of 121,140 shares of common stock from the assumed exercise of warrants
prior to this offering. Dilution in net tangible book value per share represents
the difference between the amount per share paid by purchasers of shares of
common stock in this offering and the net tangible book value per share of
common stock immediately after the completion of this offering. After giving
effect to the sale of the shares of common stock offered hereby at an
assumed initial public offering price of $ per share less underwriting
discounts and commissions and estimated offering expenses, our pro forma net
tangible book value as of December 31, 1999, would have been $ or
approximately $ per share. This represents an immediate increase in net
tangible book value of $ per share to existing stockholders and an immediate
dilution in net tangible book value of $ per share to new investors, or
approximately % of the initial public offering price of $ per share.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share at December
31, 1999............................................... $ 0.78
Increase in net tangible book value per share attributable
to this offering.......................................
--------
Pro forma net tangible book value per share after this
offering..................................................
--------
Dilution in net tangible book value per share to new
investors................................................. $
========
</TABLE>
The following table shows on a pro forma basis after giving effect to this
offering, based on an assumed initial public offering price of $ per share,
as of December 31, 1999, the differences between the existing holders of common
stock and the new investors with respect to the number of shares of common stock
purchased from us, the total consideration paid to us and the average price per
share paid, before deducting the underwriting discounts and commissions and
estimated offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- ------- --------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............................. % $ % $
New investors......................................
-------- ----- -------- ------
Total............................................ 100.0% $ 100.0%
======== ===== ======== ======
</TABLE>
The foregoing discussion and table are based on the number of shares of
common stock outstanding after this offering and excludes the following:
- 9,239,000 shares issuable upon exercise of outstanding stock options as
of December 31, 1999, with a weighted average exercise price of $0.41 per
share;
- 5,882,000 shares reserved for issuance under our stock option plan,
executive option plan and employee stock purchase plan including amounts
authorized for issuance subsequent to December 31, 1999; and
- 140,000 shares of common stock issuable upon exercise of an outstanding
warrant at an exercise price of $1.00 per share.
New investors will suffer additional dilution upon exercise of outstanding
options. At December 31, 1999, assuming exercise and payment of all outstanding
options, net tangible book value per share would be $ representing dilution
of $ per share to new investors. See "Capitalization," "Management -- Stock
Plans," "Description of Capital Stock" and note 8 of notes to consolidated
financial statements for more information about dilution.
22
<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the selected consolidated financial data set forth below in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and related
notes included elsewhere in this prospectus. The statement of operations data
for the fiscal years ended March 31, 1998 and 1999, and the nine-month period
ended December 31, 1999, and the consolidated balance sheet data at March 31,
1999, and December 31, 1999, are derived from, and are qualified by reference
to, our audited consolidated financial statements and notes thereto included
elsewhere in this prospectus. The statement of operations data for the years
ended March 31, 1996 and 1997, and the consolidated balance sheet data as of
March 31, 1996, 1997 and 1998, are derived from, and are qualified by reference
to, consolidated financial statements not appearing in this prospectus.
Historical results are not necessarily indicative of results that may be
expected for any future period. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
NINE-MONTH
PERIOD
FISCAL YEAR ENDED MARCH 31, ENDED
----------------------------------------- DECEMBER 31,
1996 1997 1998 1999 1999
----------- ------- ------- ------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues.......................................... $10,394 $10,543 $15,482 $17,285 $18,101
Cost of net revenues.................................. 5,095 5,946 8,186 9,225 12,525
------- ------- ------- ------- -------
Gross profit....................................... 5,299 4,597 7,296 8,060 5,576
Operating expenses:
Research and development........................... 1,724 3,115 3,721 7,379 7,352
Sales and marketing................................ 1,289 1,662 2,193 2,987 2,982
General and administrative......................... 1,608 1,269 1,355 2,360 2,704
Deferred compensation.............................. -- -- -- -- 132
------- ------- ------- ------- -------
Total operating expenses...................... 4,621 6,046 7,269 12,726 13,170
------- ------- ------- ------- -------
Operating income (loss)............................... 678 (1,449) 27 (4,666) (7,594)
Interest expense and other income, net................ (200) (210) (303) (303) (81)
------- ------- ------- ------- -------
Income (loss) before provision for income taxes....... 478 (1,659) (276) (4,969) (7,675)
Provision for income taxes............................ 21 2 10 2 2
------- ------- ------- ------- -------
Net income (loss)..................................... $ 457 $(1,661) $ (286) $(4,971) $(7,677)
======= ======= ======= ======= =======
Historical net income (loss) per share:
Basic.............................................. $ 0.45 $ (1.52) $ (0.25) $ (2.18) $ (3.11)
======= ======= ======= ======= =======
Diluted............................................ $ 0.02 $ (1.52) $ (0.25) $ (2.18) $ (3.11)
======= ======= ======= ======= =======
Weighted average shares:
Basic............................................ 1,011 1,096 1,148 2,284 2,468
======= ======= ======= ======= =======
Diluted.......................................... 18,768 1,096 1,148 2,284 2,468
======= ======= ======= ======= =======
Pro forma net loss per share:
Basic and diluted.................................. $ (0.24)
=======
Weighted average shares............................ 32,223
=======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------- DECEMBER 31,
1996 1997 1998 1999 1999
------ ------ ------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 376 $ 250 $ 196 $ 51 $28,067
Working capital......................................... 2,066 616 (1,166) 479 29,026
Total assets............................................ 5,186 5,564 8,197 8,240 44,852
Long-term debt, less current portion.................... 60 129 79 588 368
Total stockholders' equity (net capital deficiency)..... 1,229 (431) (702) (1,183) 35,013
</TABLE>
See note 10 of notes to consolidated financial statements for an
explanation of the determination of the weighted average common and common
equivalent shares used to compute net loss per share.
23
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our
consolidated financial statements and the notes thereto included elsewhere in
this prospectus. The results described below are not necessarily indicative of
the results to be expected in any future period. This discussion and analysis
contains forward-looking statements within the meaning of the federal securities
laws. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical results or our predictions. See "Special Note Regarding
Forward-Looking Statements."
OVERVIEW
We design, manufacture and market innovative fiber optic products for
next-generation optical networks under the Smart Optics for Networks brand. We
were founded in April, 1990 and initially developed and offered advanced
photonics tools and opto-electronic products principally for research and
commercial applications. In January 1997, we began development of a high
performance tunable laser module for test and measurement in the manufacturing
and development of optical networking products. In May 1998, we began leveraging
our extensive experience in developing advanced photonics tools and
opto-electronic products to enable networking solutions with increased channel
counts, higher data rates, longer reach lengths and new services, and which
reduce overall network cost of ownership. Our high-performance products are
compact, consume less power and are designed to be manufacturable in high
volumes.
We currently derive revenues from the sales of two groups of products,
telecom products and commercial photonics products. Through fiscal 1999,
comprised of the twelve-month period ended March 31, 1999, substantially all of
our revenues were generated from sales of commercial photonics products. Our
commercial photonics products include advanced photonics tools, which are
primarily used for commercial and research applications in a wide variety of
industries. Beginning in 1999, we began to derive an increasing amount of our
revenues from sales of telecom products. Our telecom products include fiber
amplifier products, wavelength management products, high-speed opto-electronics
and tunable laser modules. We sell these products primarily to manufacturers of
networking and test equipment in the optical telecommunications market. For the
nine-month period ended December 31, 1999, sales of our telecom products
accounted for 27.6% of overall net revenues, and are expected to continue to
increase as a percentage of our overall net revenues. We sell our products to
over 50 customers including Alcatel USA, Avanex Corporation, Corning
Incorporated, Corvis Corporation, Lucent Technologies, Nortel Networks
Corporation and Qtera Corporation (a wholly owned subsidiary of Nortel
Networks). In the nine-month period ended December 31, 1999, none of our
customers accounted for more than 10% of our net revenues.
We market and sell our telecom products predominantly through our direct
sales force. To date, most of our direct sales have been in North America,
however, we recently began marketing and selling our telecom products
internationally. We market and sell our commercial photonics products through a
combination of catalog sales, international distributors and direct sales. We
recognize revenue on all of our products on shipment, provided there are no
remaining obligations and collectability is probable. We accrue reserves for
product returns and potential warranty expenses at the time revenue is
recognized.
Our cost of net revenues consists of raw materials, direct labor and
manufacturing overhead, which includes, among other costs, production start-up
and prototype costs. In addition, we rely on contract manufacturers for some of
our key components, which are included in our cost of net revenues. As we expand
our manufacturing capacity to meet demand and introduce new products, we expect
our cost of net revenues as a percentage of net revenues to increase in the near
term.
Research and development expenses consist primarily of salaries and related
personnel expenses, fees paid to consultants and outside service providers,
materials costs and test units and other expenses related to the design,
development, testing and enhancements of our products. We expense our research
and development costs as they are incurred. In addition, from time to time, we
receive funding for research
24
<PAGE> 27
and development projects. For fiscal years 1998 and 1999 and the nine-month
period ended December 31, 1999, we received an aggregate of $5.2 million for
research and development activities, which was used to offset research and
development costs. We believe that a significant level of investment for product
research and development is required to remain competitive. Accordingly, we
expect to continue to devote substantial resources to product research and
development, and we expect our research and development expenses to continue to
increase in absolute dollars.
Sales and marketing expenses consist primarily of salaries, commissions and
related expenses for personnel engaged in marketing, sales and customer
engineering support functions, as well as costs associated with trade shows,
promotional activities and travel expenses. We intend to expand our sales and
marketing operations and efforts substantially for our telecom products, both
domestically and internationally, in order to increase market awareness and to
generate sales of our products. However, we cannot be certain that any increased
expenditures will result in higher net revenues. In addition, we believe our
future success depends upon establishing successful relationships with a variety
of key customers. We believe that continued investment in sales and marketing is
critical to our success and expect these expenses to increase in absolute
dollars in the future.
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, accounting, information technology,
facilities and human resources personnel, recruiting expenses, professional fees
and costs associated with expanding our information systems. We expect these
expenses to increase in absolute dollars as we continue to add personnel and
incur additional costs related to the growth of our business and our operations
as a public company.
In connection with the grant of stock options to our employees, we recorded
deferred compensation of approximately $821,000 through December 31, 1999,
representing the difference between the estimated fair market value of the
common stock for accounting purposes and the option exercise price of these
options at the date of grant. These amounts are being amortized using the
attribution vesting method over the vesting period of the stock options, which
for us is generally five years from the date of grant. In addition, we have
issued stock options during the first quarter of fiscal 2000 at prices below
deemed fair market value, which will result in additional deferred compensation.
RESULTS OF OPERATIONS
You should be aware that we recently changed our fiscal year end to
December 31. Our previous fiscal years ended March 31. Fiscal year 1999 refers
to the twelve-month period ended on March 31, 1999. Fiscal year 1998 refers to
the twelve-month period ended on March 31, 1998.
<TABLE>
<CAPTION>
NINE-MONTH
FISCAL YEAR ENDED FISCAL YEAR ENDED PERIOD ENDED
MARCH 31, MARCH 31, DECEMBER 31,
1998 1999 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
SUMMARY OF OPERATIONS DATA:
Net revenues............................. 100.0% 100.0% 100.0%
Cost of net revenues..................... 52.9 53.4 69.2
----- ----- -----
Gross profit............................. 47.1 46.6 30.8
----- ----- -----
Operating expenses:
Research and development.............. 24.0 42.7 40.6
Sales and marketing................... 14.2 17.3 16.5
General and administrative............ 8.8 13.6 14.9
Deferred compensation................. -- -- 0.7
----- ----- -----
Total operating expenses......... 47.0 73.6 72.7
----- ----- -----
Operating income (loss).................. 0.1 (27.0) (41.9)
Interest expense and other income, net... (2.0) (1.8) (0.5)
----- ----- -----
Net loss................................. (1.9)% (28.8)% (42.4)%
===== ===== =====
</TABLE>
25
<PAGE> 28
FISCAL YEARS ENDED MARCH 31, 1998 AND 1999 AND THE NINE-MONTH PERIOD ENDED
DECEMBER 31, 1999
Net Revenues
Net revenues of $15.5 million in fiscal 1998 and $17.3 million in fiscal
1999 were generated from sales of our commercial photonics products. We began
shipping our telecom products in March 1999. Total net revenues for the
nine-month period ended December 31, 1999, were $18.1 million, of which $5.0
million, or 27.6% of total net revenues, were from sales of our telecom
products.
Gross Margins
Gross margin decreased from 47.1% in fiscal 1998 to 46.6% in fiscal 1999.
The absolute dollar amount of manufacturing costs increased by $1.0 million from
fiscal 1998 to fiscal 1999, due primarily to an increase in net revenues. Gross
margin decreased to 30.8% for the nine-month period ended December 31, 1999. The
decrease in gross margin from fiscal 1999 to the nine-month period ended
December 31, 1999, was primarily due to the costs related to the expansion of
our manufacturing facilities for our telecom products. Increases in
manufacturing overhead costs from fiscal 1999 to the nine-month period ended
December 31, 1999, included increases in payroll costs for additional
manufacturing personnel, higher materials costs for manufacturing prototyping,
and higher depreciation costs related to increased investment in plant and
equipment. As we introduce additional new products and expand our manufacturing
capacity to meet anticipated demand, we expect our gross margin to decrease in
the near term.
Research and Development Expenses
Research and development expenses increased from 24.0% of net revenues, or
$3.7 million, in fiscal 1998 to 42.7% of net revenues, or $7.4 million, in
fiscal 1999. This increase was primarily due to the costs related to the
development of our telecom products. Research and development expenses were
40.6% of net revenues, or $7.4 million, for the nine-month period ended December
31, 1999. These expenses were incurred primarily in connection with the
continued development of existing telecom products, as well as for new telecom
products.
Sales and Marketing Expenses
Sales and marketing expenses increased from 14.2% of net revenues, or $2.2
million, in fiscal 1998 to 17.3% of net revenues, or $3.0 million, in fiscal
1999. Sales and marketing expenses were 16.5% of net revenues, or $3.0 million,
for the nine-month period ended December 31, 1999. The expenses in each of these
periods were primarily due to the hiring of additional sales and marketing
personnel and to the expansion of our sales and marketing efforts.
General and Administrative Expenses
General and administrative expenses increased from 8.8% of net revenues, or
$1.4 million, in fiscal 1998 to 13.6% of net revenues, or $2.4 million, in
fiscal 1999. General and administrative expenses increased to 14.9% of net
revenues, or $2.7 million, for the nine-month period ended December 31, 1999.
The increase over these periods was primarily due to increased staffing and
associated expenses necessary to manage and support our increased scale of
operations. In addition, the increase in general and administrative costs for
the nine-month period ended December 31, 1999, was also attributable to hiring
and recruiting expenses for personnel associated with our telecom products.
Amortization of Deferred Compensation
We recorded amortization of deferred compensation of $132,000 during the
nine-month period ended December 31, 1999, leaving an unamortized balance of
$689,000 on our December 31, 1999 consolidated balance sheet. The amortization
expense relates to options awarded to employees in all operating expense
categories.
26
<PAGE> 29
Interest Expense and Other Income, Net
Interest expense and other income, net totalled $303,000 in 1998 and 1999
and $81,000 for the nine-month period ended December 31, 1999. Interest expense
was the largest component of these amounts aggregating to $328,000, $327,000 and
$176,000 for fiscal 1998, 1999 and the nine-month period ended December 31,
1999, respectively. The interest expense for these periods consisted of interest
on debt and capital lease obligations.
Income Taxes
The provision for income taxes of approximately $2,000 for the nine-month
period ended December 31, 1999 and fiscal 1999 consists of current state minimum
taxes. The provision for income taxes of $10,000 for fiscal 1998, reflects
federal alternative minimum taxes and state minimum taxes.
As of December 31, 1999, we had approximately $12 million of federal and
$400,000 of state net operating loss carryforwards for tax purposes and $900,000
and $700,000 of federal and state research and development tax credit
carryforwards available to offset future taxable income. The net operating loss
and tax credit carryforwards will expire at various dates beginning in 2004
through 2019, if not utilized. We have not recognized any benefit from the
future use of loss carryforwards for these periods or for any other periods
since inception.
Financial Accounting Standards Board Statement No. 109 provides for the
recognition of deferred tax assets if realization of such assets is more likely
than not. Based upon the weight of available evidence, which included our
historical operating performance and the reported cumulative net losses in all
prior years, we have provided a full valuation allowance against our net
deferred tax assets.
27
<PAGE> 30
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, certain data
from our consolidated statement of operations and such data as a percentage of
net revenues. The consolidated statement of operations data have been derived
from our unaudited consolidated financial statements. In the opinion of
management, these statements have been prepared on substantially the same basis
as the audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial information for the periods presented. This
information should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1999 1999 1999 1999
-------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.............................. $3,918 $4,251 $ 4,375 $ 4,741 $ 4,581 $ 6,675 $ 6,845
Cost of net revenues...................... 2,097 2,181 2,347 2,600 2,821 4,367 5,337
------ ------ ------- ------- ------- ------- -------
Gross profit............................ 1,821 2,070 2,028 2,141 1,760 2,308 1,508
------ ------ ------- ------- ------- ------- -------
Operating expenses:
Research and development................ 1,233 1,633 2,384 2,129 1,592 2,259 3,501
Sales and marketing..................... 683 732 698 874 926 930 1,126
General and administrative.............. 569 605 550 636 605 940 1,159
Deferred compensation................... -- -- -- -- 9 29 94
------ ------ ------- ------- ------- ------- -------
Total operating expenses.............. 2,485 2,970 3,632 3,639 3,132 4,158 5,880
------ ------ ------- ------- ------- ------- -------
Operating income (loss)................... (664) (900) (1,604) (1,498) (1,372) (1,850) (4,372)
Interest expense and other income, net.... (92) (70) (45) (96) (95) 33 (19)
------ ------ ------- ------- ------- ------- -------
Loss before provision for income taxes.... (756) (970) (1,649) (1,594) (1,467) (1,817) (4,391)
Provision for income taxes................ -- -- -- 2 -- -- 2
------ ------ ------- ------- ------- ------- -------
Net loss.................................. $ (765) $ (970) $(1,649) $(1,596) $(1,467) $(1,817) $(4,393)
====== ====== ======= ======= ======= ======= =======
STATEMENT OF OPERATIONS DATA:
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1999 1999 1999 1999
-------- --------- -------- --------- -------- --------- --------
1998 1998 1998 1999 1999 1999 1999
-------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues.............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of net revenues...................... 53.5 51.3 53.6 54.8 61.6 65.4 78.0
------ ------ ------- ------- ------- ------- -------
Gross profit............................ 46.5 48.7 46.4 45.2 38.4 34.6 22.0
------ ------ ------- ------- ------- ------- -------
Operating expenses:
Research and development................ 31.5 38.4 54.5 44.9 34.8 33.8 51.1
Sales and marketing..................... 17.4 17.2 16.0 18.4 20.2 13.9 16.4
General and administrative.............. 14.5 14.2 12.6 13.4 13.2 14.1 16.9
Deferred compensation................... -- -- -- -- 0.2 0.4 1.4
------ ------ ------- ------- ------- ------- -------
Total operating expenses.............. 63.4 69.8 83.1 76.7 68.4 62.2 85.8
------ ------ ------- ------- ------- ------- -------
Operating income (loss)................... (16.9) (21.1) (36.7) (31.5) (30.0) (27.6) (63.8)
Interest expense and other income, net.... (2.2) (1.7) (1.0) (2.1) (2.0) 0.4 (0.3)
------ ------ ------- ------- ------- ------- -------
Loss before provision for income taxes.... (19.3) (22.8) (37.7) (33.6) (32.2) (27.2) (64.1)
Provision for income taxes................ -- -- -- (0.1) -- -- (0.1)
------ ------ ------- ------- ------- ------- -------
Net loss.................................. (19.3)% (22.8)% (37.7)% (33.7)% (32.0)% (27.2)% (64.2)%
====== ====== ======= ======= ======= ======= =======
</TABLE>
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<PAGE> 31
We believe that quarter-to-quarter comparisons of our operating results
will not be meaningful. You should not rely on our results for any quarter as an
indication of our future performance. Our operating results in future quarters
may be below public market analysts' or investors' expectations, which would
likely cause the price of our common stock to fall. The following discussion
highlights significant events that have impacted our net revenues and financial
results for the seven quarters ended December 31, 1999.
Net revenues increased in each of the previous seven quarters, with the
exception of a decrease in the quarter ended June 30, 1999. In that quarter, we
experienced component supply and integration issues related to new versions of
some of our commercial photonics products, which affected our ability to meet
demand for these products. These issues were addressed in the following quarter
as we refined and improved our manufacturing processes.
Increased demand for our telecom products resulted in significant revenue
increases from these products in our two most recent quarters. Net revenues from
our telecom products were $449,500, or 9.8% of net revenues, for the quarter
ended June 30, 1999, $2.0 million, or 30.3% of net revenues, for the quarter
ended September 30, 1999, and $2.5 million, or 36.9% of net revenues, for the
quarter ended December 31, 1999. We expect quarterly revenues from our telecom
products to continue to increase. Sales of our commercial photonics products
have fluctuated between $3.9 million and $4.7 million over the last seven
quarters.
Gross margins as a percentage of net revenues decreased in each of the
previous seven quarters, with the exception of an increase in the quarter ended
September 30, 1998. There has been a significant decrease in gross margins
during the most recent three quarters, which is due principally to the expansion
of our manufacturing facilities and operations for our telecom products.
Manufacturing overhead spending for telecom products increased during each of
the three quarters from the quarter ended March 31, 1999, to the quarter ended
December 31, 1999, as we added manufacturing employees, expanded production
facilities and invested in additional manufacturing equipment. We expect the
gross margin percentage to continue to decrease in the near term as we continue
to transfer new products from development to manufacturing and expand our
manufacturing capacity.
Research and development expenses increased in each of the previous seven
quarters, with the exception of a decrease in the quarter ended March 31, 1999,
and the quarter ended June 30, 1999. These increases were primarily due to the
addition of personnel, development prototyping costs, depreciation expense
related to increased investment in development equipment, consulting charges and
other costs incurred for the development of our telecom products. We have also
incurred significant expenses related to the expansion of our patent portfolio
for our telecom products. We expect research and development costs to continue
to increase for our telecom products.
Sales and marketing expenses increased in each of the previous seven
quarters, with the exception of a small decrease in the quarter ended December
31, 1998. The increased sales and marketing expenses were primarily due to an
increase in the number of sales and marketing personnel, sales commissions,
marketing expenses and other customer-related costs. We expect sales and
marketing costs to continue to increase in absolute dollars as we build our
sales and marketing organization.
General and administrative expenses increased in each of the previous seven
quarters, with the exception of the quarters ended December 31, 1998, and June
30, 1999. During the quarters ended September 30, 1999, and December 31, 1999,
we experienced a substantial increase in general and administrative costs due to
an increase in the number of personnel and additional costs related to building
an infrastructure for a public company, which includes increased legal,
accounting, recruiting and information systems costs. We expect general and
administrative expenses to continue to increase in absolute dollars.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
sales of convertible preferred stock, bank debt and loans from a shareholder.
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<PAGE> 32
Our cash and cash equivalents increased from $51,000 as of March 31, 1999,
to $28.1 million as of December 31, 1999. The increase was primarily due to cash
generated by financing activities, including the receipt of an aggregate of
$43.7 million from the sales of convertible preferred stock during the nine-
month period ended December 31, 1999, partially offset by cash used in
operations and the purchase of equipment. Net working capital increased by $1.6
million for fiscal 1999 and increased by $28.5 million in the nine-month period
ended December 31, 1999.
Cash used in operating activities was $583,000 in fiscal 1998, $3.9 million
in fiscal 1999 and $5.7 million in the nine-month period ended December 31,
1999. Cash used in operating activities in fiscal 1998 was primarily due to our
net loss of $286,000, increases in inventory balances of $1.5 million, increases
in accounts receivable balances of $1.2 million, partially offset by non-cash
charges of $700,000 and increases in accounts payable of $1.1 million. Cash used
in operating activities in fiscal 1999 was primarily due to our net loss of $5.0
million, decreases in accounts payable of $884,000, partially offset by non-cash
charges of $598,000 and increases in accrued expenses of $697,000. Cash used in
operating activities in the nine-month period ended December 31, 1999, was
primarily due to our net loss of $7.7 million, increases in inventory balances
of $2.6 million and the accounts receivable balance of $1.0 million, partially
offset by non-cash charges of $872,000 and increases in accounts payable of $3.9
million.
Cash used in investing activities was $379,000 in fiscal 1998, $1.4 million
in fiscal 1999 and $5.7 million in the nine-month period ended December 31,
1999. In all three periods cash was used to acquire property and equipment.
Cash generated by financing activities was $908,000 in fiscal 1998, $5.1
million in fiscal 1999 and $39.5 million in the nine-month period ended December
31, 1999. Cash generated by financing activities in fiscal 1998 was primarily
due to net borrowings of $567,000 under our bank lending facilities and proceeds
of $400,000 from promissory notes issued. Cash generated by financing activities
in fiscal 1999 was primarily due to proceeds of $4.2 million from the sale of
convertible preferred stock and net borrowings of $750,000 under an equipment
loan. Cash generated by financing activities in the nine-month period ended
December 31, 1999, was primarily due to proceeds of $43.7 million from the sales
of convertible preferred stock and $1.2 million under our bank lending
facilities, partially offset by $5.3 million of repayments of our bank lending
facilities and promissory notes.
We believe that the net proceeds from this offering, together with our
current cash, cash equivalents and borrowings under our current credit facility,
will be sufficient to meet our anticipated cash needs for working capital and
capital expenditures for the next twelve months. If cash generated from
operations is insufficient to satisfy our long-term liquidity requirements, we
may seek to sell additional equity or debt securities or to obtain additional
credit facilities. If additional funds are raised through the issuance of debt
securities, these securities could have rights, preferences and privileges
senior to holders of common stock, and the terms of any debt facility could
impose restrictions on our operations. The sale of additional equity or debt
securities could result in additional dilution to our stockholders, and
additional financing may not be available in amounts or on terms acceptable to
us, if at all. If we are unable to obtain this additional financing, we may be
required to reduce the scope of our planned product development and marketing
efforts, which could harm our business, financial condition and operating
results.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
We maintain our cash and cash equivalents primarily in money market funds.
We do not have any derivative financial instruments. As of December 31, 1999,
all of our investments mature in less than three months. Accordingly, we do not
believe that our investments have significant exposure to interest rate risk.
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<PAGE> 33
Exchange Rate Sensitivity
We operate primarily in the United States, and all sales to date have been
made in U.S. dollars. Accordingly, we currently have no material exposure to
foreign currency rate fluctuations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (FAS 133). SFAS 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. In June 1999, the Board issued SFAS 137, Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133, which deferred the effective date of SFAS 133 until
fiscal years beginning after June 15, 2000. We will become subject to SFAS No.
133 on January 1, 2001. Because we do not currently hold any derivative
instruments and do not engage in hedging activities, we do not believe that the
adoption of SFAS No. 133 will have a material impact on our financial position
or results of operations.
YEAR 2000 ISSUES
Prior to January 1, 2000, there was a great deal of concern regarding the
ability of computers to adequately recognize 21st century dates from 20th
century dates due to the two-digit date fields used by many systems. Most
reports to date, however, are that computer systems are functioning normally and
the compliance and remediation work accomplished leading up to 2000 was
effective to prevent any problems. Computer experts have warned that there may
still be residual consequences of the change in centuries. For example, programs
may fail to recognize February 29, 2000, as a leap year date as a result of an
exception to the calculation of leap years that will occur in the year 2000 and
otherwise occurs only once every 400 years. This problem could result in
miscalculations, data corruption, system failures or disruptions of operations.
Any such difficulties could result in a decrease in sales of our products, an
increase in allocation of resources to address Year 2000 problems of our
customers without additional revenue commensurate with such dedication of
resources, or an increase in litigation costs relating to losses suffered by our
customers due to such Year 2000 problems.
Because our internal systems utilize third party hardware and software,
residual Year 2000 problems affecting third parties' hardware and software could
cause our internal systems to fail. If residual Year 2000 problems cause the
failure of any of the technology, software or systems necessary to use our
products or operate our business, we could lose customers, suffer significant
disruptions in our business, lose revenues and incur substantial liabilities and
expenses. We could also become involved in costly litigation resulting from Year
2000 problems. This could harm our business, financial condition and results of
operations.
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<PAGE> 34
BUSINESS
OVERVIEW
We design, manufacture and market innovative fiber optic products for
next-generation optical networks under the Smart Optics for Networks brand. We
leverage our ten years of experience in developing advanced photonics tools and
opto-electronic products, to enable networking solutions with increased channel
counts, higher data rates, longer reach lengths and new services, and which
reduce overall network cost of ownership. Our high-performance products are
compact, consume less power and are designed to be manufacturable in high
volumes. Our products include fiber amplifier products, wavelength management
products, high-speed opto-electronics, tunable laser modules and advanced
photonics tools.
INDUSTRY BACKGROUND
Dramatic Increases in the Volume of Data Traffic
The Internet has become an essential communications and transaction medium.
The volume of high-speed data traffic over communications networks continues to
grow dramatically, outpacing that of traditional voice traffic. According to
International Data Corporation, a leading market research company, the number of
Internet users worldwide reached approximately 142 million in 1998 and is
forecasted to grow to approximately 502 million users by the end of 2003.
According to Ryan, Hankin & Kent, or RHK, a leading market research and
consulting firm, Internet and other data traffic is expected to increase 8,100%
between 1999 and 2003. This growth is primarily attributable to the increasing
use of the Internet among consumer and business users, easier and cheaper access
to the Internet and the large and growing number of personal computers in the
home and the workplace. E-commerce in particular is generating enormous data
traffic over communications networks as it becomes a critical strategic element
of many businesses.
Evolution of the Optical Network
The increase in data traffic, coupled with demand for enhanced services and
improved connection times, has increased demand for high capacity, or high
bandwidth, communications networks. Network service providers have had
difficulty in meeting this increased demand due to significant constraints of
the existing communications infrastructure, which was originally designed to
carry only voice traffic. Such constraints have caused network congestion,
decreased reliability and made it difficult for network service providers to
upgrade networks effectively. To alleviate this bottleneck, network service
providers are increasingly deploying next-generation optical networks that
address the demand for high-speed communications.
Optical networks transmit data by pulses of light through an optical fiber.
Light in a glass medium can carry more information over longer distances than
electrical signals over a copper medium. Optical signals are generated through
the use of lasers that produce light at specific colors, or wavelengths. In
addition to lasers, a variety of other fiber optic components are used to
create, combine, isolate, amplify, split, channel and perform various other
functions on these optical signals. Fiber optic components are split into two
broad categories: actives, or opto-electronics, which process both optical and
electrical signals and passives, which process only optical signals. Innovations
at the fiber optic component level have historically enabled a number of major
advances in optical networking systems.
Traditionally, optical signals at only a single wavelength, or channel,
were used to carry information in optical networks. With the invention of
innovative components capable of separating light into different specified
wavelengths for transmission in an optical fiber, network systems vendors began
developing enhanced equipment, including wavelength division multiplexing, or
WDM, systems, which greatly increased network capacity based on these new
components. WDM solutions increase network capacity by transmitting data
simultaneously on a number of different wavelengths along the same optical
fiber. At the destination, these wavelengths are separated and the data
extracted. Therefore, WDM technology increases
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<PAGE> 35
the bandwidth of an optical network proportional to the number of different
wavelengths that are transmitted.
In addition to increasing the number of channels, component innovation has
also resulted in an increase in the amount of data which can be transmitted per
channel, or data rate. Network service providers have been continually upgrading
the data rates of their optical networks, for example, from OC-3, or 155.5
megabits per second, to OC-48, or 2.5 gigabits per second. Service providers
today are beginning to deploy OC-192, or 10 gigabits per second, equipment
throughout their networks and are in the early stages of developing and testing
equipment with OC-768, or 40 gigabits per second, capability, creating a need
for innovative components in optical testing equipment capable of operating at
these high speeds. With increased data rates and number of channels, the amount
of data processed by network equipment has increased dramatically. As the data
rate and bandwidth between network equipment sites has expanded, the data rate
between the equipment within these sites has not kept pace. As a result, there
is increasingly a need for high data rate, or high-speed, connections to link
the equipment within a network service provider's site.
Component innovations have also led to the development of the fiber
amplifier, which resulted in a dramatic increase in the distance over which
optical signals can be transmitted without regeneration, which is the process of
converting the signals from optical to electrical and back to optical to restore
signal quality and strength. Regeneration requires large, expensive equipment,
often in remote locations, which can be costly to deploy, operate and maintain.
Fiber amplifiers restore the signal strength without regeneration and result in
significantly lower equipment, operations and maintenance costs. Prior to the
development of fiber amplifiers, signal attenuation, or loss, limited the
distance over which an optical signal could be transmitted without regeneration,
or reach, to approximately 70 kilometers. With fiber amplifiers, the reach of
optical networks has increased to thousands of kilometers. With improvements in
fiber amplifiers, network equipment manufacturers are continuing to develop
longer reach capability that has led to, among other things, all-optical
networks that operate without any regeneration. These all-optical networks
depend on advanced fiber optic components that enable extremely long reach.
Requirements of Optical Communications Systems
The increasing need for bandwidth has resulted in strong demand for optical
networking systems and a proliferation of new development efforts by traditional
and emerging network equipment providers. These providers are seeking to develop
next-generation optical networking systems, which require:
Increased channel counts. Service providers are demanding optical networks
with higher channel counts to increase bandwidth. However, with current WDM
technology, the number of wavelengths that can be transmitted, or channel count,
is limited. Current WDM technology requires that data be transmitted within a
defined range of wavelengths and with a large space between each channel. These
limitations constrain the channel count and the overall bandwidth. Network
equipment providers can increase the channel count by extending the range of
wavelengths over which data can be transmitted. At the same time, the channel
count can also be increased by reducing the spacing between channels with dense
wavelength division multiplexing, or DWDM. According to RHK, the market for DWDM
optical components is expected to grow at a compound annual growth rate of 51%
from 1999 to 2003. As wavelength range and channel counts increase, service and
network equipment providers will also need to effectively manage the
increasingly complex flow of high speed optical signals in a vast number of
wavelengths.
Higher data rates. Future systems will continue to require higher data
rates to handle the rapid growth in data traffic. Next-generation optical
networks are being developed with data rates of OC-192. As higher speed optical
networking systems are being developed, service and equipment providers will
need test and measurement equipment that is faster than the products being
measured in order to ensure accurate testing of the equipment. In addition to
increasing data rates between network equipment sites, network service providers
are demanding an increase in data rates between network equipment, such as
between routers, switches and DWDM terminals and other equipment, within a site.
As a result, service
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<PAGE> 36
and network equipment providers are demanding a large number of short-reach,
high data rate interconnections.
Longer reach. The varied and unpredictable geographical pattern of Internet
data traffic requires longer reach networks. Regeneration stations are expensive
and are costly to deploy, operate and maintain. As a result, service providers
are demanding optical networks with longer reach between regeneration stations.
Very long reach is ultimately needed for all-optical networks that do not
require regeneration.
Enabling new services. Competition among service providers is driving the
need to provide differentiated services. Similar to the introduction of systems
that increased the bandwidth and reach of current networks, there is a need for
network equipment capable of managing and flexibly delivering this bandwidth at
the fiber optic component level. Traditional methods of managing bandwidth by
converting optical signals to electrical signals for processing are limited to a
specific protocol and data rate. When processing is performed entirely in optics
without the conversion to electronics, the processing is independent of the
protocol and data rate.
Cost-effectiveness. Growth in data traffic and price competition in the
telecommunications market increasingly requires service providers to seek
solutions that reduce their overall network cost of ownership. In addition to
the basic cost of equipment, service providers incur substantial costs in terms
of space required to deploy the equipment, power consumption and on-going
operations and maintenance. In order to continue to grow and upgrade their
networks to meet higher traffic demands in a cost-effective manner, service
providers need compact, low-power consuming equipment.
THE NEW FOCUS OPPORTUNITY
In order to address the growing requirements of communications networks,
there is a demand for the introduction of increasingly sophisticated systems at
a rapid rate. To meet this performance and functionality requirement, equipment
providers must utilize increasingly sophisticated components. The fiber optic
components market, including actives and passives, is one of the fastest growing
portions of the telecommunications market. RHK estimates that the market for
fiber optic components was approximately $6.6 billion in 1999 and is expected to
grow to over $22.5 billion by 2003. As a result of the rapid pace of new product
introductions and the difficulty of designing and producing the requisite
components, equipment providers are increasingly turning to suppliers of fiber
optic products. These suppliers must offer high performance products that are
compact, consume less power and are designed to be manufacturable in high
volumes. These new innovative fiber optic products enable systems companies to
offer solutions with increased channel counts, higher data rates, longer reach
lengths and new services, and which reduce overall network cost of ownership.
THE NEW FOCUS SOLUTION
We design, manufacture and market innovative fiber optic products for
next-generation optical networks under the Smart Optics for Networks brand. We
enable networking solutions with increased channel counts, higher data rates,
longer reach lengths and new services, and which reduce overall network cost of
ownership. Our high-performance products are compact, consume less power and are
designed to be manufacturable in high volumes. We believe our Smart Optics for
Networks products provide our customers the following key benefits:
Increased channel counts. Our wavelength management products and fiber
amplifier products enable systems with extended fiber bandwidth, thereby
increasing the efficiency of optical networks by transmitting a greater number
of wavelengths in a single optical fiber. Our wavelength management products
also enable network DWDM systems to accurately, efficiently and reliably manage
the vast number of optical signals by separating these signals into different
paths that can be processed individually. Our interleavers are designed to
effectively double the capacity of DWDM systems by doubling the number of
channels operating on a single fiber. Our WDM couplers are used to split optical
signals on a single fiber into two different wavelengths on two fibers, enabling
them to be processed on an individual basis. Our optical circulators are used
for directing optical signals into the appropriate sections of a fiber
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<PAGE> 37
amplifier and offer wide wavelength operation to accommodate many optical
channels. These circulators enable advanced next-generation fiber amplifiers
that amplify signals at multiple wavelength bands and signals travelling in both
directions along a fiber.
Higher data rates. Our high-speed opto-electronics enable our customers to
solve the bandwidth bottleneck between equipment within a network service
provider's site. To address this problem we offer our 10 gigabits per second, or
Gbps, transceivers which are designed to be low cost, small sized and low-power
consuming solutions. Our advanced photonics tools enable network service and
equipment providers to develop and test their next-generation offerings,
including OC-768 products.
Longer reach. Our fiber amplifier products enable the transmission of
information at very high speeds over extended distances. We reduce the expense
associated with amplification and regeneration equipment by extending the
distances over which an optical signal can be transmitted. We offer products
with wide wavelength range and low loss that enable the high power amplification
needed to drive optical signals for very long distances often associated with
next-generation all-optical networks.
Enabling new services. Our products enable network equipment manufacturers
and service providers to offer products capable of managing and flexibly
delivering bandwidth at the fiber optic component level. Our optical circulators
enable equipment capable of delivering or dynamically adding and dropping a
single wavelength at any point in the network. Our tunable lasers are being
developed to enable flexible networks that can be reconfigured to address
changing data traffic patterns.
Cost-effectiveness. Our products enable network solutions with reduced
overall network cost of ownership. Our products are designed with compact form
factor and low power consumption to reduce system space and power requirements.
We design our products for high volume manufacturing and offer several different
products utilizing the same or similar fiber optic packaging, thereby decreasing
cost. Our fiber amplifier products increase the reach and number of channels
within a DWDM network, reducing the expense of signal amplification and
regeneration.
THE NEW FOCUS STRATEGY
Our objective is to be the leading provider of innovative, fiber optic
products that enable our customers to deploy and optimize next-generation
optical networks. Key elements of our strategy include:
Leverage our position as a leading market innovator. We believe that we
have a unique combination of component design and systems architecture
knowledge, an extensive intellectual property portfolio, as well as strong
management experience in the optical networking industry. Since our founding in
1990, we have focused exclusively on developing optical products and have formed
close relationships with leading research and development organizations in
addition to optical networking companies. We intend to leverage our reputation
in the industry to obtain new customers, partners and employees.
Focus our research and development efforts on continuing to broaden our
product offerings. We believe that the breadth and depth of our product line,
including both actives and passives, differentiates us from many of our
competitors. We will continue to expand the breadth of our product line by
developing and offering best-in-class Smart Optics for Networks products. We
believe we can accomplish this goal by continuing to aggressively invest in
product development and leverage our existing technological capabilities,
including the intellectual property and optical expertise gained through the
development of our position as a leading innovator of advanced photonics tools.
For example, we are presently leveraging our expertise in tunable lasers for
test and measurement to develop advanced tunable transmitters as solutions to
replace existing fixed wavelength lasers.
Collaborate with leading innovative systems companies. We believe that we
are integral to the development efforts of our customers, which provides us with
unique insight into the requirements of next-generation optical networks.
Regular contact with key decision-makers in both service and equipment
providers' organizations provides us with great opportunities to collaborate
with these companies to provide the required products, solve implementation
problems and aid in the design of future systems architecture. In addition, our
ability to design and offer our customers innovative fiber optic products for
their system
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<PAGE> 38
solutions gives us a strategic advantage over our competitors with respect to
system design wins. We intend to continue to target our development efforts to
both the current systems manufacturers as well as emerging optical systems
companies, whose innovative designs we believe, will drive the next-generation
optical network.
Continue to expand manufacturing capacity and improve process
efficiency. We intend to continue to expand our manufacturing capacity and
improve process efficiency. We expect to commence operations in our Shenzhen,
China facility in 2000 and will continue to expand our capacity within our
current facilities. We will also look for additional sites for future expansion.
We will continue to invest in improving our processing efficiencies through the
use of automation, proprietary tools and processes.
Pursue strategic acquisitions. We believe that we have a strong reputation
for technical innovation combined with a willingness to collaborate with the
leading technologists in the optical, or photonics, industry. We are regularly
approached by photonic technologists looking to commercialize their intellectual
property. We have integrated the intellectual property from several of these
technologists into our existing business, resulting in several new product
introductions. We intend to continue to leverage our reputation to aggressively
pursue strategic acquisitions that can provide us with key intellectual
property, strategic products and highly-qualified engineering personnel to
rapidly increase our technological expertise and expand the breadth of our
product portfolio.
PRODUCTS
Our Smart Optics for Networks products enable systems providers to meet the
dynamic demands of next-generation optical networks. Our product offerings
include fiber amplifier products, wavelength management products, high-speed
opto-electronics, tunable laser modules and advanced photonics tools. We
categorize our products by stage of development, such as shipping to customers,
beta testing, which refers to products in advanced customer testing, and alpha
testing, which refers to products in the early stages of customer and industry
testing.
FIBER AMPLIFIER PRODUCTS
Fiber amplifiers are widely deployed in DWDM and other networks to amplify
optical signals at periodic intervals along a fiber optic link. Our fiber
amplifier products enable systems with increased channel counts and longer reach
lengths at a lower overall network cost of ownership.
<TABLE>
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
PRODUCTS COMPETITIVE FEATURES BENEFITS STAGE
- ----------------------------------------------------------------------------------------------
Optical Circulators - Wide wavelength range - Increased channel Shipping
(C-Band) - Low loss counts
- Longer reach
- ----------------------------------------------------------------------------------------------
Optical Circulators - Wide wavelength range - Increased channel Beta testing
(L-Band) - Low loss counts
- Longer reach
- ----------------------------------------------------------------------------------------------
Polarization Beam - Low loss - Longer reach Shipping
Combiners - Efficient polarization - Cost-effectiveness
control
- Compact
- ----------------------------------------------------------------------------------------------
Isolator Arrays - Low loss - Longer reach Beta testing
- Reduced part count, - Cost-effectiveness
lower cost per port
- ----------------------------------------------------------------------------------------------
</TABLE>
- Optical circulators. Optical circulators are used for directing optical
signals into the appropriate sections of a fiber amplifier. Current
optical circulators are inadequate for the next generation of fiber
amplifiers because of their limited wavelength range and relatively high
losses. Our optical circulators have fewer parts than available
alternatives, resulting in wide wavelength operation and very low losses
to accommodate many optical channels. The wide wavelength range enables
next-
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<PAGE> 39
generation fiber amplifiers to amplify signals at multiple wavelength
bands and signals travelling in both directions along a fiber. Our
optical circulators operate in the two standard wavelength bands, the
C-Band and the L-Band.
- Polarization beam combiners. Polarization beam combiners are used to
combine the optical power from two pump lasers operating at the same
wavelength into a single fiber, thereby effectively doubling the amount
of power in the fiber amplifier. Additional pump power is essential to
support the increased number of channels in the next-generation DWDM
systems. However, current solutions are bulky and do not efficiently
combine optical power of the same wavelength in order to increase pump
power. Our polarization beam combiners are compact components which
efficiently combine the optical power of the same wavelength with minimal
loss, thereby enabling efficient pumping of these high power amplifiers.
- Isolator arrays. As the functionality and performance of fiber amplifiers
increase, the number of components within each amplifier increases
greatly and the size of each component becomes a significant factor. Our
two-in-one isolator arrays offer very low loss and the same functionality
as traditional isolators in half of the space, thus providing significant
cost and space savings.
WAVELENGTH MANAGEMENT PRODUCTS
As the number of channels in DWDM systems increases, advances in products
to manage optical signals on different wavelengths are increasingly critical.
Our wavelength management products enable DWDM systems to accurately,
efficiently and reliably manage the vast number of optical signals.
<TABLE>
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
PRODUCTS COMPETITIVE FEATURES BENEFITS STAGE
- ----------------------------------------------------------------------------------------------
DWDM Interleavers - Dense channel spacing - Increased channel Alpha testing
- Compact counts
- Requires no active - Cost-effectiveness
cooling
- ----------------------------------------------------------------------------------------------
WDM Couplers - Low loss - Longer reach Beta testing
- Cost-effective - Cost-effectiveness
all-fiber product - Enables new services
- ----------------------------------------------------------------------------------------------
Optical Circulators - Wide wavelength range - Increased channel Shipping and
- Low loss counts Beta testing
- Enables new services
- ----------------------------------------------------------------------------------------------
</TABLE>
- DWDM interleavers. DWDM interleavers effectively double the capacity of
DWDM systems by doubling the number of channels transmitted on a single
fiber. DWDM interleavers accomplish this by combining signals from two
fibers onto a single fiber in the same wavelength range, thus,
effectively doubling the capacity of that fiber. Current interleavers are
bulky, expensive and require active cooling, or separately powered
temperature control, which significantly increases system complexity. Our
DWDM interleaver design does not require active cooling and is
considerably smaller and less expensive than current solutions.
- WDM couplers. WDM couplers are used to split optical signals on a single
fiber into two different wavelength ranges on two fibers so that they can
be processed separately. Our WDM couplers have low loss and are designed
for robust operation under difficult environmental conditions, such as
vibration, mechanical shock or humidity, over a long period of time.
- Optical circulators. Our optical circulators, as described above, are
also used in wavelength management applications to direct optical signals
to the appropriate sections of the system. These circulators enable new
services such as adding or dropping individual channels at defined points
in the network.
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HIGH-SPEED OPTO-ELECTRONICS
Our high-speed, high data rate opto-electronic products are focused on
compact, low power consuming, low cost solutions for short-range
interconnections at 10 Gbps and above.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
PRODUCTS COMPETITIVE FEATURES BENEFITS STAGE
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
10 Gbps VCSEL-based - Compact - Cost-effectiveness Alpha
transceivers - Low power consumption - Higher data rates testing
- Requires no active
cooling
- ----------------------------------------------------------------------------------------------
</TABLE>
- 10 Gbps Vertical Cavity Surface Emitting Lasers, or VCSEL-based
transceivers. Transceivers convert optical signals to electronic signals
and vice versa and are an essential component of optical networks.
Current solutions for service providers are expensive, large and power
consuming transmitters and receivers. In contrast, our 10 Gbps
transceivers are designed around VCSEL technology, which does not require
external modulation or active cooling and is low cost to manufacture. In
addition, our transceivers are designed to consume little power and to be
compact, making them an attractive solution for short-range, high data
rate interconnections.
TUNABLE LASER MODULES
Our high performance tunable laser modules are used for testing and
measuring fiber optic components and systems in manufacturing, development and
research environments. We are also developing a tunable laser module for
replacement of conventional fixed wavelength lasers in telecommunications
networks.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
PRODUCTS COMPETITIVE FEATURES BENEFITS STAGE
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
Swept-wavelength lasers - Rapid, precise - Reduced development Shipping
wavelength scanning and manufacturing time
- ----------------------------------------------------------------------------------------------
Test and measurement - Wide wavelength range - Enables development of Shipping
lasers systems with increased
channel counts systems
- ----------------------------------------------------------------------------------------------
Tunable transmitters - High output power - Cost-effectiveness Alpha testing
- Wide wavelength range - Enables new services
- ----------------------------------------------------------------------------------------------
</TABLE>
- Swept-wavelength lasers. Our swept-wavelength lasers provide rapid
wavelength scanning for precise measurement of network components and
systems, reducing development time for new products and reducing
manufacturing bottlenecks.
- Test and measurement tunable lasers. Our high precision tunable lasers
are used for test and measurement in the manufacturing and development of
optical network products. Our test and measurement tunable laser modules
operate across a wide tuning range for thorough testing and provide high
output power for improved accuracy. These laser modules are designed and
tested to withstand harsh environmental conditions without degradation of
performance.
- Tunable transmitters. As DWDM systems rapidly grow in channel count, the
number of wavelength-specific parts has grown proportionally. Current
fixed wavelength laser solutions result in deployment, inventory and
maintenance problems for network service and equipment providers. We are
presently developing advanced tunable transmitters as solutions to
replace existing fixed wavelength lasers. Our tunable transmitters are
designed for high output power over a very wide wavelength range to meet
the requirements of existing transmitters while providing a high degree
of flexibility. These tunable transmitters are designed to enable
reconfigurable, flexible networks.
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<PAGE> 41
ADVANCED PHOTONICS TOOLS
We offer a wide range of photonics tools for advanced research, development
and manufacturing. These products leverage our core competencies in optics for a
number of applications including telecommunications research and product
development. For example, our precision opto-mechanics and picomotor products
are used for advanced manufacturing of fiber optic components and for research
and development of high-speed network products. As another example,
photodetectors that are faster than the products being measured are needed to
accurately characterize the optical performance of the tested device, and our
high-speed photodetectors are being used to develop OC-768 products.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
PRODUCTS COMPETITIVE FEATURES BENEFITS STAGE
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
Precision - Precise positioning - Enables automated Shipping
opto-mechanics fiber optic
manufacturing
- ----------------------------------------------------------------------------------------------
Picomotors - Precise positioning - Enables development of Shipping
next-generation
products
- ----------------------------------------------------------------------------------------------
Photodetectors - High speeds - Enables development of Shipping
high data rate
products
- ----------------------------------------------------------------------------------------------
</TABLE>
TECHNOLOGY
Our technical capabilities span several key areas that we believe will
result in rapid development and deployment of our Smart Optics for Networks
products.
Wideband passives technology. As more channels are needed in DWDM networks
to handle more data traffic, the fiber optic elements within the network need to
accommodate more wavelengths and hence more channels. Our wideband passives
technology enables us to develop advanced fiber amplifier and WDM products that
have a wide wavelength operating range with low cost by design. Our wideband
passives technology is based on a patent pending design that eliminates
unnecessary parts that are wavelength sensitive, thereby resulting in wide
wavelength operation for high channel count. Our wideband passives technology is
used in our rapidly growing optical circulator products.
Wavelength management technology. The growing number of wavelengths or
channels in DWDM systems has caused these systems to become increasingly complex
and difficult to handle. Our wavelength management technology enables efficient
management of numerous signals by separating them into different paths that can
be treated individually. This technology includes capabilities in advanced
micro-optic design for products with novel crystals, geometries and
functionality, and in fused-fiber design, development and manufacturing for
all-fiber based products. Our wavelength management technology is used in our
wavelength management products.
Advanced fiber optic packaging. Our advanced fiber optic packaging
technology enables us to develop components with compact size, high reliability
and improved temperature sensitivity. This technology also enables a common
platform across many products, resulting in economies of scale and significantly
reducing design, development and test time. Our packaging meets Telcordia, or
Bellcore, industry standards for reliability and is qualified by many key
network equipment providers. This technology is based on our design capabilities
in micro-optic and fused-fiber packaging and our advanced testing facilities and
expertise. Our advanced fiber optic packaging technology is used in our fiber
amplifier and wavelength management products.
Tunable laser technology. Traditional laser transmitters operate at only a
single wavelength, corresponding to a single channel. Our tunable laser
technology allows us to create transmitters that have a tunable, or adjustable,
wavelength so that each laser can operate on any number of the required
channels. Our capabilities and intellectual property in this area include
advanced laser design, development and manufacturing, advanced laser packaging
for high robustness and reliability, dynamic filter technology to adjust the
laser wavelength to any desired channel, and integrated wavelength locking
technology that
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<PAGE> 42
results in minimal error in the laser wavelength from the desired channel. These
capabilities have resulted in tunable laser products with high output power and
wide wavelength coverage.
High-speed opto-electronics technology. Our high-speed opto-electronics
capabilities include analog chip design, photo detector design and advanced
manufacturing, packaging and assembly. This capability has resulted in our 60
gigahertz photodetector product and electronic amplifier products at speeds
greater than 15 gigahertz, while allowing us to develop transmitters, modulators
and receivers that operate at data rates of OC-192 or OC-768.
Advanced thin films. Specialized precision thin film coatings result in
extremely low optical reflections and are a critical part of many optical
devices. When applied to our tunable lasers, the low reflections result in high
optical power output and wide wavelength tunability, or range, of over 50
nanometers. Our advanced thin film capability includes advanced thin film
design, ion assisted deposition processes, equipment and facilities for
depositing the specialized coatings and thin film monitoring capability for
precision control of the thin film properties. This capability has resulted in
high performance active devices such as our tunable lasers modules.
CUSTOMERS
We sell our fiber optic products to network equipment providers and our
advanced photonics tools to suppliers of components, systems and
services-related products in the optical networking industry. We have sold our
products to over 50 customers, and no single customer accounted for more than
10% of our revenues for the nine-month period ended December 31, 1999.
The following is a list of our top customers based on our net revenues in
each of our two product groups during the nine-month period ended December 31,
1999:
TELECOM PRODUCTS:
Agilent Technologies
Alcatel USA
Avanex Corporation
Corning Incorporated
Corvis Corporation
JDS Uniphase Corporation
Lucent Technologies
Nortel Networks Corporation
Optical Products
Pirelli (recently acquired by Cisco Systems)
Qtera Corporation (a wholly owned subsidiary of Nortel Networks)
3M Company
COMMERCIAL PHOTONICS PRODUCTS:
BFI Optilas
Corning Incorporated
ERIM International
GSI Lumonics
INDECO
Jet Propulsion Laboratory
KLA-Tencor Corporation
Molecular Dynamics
Optima Research
Positive Light
Sandia National Laboratories
Schlumberger Technology Corporation
AGILENT TECHNOLOGIES
Agilent Technologies is a global, diversified technology company focusing
on high-growth markets in the communications, electronics, life sciences and
healthcare industries. In 1996, Agilent found that they required a low-cost
tunable laser for testing long-range optical equipment. In that year, we began
collaborating with Agilent for the development of a low-cost tunable laser
product. From 1996 to 1999, we developed a low-cost tunable laser according to
Agilent's needs. In addition to funding a portion of this project, Agilent
agreed to begin commercial purchase of our low-cost tunable laser product. We
delivered the first product, a tunable laser module along with the associated
control electronics, in the second half of 1999. To date, we have experienced a
great deal of success with our tunable laser modules as well as with the
development of advanced tunable laser products. By incorporating our products,
Agilent has been able
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<PAGE> 43
to offer a broader line of tunable lasers for their customers at more
competitive prices than previous solutions.
ALCATEL
Alcatel is a premier provider of optical networking equipment for the
telecommunications industry. In order to meet the need for next-generation
systems, Alcatel's systems require a number of optical circulators. In 1998, we
first developed the intellectual property for design and production of a
circulator that allows wider wavelength range, lower loss, and more compact size
than previously available products. In early 1999, Alcatel took delivery of a
beta test version of this product, concluding a number of very successful tests.
Alcatel presently deploys our circulator products to enhance the performance of
their systems.
AVANEX
Avanex is a provider of photonics processors for optical networks. Avanex
requires highly reliable tunable lasers to use as an integral part of their
manufacturing process. Our products address these needs in two areas. First, we
supply the tunable test lasers that are incorporated into Avanex's standard
production line. Our tunable test lasers have allowed Avanex to decrease the
calibration time required at each station. Second, our swept wavelength lasers
are being incorporated into production lines for Avanex's next-generation high
performance devices. Our technology allows faster optimization for the device in
production.
CORNING
Corning is a premier provider of optical fiber, cable and photonic products
for the telecommunications industry. In order to meet the need for higher power
amplifiers driven by increasing channel counts in WDM networks, Corning
developed a complex, high-end fiber amplifier product that required a number of
circulators. In 1998, we first developed the intellectual property for design
and production of a circulator that allows higher channel counts than previously
available products. In early 1999, Corning took delivery of a beta test version
of this product concluding a number of successful tests. Corning presently
deploys our circulator products to enhance the performance of their fiber
amplifier products and to allow for more complex fiber amplifier architectures
demanded by Corning's customers.
QTERA
Qtera Corporation (a wholly owned subsidiary of Nortel Networks) is a
provider of extremely long reach, high power network solutions. In developing
these solutions, Qtera had a need for a packaging solution for one of the key
components used in their system. This package was required to pass rigid
Telcordia testing. We used our existing intellectual property and developed new
intellectual property that solves the packaging problem and addresses Qtera's
needs. We consider this technology to be a core competency. In addition to
enhancing Qtera's product offerings, we have leveraged this technology to supply
solutions to other systems vendors. Qtera's deployment of this technology will
provide carriers with increased power and signal transmission distance, reducing
the number of regeneration points in a network.
SALES, MARKETING AND CUSTOMER SUPPORT
We sell and market our fiber optic products primarily through direct sales.
We sell and market our photonics tools primarily through a combination of direct
sales, catalog sales and distributors. We focus our direct sales efforts on
service providers and optical network equipment manufacturers. Our direct sales
account managers cover the market on an assigned account basis. We believe that
support services are essential to the successful installation and ongoing
support of our products. 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.
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<PAGE> 44
MANUFACTURING
We manufacture the majority of our products internally. We do, however,
outsource, on a limited basis, manufacturing of selected subcomponents,
primarily for our commercial photonics products. Our manufacturing operations
are presently centered at our facility in Santa Clara, California. We are
currently establishing a facility in Shenzhen, China. In Middleton, Wisconsin,
we intend to install a pilot production facility, which we anticipate occupying
in the near term. We are also expanding our operations in California to a second
facility in San Jose.
We are committed to designing and manufacturing high quality products that
have been thoroughly tested for reliability and performance. Our manufacturing
processes utilize stringent quality controls, including incoming material
inspection, in-process testing and final test. We perform extensive in-house
thermal, shock and environmental testing, including testing to industry accepted
Telcordia standards. Our commitment to manufacturing high quality products is
evidenced by our being recommended for ISO-9001 quality certification.
We will also continue to leverage our competencies in rapid prototyping,
automation and proprietary tools and processes to improve our manufacturing
abilities.
Rapid prototyping. As advances in optical network technologies accelerate,
the time required to introduce new products into the market needs to be
minimized. Our capabilities include precision machining and advanced tooling
design for quick turn implementation of new designs into product prototypes.
These capabilities result in reduced development times for new products and
support yields and capacity improvement efforts within manufacturing.
Automation and proprietary tools and processes. Traditional manufacturing
processes for fiber optic components and modules are highly manual, yet require
high precision and high yields. Our proprietary tools and processes include
automated precision processes, technology and equipment that result in increased
capacity and yields. For example, our robotics technology has pick-and-place
capability at the one micro-meter level, the precision required in the assembly
of our products. We have developed intellectual property in this area and have
applied it to products that are presently in production as well as those that
are in development.
RESEARCH AND DEVELOPMENT
We have assembled a team of engineers, technicians and operators with
significant experience in the optical networking industry, highly specialized
manufacturing industries such as semiconductor capital equipment and optical
storage, and the communications industry. Our team has expertise in optics,
fiber optic package design, opto-electronics and systems architecture. Our
product development efforts focus on high-speed opto-electronics, innovative
fiber optic products and advanced automation techniques, which will enable us to
offer next-generation products in volume.
We have made, and will continue to make, a substantial investment in
research and development. Our research and development expenses totaled $6.2
million for our fiscal year ended March 31, 1998, $9.1 million for our fiscal
year ended March 31, 1999, and $8.4 million for the nine-month period ended
December 31, 1999.
COMPETITION
Competition in the optical networking market in which we provide products
is intense. We face competition from companies, such as E-Tek Dynamics, JDS
Uniphase Corporation, Lucent Technologies and Nortel Networks Corporation.
Many of 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 than we can to the development, promotion, sale and support of
their products. In addition, our competitors have large market capitalizations
or cash reserves and are much better positioned
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<PAGE> 45
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, more extensive customer bases, better developed distribution
channels, broader product offerings and greater manufacturing capacity than we
have. These companies can leverage their customer bases and broader product
offerings and adopt aggressive pricing policies to gain market share. Additional
competitors may enter the market and we are likely to compete with new companies
in the future. We expect to encounter potential customers that, due to existing
relationships with our competitors, are committed to the products offered by
these competitors.
The principal factors upon which we compete are:
- the innovative nature and features of fiber optic component products;
- ability to rapidly develop and introduce new products;
- responsive customer service and support; and
- price.
We believe we compete favorably on each of these factors.
INTELLECTUAL PROPERTY
Our success and ability to compete depend substantially upon our
technology. We pursue patent protection in the United States and abroad, and we
have been granted 25 U.S. patents and one European patent. We currently have 30
U.S. utility filings, of which four have been allowed by the U.S. Patent and
Trademark Office, 10 U.S. provisional filings and nine overseas filings in
various stages of prosecution, and we continue to file new patent applications
in the United States and overseas.
While we rely on patent, copyright, trade secret and trademark law to
protect our technology, we also believe that factors such as our existing
contracts with equipment manufacturers, our licensing agreements with companies
and universities, 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 technologies.
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
each of the market segments in which we participate. We expect that the optical
networking industry may be increasingly subject to third-party infringement
claims as the number of competitors grows and the functionality of products in
different industry segments overlaps. In addition, we believe that many of our
competitors have filed or intend to file patent applications covering aspects of
their technology on which they may claim our technology infringes. We are
currently defending a claim brought against us by Kaifa Technology, Inc., which
was recently acquired by E-Tek Dynamics, Inc., alleging, among other things,
that we have infringed some of their intellectual property rights. We cannot
make any assurances that additional third parties in the future will not claim
infringement by us with respect to our products and our associated technology.
The Kaifa claim and other such claims in the future, 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
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against us and failure or inability by us to license the infringed or similar
technology could 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
At January 31, 2000, we had a total of 390 employees located in both the
United States and the People's Republic of China. Of the total, 71 were in
research and development, 27 were engaged in sales and marketing, 292 were in
administration, finance and operations. None of our employees are subject to a
collective bargaining agreement and we believe that our relations with our
employees are good.
FACILITIES
Our corporate headquarters facility, of approximately 55,000 square feet,
is located in Santa Clara, California. We lease our corporate headquarters
facility pursuant to a lease agreement that expires in April 2005.
We also have facilities in Wisconsin. We lease approximately 2,000 square
feet of space in Madison, Wisconsin under a lease agreement that expires
December 2000. We are also leasing approximately 2,500 square feet in Middleton,
Wisconsin, pursuant to a lease agreement that expires November 2000 or, upon our
occupation of a 14,000 square foot facility, pursuant to a new lease agreement
that expires in 2007.
Our manufacturing facility in Shenzhen, China is located in a premise on
land leased from China's government by a third party under land use certificates
and agreements with terms of 50 years. We lease our manufacturing facility from
this third party under a lease agreement that will expire in November 2002,
subject to our option to renew for an additional three-year period. The size of
our facility in Shenzhen, China is approximately 20,000 square feet.
Effective trademark, tradename or servicemark protection may not be
available in every country in which our products and services are distributed or
made available.
LEGAL PROCEEDINGS
On December 8, 1999, Kaifa Technology, Inc., or Kaifa, recently acquired by
E-Tek Dynamics, Inc., filed a complaint against us for patent infringement in
the United States District Court, Northern District of California. In addition
to maintaining its original claim of patent infringement against us, Kaifa has
asserted claims against us of intentional and negligent interference with
contract, trade secret misappropriation, unfair competition and breach of
contract. Kaifa is seeking a declaratory judgment, damages, injunctive relief
and attorneys' fees. Discovery has not begun and we intend to defend the action
vigorously. On February 23, 2000, we filed a motion to dismiss Kaifa's complaint
and joined one of our employees named in the complaint in filing another motion
to dismiss Kaifa's complaint. On the same date, certain of our employees named
in the complaint also filed a motion to dismiss Kaifa's complaint. These motions
are scheduled to be heard on March 31, 2000. If we are unsuccessful in defending
this action, any remedies awarded to Kaifa may harm our business. Furthermore,
defending this action will be costly and divert management's attention
regardless of whether we successfully defend the action.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to our
executive officers and directors as of March 1, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Kenneth E. Westrick.................. 42 President and Chief Executive Officer, Director
William L. Potts, Jr................. 53 Chief Financial Officer
Dr. Timothy Day...................... 36 Chief Technical Officer and Vice President, Engineering,
Telecom
Paul G. Smith........................ 41 Vice President, General Manager, Telecom
Dr. Bao-Tong Ma...................... 50 Vice President, General Manager, New Focus Pacific Co.
Dr. Robert A. Marsland............... 35 Vice President, Focused Research, Inc.
George Yule.......................... 61 Vice President, Operations
Dr. Milton Chang(2).................. 57 Chairman of the Board of Directors
Charles Boppell...................... 57 Director
John Dexheimer....................... 45 Director
Dr. Winston S. Fu(1)................. 34 Director
R. Clark Harris(1)................... 62 Director
Robert D. Pavey(2)................... 57 Director
</TABLE>
- -------------------------
(1) Member of the audit committee.
(2) Member of the compensation committee.
Kenneth E. Westrick has served as our President, Chief Executive Officer
and director since November 1997. Prior to joining us, Mr. Westrick spent nine
years at Cornerstone Imaging, Inc. where he held positions such as Senior Vice
President, General Manager Display Division and Managing Director Europe. Mr.
Westrick has nearly 20 years experience managing different aspects of technology
start-up companies, generally in the computer industry. Mr. Westrick holds a
B.S. in economics from Northwestern University and an M.B.A. from Stanford
University.
William L. Potts, Jr. has served as our Chief Financial Officer since
February 2000. Prior to joining us, Mr. Potts worked at Komag, Incorporated from
July 1987 to February 2000. For ten years he served as Komag's chief financial
officer and most recently held the position of Executive Vice President, Chief
Financial Officer and Secretary. Prior to joining Komag in 1987, Mr. Potts held
financial management positions in the computer, medical and entertainment
industries. Early in his career he served on the consulting staff of Arthur
Andersen & Co. Mr. Potts holds a B.S. in industrial engineering from Lehigh
University and an M.B.A. from Stanford University.
Dr. Timothy Day is one of our co-founders and has served as our Chief
Technical Officer since July 1990 and as our acting Vice President of
Engineering, Telecom since November 1998. Since our founding, Dr. Day has served
us in various other positions, including acting General Manager, acting Vice
President, Operations and as the former Vice President, Focused Research. Dr.
Day received both a B.S. and an M.S. in physics from San Diego State University
and a Ph.D. in electrical engineering from Stanford University. Dr. Day is a
member of IEEE Lasers and Electro-Optics Society, Optical Society of America and
the Society of Photo-Instrumentation Engineers.
Paul G. Smith joined us in May 1998 as Vice President, General Manager,
Telecom. From April 1997 to May 1998, Mr. Smith was Senior Vice President of
Marketing and Sales and from May 1995 to April 1997 he was Vice President of
Marketing at Asante Technologies, Inc. From May 1994 to May 1995, Mr. Smith was
CEO of Holosoft, Inc. Mr. Smith received a B.S. in engineering from the
University of Alabama and a M.S.E.E. from Purdue University.
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Dr. Bao-Tong Ma joined us in November 1999 as Vice President, General
Manager, New Focus Pacific Co. From November 1990 to November 1999, Dr. Ma was
employed by IBM's Microelectronics Division. From 1993 to 1999, Dr. Ma was
involved in setting up and running an IBM subsidiary in China, holding various
positions, including Vice General Manager and Deputy General Manager. Dr. Ma
holds a B.S. in metallurgy from Shanghai Metallurgy Institute and a Ph.D. in
materials science from University of Pennsylvania.
Dr. Robert A. Marsland is one of our co-founders and has served as our Vice
President, Focused Research, since July 1997. From July 1994 to July 1997, Dr.
Marsland was employed as a Senior Scientist at Focused Research, Inc. Dr.
Marsland received his B.S. in electrical engineering from Arizona State
University and studied at Stanford University on an Office of Naval Research
fellowship. Dr. Marsland received a Ph.D. in engineering from Stanford. Dr.
Marsland is a member of IEEE Microwave Theory and Techniques Society, the Lasers
and Electro-optics Society and the Optical Society of America.
George Yule joined us in January 1998 as our Vice President, Operations.
From October 1997 to January 1998, he served as Vice President and General
Manager of the Display Division of Cornerstone Imaging, Inc. and from February
1993 to October 1997 as its Vice President, Operations. Mr. Yule received a B.S.
in electronic engineering from Worcester Polytechnic Institute and an M.B.A.
from Stanford University.
Dr. Milton Chang is one of our co-founders and has served as one of our
directors since our inception in April 1990. Dr. Chang has also served as the
chairman of our board of directors since May 1996. From 1990 to 1997, Dr. Chang
served as our President and Chief Executive Officer and continues to perform
research and marketing activities for us. From 1996 to 1998, Dr. Chang served on
the Visiting Committee for Advanced Technology of the National Institute of
Standards and Technology. He has also served in various positions at Newport
Corporation, including as its President and Chief Executive Officer. Currently,
Mr. Chang is a member of the board of directors for Euphonix, Inc., IRIDEX
Corporation and Gadzoox Networks, Inc., as well as on the board of several
private companies. Dr. Chang holds a B.S. in electrical engineering from the
University of Illinois and a M.S. and Ph.D. both in electrical engineering from
the California Institute of Technology.
Charles Boppell has served as one of our directors since April 1990. Since
March 1999, Mr. Boppell has served as the President, Chief Executive Officer and
Director of Sizzler International, Inc., a restaurant operator and franchiser
corporation. From November 1993 to March 1999, Mr. Boppell served as the
President and Chief Executive Officer of La Salsa Holding Co., an operator of
restaurants throughout the United States. He serves on the boards of directors
of Sizzler International, Inc. and Fresh Choice Restaurants, Inc., as well as
chairman of the board of his alma mater, Whitworth College. Mr. Boppell holds a
B.A. in business and economics from Whitworth College.
John Dexheimer has served as one of our directors since July 1998. Since
January 1999, he has served as President of LightWave Advisors, Inc., a venture
capital and business development advisor to firms in optical communications,
software and Internet companies. From March 1990 through December 1998, Mr.
Dexheimer was a managing director and partner at C.E. Unterberg Towbin, an
investment banking and venture capital firm, and its predecessor, Unterberg
Harris. Mr. Dexheimer holds a B.S. from the University of Minnesota Institute of
Technology and an M.B.A. from Harvard University.
Dr. Winston S. Fu has served as one of our directors since June 1999. Dr.
Fu is an associate at U.S. Venture Partners, a venture capital firm. Prior to
joining U.S. Venture Partners in August 1997, Dr. Fu was enrolled in the MBA
program at Northwestern University. Dr. Fu holds a B.S. in physics from
Massachusetts Institute of Technology, an M.B.A. from Northwestern University
and a Ph.D. in applied physics from Stanford University.
R. Clark Harris has served as one of our directors since December 1998. Mr.
Harris is a partner in NorthEast Ventures, a venture capital firm. Prior to
joining NorthEast Ventures in June 1998, Mr. Harris served as the president of a
major division of Uniphase, now JDS Uniphase, from May 1995 to May 1998. Before
joining JDS Uniphase in 1995, Mr. Harris spent 19 years at United Technologies
Corporation in
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various operating positions, including Senior Vice President of Sikorsky
Aircraft Division. Mr. Harris received a B.A. in engineering from Georgia Tech
and holds an M.B.A. from Massachusetts Institute of Technology.
Robert D. Pavey has served as one of our directors since June 1999. Mr.
Pavey is a partner at Morgenthaler Venture Partners, a venture capital firm,
which he joined in 1969. Mr. Pavey also sits on the board of directors of
BlueGill Technologies, Inc., Endgate Corporation, LightChip, Inc., Lightwave
Microsystems Corporation, and Think & Do Software, Inc. Mr. Pavey is also a
Trustee of the Commonfund, a leading educational firm for non-profit endowments.
Mr. Pavey holds a B.S. in physics from The College of William & Mary, an M.S. in
metallurgy from Columbia University, and an M.B.A. from Harvard University.
BOARD OF DIRECTORS
Our board of directors currently consists of seven authorized 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. 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.
COMMITTEES
Our board of directors has an audit committee and a compensation committee.
The audit committee consists of Messrs. Fu and Harris. The audit committee
reviews our internal accounting procedures, consults with and reviews the
services provided by our independent accountants and makes recommendations to
the board of directors regarding the selection of independent accountants. The
compensation committee consists of Messrs. Chang and Pavey. The compensation
committee reviews and recommends to the board of directors the salaries,
incentive compensation and benefits of our officers and employees other than our
chief executive officer, and administers our stock plans and employee benefit
plans.
Compensation Committee Interlocks and Insider Participation
With the exception of Milton Chang, who served as our President and Chief
Executive Officer from 1990 to 1997, and continues to perform research and
marketing activities for us, none of the members of the compensation committee
is currently, or has ever been at any time since our formation, one of our
officers or employees. No member of the compensation committee serves as a
member of the board of directors or compensation committee of any entity that
has one or more officers serving as a member of our board of directors or
compensation committee.
Compensation
Our non-employee directors are reimbursed for expenses incurred in
connection with attending board and committee meetings but are not compensated
for their services as board or committee members. We have in the past granted
non-employee directors options to purchase our common stock pursuant to the
terms of our 1990 Incentive Stock Option Plan and 1998 Stock Plan. We may also
grant non-employee directors options to purchase our common stock pursuant to
the terms of our 2000 Director Option Plan. See "-- Stock Plans."
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<PAGE> 50
EXECUTIVE OFFICERS
Our executive officers are appointed by our board of directors and serve
until their successors are elected or appointed.
Compensation
The following table sets forth all compensation paid or accrued during our
nine-month period ended December 31, 1999, to our President and Chief Executive
Officer and each of our four next most highly compensated officers whose
compensation exceeded $100,000 for the same period. In accordance with the rules
of the Securities and Exchange Commission, the compensation described in this
table does not include perquisites and other personal benefits received by the
executive officers named in the table below which do not exceed the lesser of
$50,000 or 10% of the total salary and bonus reported for these officers.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION FOR NINE-MONTH ---------------------------------------
PERIOD ENDED DECEMBER 31, 1999 SECURITIES
------------------------------------ RESTRICTED UNDER-
ALL OTHER STOCK LYING ALL OTHER
NAME AND PRINCIPAL POSITIONS SALARY BONUS COMPENSATION AWARDS OPTIONS COMPENSATION
---------------------------- -------- ------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth E. Westrick.............. $144,127(1) $15,600 -- -- -- --
President and Chief Executive
Officer
George Yule...................... $135,852(2) $18,307 -- -- -- --
Vice President, Operations
Paul Smith....................... $133,693(3) $22,917 -- -- -- --
Vice President, General
Manager, Telecom
Laurie Conner(4)................. $119,231(5) $ -- -- -- -- --
Dr. Timothy Day.................. $111,623(6) $18,499 -- -- -- --
Chief Technical Officer, Vice
President, Engineering, Telecom
</TABLE>
- -------------------------
(1) Kenneth Westrick's annual compensation for the twelve months ended December
31, 1999, was $227,093.69.
(2) George Yule's annual compensation for the twelve months ended December 31,
1999, was $182,055.53.
(3) Paul Smith's annual compensation for the twelve months ended December 31,
1999, was $192,758.16.
(4) Laurie Conner's employment relationship with us terminated on February 15,
2000. Under the severance package accepted by Laurie Conner, Ms. Conner
continued to receive salary until February 15, 2000.
(5) Laurie Conner's annual compensation for the twelve months ended December
31, 1999, was $144,224.72.
(6) Dr. Day's annual compensation for the twelve months ended December 31,
1999, was $163,173.71.
Option grants in the nine-month period ended December 31, 1999
There were no grants of stock options to any of the executive officers
named in the table above during the nine-month period ended December 31, 1999.
Aggregate option exercises in the nine-month period ended December 31, 1999, and
values at December 31, 1999
The following table sets forth information concerning exercisable and
unexercisable stock options held by the executive officers named in the summary
compensation table at December 31, 1999. The value of
48
<PAGE> 51
unexercised in-the-money options is based on an assumed initial offering price
of $ per share minus the actual exercise prices. All options were granted
under our 1990 Incentive Stock Option Plan, as amended, or our 1999 Stock Plan.
These options vest over five years and otherwise generally conform to the terms
of our 1990 Incentive Stock Option Plan and our 1999 Stock Plan.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1999 AT DECEMBER 31, 1999
----------------------------------- ----------------------------
EXERCISABLE(1) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Kenneth E. Westrick.................... 833,334 1,166,666
George Yule............................ 103,334 196,666
Paul G. Smith.......................... 133,334 266,666
Laurie Conner.......................... 85,000 215,000
Dr. Timothy Day........................ 527,334 162,666
</TABLE>
- -------------------------
(1) The options vest according to the following vesting schedule: one-fifth of
the shares subject to the option vest twelve months after the vesting
commencement date and one-sixtieth of the shares subject to the option vest
each month thereafter. Pursuant to an amendment to the 1990 Incentive Stock
Option Plan and the 1999 Stock Plan, our executives may, at any time,
exercise options which are unvested, subject to our right of repurchase
which lapses on the same vesting schedule.
LIMITATIONS ON DIRECTORS' AND OFFICERS' LIABILITY AND INDEMNIFICATION
Our amended and restated certificate of incorporation to be filed upon
completion of this offering limits the liability of our 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 associated with any of the
following:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemption; or
- any transaction from which the director derived an improper personal
benefit.
The limitation of our directors' 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 amended and restated certificate of incorporation and bylaws also
provide that we shall indemnify our directors and executive officers and may
indemnify our other officers and employees and other agents to the fullest
extent permitted by law. We believe that indemnification under our bylaws covers
at least negligence and gross 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
such capacity, regardless of whether our bylaws would permit indemnification.
We are entering into indemnification agreements with each of our officers
and directors containing provisions that require us to, among other things,
indemnify such officers and directors against liabilities that may arise by
reason of their status or service as directors or 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 cover our directors and officers under any of
our liability insurance policies applicable to our directors and officers. We
believe that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
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<PAGE> 52
STOCK PLANS
1990 Incentive Stock Option Plan
Our 1990 Incentive Stock Option Plan was adopted by our board of directors
in July 1990 and our stockholders initially approved the plan in July 1990. Our
1990 Incentive Stock Option Plan provides for the grant of incentive stock
options, which may provide for preferential tax treatment, to our employees, and
for the grant of nonstatutory stock options and stock purchase rights to our
employees, directors and consultants. All of the grants under the Plan have been
for the grant of nonstatutory stock options.
We have reserved an aggregate of 9,900,000 shares of our common stock for
issuance under this plan. As of January 31, 2000, 6,151,312 shares had been
issued pursuant to the exercise of options, options to purchase 3,703,504 shares
of common stock were outstanding and 45,184 shares were available for future
grant. The 1990 Incentive Stock Option Plan expires in July 2000. We will not
grant any additional stock options under our 1990 Incentive Stock Option Plan
following the completion of this offering. Any shares reserved for issuance
under the 1990 Incentive Stock Option Plan and any shares returned to the plan
shall be reserved for issuance under the 2000 Stock Plan following the
completion of this offering.
The 1990 Incentive Stock Option Plan provides that in the event of a change
of control, each outstanding option will be assumed or an equivalent option will
be granted in its place by the successor corporation. If the successor
corporation refuses to assume or substitute for the options, the options will
terminate as of the closing of the merger or sale of assets.
1998 Stock Plan
Our 1998 Stock Plan was adopted by our board of directors in December 1998,
and our stockholders initially approved the plan in June 1999. Our 1998 Stock
Plan provides for the grant of incentive stock options, which may provide for
preferential tax treatment, to our employees, and for the grant of nonstatutory
stock options and stock purchase rights to our employees, directors and
consultants.
We have reserved an aggregate of 800,000 shares of our common stock for
issuance under this plan. As of January 31, 2000, 4,000 shares had been issued
pursuant to the exercise of options, options to purchase 359,600 shares of
common stock were outstanding and 436,400 shares were available for future
grant. We will not grant any additional stock options under our 1998 Stock Plan
following the completion of this offering. Any shares reserved for issuance
under the 1998 Stock Plan and any shares returned to the plan shall be reserved
for issuance under the 2000 Stock Plan following the completion of this
offering.
The 1998 Stock Plan provides that in the event of a change in control, each
outstanding option will be assumed or an equivalent option will be granted in
its place by the successor corporation. If the successor corporation refuses to
assume or substitute for the options, the options will terminate as of the
closing of the merger or sale of assets.
1999 Stock Plan
Our 1999 Stock Plan was adopted by our board of directors in December 1999,
and our stockholders initially approved the plan in February 2000. Our 1999
Stock Plan provides for the grant of incentive stock options, which may provide
for preferential tax treatment, to our employees, and for the grant of
nonstatutory stock options and stock purchase rights to our employees, directors
and consultants.
We have reserved an aggregate of 5,400,000 shares of our common stock for
issuance under this plan. As of January 31, 2000, 1,200,000 shares had been
issued pursuant to the exercise of options and stock purchase rights, options to
purchase 829,200 shares of common stock were outstanding and 3,370,800 shares
were available for future grant. We will not grant any additional stock options
under our 1999 Stock Plan following the completion of this offering. Any shares
reserved for issuance under the 1999 Stock Plan and any shares returned to the
1999 Stock Plan shall be reserved for issuance under the 2000 Stock Plan
following the completion of this offering.
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<PAGE> 53
The 1999 Stock Plan provides that in the event of a change in control, each
outstanding option will be assumed or an equivalent option will be granted in
its place by the successor corporation. If the successor corporation refuses to
assume or substitute for the options, the options become fully vested and
exercisable.
2000 Stock Plan
Our 2000 Stock Plan was adopted by our board of directors in January 2000,
and our stockholders are expected to approve the plan in March 2000. This plan
provides for the grant of incentive stock options to our employees and
nonstatutory stock options and stock purchase rights to our employees, directors
and consultants. As of February 25, 2000, a total of 1,000,000 shares of our
common stock were reserved for issuance pursuant to our 2000 Stock Plan, plus
any shares reserved for issuance under the 1998 and 1999 Stock Plans and any
shares returned to the 1998 and 1999 Stock Plans.
No options have yet been issued pursuant to the 2000 Stock Plan. The number
of shares reserved for issuance under our 2000 Stock Plan will increase annually
on the first day of our fiscal year beginning in 2001 by an amount equal to the
lesser of six percent of the outstanding shares of our common stock on the first
day of the year, 9,000,000 shares or such lesser amount as our board of
directors may determine.
Our board of directors or a committee of our board administers the 2000
Stock Plan. The committee may consist of two or more outside directors to
satisfy certain tax and securities requirements. The administrator has the power
to determine the terms of the options or stock purchase rights granted,
including the exercise price, the number of shares subject to each option or
stock purchase right, the exercisability of the options and the form of
consideration payable upon exercise. The administrator determines the exercise
price of options granted under our stock option plan, but with respect to
incentive stock options, the exercise price must at least be equal to the fair
market value of our common stock on the date of grant. Additionally, the term of
an incentive stock option may not exceed ten years. The administrator determines
the term of all other options. No optionee may be granted an option to purchase
more than 1,000,000 shares in any fiscal year. In connection with his or her
initial service, an optionee may be granted an additional option to purchase up
to 1,000,000 shares of our common stock. After termination of one of our
employees, directors or consultants, he or she may exercise his or her option
for the period of time stated in the option agreement. If termination is due to
death or disability, the option will generally remain exercisable for 12 months
following such termination. In all other cases, the option will generally remain
exercisable for three months. However, an option may never be exercised later
than the expiration of its term.
The administrator determines the exercise price of stock purchase rights
granted under our 2000 Stock Plan. Unless the administrator determines
otherwise, the restricted stock purchase agreement will grant us a repurchase
option that we may exercise upon the voluntary or involuntary termination of the
purchaser's service with us for any reason (including death or disability). The
purchase price for shares we repurchase will generally be the original price
paid by the purchaser. The administrator determines the rate at which our
repurchase option will lapse. Our stock option plan generally does not allow for
the transfer of options or stock purchase rights and only the optionee may
exercise an option and stock purchase right during his or her lifetime.
Our 2000 Stock 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 will assume each option or stock purchase right or substitute
equivalent securities. If the outstanding options or stock purchase rights are
not assumed or substituted for, all outstanding options and stock purchase
rights become fully vested and exercisable. The plan will automatically
terminate in 2010, unless we terminate it sooner. In addition, our board of
directors has the authority to amend, suspend or terminate the plan provided
that any option previously granted under the plan is not adversely affected.
2000 Employee Stock Purchase Plan
Concurrently with this offering, we intend to establish an employee stock
purchase plan. A total of 1,000,000 shares of our common stock will be reserved
for issuance. In addition, our plan provides for
51
<PAGE> 54
annual increases in the number of shares reserved for issuance under the 2000
Employee Stock Purchase Plan on the first day of our fiscal year beginning in
2001 in an amount equal to the lesser of 1.25% of the outstanding shares of our
common stock on the first day of the calendar year, 1,000,000 shares, or such
other lesser amount as may be determined by our board of directors. Our board of
directors or a committee of our board administers the plan. Our board of
directors or its committee has full and exclusive authority to interpret the
terms of the plan and determine eligibility. All of our employees except those
employed by New Focus Pacific Co. are eligible to participate if they are
customarily employed by us or any participating subsidiary for at least 20 hours
per week and more than five months in any calendar year. However, no employee
shall be granted an option to purchase stock under the plan if such employee:
- immediately after the grant of the option owns stock possessing five
percent or more of the total combined voting power or value of all
classes of our capital stock, or
- whose rights to purchase stock under all of our employee stock purchase
plans accrues at a rate that exceeds $25,000 worth of stock for each
calendar year.
Our plan is intended to qualify for preferential tax treatment and contains
consecutive, overlapping 24-month offering periods. Each offering period
includes four 6-month purchase periods. The offering periods generally start on
the first trading day on or after January 31 and July 31 of each year, except
for the first such offering period which will commence on the first trading day
on or after the effective date of this offering and will end on the last trading
day on or before July 30, 2002.
The plan permits participants to purchase common stock through payroll
deductions of up to 15% of their eligible compensation, which includes all cash
compensation, except signing bonus, if any, a participant's base straight time
gross earnings and commissions, but excludes all other compensation paid to our
employees. A participant may purchase no more than 5,000 shares during any
six-month purchase period.
Amounts deducted and accumulated by the participant are used to purchase
shares of our common stock at the end of each 6-month purchase period. The price
is 85% of the lower of the fair market value of our common stock at the
beginning of an offering period or at the end of a purchase period. If the fair
market value at the end of a purchase period is less than the fair market value
at the beginning of the offering period, participants will be withdrawn from the
current offering period following their purchase of shares on the purchase date
and will be automatically re-enrolled in a new offering period. Participants may
end their participation at any time during an offering period, and will be paid
their payroll deductions to date. Participation ends automatically upon
termination of employment with us.
A participant may not transfer rights granted under our 2000 Employee Stock
Purchase Plan other than by will, the laws of descent and distribution or as
otherwise provided under the plan.
In the event of our merger with or into another corporation or a sale of
all or substantially all of our assets, a successor corporation may assume or
substitute each outstanding option. 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.
Our plan will terminate in 2010. However, our board of directors has the
authority to amend or terminate our plan, except that, subject to certain
exceptions described in the plan, no such action may adversely affect any
outstanding rights to purchase stock under our plan.
2000 Director Option Plan
Our board of directors adopted the 2000 Director Option Plan in February
2000 and our stockholders are expected to initially approved the plan in March
2000. The 2000 Director Option Plan provides for the periodic grant of
nonstatutory stock options to our non-employee directors. As of February 25,
2000, a total of 200,000 shares were reserved for issuance under the plan, of
which no options were issued and outstanding as of this date.
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<PAGE> 55
All grants of options to our non-employee directors under the 2000 Director
Option Plan are automatic. We will grant to each individual who first become a
non-employee director on or after the completion of this offering, an option to
purchase 25,000 shares when such person first becomes a non-employee director
(except for those directors who become non-employee directors by ceasing to be
employee directors). Twenty percent (20%) of the shares subject to the option
become exercisable on each anniversary of the date of grant provided the
individual remains an outside director on such dates.
Each outside director shall automatically be granted an option to purchase
5,000 shares on each annual meeting of our stockholders occurring after the end
of our fiscal year 2000, if immediately after such meeting, he or she shall
continue to serve on the board and has been a director for at least 6 months
prior to the annual shareholders meeting. 100% of the shares subject to the
annual options vest on the one year anniversary from the date of grant, provided
the individual remains our outside director on such dates.
All options granted under our 2000 Director Option Plan have a term of ten
years and an exercise price equal to fair market value on the date of grant.
After termination as a non-employee director with us, an optionee must exercise
an option at the time set forth in his or her option agreement. If termination
is due to death or disability, the option will remain exercisable for 12 months.
In all other cases, the option will remain exercisable for a period of three
months. However, an option may never be exercised later than the expiration of
its term. A non-employee director may not transfer options granted under our
2000 Director Option Plan other than by will or the laws of descent and
distribution. Only the non-employee director may exercise the option during his
or her lifetime.
In the event of a change of control, all of the outstanding options become
fully vested and exercisable.
Unless terminated sooner, our 2000 Director Option Plan will automatically
terminate in 2010. Our board of directors has the authority to amend, alter,
suspend, or discontinue the plan, but no such action may adversely affect any
grant made under the plan.
401(K) PLAN
In April, 1993, we adopted a 401(k) Profit Sharing Plan and Trust covering
our employees who (a) are age 21 as of the 401(k) Profit Sharing Plan and Trust
effective date, and/or (b) have at 1,000 hours of service credited as of their
anniversary hire date with us and for every plan year thereafter. The 401(k)
Profit Sharing Plan and Trust excludes nonresident alien employees. Our 401(k)
Profit Sharing Plan and Trust is intended to qualify under Section 401(k) of the
United States tax code, so that contributions to the 401(k) Profit Sharing Plan
and Trust by employees or by us and the investment earnings thereon are not
taxable to the employees until withdrawn. If our 401(k) Profit Sharing Plan and
Trust qualifies under Section 401(k) of the United States tax code, our
contributions will be deductible by us when made. Our employees may elect to
reduce their current compensation by up to the statutorily prescribed annual
limit of $10,500 in 2000 and to have those funds contributed to the 401(k)
Profit Sharing Plan and Trust. The 401(k) Profit Sharing Plan and Trust permits
us, but does not require us, to make additional matching contributions on behalf
of all participants. To date, we have not made any contributions to the 401(k)
Profit Sharing Plan and Trust.
EMPLOYMENT AND CHANGE-OF-CONTROL AGREEMENTS
From time to time, we have entered into employment agreements with our
executive officers, including the executive officers listed in the "Summary
Compensation Table."
Laurie Conner. In June 1998, Laurie Conner accepted our offer of
employment. The terms of Ms. Conner's employment with us provided that if her
employment with us were to be terminated as a result of a change of control, Ms.
Conner would continue to receive her salary for the earlier of three months or
attaining subsequent employment. On December 16, 1999, we entered into a
separation and general release agreement with Laurie Conner under which Laurie
Conner's employment relationship with us terminated as of February 15, 2000, at
which time Ms. Conner's salary and benefits terminated and her unvested options
ceased to vest.
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<PAGE> 56
Bao-Tong Ma. In October 1999, Bao-Tong Ma accepted our offer of employment.
The terms of Mr. Ma's employment provide that if we terminate his employment
without cause prior to the first anniversary of employment, Mr. Ma would receive
his salary until the earlier of 24 months or new employment. Mr. Ma's stock
options would cease to vest upon termination. If Mr. Ma's employment is
terminated after the first anniversary of employment, but prior to the second
anniversary, Mr. Ma would continue to receive his salary for 12 months. If Mr.
Ma's employment is terminated after the second anniversary, but prior to the
third anniversary, Mr. Ma would receive his salary six months. If Mr. Ma's
employment is terminated following the third anniversary of employment, he will
not receive any severance.
Charles Boppell. In January 1998, we entered into a change of control
agreement with Charles Boppell under which any unvested non-statutory stock
options granted to Mr. Boppell on July 29, 1990, March 1, 1992 and January 17,
1996, each vesting over five years at the rate of one-fifth after the first year
and one-sixtieth per month thereafter, will vest immediately upon a change of
control.
In January 2000, we amended our stock option agreements with Kenneth E.
Westrick, George Yule, Paul Smith and Dr. Timothy Day to give these officers the
right to purchase both vested and unvested shares and to pay for the shares with
a promissory note. In addition, we amended the stock option agreements to
provide that if the employment or consulting relationship of these officers is
terminated involuntarily within 18 months of a change in control then 50% of
their unvested options shall vest.
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<PAGE> 57
CERTAIN TRANSACTIONS
Other than compensation agreements and other arrangements, which are
described as required in "Management," and the transactions described below, for
the last three years, there has not been, nor is there currently proposed, any
transaction or series of similar transactions to which we were or will be a
party:
- in which the amount involved exceeded or will exceed $60,000, and
- in which any director, executive officer, holder of more than 5% of our
common stock on an as-converted basis or any member of their immediate
family had or will have a direct or indirect material interest.
We believe that each of the transactions described below were on terms no
less favorable than could have been obtained from unaffiliated third parties.
All future transactions between us and any director or executive officer will be
subject to approval by a majority of the disinterested members of our board of
directors.
SERIES D PREFERRED STOCK.
On July 31, 1998, and August 6, 1998, we sold 3,977,000 shares of our
Series D preferred stock at a price of $1.00 per share. The purchasers of the
Series D preferred stock included, among others:
<TABLE>
<CAPTION>
AS CONVERTED
SHARES OF SHARES OF
PURCHASER SERIES D STOCK COMMON STOCK
--------- -------------- ------------
<S> <C> <C>
George Yule.............................................. 44,000 44,000
John Dexheimer........................................... 125,000 125,000
</TABLE>
SERIES E PREFERRED STOCK.
On June 14, 1999, we sold 10,857,616 shares of our Series E preferred stock
at a price of $1.20 per share. The purchasers of the Series E preferred stock
included, among others:
<TABLE>
<CAPTION>
AS CONVERTED
SHARES OF SHARES OF
PURCHASER SERIES E STOCK COMMON STOCK
--------- -------------- ------------
<S> <C> <C>
Kenneth E. Westrick...................................... 416,668 416,668
Morgenthaler Venture Partners V, L.P. ................... 5,000,000 5,000,000
U.S. Venture Partners VI, L.P. .......................... 5,000,000 5,000,000
</TABLE>
SERIES G PREFERRED STOCK.
On November 23, 1999, December 7, 1999 and December 28, 1999 we sold
9,230,728 shares of our Series G preferred stock at a price of $3.25 per share.
The purchasers of the Series G preferred stock included, among others:
<TABLE>
<CAPTION>
AS CONVERTED
SHARES OF SHARES OF
PURCHASER SERIES G STOCK COMMON STOCK
--------- -------------- ------------
<S> <C> <C>
Clark Harris............................................. 40,000 40,000
Morgenthaler Venture Partners, V, L.P. .................. 1,384,614 1,384,614
Entities Affiliated with U.S. Venture Partners........... 1,384,614 1,384,614
</TABLE>
LOANS FROM SHAREHOLDER
From April 1991 to September 1997, Dr. Milton Chang loaned us a total of
$1,600,000. On July 7, 1999, we repaid all of the outstanding principal and
interest owing under the promissory note, which totaled approximately
$2,400,000, however, Dr. Chang agreed to loan us up to $2,424,000 upon thirty
(30) days written request. This agreement was terminated in December 1999.
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<PAGE> 58
LOANS TO OFFICERS
The following is a list of loans made by us to certain of our officers, in
connection with the purchase of shares of our stock. Each of these loans were
made pursuant to a full recourse promissory note secured by a stock pledge. The
notes bear no interest but interest will be imputed and reported annually as
compensation on the officer's W-2. All unvested shares purchased by the officers
are subject to repurchase by us at the original exercise price if the officer's
employment is terminated.
On January 12, 2000, we loaned $1,044,208 to Kenneth Westrick, our
President and Chief Executive Officer, secured by a stock pledge, in connection
with the purchase of 2,000,000 shares of our common stock at $.462 per share and
associated costs. The note is interest-free and is due and payable on January
11, 2005. The entire principal amount on this note remains outstanding.
On January 12, 2000, we loaned $375,000 to Paul Smith, our Vice President,
General Manager, Telecom, secured by a stock pledge, in connection with the
purchase of 600,000 shares of our common stock at $.625 per share. The note is
interest-free and is due and payable on January 11, 2005. The entire principal
amount on this note remains outstanding.
On January 12, 2000, we loaned $312,500 to Bao-Tong Ma, our Vice President,
General Manager, New Focus Pacific Co., secured by a stock pledge, in connection
with the purchase of 500,000 shares of our common stock at $.625 per share. The
note is interest-free and is due and payable on January 11, 2005. The entire
principal amount on this note remains outstanding.
On January 12, 2000, we loaned $173,134 to George Yule, our Vice President,
Vice President, Operations, secured by a stock pledge, in connection with the
purchase of 100,000 shares of our common stock at $.625 and 200,000 shares of
our common stock at $.512 per share and associated costs. The note is
interest-free and is due and payable on January 11, 2005. The entire principal
amount on this note remains outstanding.
On January 12, 2000, we loaned $137,232 to Rob Marsland, our Vice
President, Focused Research secured by a stock pledge, in connection with the
purchase of 70,000 shares of our common stock at $.625 per share and 400,000
shares of our common stock at $.0025 per share and associated costs. The note is
interest-free and is due and payable on January 11, 2005. The entire principal
amount on this note remains outstanding.
On January 12, 2000, we loaned $255,483 to Timothy Day, our Chief
Technology Officer and Vice President, Operations, Telecom, secured by a stock
pledge, in connection with the purchase of 400,000 shares of our common stock at
$.0025 per share, 100,000 shares of our common stock at $.462 per share, 120,000
shares of our common stock at $.512 per share and 70,000 shares of our common
stock at $.625 per share and associated costs. The note is interest-free and is
due and payable on January 11, 2005. The entire principal amount on this note
remains outstanding.
On February 9, 2000 we loaned $375,000 to Kenneth E. Westrick, our
President and Chief Executive Officer, secured by a stock pledge, in connection
with the sale of 300,000 shares of our common stock at $1.25 per share. The note
is interest-free and is due and payable on February 9, 2005. The entire
principal amount on this note remains outstanding.
On February 9, 2000 we loaned $125,000 to Paul G. Smith, our Vice
President, General Manager, Telecom, secured by a stock pledge, in connection
with the sale of 100,000 shares of our common stock at $1.25 per share. The note
is interest-free and is due and payable on February 9, 2005. The entire
principal amount on this note remains outstanding.
On February 9, 2000 we loaned $125,000 to Dr. Robert A. Marsland, our Vice
President, secured by a stock pledge, in connection with the sale of 100,000
shares of our common stock at $1.25 per share. The note is interest-free and is
due and payable on February 9, 2005. The entire principal amount on this note
remains outstanding.
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<PAGE> 59
On February 9, 2000 we loaned $375,000 to Dr. Timothy Day, our Chief
Technical Officer and Vice President Engineering, Telecom, secured by a stock
pledge, in connection with the sale of 300,000 shares of our common stock at
$1.25 per share. The note is interest-free and is due and payable on February 9,
2005. The entire principal amount on this note remains outstanding.
OTHER MATTERS
From 1990 to 1997, Dr. Chang served as our President and Chief Executive
Officer. Since 1997, we have employed Dr. Chang in a research and marketing
capacity. Dr. Chang received compensation of $80,539, $110,000 and $110,000 for
the nine-month period ended December 31, 1999, fiscal year ended March 31, 1999
and fiscal year ended March 31, 1998, respectively.
On March 3, 1999 and November 1, 1999, we entered into consulting
agreements with John Dexheimer, one of our directors, for services to be
rendered in connection with our Series E, Series F and Series G Preferred Stock
financings. Pursuant to these agreements, Mr. Dexheimer received warrants to
purchase 111,972 shares of Series E Preferred Stock at an exercise price of
$1.20 per share and a cash payment of $618,731.
INDEMNIFICATION
We will enter into indemnification agreements with each of our directors
and officers. Such indemnification agreements will require us to indemnify our
directors and officers to the fullest extent permitted by Delaware law. For a
description of the limitation of our directors' liability and our
indemnification of officers, see "Limitation on Directors' and Officers'
Liability and Indemnification."
EMPLOYMENT AGREEMENTS
We have entered into employment arrangements, compensation arrangements and
severance arrangements with certain of our executive officers, see
"Management -- Employment and Change-of-Control Agreements" and "-- Executive
Officers -- Compensation." For information regarding stock options, see
"Management -- Stock Plans."
FUTURE TRANSACTIONS
All future transactions, including any loans from us to our officers,
directors, principal stockholders or affiliates, will be approved by a majority
of the board of directors, including a majority of the independent and
disinterested members of the board of directors or, if required by law, a
majority of disinterested stockholders, and will be on terms no less favorable
to us than could be obtained from unaffiliated third parties.
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<PAGE> 60
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of January 31, 2000, and as adjusted
to reflect the sale of common stock offered hereby by the following:
- each stockholder known by us to own beneficially more than 5% of our
common stock;
- each of our executive officers named in the compensation table above;
- each of our directors; and
- all directors and executive officers as a group.
As of January 31, 2000, there were 51,015,596 shares of our common stock
outstanding, assuming that all outstanding preferred stock has been converted
into common stock and the exercise of warrants to purchase 121,140 shares of
common stock. Except as otherwise indicated, we believe that the beneficial
owners of the common stock listed below, based on the information furnished by
such owners, have sole voting power and investment power with respect to such
shares. Beneficial ownership is determined in accordance with the rules of the
Securities Exchange Commission. In computing the number of shares beneficially
owned by a person and the percent ownership of that person, shares of common
stock subject to options or warrants held by that person that are currently
exercisable or will become exercisable within 60 days after January 31, 2000 are
deemed outstanding, while such shares are not deemed outstanding for purposes of
computing percent ownership of any other person. Unless otherwise indicated in
the footnotes below, the persons and entities named in the table have sole
voting and investment power with respect to all shares beneficially owned,
subject to community property laws where applicable.
<TABLE>
<CAPTION>
PERCENT OF SHARES
OUTSTANDING
SHARES --------------------------
BENEFICIALLY PRIOR TO
NAME OR GROUP OF BENEFICIAL OWNERS OWNED OFFERING AFTER OFFERING
---------------------------------- ------------ -------- --------------
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Kenneth E. Westrick(1)................................... 2,297,334 4.5%
Timothy Day(2)........................................... 810,000 1.6
Robert A. Marsland(3).................................... 670,000 1.3
Paul Smith(4)............................................ 600,000 1.2
George Yule(5)........................................... 344,000 *
Charles Boppell(6)....................................... 170,800 *
Dr. Milton Chang(7)...................................... 13,101,456 25.7
John Dexheimer(8)........................................ 147,666 *
Dr. Winston S. Fu(9)..................................... 6,384,614 12.5
R. Clark Harris(10)...................................... 57,334 *
Robert Pavey(11)......................................... 6,384,614 12.5
All directors and officers as a group (12 persons)(12)... 31,564,742 60.4
5% STOCKHOLDERS
Chang Partners, A California Limited Partnership......... 8,000,000 15.7
Morgenthaler Venture Partners V, L.P..................... 6,384,614 12.5
U.S. Venture Partners.................................... 6,287,690 12.5
London Pacific Life & Annuity Company.................... 4,615,386 9.0
</TABLE>
- ------------------------
* Denotes less than one percent of the outstanding stock.
(1) Includes 1,133,332 subject to our right of repurchase which lapses over
time. Also includes 21,080 shares held by Mr. Westrick's minor daughter and
22,600 shares held by Mr. Westrick's minor son.
(2) Includes 157,834 shares subject to our right of repurchase, which lapses
over time.
(3) Includes 52,500 shares subject to our right of repurchase, which lapses
over time.
(4) Includes 460,000 shares subject to our right of repurchase, which lapses
over time.
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<PAGE> 61
(5) Includes 95,834 shares subject to our right of repurchase, which lapses
over time.
(6) Includes 142,000 shares subject to options, which are exercisable within 60
days of January 31, 2000.
(7) Includes 8,000,000 shares held by Chang Partners, a California limited
partnership, of which Mr. Chang is a general partner.
(8) Includes 22,666 shares subject to an option, which is exercisable within 60
days of January 31, 2000.
(9) Includes 6,287,690 shares held by U.S. Venture Partners VI, L.P., 40,154
shares held by USVP VI Entrepreneurs Partners, L.P., 36,000 shares held by
USVP VI Affiliates Fund, L.P. and 20,770 shares held by 2180 Associates
Fund VI, L.P. Mr. Fu is an associate of U.S. Venture Partners. Mr. Fu
disclaims beneficial ownership of shares held by this entity, except to the
extent of his pecuniary interest in these entities.
(10) Includes 17,334 shares subject to an option exercisable within 60 days of
January 31, 2000.
(11) Includes 6,384,614 shares held by Morgenthaler Ventures Partners V, L.P.
Mr. Pavey is a partner at Morgenthaler Ventures. Mr. Pavey disclaims
beneficial ownership of shares held by this entity, except to the extent of
his pecuniary interest in these entities.
(12) Includes an aggregate of 182,000 shares subject to options exercisable
within 60 days of January 31, 2000 and 1,899,500 shares subject to our
right of repurchase, which lapses over time.
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<PAGE> 62
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we will be authorized to issue
260,000,000 shares, $0.001 par value per share, to be divided into two classes
to be designated common stock and preferred stock. Of the shares authorized,
250,000,000 shares shall be designated as common stock and 10,000,000 shares
shall be designated as preferred stock. The following description of our capital
stock is only a summary. You should refer to our certificate of incorporation
and bylaws as in effect upon the closing of this offering, 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 January 31, 2000, and assuming the conversion of all outstanding
shares of preferred stock into common stock, there were 50,894,456 shares of
common stock outstanding which were held of record by approximately 183
stockholders. There will be shares of common stock outstanding
(assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options after January 31, 1999) after giving effect to the sale
of our common stock in this offering. In addition to 4,900,304 shares issuable
upon exercise of outstanding options under our 1990 Incentive Stock Option Plan,
1998 Stock Plan and 1999 Stock Plan, as of January 31, 2000, there are an
aggregate of 2,200,000 shares reserved for issuance under our 2000 Stock Plan,
2000 Employee Stock Purchase Plan and 2000 Director Option Plan. See
"Management -- Stock Plans" for a description of our stock plans.
The holders of our common stock are entitled to one vote per share held of
record on all matters submitted to a vote of the stockholders. Our amended and
restated certificate of incorporation to be filed concurrently with completion
of this offering does not provide for cumulative voting in the election of
directors. Subject to preferences that may be applicable to any outstanding
preferred stock, the holders of our common stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by our board of
directors out of funds legally available for that purpose. In the event of our
liquidation, dissolution or winding up, holders of our 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.
Holders of our common stock have no preemptive or other subscription or
conversion rights. There are no redemption or sinking fund provisions applicable
to our common stock. All outstanding shares of common stock are fully paid and
non-assessable, and the shares of common stock to be issued upon the completion
of this offering will be fully paid and non-assessable.
PREFERRED STOCK
Our certificate of incorporation filed in connection with this offering
provides that our board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series. The rights,
preferences and privileges of each series of preferred stock may be greater than
the rights of our common stock. It is not possible to state the actual effect of
the issuance of any shares of preferred stock upon the rights of holders of our
common stock until the board of directors determines the specific rights of the
holders of any preferred stock that may be issued. However, the effects might
include, among other things: (1) restricting dividends on the common stock, (2)
diluting the voting power of the common stock, (3) impairing the liquidation
rights of the common stock and (4) delaying or preventing a change in our
control without further action by the stockholders. Upon the closing of this
offering, no shares of preferred stock will be outstanding, and we have no
present plans to issue any shares of preferred stock.
REGISTRATION RIGHTS
Pursuant to a registration rights agreement we entered into with holders of
shares of our preferred stock (36,681,038 shares assuming conversion of all
outstanding shares of preferred stock), the holders of these shares are entitled
to certain registration rights regarding these shares. The registration rights
provide that if we propose to register any securities under the Securities Act,
either for our own account or for the
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<PAGE> 63
account of other security holders exercising registration rights, they are
entitled to notice of the registration and are entitled to include shares of
their common stock in the registration. This right is subject to conditions and
limitations, including the right of the underwriters in an offering to limit the
number of shares included in the registration. The holders of these shares may
also require us to file up to two registration statements under the Securities
Act at our expense with respect to their shares of common stock. We are required
to us our best efforts to effect this registration, subject to conditions and
limitations. Furthermore, the holders of these shares may require us to file
additional registration statements on Form S-3, subject to conditions and
limitations. These rights terminate on the earlier of five years after the
effective date of this offering, or when a holder is able to sell all its shares
pursuant to Rule 144 under the Securities Action in any 90-day period.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make more difficult the acquisition of our company by means of a
tender offer, a proxy contest or otherwise and the removal of incumbent officers
and directors. These provisions, summarized below, may discourage certain types
of coercive takeover practices and inadequate takeover bids and encourage
persons seeking to acquire control of our company to first negotiate with our
company. We believe that the benefits of increased protection of our company's
potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure our company outweigh the
disadvantages of discouraging such proposals because, among other things,
negotiation of such 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 certain 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 bylaws eliminate the right of stockholders to act by written consent
without a meeting and require a majority of stockholders to call a special
meeting. Our certificate of incorporation and bylaws do not provide for
cumulative voting in the election of directors. The authorization of
undesignated preferred stock makes it possible for the board of directors to
issue preferred stock with voting or other rights or preferences that could
impede the success of any attempt to change control of our company. These and
other provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of our company. The amendment of any of these
provisions would require approval by holders of at least 66 2/3% of our
outstanding common stock.
Section 203
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is .
NASDAQ STOCK MARKET NATIONAL MARKET LISTING
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "NUFO."
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our stock.
Future sales of substantial amounts of our common stock in the public market
following this offering or the possibility of such sales occurring could
adversely affect market prices for our common stock or could impair our ability
to raise capital through an offering of equity securities. Furthermore, since no
shares will be available for sale shortly after this offering because of
contractual and legal restrictions on resale as described below, sales of
substantial amounts of our common stock in the public after these restrictions
lapse could adversely affect the prevailing market price and our ability to
raise equity capital in the future.
Upon completion of this offering, we will have shares of common
stock outstanding (assuming conversion of all of the currently outstanding
shares of preferred stock) based on shares outstanding as of January 31, 2000,
and assuming no exercise of the underwriters' over-allotment option and no
exercise of outstanding options. All of the shares sold in this
offering will be freely transferable without restriction under the Securities
Act. However, the sale of any of these shares if purchased by "affiliates" as
that term is defined in Rule 144 are subject to certain limitations and
restrictions that are described below.
The remaining 51,015,596 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. These shares are "restricted
shares" as that term is defined in Rule 144 and therefore may not be sold
publicly unless they are registered under the Securities Act or are sold
pursuant to Rule 144 or another exemption from registration. In addition, our
directors and officers as well as other stockholders and optionholders have
entered into "lock-up agreements" with the underwriters. These lock-up
agreements provide that, except under limited exceptions, the stockholder or
optionholder may not offer, sell, contract to sell or otherwise dispose of any
of our common stock or securities that are convertible into or exchangeable for,
or that represent the right to receive, our common stock for a period of 180
days after the date of this prospectus. The underwriters , however, may in their
sole discretion, at any time without notice, release all or any portion of the
shares subject to lock-up agreements. Accordingly, of the remaining 51,015,596
shares, 41,663,728 shares will become eligible for sale 180 days after the
effective date subject to Rules 144 and 701.
As of January 31, 2000, there were a total of 4,900,304 shares of common
stock subject to outstanding options under our 1990 Incentive Stock Option Plan,
1998 Stock Plan and our 1999 Stock Plan, 1,461,836 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, our 2000 Employee Stock Purchase
Plan and our 2000 Director Option Plan. On the date 180 days after the effective
date of the offering, the date that the lock-up agreements expire, a total of
2,277,812 shares of our common stock subject to outstanding options will be
vested. After the effective dates of the registration statements on Form S-8,
shares purchased upon exercise of options granted pursuant to our 1998 Stock
Plan, our 1990 Incentive Stock Option Plan, our 2000 Employee Stock Purchase
Plan and our 2000 Director Option Plan generally would be available for resale
in the public 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 shares. An
affiliate who has 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 shares immediately after this offering; or
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- the average weekly trading volume of the common stock on the Nasdaq Stock
Market's 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 certain 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 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
generally 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.
Rule 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase 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 certain restrictions, including the holding period, contained in
Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of 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.
Securities issued in reliance on Rule 701 may be sold by "affiliates" under Rule
144 without compliance with its one year minimum holding period requirement.
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Chase Securities
Inc., Dain Rauscher Incorporated and U.S. Bancorp Piper Jaffray Inc. are acting
as representatives, the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Chase Securities Inc........................................
Dain Rauscher Incorporated..................................
U.S. Bancorp Piper Jaffray Inc..............................
--------
Total.............................................
========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults,
the purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares at the initial public
offering price less the underwriting discounts and commissions. The option may
be exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
---------------------- ----------------------
Without With Without With
Over- Over- Over- Over-
allotment allotment allotment allotment
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Underwriting Discounts and
Commissions paid by us........................ $ $ $ $
Expenses payable by us.......................... $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933
relating to, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
issuances pursuant to the exercise of employee stock options outstanding on the
date hereof or pursuant to our dividend reinvestment plan.
Our officers and directors and stockholders have agreed that they will not
offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, enter into a
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transaction which would have the same effect, or enter into any swap, hedge or
other arrangement that transfers, in whole or in part, any of the economic
consequences of ownership of our common stock, whether any such aforementioned
transaction is to be settled by delivery of our common stock or such other
securities, in cash or otherwise, or publicly disclose the intention to make any
such offer, sale, pledge or disposition, or to enter into any such transaction,
swap, hedge or other arrangement, without, in each case, the prior written
consent of Credit Suisse First Boston Corporation for a period of 180 days after
the date of this prospectus.
The underwriters have reserved for sale, at the initial public offering
price up to shares of the common stock for employees, directors and
certain other persons associated with us who have expressed an interest in
purchasing common stock in the offering. The number of shares available for sale
to the general public in the offering will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same terms as the other
shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be required
to make in that respect.
We have applied to list the shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "NUFO".
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on The
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
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NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions".
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
66
<PAGE> 69
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Legal matters will be passed upon for the underwriters by Brobeck,
Phleger & Harrison LLP, San Francisco, California.
EXPERTS
Ernst & Young LLP, independent auditors have audited our consolidated
financial statements and schedule at March 31, 1999 and December 31, 1999 and
for each of the two years in the period ended March 31, 1999, and for the nine
months ended December 31, 1999 as described in their report. We have included
our financial statements and schedule in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given upon
their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington,
D.C., a registration statement on Form S-1 under the Securities Act with respect
to the shares of common stock offered hereby. This prospectus does not contain
all the information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to us and our common
stock, reference is made to the registration statement and to the exhibits and
schedules filed therewith. Statements contained in this prospectus as to the
contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of the contract or
other document filed as an exhibit to the registration statement, each statement
being qualified in all respects by this reference. A copy of the registration
statement may be inspected by anyone without charge at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of all or any portion of the registration
statement may be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees.
The Commission maintains a Web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission.
67
<PAGE> 70
NEW FOCUS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity (Net Capital
Deficiency)............................................... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 71
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
New Focus, Inc.
We have audited the accompanying consolidated balance sheets of New Focus,
Inc. as of March 31, 1999 and December 31, 1999, and the related consolidated
statements of operations, shareholders' equity (net capital deficiency), and
cash flows for each of the two years in the period ended March 31, 1999, and for
the nine-month period 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 auditing standards generally
accepted in the United States. 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 New Focus, Inc.
at March 31, 1999 and December 31, 1999, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
March 31, 1999, and for the nine-month period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
San Jose, California
February 25, 2000, except as to Note 12,
as to which the date is March , 2000
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion of
the Company's reincorporation in the state of Delaware.
/s/ ERNST & YOUNG LLP
San Jose, California
February 29, 2000
F-2
<PAGE> 72
NEW FOCUS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA
STOCKHOLDERS' EQUITY
MARCH 31, DECEMBER 31, DECEMBER 31,
1999 1999 1999
--------- ------------ --------------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 51 $ 28,067
Accounts receivable, less allowance for doubtful accounts
of $135 at March 31, 1999 and $160 at December 31,
1999................................................... 2,064 3,102
Unbilled receivables...................................... 192 121
Inventories............................................... 3,654 6,217
Prepaid expenses and other current assets................. 141 243
------- --------
Total current assets................................. 6,102 37,750
Fixed assets, net........................................... 1,880 6,895
Other assets, net of accumulated amortization of $29 at
March 31, 1999 and $56 at December 31, 1999............... 258 207
------- --------
Total assets......................................... $ 8,240 $ 44,852
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Loans payable to bank..................................... $ 1,755 $ --
Accounts payable.......................................... 1,788 5,658
Accrued expenses.......................................... 1,567 2,540
Deferred research and development funding................. 250 250
Current portion of long-term debt......................... 263 276
------- --------
Total current liabilities............................ 5,623 8,724
Notes payable to stockholder/director....................... 2,305 --
Accrued interest to stockholder/director.................... 117 --
Long-term debt, less current portion........................ 588 368
Deferred rent............................................... 790 747
Commitments and contingencies
Stockholders' equity (net capital deficiency):
Series A through G convertible preferred stock, $0.001 par
value:
Authorized shares -- 44,083,326
Issued and outstanding shares -- 20,737,000 at March
31, 1999 and 41,939,144 at December 31, 1999
(liquidation preference of $99,340 at December 31,
1999)................................................ 21 42 $ --
Common stock, $0.001 par value:
Authorized shares -- 80,000,000
Issued and outstanding shares -- 2,410,380 at March 31,
1999 and 2,578,824 at December 31, 1999, and
44,517,968 pro forma................................. 2 2 44
Additional paid-in capital................................ 6,627 51,168 51,168
Deferred compensation..................................... -- (689) (689)
Accumulated deficit....................................... (7,833) (15,510) (15,510)
------- -------- --------
Total stockholders' equity (net capital
deficiency)....................................... (1,183) 35,013 $ 35,013
------- -------- ========
Total liabilities and stockholders' equity (net
capital deficiency)............................... $ 8,240 $ 44,852
======= ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 73
NEW FOCUS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
---------------------- ------------
1998 1999 1999
--------- --------- ------------
<S> <C> <C> <C>
Net revenues............................................... $15,482 $17,285 $18,101
Cost of net revenues(1).................................... 8,186 9,225 12,525
------- ------- -------
Gross profit............................................... 7,296 8,060 5,576
Operating expenses:
Research and development(2).............................. 6,188 9,115 8,386
Less funding received from research and development
contracts............................................. (2,467) (1,736) (1,034)
------- ------- -------
Net research and development............................. 3,721 7,379 7,352
Sales and marketing(3)................................... 2,193 2,987 2,982
General and administrative(4)............................ 1,355 2,360 2,704
Deferred compensation.................................... -- -- 132
------- ------- -------
Total operating expenses.............................. 7,269 12,726 13,170
------- ------- -------
Operating income (loss).................................... 27 (4,666) (7,594)
Interest expense........................................... (328) (327) (176)
Other income, net.......................................... 25 24 95
------- ------- -------
Loss before provision for income taxes..................... (276) (4,969) (7,675)
Provision for income taxes................................. 10 2 2
------- ------- -------
Net loss.............................................. $ (286) $(4,971) $(7,677)
======= ======= =======
Historical basic and diluted net loss per share............ $ (0.25) $ (2.18) $ (3.11)
======= ======= =======
Shares used to compute historical basic and diluted net
loss per share........................................... 1,148 2,284 2,468
======= ======= =======
Pro forma basic and diluted net loss per share............. $ (0.24)
=======
Shares used to compute pro forma basic and diluted net loss
per share................................................ 32,223
=======
</TABLE>
- -------------------------
(1) Excluding $62 in amortization of deferred stock based compensation
(2) Excluding $54 in amortization of deferred stock based compensation
(3) Excluding $10 in amortization of deferred stock based compensation
(4) Excluding $6 in amortization of deferred stock based compensation
See accompanying notes.
F-4
<PAGE> 74
NEW FOCUS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- ------------------ PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL
---------- ------ --------- ------ ---------- ------------ ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997.......... 16,160,000 $16 1,127,180 $1 $ 2,128 $ -- $ (2,576) $ (431)
Issuance of common stock from
exercise of options............ -- -- 157,716 -- 16 -- -- 16
Repurchase of common stock....... -- -- (8,996) -- (1) -- -- (1)
Net loss......................... -- -- -- -- -- -- (286) (286)
---------- --- --------- -- ------- ----- -------- -------
Balance at March 31, 1998.......... 16,160,000 16 1,275,900 1 2,143 -- (2,862) (702)
Issuance of Series C preferred
stock, net of issuance cost of
$16............................ 600,000 1 -- -- 493 -- -- 494
Issuance of Series D preferred
stock, net of issuance cost of
$54............................ 3,977,000 4 -- -- 3,919 -- -- 3,923
Issuance of common stock from
exercise of options............ -- -- 1,443,444 1 187 -- -- 188
Repurchase of common stock....... -- -- (308,964) -- (193) -- -- (193)
Warrant issued to long-term
creditor....................... -- -- -- -- 78 -- -- 78
Net loss......................... -- -- -- -- -- -- (4,971) (4,971)
---------- --- --------- -- ------- ----- -------- -------
Balance at March 31, 1999.......... 20,737,000 21 2,410,380 2 6,627 -- (7,833) (1,183)
Issuance of Series E preferred
stock, net of issuance cost of
$489........................... 10,857,616 11 -- -- 12,526 -- -- 12,537
Issuance of Series F preferred
stock, net of issuance cost of
$28............................ 1,113,800 1 -- -- 1,307 -- -- 1,308
Issuance of Series G preferred
stock, net of issuance cost of
$160........................... 9,230,728 9 -- -- 29,832 -- -- 29,841
Issuance of common stock from
exercise of options............ -- -- 168,444 -- 55 -- -- 55
Deferred compensation............ -- -- -- -- 821 (821) -- --
Amortization of deferred
compensation................... -- -- -- -- -- 132 -- 132
Net loss......................... -- -- -- -- -- -- (7,677) (7,677)
---------- --- --------- -- ------- ----- -------- -------
Balance at December 31, 1999....... 41,939,144 $42 2,578,824 $2 $51,168 $(689) $(15,510) $35,013
========== === ========= == ======= ===== ======== =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 75
NEW FOCUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED MARCH 31, ENDED
---------------------- DECEMBER 31,
1998 1999 1999
--------- --------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................................... $ (286) $(4,971) $(7,677)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation of fixed assets............................. 475 588 756
Amortization of intangibles.............................. 41 10 27
Amortization of deferred compensation.................... -- -- 132
Deferred rent............................................ 184 -- (43)
Changes in operating assets and liabilities:
Accounts receivable and unbilled receivables.......... (1,231) 372 (967)
Inventories........................................... (1,515) 184 (2,563)
Prepaid expenses and other current assets............. (78) 93 (102)
Accounts payable...................................... 1,137 (884) 3,870
Accrued expenses and accrued interest to
stockholder......................................... 440 697 856
Deferred research and development funding............. 250 -- --
------- ------- -------
Net cash used in operating activities...................... (583) (3,911) (5,711)
INVESTING ACTIVITIES
Acquisition of property and equipment...................... (396) (1,359) (5,771)
Decrease in other assets................................... 17 2 24
------- ------- -------
Net cash used in investing activities...................... (379) (1,357) (5,747)
FINANCING ACTIVITIES
Proceeds from notes payable to stockholders................ 400 200 --
Proceeds from bank loans................................... 1,395 1,755 1,245
Proceeds from issuance of preferred stock.................. -- 4,217 43,686
Proceeds from equipment loan............................... -- 800 --
Proceeds from capital lease obligations.................... -- 35 --
Payments on notes payable.................................. (19) (21) (2,305)
Payments on bank loan...................................... (828) (1,772) (3,000)
Payments on equipment loan................................. -- (50) (195)
Payments under capital lease obligations................... (55) (36) (12)
Proceeds from exercise of stock options.................... 16 188 55
Repurchase of common stock................................. (1) (193) --
------- ------- -------
Net cash provided by financing activities.................. 908 5,123 39,474
------- ------- -------
Increase (decrease) in cash................................ (54) (145) 28,016
Cash at beginning of period................................ 250 196 51
------- ------- -------
Cash at end of period...................................... $ 196 $ 51 $28,067
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest..................................... $ 174 $ 155 $ 188
Promissory note payable converted to equity................ $ -- $ 200 $ --
Interest on note converted to principal.................... $ -- $ 680 $ --
Warrant issued to long-term creditor....................... $ -- $ 78 $ --
</TABLE>
See accompanying notes.
F-6
<PAGE> 76
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
New Focus, Inc. (the Company) was incorporated in California on April 17,
1990. The Company is engaged in developing, manufacturing, and marketing
telecommunications equipment and photonics products primarily for use in the
telecommunications and research markets.
Basis of Presentation
The consolidated financial statements include the Company and its wholly
owned subsidiary, Focused Research, Inc. All intercompany transactions and
balances have been eliminated.
During 1999, the Company changed its year end to December 31, 1999 from
March 31, 2000.
Cash Equivalents
Cash equivalents consist of a money market fund. For purposes of the
accompanying statements of cash flows, the Company considers all such liquid
instruments with an original maturity date of three months or less to be cash
equivalents. The fair value, based on quoted market prices of the cash
equivalents, is substantially equal to their carrying value at March 31, 1999
and December 31, 1999.
Inventories
Inventories are stated at the lower of cost or market on a first-in,
first-out basis. Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1999
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Raw Materials........................................ $1,994 $3,247
Work in Progress..................................... 372 1,283
Finished Goods....................................... 1,288 1,687
------ ------
Total................................................ $3,654 $6,217
====== ======
</TABLE>
Fixed Assets
The Company records its property and equipment at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets, generally three to five years. Amortization is computed on leasehold
improvements using the straight-line method over the shorter of the estimated
useful lives of the assets or the term of the lease.
Other Assets
Other assets consist primarily of deposits as well as intangible assets.
Intangible assets, consisting of goodwill and debt issuance costs from warrants
relating to the Company's equipment line are amortized over their estimated
useful lives of approximately three years.
In connection with the Company's acquisition in July 1996 of Palo Alto
Research Corporation, the Company issued a $110,000 note payable, bearing
interest at 6.74%, to the former owner of the business in exchange for $48,000
in fixed assets and $9,000 in inventory. The remaining $53,000 in the purchase
price was classified as goodwill and is being amortized over four years. The
terms of the note require the Company to repay this debt over four years with
annual installments of $25,000 including interest. At December 31, 1999, the
Company owed $23,400 in principal on this note.
F-7
<PAGE> 77
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Advertising Expenses
The cost of advertising is expensed as incurred. The Company's advertising
costs for the fiscal years ended March 31, 1998 and 1999 and for the nine-month
period ended December 31, 1999 were approximately $316,000, $342,000, and
$256,967, respectively.
Revenue Recognition
Product revenue is recorded upon shipment provided there are no significant
remaining obligations and collectibility is probable. The Company provides an
allowance for estimated returns of defective products.
Research and Development
Company-sponsored research and development costs as well as costs related
to research and development contracts are currently expensed. Total expenditures
for research and development in fiscal 1998 and 1999, and the nine-month period
ended December 31, 1999 were $6,188,000, $9,115,000, and $8,386,000,
respectively. Funding received from research and development contracts is netted
against research and development costs, which were $2,467,000, $1,736,000, and
$1,034,000 for the fiscal years ended March 31, 1998 and 1999, and for the
nine-month period ended December 31, 1999, respectively. The funding relates to
various arrangements, primarily with government agencies, whereby the Company is
reimbursed for substantially all of its costs incurred under the related
project. Unbilled receivables reflect the costs incurred under these contracts
that have yet to be billed at the balance sheet date.
Unaudited Pro Forma Stockholders' Equity
If the offering contemplated by the Company is consummated, all of the
convertible preferred stock outstanding as of the closing date will
automatically be converted into 41,939,144 shares of common stock based on the
shares of convertible preferred stock outstanding at December 31, 1999. The
unaudited pro forma stockholders' equity reflects this conversion.
Stock-Based Compensation
The Company accounts for stock-based awards to employees under the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25), and has adopted the
disclosure-only alternative of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (FAS 123).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
Comprehensive Income
Effective April 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS 130). FAS
130 established rules for reporting and displaying comprehensive income. The
Company's comprehensive net loss was the same as its net loss for the years
ended March 31, 1998 and 1999 and the nine months ended December 31, 1999.
F-8
<PAGE> 78
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133). FAS 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. In June 1999, the Board issued FAS 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133", which deferred the effective date of FAS 133 until
fiscal years beginning after June 15, 2000. The Company believes that the
adoption of FAS 133 will not have a significant impact on the Company's
operating results or cash flows.
2. CONCENTRATION OF CREDIT RISK
The Company sells to a large number of companies and research laboratories
involved in the application of laser technology. The Company performs ongoing
credit evaluations of its customers and does not require collateral. The Company
provides reserves for potential credit losses, and such losses have been within
management's expectations.
Financial instruments that potentially subject the Company to significant
concentrations of credit risks consist principally of cash, cash equivalents and
accounts receivable. The Company places its cash equivalents in high-credit
quality financial institutions. The Company is exposed to credit risk in the
event of default by these institutions to the extent of the amount recorded on
the balance sheet. As of December 31, 1999 all money market funds are invested
in a single fund.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1999
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Manufacturing and development equipment..................... $ 2,250 $ 6,404
Computer software and equipment............................. 1,282 1,787
Office equipment............................................ 166 259
Leasehold improvements...................................... 213 1,120
Construction in Progress.................................... -- 91
------- -------
3,911 9,661
Less accumulated depreciation and amortization.............. (2,031) (2,766)
------- -------
$ 1,880 $ 6,895
======= =======
</TABLE>
4. DEBT
Note payable to stockholder/director
The Company had unsecured promissory notes payable to a
stockholder/director. On July 21, 1998, the principal and interest outstanding
was rolled over in a new promissory note issued with interest at 7.35% per
annum. At March 31, 1999, the Company had borrowings outstanding under this
arrangement of $2,305,000 and owed interest of $117,000. The promissory note and
its related interest were repaid outstanding during the nine-month period ended
December 31, 1999.
Loan Payable to Bank
On October 19, 1998, the Company entered into a revolving line of credit
agreement with a bank. At March 31, 1999, the Company had borrowings under this
arrangement amounting to $1,755,000 at an
F-9
<PAGE> 79
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
interest rate of 8.625%. The line was repaid during the nine-month period ended
December 31, 1999. At December 31, 1999, the line of credit agreement had
expired.
Equipment Loan Payable
On February 9, 1999, the Company entered into an agreement for an equipment
loan facility for a maximum of $2,000,000, which expired on December 31, 1999.
The loan facility charges interest at 8.4% per annum and has a termination
payment for 10% of the original principal amount. Certain equipment of the
Company secures the loan facility. Under the terms of this agreement the Company
is restricted from paying cash dividends, until the time it has completed a
qualified initial public offering of not less than $20,000,000. At March 31,
1999, the Company had borrowed $800,000 under this loan facility of which
$750,000 and $598,000 was outstanding at March 31, 1999 and December 31, 1999,
respectively.
Future minimum payments on this facility at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
2000........................................... $231
2001........................................... 265
2002........................................... 102
----
Total.......................................... $598
====
</TABLE>
The Company will pay $45,000 in 2000 and $1,000 in 2001 in relation to
other long-term debt facilities outstanding at December 31, 1999.
5. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its facilities and certain equipment under noncancelable
operating lease agreements that expire at various dates throughout fiscal 2007.
Net rental expense for these leases aggregated $444,000, $440,000, and $383,000
for the fiscal years ended March 31, 1998 and 1999, and the nine-month period
ended December 31, 1999, respectively. These amounts are net of $230,000,
$255,000, and $91,000 of sublease income for the fiscal years ended March 31,
1998 and 1999, and the nine-month period ended December 31, 1999.
Future minimum lease payments under noncancelable operating leases at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
OPERATING LEASES
----------------
(IN THOUSANDS)
<S> <C>
2000.......................................... $ 1,405
2001.......................................... 1,964
2002.......................................... 2,016
2003.......................................... 2,061
2004.......................................... 2,132
Thereafter.................................... 3,340
-------
Total minimum payments........................ $12,918
=======
</TABLE>
Litigation
On December 8, 1999, Kaifa Technology, Inc., recently acquired by E-Tek
Dynamics, Inc., filed a complaint against the Company for patent infringement in
the United States District Court, Northern District of California. In addition
to maintaining its original claim of patent infringement against the
F-10
<PAGE> 80
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company, Kaifa has asserted claims against the Company of intentional and
negligent interference with contract, trade secret misappropriation, unfair
competition and breach of contract. Kaifa is seeking a declaratory judgment,
damages, injunctive relief and attorney's fees. On February 23, 2000, the
Company filed a motion to dismiss Kaifa's complaint and joined one of their
employees named in the complaint in filing another motion to dismiss Kaifa's
complaint. On the same date, certain of the employees named in the complaint
also filed a motion to dismiss Kaifa's complaint. These motions are scheduled to
be heard on March 31, 2000. The Company intends to defend the action vigorously.
If the Company is unsuccessful in defending this action, any remedies awarded to
Kaifa may have a material adverse effect on the Company. Furthermore, defending
this action will be costly and divert management's attention regardless of
whether the action is successfully defended.
In addition, the Company is subject to various claims which arise in the
normal course of business. In the opinion of management, the ultimate
disposition of these claims will not have a material adverse effect on the
position of the Company.
6. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) Profit Sharing Plan that allows voluntary
contributions by employees who have six months or more of service. Eligible
employees may elect to contribute up to the maximum allowed under the Internal
Revenue Service regulations.
The Company made matching contributions of a participant's salary deferral
of 10%, 25%, and 25% and recognized costs of $26,000, $131,000 and $125,000
related to this plan in the fiscal years ended March 31, 1998 and 1999 and the
nine month fiscal year ended December 31, 1999, respectively.
7. INCOME TAXES
The difference between the provision for income taxes and the amount
computed by applying the federal statutory income tax rate (34%) to loss before
provision for income taxes is explained below (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
MARCH 31, ENDED
--------------- DECEMBER 31,
1998 1999 1999
---- ------- ------------
<S> <C> <C> <C>
Tax (benefit) at federal statutory rate..................... $(94) $(1,689) $(2,609)
Loss for which no tax benefit is currently recognizable..... 94 1,689 2,609
State taxes................................................. 2 2 2
Alternate minimum taxes..................................... 8 -- --
---- ------- -------
Total provision............................................. $ 10 $ 2 $ 2
==== ======= =======
</TABLE>
F-11
<PAGE> 81
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
MARCH 31,
------------------ DECEMBER 31,
1998 1999 1999
------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $ 121 $ 1,469 $ 4,363
Tax credit carryforwards................................. 788 1,044 1,428
Capitalized research and development..................... 340 390 786
Other individually immaterial items...................... 735 1,097 501
------- ------- -------
Total deferred tax assets.................................. 1,984 4,000 7,078
Valuation allowance........................................ (1,984) (4,000) (7,078)
------- ------- -------
Net deferred tax assets.................................... $ -- $ -- $ --
======= ======= =======
</TABLE>
The valuation allowance increased by $3,078,000 during the nine-month
period ended December 31, 1999, and $2,016,000 for the period ended March 31,
1999. Approximately $260,000 of the valuation allowance for deferred tax assets
relates to benefits of stock option deductions which, when recognized, will be
allocated directly to additional paid in capital.
Financial Accounting Standards Board Statement No. 109 provides for the
recognition of deferred tax assets if realization of such assets is more likely
than not. Based upon the weight of available evidence, which included the
Company's historical operating performance and the reported cumulative net
losses in all prior years, the Company has provided a full valuation allowance
against its net deferred tax assets.
As of December 31, 1999 the Company had federal and state net operating
loss carryforwards of approximately $12,000,000 and $400,000, respectively. As
of December 31, 1999, the Company also had federal and state research and
development tax credit carryforwards of approximately $900,000 and $700,000,
respectively. The net operating loss and tax credit carryforwards will expire at
various dates beginning in 2004 through 2019, if not utilized.
Utilization of the net operating loss and tax credit carryforwards may be
subject to substantial annual limitations due to the ownership change
limitations provided by the Internal Revenue Code and similar state provisions.
The annual limitation may result in the expiration of net operating losses and
tax credit carryforwards before utilization.
8. STOCKHOLDERS' EQUITY
Stock Split
On August 20, 1999 the Company's Board of Directors and stockholders
approved a two-for-one stock split of the Company's common and preferred stock.
On February 9, 2000 the Company's Board of Directors and stockholders approved
another two-for-one stock split of the Company's common and preferred stock. All
preferred stock, common stock, common equivalent shares, and per share amounts
have been adjusted retroactively to give effect to the stock splits.
F-12
<PAGE> 82
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Preferred Stock
Preferred stock consists of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1999
---------- ------------
<S> <C> <C>
Series A:
Authorized, issued and outstanding shares................. 15,160,000 15,160,000
========== ============
Series B:
Authorized, issued, and outstanding shares................ 1,000,000 1,000,000
========== ============
Series C:
Authorized, issued, and outstanding shares................ 600,000 600,000
========== ============
Series D:
Authorized shares......................................... 6,000,000 6,000,000
========== ============
Issued and outstanding shares............................. 3,977,000 3,977,000
========== ============
Series E:
Authorized shares......................................... 10,978,756
============
Issued and outstanding shares............................. 10,857,616
============
Series F:
Authorized shares......................................... 1,113,800
============
Issued and outstanding shares............................. 1,113,800
============
Series G:
Authorized shares......................................... 9,230,770
============
Issued and outstanding shares............................. 9,230,728
============
</TABLE>
All preferred stock series are convertible into common stock at the option
of the stockholder on a one-for-one basis subject to antidilution adjustments.
Conversion is mandatory concurrent with a qualified initial public offering of
not less than $15,000,000 and a per share price of not less than $3.75. Such
conversion can occur for Series A, B and C convertible preferred stock upon the
consent of the holders of a majority of the then outstanding shares of
convertible preferred stock voting as a single class. Such conversion can occur
for Series D, E, F and G convertible preferred stock upon the consent of the
holders of a majority of the then outstanding shares of Series D, E, F and G
convertible preferred stock voting as a single class. The preferred stockholders
have voting rights equal to the voting rights of the common stockholders on an
as-if-converted basis.
The Series D, E, F, and G preferred stockholders are entitled to dividends,
prior and in preference to any other dividends payable, at the rate of $0.08,
$0.095, $0.095, and $0.26 per share, respectively. The dividends are
noncumulative until and unless the Company has not closed a qualified initial
public offering or the Series D, E, F, and G preferred stock has not been
converted into common stock by December 31, 2000. In this respect, the dividends
will begin to accumulate beginning January 1, 2002 at the same dividend rate and
will be due and payable quarterly in arrears. After payment of dividends to
Series D, E, F, and G preferred stockholders, Series A, B, and C preferred
stockholders are entitled to noncumulative dividends, when and if declared by
the Board of Directors, at an annual amount of $0.01, $0.02, and $0.0275 per
share, respectively. Such dividends have a preference over the payment of
dividends on common stock.
F-13
<PAGE> 83
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In the event of liquidation, payment will be made to Series D, E, F, and G
preferred stockholders, prior and in preference to any other stockholders, for
the purchase price of $1.00, $1.20, $1.20, and $3.25 per share, respectively,
plus all declared and unpaid dividends. Subsequent to this payment, the Series
A, B, C, D, E, F, and G preferred stockholders are entitled to a liquidation
preference distribution of $0.125, $0.25, $0.85, $1.00, $1.20, $1.20, and $3.25
per share, respectively, plus all declared and unpaid dividends. Any amounts in
excess of this amount will be distributed to common stockholders.
Stock Option Plans
Under its 1990 Incentive Stock Option Plan, the Company may grant incentive
stock options and nonstatutory stock options to employees, directors, and
consultants. Under its 1998 Stock Plan, the Company may grant options and stock
purchase rights to employees and consultants provided that incentive stock
options may only be granted to employees. During the year ended December 31,
1999, the Company established the 1999 Stock Option Plan. Under its 1999 Stock
Plan, the Company may grant options and stock purchase rights to employees and
consultants provided that incentive stock options may only be granted to
employees. Options may be granted to purchase common stock at an exercise price
of not less than 100% of the fair value of the stock at the date of grant as
determined by the Board of Directors. Generally, options vest ratably over five
years and expire after ten years.
The following table summarizes activity under the 1990, 1998 and 1999 Stock
Plans:
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVERAGE
AVAILABLE OPTIONS EXERCISE
FOR GRANT OUTSTANDING PRICE
---------- ----------- --------
<S> <C> <C> <C>
Balance at March 31, 1997................................ 1,944,000 5,230,000 $0.21
Granted................................................ (2,948,000) 2,948,000 $0.48
Exercised.............................................. -- (158,000) $0.10
Canceled............................................... 1,220,000 (1,220,000) $0.37
Repurchased............................................ 8,000 -- $0.15
---------- ----------
Balance at March 31, 1998................................ 224,000 6,800,000 $0.30
Authorized............................................. 3,200,000 -- $ --
Granted................................................ (2,984,000) 2,984,000 $0.62
Exercised.............................................. -- (1,443,000) $0.13
Canceled............................................... 208,000 (208,000) $0.41
Repurchased............................................ 308,000 -- $0.63
---------- ----------
Balance at March 31, 1999................................ 956,000 8,133,000 $0.44
Authorized............................................. 5,400,000 -- --
Granted................................................ (692,000) 692,000 $0.63
Exercised.............................................. (168,000) $0.33
Canceled............................................... 218,000 (218,000) $0.55
Repurchased............................................ -- --
---------- ----------
Balance at December 31, 1999............................. 5,882,000 8,439,000 $0.45
========== ==========
Options exercisable at March 31, 1998.................... 3,076,000 $0.10
==========
Options exercisable at March 31, 1999.................... 2,660,000 $0.22
==========
Options exercisable at December 31, 1999................. 3,881,000 $0.33
==========
</TABLE>
The weighted average fair value of options granted in the fiscal years
ended March 31, 1998 and 1999 and for the nine-month period ended December 31,
1999 was $0.48, $0.55, and $0.56, respectively.
F-14
<PAGE> 84
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following summarizes option information relating to outstanding options
under the plans as of December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------ OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.0025 - $0.0125 1,236,000 .88 years $0.01 1,236,000 $0.01
$0.025 - $0.0625 165,000 4.93 years $0.04 156,000 $0.04
$.375 - $.4625 2,927,000 7.48 years $0.45 1,445,000 $0.45
$.5125 715,000 8.09 years $0.51 269,000 $0.51
$.625 3,396,000 8.79 years $0.63 775,000 $0.63
--------- ---------
$0.0025 - $.625 8,439,000 7.04 years $0.45 3,881,000 $0.33
========= =========
</TABLE>
In addition, nonplan options to purchase 800,000 shares of common stock at
an exercise price of $0.0025 per share were granted to the Company's founder and
Chairman of the Board in fiscal 1991 and are fully exercisable. These options
expire in April 2000 if not exercised.
Deferred Compensation
During the nine months ended December 31, 1999, the Company recorded
aggregate deferred compensation of $821,000 representing the difference between
the exercise price of stock options granted and the then deemed fair value of
the Company's common stock. These amounts are being amortized as charges to
operations, using the graded method, over the vesting periods of the individual
stock options, generally five years. Under the graded method, approximately
51.53%, 24.62%, 14.16%, 7.37% and 2.32%, respectively, of each options
compensation expense is recognized in each of the five years following the date
of grant. For the nine-month period ended December 31, 1999, the Company
amortized $132,000 of deferred compensation.
Pro Forma Disclosure of the Effect of Stock-Based Compensation
The Company has elected to follow APB Opinion No. 25 and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FAS
123 requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB Opinion No. 25, when the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, there is no compensation expense
recognized.
Pro forma information regarding net loss is required by FAS 123 which also
requires that the information be determined as if the Company has accounted for
its employee stock options granted during the fiscal periods ended March 31,
1998 and 1999 and the nine-month periods ended December 31, 1999 under the fair
value method of FAS 123. The fair value for these options was estimated at the
date of grant using the minimum value method with the following weighted average
assumptions:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31, NINE MONTHS ENDED
---------------------- DECEMBER 31,
1998 1999 1999
--------- --------- -----------------
<S> <C> <C> <C>
Risk-free interest rate...................... 5.9% 5.14% 6.0%
Dividend yield............................... 0% 0% 0%
Expected option life......................... 5.0 years 5.0 years 5.0 years
</TABLE>
F-15
<PAGE> 85
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The option valuation models were developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the option. Because the
Company's employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in 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 estimated fair value of the
options is amortized to expense over the options' vesting period, under the
graded method. Because FAS 123 is applicable only to options granted subsequent
to March 31, 1995, its pro forma effect will not be fully reflected until
calendar year 2000 and thereafter.
If compensation cost for the Company's stock-based compensation plan had
been determined based on the fair value at the grant dates for awards under this
plan consistent with the method provided for under FAS 123, then the Company's
net loss would have been as indicated in the pro forma amount below:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31, NINE MONTHS ENDED
------------------------ DECEMBER 31,
1998 1999 1999
--------- ----------- -----------------
<S> <C> <C> <C>
Net loss as reported............................. $(286,000) $(4,971,000) $(7,677,000)
Pro forma net loss............................... $(349,000) $(5,116,000) $(7,845,000)
Net loss per share as reported, basic and
diluted........................................ $ (0.25) $ (2.18) $ (3.11)
Pro forma net loss per share, basic and
diluted........................................ $ (0.30) $ (2.24) $ (3.18)
</TABLE>
Warrants
During the year ended March 31, 1999 the Company issued a warrant for the
purchase of 140,000 shares of the Company's Series D preferred stock at $1.00
per share in connection with entering into an equipment loan agreement. The fair
value of the warrant was determined using the Black-Scholes method and the
following assumptions: expected life 5 years, exercise price $1.00, stock price
on date of grant $1.00, expected dividend yield of 0%, risk free rate of 5%, and
expected volatility of 0.30 to be $78,000. This amount was capitalized as debt
issuance costs and is being amortized over the life of the loan. The warrant
expires not earlier than December 31, 2004. The warrant incorporates
antidilution protection.
During the nine-month period ended December 31, 1999 the Company committed
to issue a warrant for the purchase of 112,000 shares of the Company's Series E
preferred stock at a price of $1.20 per share in return for fees associated with
issuance of Series E preferred stock. The fair value of the warrant was
determined using the Black-Scholes method and the following assumptions:
expected life 5 years, exercise price $1.20, stock price on date of grant $1.20,
expected dividend yield of 0%, risk free rate of 6%, and expected volatility of
0.27 to be $48,000. This amount was offset against the proceeds of the Series E
preferred stock. The warrant expires not earlier than February 9, 2005. The
warrant incorporates antidilution protection.
During the nine-month period ended December 31, 1999 the Company committed
to issue a warrant to purchase 9,000 shares of the Company's Series E preferred
shares at a price of $1.20 per share. The fair value of the warrant was
determined using the Black-Scholes method and the following assumptions:
expected life 5 years, exercise price $1.20, stock price on date of grant $1.20,
expected dividend yield of 0%, risk free rate of 6%, and expected volatility of
0.27 to be $4,000. This amount was expensed in the current period. The warrant
expires not earlier than February 9, 2005. The warrant incorporates antidilution
protection.
F-16
<PAGE> 86
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Common Stock
At December 31, 1999, common stock reserved for future issuance is as
follows:
<TABLE>
<S> <C>
Stock option plan:
Outstanding options....................................... 8,439,000
Reserved for future grants................................ 5,882,000
----------
14,321,000
Warrants for Series D preferred stock....................... 140,000
Warrants for Series E preferred stock....................... 121,000
Nonplan stock options granted............................... 800,000
Convertible preferred stock................................. 41,939,000
----------
57,321,000
==========
</TABLE>
9. SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
Through March 31, 1998, the Company operated as one segment. For the fiscal
period ended March 31, 1999, the Company had two reportable segments: Telecom
and Commercial Photonics Group (CPG). The telecom segment performs research and
development, manufacturing, marketing and sales of fiber amplified products,
wavelength management products, high-speed opto-electronics and tunable laser
modules, which are primarily sold to manufacturers of networking and test
equipment in the optical telecommunications markets. The CPG segment performs
research and development, manufacturing, marketing and sales of photonic tools,
which are primarily used for commercial and research applications.
The Company evaluates performance and allocates resources based on profit
or loss from operations before income taxes, excluding gains and losses on the
Company's investment portfolio. The accounting policies for the reportable
segments are consistent with those described in the summary of significant
accounting policies. There were no intercompany sales or transfers.
The Company does not segregate assets by segment.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1999
-----------------------------
TELECOM CPG TOTAL
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Revenues from external customers............................ $ 45 $17,240 $17,285
Depreciation expense........................................ $ 102 $ 486 $ 588
Operating segment profit (loss)............................. $(6,658) $ 1,992 $(4,666)
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, 1999
-----------------------------
TELECOM CPG TOTAL
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues from external customers............................ $ 5,002 $13,099 $18,101
Depreciation expense........................................ $ 289 $ 467 $ 756
Operating segment profit (loss)............................. $(9,087) $ 1,625 $(7,462)
</TABLE>
F-17
<PAGE> 87
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
MARCH 31, DECEMBER 31,
1999 1999
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
PROFIT OR LOSS
Total profit or loss for reportable segments................ $(4,666) $(7,462)
Other income (expense), net................................. (303) (81)
Amortization of deferred compensation....................... -- (132)
------- -------
Income before income taxes.................................. $(4,969) $(7,675)
======= =======
</TABLE>
<TABLE>
<CAPTION>
REVENUES REVENUES
GEOGRAPHIC INFORMATION ----------- ------------
<S> <C> <C>
United States............................................... $12,445 $13,214
Asia........................................................ 2,247 1,629
Europe...................................................... 2,593 3,258
------- -------
Consolidated total........................................ $17,285 $18,101
======= =======
</TABLE>
Revenues are attributed to countries based on the location of customers.
10. NET LOSS PER SHARE AND UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
The Company follows the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." Basic and diluted net loss per share is
computed by dividing net loss by the weighted average number of common shares
outstanding during the period less outstanding nonvested shares. Outstanding
nonvested shares are not included in the computations of basic and diluted net
loss per share until the time-based vesting restrictions have lapsed.
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
MARCH 31, DECEMBER 31,
---------------- ------------
1998 1999 1999
------ ------- ------------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net loss (numerator)........................................ $ (286) $(4,971) $(7,677)
====== ======= =======
Shares used in computing historical basic and diluted net
loss per share (denominator):
Denominator for historical basic and diluted net loss per
share -- weighted average common shares outstanding....... 1,148 2,284 2,468
====== =======
Conversion of preferred stock (pro forma)................... 29,755
-------
Denominator for pro forma basic and diluted net loss per
share..................................................... 32,223
=======
Historical basic and diluted net loss per share............. $(0.25) $ (2.18) $ (3.11)
====== ======= =======
Pro forma basic and diluted net loss per share.............. $ (0.24)
=======
</TABLE>
The Company has excluded the impact of all convertible preferred stock,
warrants for convertible preferred stock and common stock and outstanding stock
options from the calculation of historical diluted loss per common share because
all such securities are antidilutive for all periods presented. The total number
of shares excluded from the calculations of historical diluted net loss per
share was 22,960,000 and 27,351,000 for the years ended March 31, 1998 and 1999
and 38,193,000 for the nine months ended December 31, 1999.
F-18
<PAGE> 88
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INTERIM FINANCIAL RESULTS (UNAUDITED)
The following table provides financial information for the nine months
ended December 31, 1998, (in thousands, except per share amount) and presents
comparable information to the Company's nine-month period ended December 31,
1999.
<TABLE>
<S> <C>
Net revenues................................................ $12,544
Gross profit................................................ $ 5,919
Net loss.................................................... $(3,375)
Historical basic and diluted net loss per share............. $ (1.50)
Shares used to compute historical basic and diluted net loss
per share................................................. 2,245
</TABLE>
12. SUBSEQUENT EVENTS
On January 12, 2000 the Company made full recourse loans aggregating
approximately $2.7 million to certain executive officers in connection with
their purchase of shares of common stock. Each of these loans were made pursuant
to a full recourse promissory note secured by a stock pledge. The notes bear no
interest but interest will be imputed and reported annually as compensation on
the officer's W-2. All unvested shares purchased by officers are subject to
repurchase by us at the original exercise price if the officer's employment is
terminated.
On February 9, 2000, the Board of Directors adopted the 2000 Stock Plan
(2000 Plan), subject to stockholder approval, to provide for the grant of
incentive stock options to purchases shares of common stock to employees,
directors and consultants. The 2000 Plan is administered by the Board of
Directors, and may be delegated to a committee.
A total of 1,000,000 shares of common stock has been reserved for issuance.
The number of shares of common stock reserved for issuance will increase
annually beginning in fiscal 2001 subject to the Board of Directors to a maximum
of 6% of the outstanding share of common stock.
The exercise price is to be determined by the Board of Directors or the
committee. The Board of Directors or the committee reserve the right, under the
Restricted Stock Repurchase Agreement to repurchase options, at a price
determined by the same, upon the termination of an optionee,
On February 9, 2000, the Board of Directors adopted the 2000 Director
Option Plan (Directors' Plan), subject to stockholder approval, to provide for
the automatic grant of options to purchase shares of common stock to our
non-employee directors who are not any of the Company's affiliates' employees or
consultants. The Directors' Plan is administered by the Board of Directors, and
may be delegated to a committee.
A total of 200,000 shares of common stock have been reserved for issuance.
Under the terms of the Directors' Plan, as of the initial public offering, each
non-employee Director, and each person who is thereafter elected or appointed
for the first time to be a non-employee, or Director by the Board stockholder,
be granted an option to purchase 25,000 shares of common stock. In addition,
upon the date of each annual stockholders' meeting subsequent to the date of
each non-employee directors' initial grant under the directors' plan, each
person who is then serving as a non-employee director automatically shall be
granted an option to purchase 5,000 shares of common stock.
On February 9, 2000, the Company's Board of Directors, subject to
stockholder approval, approved the 2000 Employee Stock Purchase Plan (Purchase
Plan). A total of 1,000,000 shares of common stock have been reserved for
issuance, plus annual increases equal to the lesser of (i) 1,000,000 shares of
common stock, (ii) 1.25% of the outstanding shares on such date or (iii) a
lesser amount determined by the Board of Directors. Under the Purchase Plan, the
Board of Directors may authorize participation by eligible employees, in
periodic offerings following the adoption of the Purchase Plan. The offering
period
F-19
<PAGE> 89
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
for any offering will be no more than 27 months. The price of common stock
purchased under the Purchase Plan will be equal to 85% of the lower of the fair
market value of the common stock on the commencement date of each offering
period or the relevant purchase date.
In the event of certain changes in control, the Board of Directors has
discretion to provide that each right to purchase common stock will be assumed
or an equivalent right will be substituted by the successor corporation. In the
event that the successor corporation does not assume or substitute each right to
purchase common stock, the Board of Directors may shorten the vesting period.
The Purchase Plan will terminate at the Board's discretion or when all of the
shares reserved for issuance under the Purchase Plan have been issued.
On February 9, 2000, the Company's board of directors, subject to approval
of the Amended and Restated Certificate of Incorporation by the state of
Delaware, authorized the reincorporation of the Company in Delaware. The par
value of the preferred and common stock is $0.001 per share. The Company's
Certificate of Incorporation will be amended to authorize 10,000,000 shares of
preferred stock and 250,000,000 shares of common stock. The board of directors
has the authority to fix or alter the designations, powers, preferences, and
rights of the shares of each such series. The Company's reincorporation has been
reflected in the consolidated financial statements for all periods presented.
On February 28, 2000, the Company issued rights to 116,000 shares of the
Company's stock in connection with a business acquisition.
F-20
<PAGE> 90
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 New Focus, Inc. 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........................................ $22,770
NASD filing fee Nasdaq National Market listing fee.......... 9,125
Printing and engraving costs................................ *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue Sky fees and expenses.................................. 3,000
Transfer Agent and Registrar fees........................... *
Miscellaneous expenses...................................... *
-------
Total....................................................... $ *
=======
</TABLE>
- -------------------------
* To be filed by amendment.
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 of the Registrant's Certificate of
Incorporation provides for the indemnification of directors to the fullest
extent permissible under Delaware law.
Article of the Registrant's Bylaws provides for the
indemnification of officers, directors and third parties acting on behalf of the
Registrant if such person acted in good faith and in a manner reasonably
believed to be in and not opposed to the best interest of the Registrant, and,
with respect to any criminal action or proceeding, the indemnified party had no
reason to believe his or her conduct was unlawful.
The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for in
the Registrant's Bylaws, and intends to enter into indemnification agreements
with any new directors and executive officers in the future.
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 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) On April 18, 1990, we sold 400,000 shares of common stock to Milton Chang
at a purchase price of $.005 per share. On April 18, 1990, the Board of
Directors granted Milton Chang an option outside
II-1
<PAGE> 91
of our Stock Option Plan for 800,000 shares of our Common Stock at an
exercise price of $.0025. Mr. Chang exercised this option on January 19,
2000.
(2) From February 28, 1997 through January 31, 2000, (the most recent
practicable date) we granted stock options to acquire an aggregate of
5,826,000, 422,000 and 1,989,200 shares of our common stock at prices
ranging from $.46 to $1.25, $.62 to $.62 and from $.62 to $1.25 to
employees, consultants and directors pursuant to our 1990 Incentive Stock
Option Plan, 1998 Stock Plan and 1999 Stock Plan, respectively.
(3) From April, 1991 through February, 1992, we issued 8,640,000 shares of
Series A preferred stock to Milton Chang pursuant to a series of put-option
agreements at a price of $.1250.
(4) From May, 1990 through January 1991 we sold 15,160,000 shares of Series A
Preferred Stock for $.125 per share to a group of private investors for an
aggregate purchase price of $1,895,000.
(5) On December 10, 1993, we sold 1,000,000 shares of Series B Preferred Stock
for $0.25 per share to a group of private investors for an aggregate
purchase price of $250,000.
(6) On July 24, 1998, we sold 600,000 shares of Series C Preferred Stock for
$.85 per share to a group of private investors for an aggregate purchase
price of $510,000.
(7) On July 31, 1998, and August 6, 1998, we sold 3,977,000 shares of Series D
Preferred Stock for $1.00 per share to a group of private investors for an
aggregate purchase price of $3,977,000.
(8) On February 9, 1999, in connection with a Loan and Security Agreement, we
issued a warrant to purchase 140,000 shares of Series D Preferred Stock at
an exercise price of $1.00 to Venture Lending and Leasing II, Inc.
(9) On June 14, 1999, we sold 10,857,616 shares of Series E Preferred Stock for
$1.20 per share to a group of private investors for an aggregate purchase
price of $13,029,139.20.
(10) We entered into a Technology Transfer Agreement dated June 24, 1999, with
Peter Chen pursuant to which we purchased certain technology from Mr. Chen
in consideration for options to purchase 230,000 shares of our common stock
at the fair market value and the sum of $220,000. Additional terms and
conditions are set forth in such Technology Transfer Agreement.
(11) On October 15, 1999, we sold 1,113,800 shares of Series F Preferred for
$1.20 per share to a group of private investors for an aggregate purchase
price of $1,336,560.
(12) On November 23, 1999, we sold 9,350,728 shares of Series G Preferred for
$3.25 per share to a group of private investors for an aggregate purchase
price of $30,389,866.
(13) On March 3, 1999 and November 1, 1999, we entered into consulting
agreements with John Dexheimer, one of our directors, for services rendered
in connection with the Series E, Series F and Series G Preferred Stock
financings. Pursuant to these agreements, Mr. Dexheimer received warrants
to purchase 111,792 shares of Series E Preferred Stock at a price per share
of $1.20.
(14) On February 28, 2000, we issued rights to 116,000 shares of our stock in
connection with a business acquisition.
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.
The sales of the above securities were deemed to be exempt from
registration in reliance on Rule 701 promulgated under Section 3(b) under the
Securities Act as transactions pursuant to a compensatory benefit plan or a
written contract relating to compensation, or in reliance on Section 4(2) of the
Securities Act or Regulation D promulgated thereunder as transactions by an
issuer not involving any public offering. The recipients of securities in each
such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions.
II-2
<PAGE> 92
All recipients either received adequate information about New Focus, Inc. or had
access, through employment or other relationships, to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1** Amended and Restated Certificate of Incorporation of the
Registrant
3.2** Bylaws of the Registrant
4.1* Form of stock certificates
4.2* Warrant to Purchase Series D Preferred Stock dated February
1999, between Registrant and Venture Lending and Leasing,
see Exhibit 10.15.
4.3** Warrant to Purchase Series E Preferred Stock dated February
9, 2000, between Registrant and John Dexheimer.
4.4** Warrant to Purchase Series E Preferred stock dated February
9, 2000, between Registrant and Pamela York.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1** Form of Indemnification Agreement between the Registrant and
each of its directors and officers
10.2 2000 Stock Plan
10.3 2000 Employee Stock Purchase Plan
10.4 2000 Director Option Plan and form of agreement thereunder
10.5** Form of Amendment to New Focus, Inc. Non Statutory Stock
Option Agreement, Restated Stock Purchase Agreement,
including Security Agreement and Promissory Note between
Registrant and Kenneth E. Westrick, Paul Smith, Bao-Tong Ma,
George Yule, Robert Marsland, Timothy Day, dated January 12,
2000.
10.6** Premises Lease Contract between Registrant and Shenzhen New
and High-tech Village Development Company dated September
23, 1999.
10.7 Lease Agreement between Registrant and Silicon Valley
Properties dated December 23, 1999.
10.8* Agreement on Terms and Conditions of Purchase and Sale of
Optical Components dated January 1, 2000.
10.9 Lease Agreement between Focused Research Inc. and University
Science Center Partnership, dated May 22, 1996, as amended,
June 19, 1997.
10.10** Fifth Amended and Restated Registration Rights Agreement
10.11* Development Agreement between Registrant and Hewlett-Packard
GmbH dated December 23, 1996.
10.12* Addendum to the Development Agreement between Registrant and
Hewlett-Packard GmbH dated November 6, 1997.
10.13* Addendum No. 2 to the Development Agreement of December 23,
1996 between Registrant and Agilent Technologies Deutschland
GmbH dated December 10, 1999.
10.14* Memorandum of Agreement between Registrant and Alcatel USA
Sourcing, L.P. dated January 27, 2000.
10.15* Loan and Security Financing Agreement between Registrant and
Venture Lending and Leasing II, Inc.
21.1** List of Subsidiaries
23.1** Consent of Ernst & Young LLP, Independent Auditors
23.2* Consent of Counsel (see Exhibit 5.1)
24.1** Power of Attorney
27.1* Financial Data Schedules
</TABLE>
- -------------------------
* To be filed by amendment.
** Previously filed.
II-3
<PAGE> 93
(b) FINANCIAL STATEMENT SCHEDULES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
<TABLE>
<CAPTION>
ADDITIONS-
BALANCES AT CHARGED TO BALANCES
BEGINNING COSTS AND DEDUCTIONS- AT END OF
OF PERIOD EXPENSES WRITE-OFFS PERIOD
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Year ended March 31, 1998...................... $ 70 $ 63 -- $$133
Year ended March 31, 1999...................... $133 $ 40 $(38) $135
Nine months ended December 31, 1999............ $135 $ 39 $(14) $160
</TABLE>
Schedules other than that listed above have been omitted since they are not
required or are not applicable or the required information is shown in the
financial statements or related notes.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification 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 controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by a director,
officer or controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, 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-4
<PAGE> 94
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Santa
Clara, State of California, on the 6th day of March, 2000.
NEW FOCUS, INC.
By: /s/ KENNETH E. WESTRICK
------------------------------------
Kenneth E. Westrick
President and Chief Executive
Officer
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/ KENNETH E. WESTRICK President, Chief Executive March 6, 2000
- -------------------------------------------------------- Officer and Director
Kenneth E. Westrick (Principal Executive
Officer)
/s/ WILLIAM L. POTTS, JR.* Chief Financial Officer March 6, 2000
- -------------------------------------------------------- (Principal Financial and
William L. Potts, Jr. Accounting Officer)
/s/ CHARLES BOPPELL* Director March 6, 2000
- --------------------------------------------------------
Charles Boppell
/s/ DR. MILTON CHANG* Director March 6, 2000
- --------------------------------------------------------
Dr. Milton Chang
/s/ JOHN DEXHEIMER* Director March 6, 2000
- --------------------------------------------------------
John Dexheimer
/s/ DR. WINSTON FU* Director March 6, 2000
- --------------------------------------------------------
Dr. Winston Fu
/s/ R. CLARK HARRIS* Director March 6, 2000
- --------------------------------------------------------
R. Clark Harris
/s/ ROBERT D. PAVEY* Director March 6, 2000
- --------------------------------------------------------
Robert D. Pavey
*By: /s/ KENNETH E. WESTRICK
------------------------------------------------
Kenneth E. Westrick
Attorney-in-fact
</TABLE>
II-5
<PAGE> 95
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1** Amended and Restated Certificate of Incorporation of the
Registrant
3.2** Bylaws of the Registrant
4.1* Form of stock certificates
4.2* Warrant to Purchase Series D Preferred Stock dated February
1999, between Registrant and Venture Lending and Leasing,
see Exhibit 10.15.
4.3** Warrant to Purchase Series E Preferred Stock dated February
9, 2000, between Registrant and John Dexheimer.
4.4** Warrant to Purchase Series E Preferred stock dated February
9, 2000, between Registrant and Pamela York.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1** Form of Indemnification Agreement between the Registrant and
each of its directors and officers
10.2 2000 Stock Plan
10.3 2000 Employee Stock Purchase Plan
10.4 2000 Director Option Plan and form of agreement thereunder
10.5** Form of Amendment to New Focus, Inc. Non Statutory Stock
Option Agreement, Restated Stock Purchase Agreement,
including Security Agreement and Promissory Note between
Registrant and Kenneth E. Westrick, Paul Smith, Bao-Tong Ma,
George Yule, Robert Marsland, Timothy Day, dated January 12,
2000.
10.6** Premises Lease Contract between Registrant and Shenzhen New
and High-tech Village Development Company dated September
23, 1999.
10.7 Lease Agreement between Registrant and Silicon Valley
Properties dated December 23, 1999.
10.8* Agreement on Terms and Conditions of Purchase and Sale of
Optical Components dated January 1, 2000.
10.9 Lease Agreement between Focused Research Inc. and University
Science Center Partnership, dated May 22, 1996, as amended,
June 19, 1997.
10.10** Fifth Amended and Restated Registration Rights Agreement
10.11* Development Agreement between Registrant and Hewlett-Packard
GmbH dated December 23, 1996.
10.12* Addendum to the Development Agreement between Registrant and
Hewlett-Packard GmbH dated November 6, 1997.
10.13* Addendum No. 2 to the Development Agreement of December 23,
1996 between Registrant and Agilent Technologies Deutschland
GmbH dated December 10, 1999.
10.14* Memorandum of Agreement between Registrant and Alcatel USA
Sourcing, L.P. dated January 27, 2000.
10.15* Loan and Security Agreement between Registrant and Venture
Lending and Leasing II, Inc.
21.1** List of Subsidiaries
23.1** Consent of Ernst & Young LLP, Independent Auditors
23.2* Consent of Counsel (see Exhibit 5.1)
24.1** Power of Attorney
27.1* Financial Data Schedules
</TABLE>
- -------------------------
* To be filed by amendment.
** Previously filed.
<PAGE> 1
EXHIBIT 10.2
NEW FOCUS, INC.
2000 STOCK PLAN
1. Purposes of the Plan. The purposes of this 2000 Stock Plan are:
- to attract and retain the best available personnel for
positions of substantial responsibility,
- to provide additional incentive to Employees, Directors and
Consultants, and
- to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees as shall
be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options or Stock Purchase Rights are,
or will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means a committee of Directors appointed by the Board
in accordance with Section 4 of the Plan.
(f) "Common Stock" means the common stock of the Company.
(g) "Company" means New Focus, Inc., a California corporation.
(h) "Consultant" means any person, including an advisor, engaged by
the Company or a Parent or Subsidiary to render services to such entity.
(i) "Director" means a member of the Board.
<PAGE> 2
(j) "Disability" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(m) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(o) "Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
(p) "Notice of Grant" means a written or electronic notice evidencing
certain terms and conditions of an individual Option or Stock Purchase Right
grant. The Notice of Grant is part of the Option Agreement.
-2-
<PAGE> 3
(q) "Officer" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(r) "Option" means a stock option granted pursuant to the Plan.
(s) "Option Agreement" means an agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
(t) "Option Exchange Program" means a program whereby outstanding
Options are surrendered in exchange for Options with a lower exercise price.
(u) "Optioned Stock" means the Common Stock subject to an Option or
Stock Purchase Right.
(v) "Optionee" means the holder of an outstanding Option or Stock
Purchase Right granted under the Plan.
(w) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(x) "Plan" means this 2000 Stock Option Plan.
(y) "Restricted Stock" means shares of Common Stock acquired pursuant
to a grant of Stock Purchase Rights under Section 11 of the Plan.
(z) "Restricted Stock Purchase Agreement" means a written agreement
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted Stock
Purchase Agreement is subject to the terms and conditions of the Plan and the
Notice of Grant.
(aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(bb) "Section 16(b) " means Section 16(b) of the Exchange Act.
(cc) "Service Provider" means an Employee, Director or Consultant.
(dd) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 13 of the Plan.
(ee) "Stock Purchase Right" means the right to purchase Common Stock
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ff) "Subsidiary" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
-3-
<PAGE> 4
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 1,000,000 Shares, plus the Shares available for future
issuance under the New Focus, Inc. 1998 Stock Plan (the "1998 Plan"), and the
New Focus, Inc. 1999 Stock Option Plan (the "1999 Plan") on the date the
Securities and Exchange Commission declares the company's registration statement
effective and any Shares returned to the 1998 and 1999 Stock Plans.
The number of Shares reserved for issuance under the Plan shall increase
annually on the first day of the Company's fiscal year beginning in 2001 by an
amount of Shares equal to the lesser of (i) 9,000,000 Shares, (ii) 6% of the
outstanding Shares on such date or (iii) an amount determined by the Board. The
Shares may be authorized, but unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
the Plan, whether upon exercise of an Option or Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
4. Administration of the Plan.
(a) Procedure.
(i) Multiple Administrative Bodies. Different Committees with
respect to different groups of Service Providers may administer the Plan.
(ii) Section 162(m). To the extent that the Administrator
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify transactions
hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder
shall be structured to satisfy the requirements for exemption under Rule 16b-3.
(iv) Other Administration. Other than as provided above, the Plan
shall be administered by (A) the Board or (B) a Committee, which committee shall
be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
-4-
<PAGE> 5
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any Option or Stock Purchase Right granted hereunder.
Such terms and conditions include, but are not limited to, the exercise price,
the time or times when Options or Stock Purchase Rights may be exercised (which
may be based on performance criteria), any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or limitation regarding any Option
or Stock Purchase Right or the shares of Common Stock relating thereto, based in
each case on such factors as the Administrator, in its sole discretion, shall
determine;
(vi) to reduce the exercise price of any Option or Stock Purchase
Right to the then current Fair Market Value if the Fair Market Value of the
Common Stock covered by such Option or Stock Purchase Right shall have declined
since the date the Option or Stock Purchase Right was granted;
(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to modify or amend each Option or Stock Purchase Right
(subject to Section 15(c) of the Plan), including the discretionary authority to
extend the post-termination exercisability period of Options longer than is
otherwise provided for in the Plan;
(xi) to allow Optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the Shares to be issued upon exercise
of an Option or Stock Purchase Right that number of Shares having a Fair Market
Value equal to the amount required to be withheld. The Fair Market Value of the
Shares to be withheld shall be determined on the date that the amount of tax to
be withheld is to be determined. All elections by an Optionee to have Shares
withheld for this purpose shall be made in such form and under such conditions
as the Administrator may deem necessary or advisable;
(xii) to authorize any person to execute on behalf of the Company
any instrument required to effect the grant of an Option or Stock Purchase Right
previously granted by the Administrator;
-5-
<PAGE> 6
(xiii) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Stock Purchase Rights.
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may
be granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. Limitations.
(a) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 6(a), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere in
any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal year of
the Company, Options to purchase more than 1,000,000 Shares.
(ii) In connection with his or her initial service, a Service
Provider may be granted Options to purchase up to an additional 1,000,000
Shares, which shall not count against the limit set forth in subsection (i)
above.
(iii) The foregoing limitations shall be adjusted proportionately
in connection with any change in the Company's capitalization as described in
Section 13.
(iv) If an Option is cancelled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 13), the cancelled Option will be counted against the
limits set forth in subsections (i) and (ii) above. For this purpose, if the
exercise price of an Option is reduced, the transaction will be treated as a
cancellation of the Option and the grant of a new Option.
7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall
become effective upon its adoption by the Board. It shall continue in effect for
a term of ten (10) years unless terminated earlier under Section 15 of the Plan.
-6-
<PAGE> 7
8. Term of Option. The term of each Option shall be stated in the Option
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be five (5) years from the date of grant or such
shorter term as may be provided in the Option Agreement.
9. Option Exercise Price and Consideration.
(a) Exercise Price. The per share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive
Stock Option is granted, owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee described
in paragraph (A) immediately above, the per Share exercise price shall be no
less than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price of less than 100% of the Fair Market Value per Share
on the date of grant pursuant to a merger or other corporate transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions that must be satisfied before the
Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
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<PAGE> 8
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six months
on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
(v) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement. Unless the Administrator provides otherwise,
vesting of Options granted hereunder shall be tolled during any unpaid leave of
absence. An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (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 Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number of
Shares thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. If an
Optionee ceases to be a Service Provider, other than upon the Optionee's death
or Disability, the Optionee may exercise
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<PAGE> 9
his or her Option within such period of time as is specified in the Option
Agreement to the extent that the Option is vested on the date of termination
(but in no event later than the expiration of the term of such Option as set
forth in the Option Agreement). In the absence of a specified time in the Option
Agreement, the Option shall remain exercisable for three (3) months following
the Optionee's termination. If, on the date of termination, the Optionee is not
vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified by the
Administrator, the Option shall terminate, and the Shares covered by such Option
shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
to the extent the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
the Option may be exercised within such period of time as is specified in the
Option Agreement (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant), by the Optionee's estate or by a
person who acquires the right to exercise the Option by bequest or inheritance,
but only to the extent that the Option is vested on the date of death. In the
absence of a specified time in the Option Agreement, the Option shall remain
exercisable for twelve (12) months following the Optionee's termination. If, at
the time of death, the Optionee is not vested as to his or her entire Option,
the Shares covered by the unvested portion of the Option shall immediately
revert to the Plan. The Option may be exercised by the executor or administrator
of the Optionee's estate or, if none, by the person(s) entitled to exercise the
Option under the Optionee's will or the laws of descent or distribution. If the
Option is not so exercised within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to
buy out for a payment in cash or Shares an Option previously granted based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
11. Stock Purchase Rights.
(a) Rights to Purchase. Stock Purchase Rights may be issued either
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically, by means of a Notice of Grant, of the
terms, conditions and restrictions related to the offer, including the number of
Shares that the offeree shall be entitled to purchase, the price to be paid, and
the time within which the offeree must accept
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<PAGE> 10
such offer. The offer shall be accepted by execution of a Restricted Stock
Purchase Agreement in the form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's service with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to 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 the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 13
of the Plan.
12. Non-Transferability of Options and Stock Purchase Rights. Unless
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
Asset Sale.
(a) Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall
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<PAGE> 11
be made with respect to, the number or price of shares of Common Stock subject
to an Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse
as to all such Shares, provided the proposed dissolution or liquidation takes
place at the time and in the manner contemplated. To the extent it has not been
previously exercised, an Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the event
that the successor corporation refuses to assume or substitute for the Option or
Stock Purchase Right, the Optionee shall fully vest in and have the right to
exercise the Option or Stock Purchase Right as to all of the Optioned Stock,
including Shares as to which it would not otherwise be vested or exercisable. If
an Option or Stock Purchase Right becomes fully vested and exercisable in lieu
of assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option or Stock Purchase Right shall be fully vested and exercisable for a
period of fifteen (15) days from the date of such notice, and the Option or
Stock Purchase Right shall terminate upon the expiration of such period. For the
purposes of this paragraph, the Option or Stock Purchase Right shall be
considered assumed if, following the merger or sale of assets, the option or
right confers the right to purchase or receive, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets by holders of Common Stock
for each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares); provided, however, that if
such consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option or Stock Purchase Right, for each Share
of Optioned Stock subject to the Option or Stock Purchase Right, to be solely
common stock of the successor corporation or its Parent equal in fair market
value to the per share consideration received by holders of Common Stock in the
merger or sale of assets.
14. Date of Grant. The date of grant of an Option or Stock Purchase
Right shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall be
provided to each Optionee within a reasonable time after the date of such grant.
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<PAGE> 12
15. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend,
alter, suspend or terminate the Plan.
(b) Shareholder Approval. The Company shall obtain shareholder
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
16. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued pursuant to the
exercise of an Option or Stock Purchase Right unless the exercise of such Option
or Stock Purchase Right and the issuance and delivery of such Shares shall
comply with Applicable Laws and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an
Option or Stock Purchase Right, the Company may require the person exercising
such Option or Stock Purchase Right to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.
17. Inability to Obtain Authority. The inability of the Company to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
18. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. Shareholder Approval. The Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
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<PAGE> 1
EXHIBIT 10.3
NEW FOCUS, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 2000 Employee Stock
Purchase Plan of New Focus, Inc.
1. Purpose. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the intention
of the Company to have the Plan qualify as an "Employee Stock Purchase Plan"
under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the Company or any
committee thereof designated by the Board of Directors of the Company in
accordance with Section 14 of the Plan.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Common Stock" shall mean the common stock of the Company.
(d) "Company" shall mean New Focus, Inc. and any Designated
Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross earnings,
commissions, but exclusive of payments for overtime, shift premium, incentive
compensation, other bonuses and other compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary that has been
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of the
Company for tax purposes whose customary employment with the Company is at least
twenty (20) hours per week and more than five (5) months in any calendar year.
For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "Enrollment Date" shall mean the first Trading Day of each
Offering Period.
(i) "Exercise Date" shall mean the last Trading Day of each Purchase
Period.
<PAGE> 2
(j) "Fair Market Value" shall mean, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the date of determination, as reported in
The Wall Street Journal or such other source as the Board deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean of the closing bid and asked prices for the Common Stock prior
to the date of determination, as reported in The Wall Street Journal or such
other source as the Board deems reliable;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board; or
(iv) For purposes of the Enrollment Date of the first Offering
Period under the Plan, the Fair Market Value shall be the initial price to the
public as set forth in the final prospectus included within the registration
statement in Form S-1 filed with the Securities and Exchange Commission for the
initial public offering of the Company's Common Stock (the "Registration
Statement").
(k) "Offering Periods" shall mean the periods of approximately
twenty-four (24) months during which an option granted pursuant to the Plan may
be exercised, commencing on the first Trading Day on or after January 31 and
July 31 of each year and terminating on the last Trading Day in the periods
ending twenty-four months later; provided, however, that the first Offering
Period under the Plan shall commence with the first Trading Day on or after the
date on which the Securities and Exchange Commission declares the Company's
Registration Statement effective and ending on the last Trading Day on or before
July 30, 2002. The duration and timing of Offering Periods may be changed
pursuant to Section 4 of this Plan.
(l) "Plan" shall mean this 2000 Employee Stock Purchase Plan.
(m) "Purchase Period" shall mean the approximately six month period
commencing after one Exercise Date and ending with the next Exercise Date,
except that the first Purchase Period of any Offering Period shall commence on
the Enrollment Date and end with the next Exercise Date.
(n) "Purchase Price" shall mean 85% of the Fair Market Value of a
share of Common Stock on the Enrollment Date or on the Exercise Date, whichever
is lower; provided however, that the Purchase Price may be adjusted by the Board
pursuant to Section 20.
(o) "Reserves" shall mean the number of shares of Common Stock
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
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<PAGE> 3
(p) "Subsidiary" shall mean a corporation, domestic or foreign, of
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(q) "Trading Day" shall mean a day on which national stock exchanges
and the Nasdaq System are open for trading.
3. Eligibility.
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. Offering Periods. The Plan shall be implemented by consecutive,
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after January 31 and July 31 each year, or on such other date
as the Board shall determine, and continuing thereafter until terminated in
accordance with Section 20 hereof; provided, however, that the first Offering
Period under the Plan shall commence with the first Trading Day on or after the
date on which the Securities and Exchange Commission declares the Company's
Registration Statement effective and ending on the last Trading Day on or before
July 30, 2002. The Board shall have the power to change the duration of Offering
Periods (including the commencement dates thereof) with respect to future
offerings without shareholder approval if such change is announced at least five
(5) days prior to the scheduled beginning of the first Offering Period to be
affected thereafter.
5. Participation.
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
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<PAGE> 4
6. Payroll Deductions.
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding fifteen (15%) of the
Compensation which he or she receives on each pay day during the Offering
Period.
(b) All payroll deductions made for a participant shall be credited
to his or her account under the Plan and shall be withheld in whole percentages
only. A participant may not make any additional payments into such account.
(c) A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof, or may increase or decrease the rate of
his or her payroll deductions during the Offering Period by completing or filing
with the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's
payroll deductions may be decreased to zero percent (0%) at any time during a
Purchase Period. Payroll deductions shall recommence at the rate provided in
such participant's subscription agreement at the beginning of the first Purchase
Period which is scheduled to end in the following calendar year, unless
terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or at
the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period, each
eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Purchase Period more than 5,000
shares of the Company's Common Stock (subject to any adjustment pursuant to
Section 19), and provided further that such purchase shall be subject to the
limitations set forth in Sections 3(b) and 12 hereof. The Board may, for future
Offering Periods, increase or decrease, in its absolute discretion, the maximum
number of shares of
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<PAGE> 5
the Company's Common Stock an Employee may purchase during each Purchase Period
of such Offering Period. Exercise of the option shall occur as provided in
Section 8 hereof, unless the participant has withdrawn pursuant to Section 10
hereof. The option shall expire on the last day of the Offering Period.
8. Exercise of Option.
(a) Unless a participant withdraws from the Plan as provided in
Section 10 hereof, his or her option for the purchase of shares shall be
exercised automatically on the Exercise Date, and the maximum number of full
shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to purchase
shares hereunder is exercisable only by him or her.
(b) If the Board determines that, on a given Exercise Date, the
number of shares with respect to which options are to be exercised may exceed
(i) the number of shares of Common Stock that were available for sale under the
Plan on the Enrollment Date of the applicable Offering Period, or (ii) the
number of shares available for sale under the Plan on such Exercise Date, the
Board may in its sole discretion (x) provide that the Company shall make a pro
rata allocation of the shares of Common Stock available for purchase on such
Enrollment Date or Exercise Date, as applicable, in as uniform a manner as shall
be practicable and as it shall determine in its sole discretion to be equitable
among all participants exercising options to purchase Common Stock on such
Exercise Date, and continue all Offering Periods then in effect, or (y) provide
that the Company shall make a pro rata allocation of the shares available for
purchase on such Enrollment Date or Exercise Date, as applicable, in as uniform
a manner as shall be practicable and as it shall determine in its sole
discretion to be equitable among all participants exercising options to purchase
Common Stock on such Exercise Date, and terminate any or all Offering Periods
then in effect pursuant to Section 20 hereof. The Company may make pro rata
allocation of the shares available on the Enrollment Date of any applicable
Offering Period pursuant to the preceding sentence, notwithstanding any
authorization of additional shares for issuance under the Plan by the Company's
shareholders subsequent to such Enrollment Date.
9. Delivery. As promptly as practicable after each Exercise Date on
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of a certificate representing the shares
purchased upon exercise of his or her option.
10. Withdrawal.
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any time by giving written notice to the Company in
the form of Exhibit B to this Plan. All of the participant's payroll deductions
credited to his or her account shall be paid to such participant
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<PAGE> 6
promptly after receipt of notice of withdrawal and such participant's option for
the Offering Period shall be automatically terminated, and no further payroll
deductions for the purchase of shares shall be made for such Offering Period. If
a participant withdraws from an Offering Period, payroll deductions shall not
resume at the beginning of the succeeding Offering Period unless the participant
delivers to the Company a new subscription agreement.
(b) A participant's withdrawal from an Offering Period shall not
have any effect upon his or her eligibility to participate in any similar plan
which may hereafter be adopted by the Company or in succeeding Offering Periods
which commence after the termination of the Offering Period from which the
participant withdraws.
11. Termination of Employment.
Upon a participant's ceasing to be an Employee, for any reason, he
or she shall be deemed to have elected to withdraw from the Plan and the payroll
deductions credited to such participant's account during the Offering Period but
not yet used to exercise the option shall be returned to such participant or, in
the case of his or her death, to the person or persons entitled thereto under
Section 15 hereof, and such participant's option shall be automatically
terminated. The preceding sentence notwithstanding, a participant who receives
payment in lieu of notice of termination of employment shall be treated as
continuing to be an Employee for the participant's customary number of hours per
week of employment during the period in which the participant is subject to such
payment in lieu of notice.
12. Interest. No interest shall accrue on the payroll deductions of a
participant in the Plan.
13. Stock.
(a) Subject to adjustment upon changes in capitalization of the Company
as provided in Section 19 hereof, the maximum number of shares of the Company's
Common Stock which shall be made available for sale under the Plan shall be
1,000,000 shares plus an annual increase to be added on the first beginning in
2001, equal to the lesser of (i) 1,000,000 shares, (ii) 1.25% of the outstanding
shares on such date or (iii) a lesser amount determined by the board.
(b) The participant shall have no interest or voting right in shares
covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant or in the name of the participant and
his or her spouse.
14. Administration. The Plan shall be administered by the Board or a
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision and
determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
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<PAGE> 7
15. Designation of Beneficiary.
(a) A participant may file a written designation of a beneficiary
who is to receive any shares and cash, if any, from the participant's account
under the Plan in the event of such participant's death subsequent to an
Exercise Date on which the option is exercised but prior to delivery to such
participant of such shares and cash. In addition, a participant may file a
written designation of a beneficiary who is to receive any cash from the
participant's account under the Plan in the event of such participant's death
prior to exercise of the option. If a participant is married and the designated
beneficiary is not the spouse, spousal consent shall be required for such
designation to be effective.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more dependents or
relatives of the participant, or if no spouse, dependent or relative is known to
the Company, then to such other person as the Company may designate.
16. Transferability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the Company
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each
participant in the Plan. Statements of account shall be given to participating
Employees at least annually, which statements shall set forth the amounts of
payroll deductions, the Purchase Price, the number of shares purchased and the
remaining cash balance, if any.
19. Adjustments Upon Changes in Capitalization, Dissolution,
Liquidation, Merger or Asset Sale.
(a) Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the Reserves, the maximum number of shares each
participant may purchase each Purchase Period (pursuant to Section 7), as well
as the price per share and the number of shares of Common Stock covered by each
option under the Plan which has not yet been exercised shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of
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<PAGE> 8
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board. The New
Exercise Date shall be before the date of the Company's proposed dissolution or
liquidation. The Board shall notify each participant in writing, at least ten
(10) business days prior to the New Exercise Date, that the Exercise Date for
the participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
(c) Merger or Asset Sale. In the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, any Purchase Periods
then in progress shall be shortened by setting a new Exercise Date (the "New
Exercise Date") and any Offering Periods then in progress shall end on the New
Exercise Date. The New Exercise Date shall be before the date of the Company's
proposed sale or merger. The Board shall notify each participant in writing, at
least ten (10) business days prior to the New Exercise Date, that the Exercise
Date for the participant's option has been changed to the New Exercise Date and
that the participant's option shall be exercised automatically on the New
Exercise Date, unless prior to such date the participant has withdrawn from the
Offering Period as provided in Section 10 hereof.
20. Amendment or Termination.
(a) The Board of Directors of the Company may at any time and for
any reason terminate or amend the Plan. Except as provided in Section 19 hereof,
no such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Offering Period or the Plan
is in the best interests of the Company and its shareholders. Except as provided
in Section 19 and this Section 20 hereof, no amendment may make any change in
any option theretofore granted which adversely affects the rights of any
participant. To the extent necessary to comply with Section 423 of the Code (or
any successor rule or provision or any other applicable law, regulation or stock
exchange rule), the Company shall obtain shareholder approval in such a manner
and to such a degree as required.
(b) Without shareholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount
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<PAGE> 9
withheld during an Offering Period, establish the exchange ratio applicable to
amounts withheld in a currency other than U.S. dollars, permit payroll
withholding in excess of the amount designated by a participant in order to
adjust for delays or mistakes in the Company's processing of properly completed
withholding elections, establish reasonable waiting and adjustment periods
and/or accounting and crediting procedures to ensure that amounts applied toward
the purchase of Common Stock for each participant properly correspond with
amounts withheld from the participant's Compensation, and establish such other
limitations or procedures as the Board (or its committee) determines in its sole
discretion advisable which are consistent with the Plan.
(c) In the event the Board determines that the ongoing operation of
the Plan may result in unfavorable financial accounting consequences, the Board
may, in its discretion and, to the extent necessary or desirable, modify or
amend the Plan to reduce or eliminate such accounting consequence including, but
not limited to:
(i) altering the Purchase Price for any Offering Period
including an Offering Period underway at the time of the change in Purchase
Price;
(ii) shortening any Offering Period so that Offering Period
ends on a new Exercise Date, including an Offering Period underway at the time
of the Board action; and
(iii) allocating shares.
Such modifications or amendments shall not require stockholder approval
or the consent of any Plan participants.
21. Notices. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any such
exercise that the shares are being purchased only for investment and without any
present intention to sell or distribute such shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
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<PAGE> 10
24. Automatic Transfer to Low Price Offering Period. To the extent
permitted by any applicable laws, regulations, or stock exchange rules if the
Fair Market Value of the Common Stock on any Exercise Date in an Offering Period
is lower than the Fair Market Value of the Common Stock on the Enrollment Date
of such Offering Period, then all participants in such Offering Period shall be
automatically withdrawn from such Offering Period immediately after the exercise
of their option on such Exercise Date and automatically re-enrolled in the
immediately following Offering Period as of the first day thereof.
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<PAGE> 11
EXHIBIT A
NEW FOCUS, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date:___________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. ____________________ hereby elects to participate in the New Focus, Inc.
Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") and
subscribes to purchase shares of the Company's Common Stock in
accordance with this Subscription Agreement and the Employee Stock
Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount
of ____% of my Compensation on each payday (from 0 to _____%) during the
Offering Period in accordance with the Employee Stock Purchase Plan.
(Please note that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise my
option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is
in all respects subject to the terms of the Plan. I understand that my
ability to exercise the option under this Subscription Agreement is
subject to shareholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only).
6. I understand that if I dispose of any shares received by me pursuant to
the Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares) or one year after
the Exercise Date, I will be treated for federal income tax purposes as
having received ordinary income at the time of such disposition in an
amount equal to the excess of the fair market value of the shares at the
time such shares were purchased by me over the price which I paid for
the shares. I hereby agree to notify the Company in writing within 30
days after the date of any disposition of my shares and I will make
adequate provision for Federal, state or other tax withholding
obligations, if any, which arise upon the
<PAGE> 12
disposition of the Common Stock. The Company may, but will not be
obligated to, withhold from my compensation the amount necessary to meet
any applicable withholding obligation including any withholding
necessary to make available to the Company any tax deductions or
benefits attributable to sale or early disposition of Common Stock by
me. If I dispose of such shares at any time after the expiration of the
2-year and 1-year holding periods, I understand that I will be treated
for federal income tax purposes as having received income only at the
time of such disposition, and that such income will be taxed as ordinary
income only to the extent of an amount equal to the lesser of (1) the
excess of the fair market value of the shares at the time of such
disposition over the purchase price which I paid for the shares, or (2)
15% of the fair market value of the shares on the first day of the
Offering Period. The remainder of the gain, if any, recognized on such
disposition will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon
my eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print)___________________________________________________
(First) (Middle) (Last)
_________________________ __________________________________
Relationship
__________________________________
(Address)
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<PAGE> 13
Employee's Social
Security Number: ___________________________________
Employee's Address: ___________________________________
___________________________________
___________________________________
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:_________________________ ___________________________________
Signature of Employee
___________________________________
Spouse's Signature
(If beneficiary other than spouse)
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<PAGE> 14
EXHIBIT B
NEW FOCUS, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the New Focus,
Inc. Employee Stock Purchase Plan which began on ____________, ______ (the
"Enrollment Date") hereby notifies the Company that he or she hereby withdraws
from the Offering Period. He or she hereby directs the Company to pay to the
undersigned as promptly as practicable all the payroll deductions credited to
his or her account with respect to such Offering Period. The undersigned
understands and agrees that his or her option for such Offering Period will be
automatically terminated. The undersigned understands further that no further
payroll deductions will be made for the purchase of shares in the current
Offering Period and the undersigned shall be eligible to participate in
succeeding Offering Periods only by delivering to the Company a new Subscription
Agreement.
Name and Address of Participant:
___________________________________
___________________________________
___________________________________
Signature:
___________________________________
Date:______________________________
<PAGE> 1
EXHIBIT 10.4
NEW FOCUS, INC.
2000 DIRECTOR OPTION PLAN
1. Purposes of the Plan. The purposes of this 2000 Director Option Plan
are to attract and retain the best available personnel for service as Outside
Directors (as defined herein) of the Company, to provide additional incentive to
the Outside Directors of the Company to serve as Directors, and to encourage
their continued service on the Board.
All options granted hereunder shall be nonstatutory stock options.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Board" means the Board of Directors of the Company.
(b) "Change of Control" means the occurrence of any of the following
events:
(i) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) becomes the "beneficial owner" (as defined in Rule
13d-3 of the Exchange Act), directly or indirectly, of securities of the Company
representing fifty percent (50%) or more of the total voting power represented
by the Company's then outstanding voting securities; or
(ii) The consummation of the sale or disposition by the Company
of all or substantially all of the Company's assets; or
(iii) The consummation of a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation which
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity or its parent) at
least fifty percent (50%) of the total voting power represented by the voting
securities of the Company or such surviving entity or its parent outstanding
immediately after such merger or consolidation.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Common Stock" means the common stock of the Company.
(e) "Company" means New Focus, Inc., a California corporation.
(f) "Director" means a member of the Board.
(g) "Disability" means total and permanent disability as defined in
section 22(e)(3) of the Code.
<PAGE> 2
(h) "Employee" means any person, including officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a Director's fee by the Company shall not be sufficient in and of itself to
constitute "employment" by the Company.
(i) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(j) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock for the last market trading day prior to the time of
determination, as reported in The Wall Street Journal or such other source as
the Board deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board.
(k) "Inside Director" means a Director who is an Employee.
(l) "IPO Effective Date" means the date upon which the Securities and
Exchange Commission declares the initial public offering of the Company's Common
Stock as effective.
(m) "Option" means a stock option granted pursuant to the Plan.
(n) "Optioned Stock" means the Common Stock subject to an Option.
(o) "Optionee" means a Director who holds an Option.
(p) "Outside Director" means a Director who is not an Employee.
(q) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(r) "Plan" means this 2000 Director Option Plan.
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<PAGE> 3
(s) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 10 of the Plan.
(t) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Internal Revenue Code of
1986.
3. Stock Subject to the Plan. Subject to the provisions of Section 10 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is [500,000] Shares (the "Pool").
If an Option expires or becomes unexercisable without having been
exercised in full, the unpurchased Shares which were subject thereto shall
become available for future grant or sale under the Plan (unless the Plan has
terminated). Shares that have actually been issued under the Plan shall not be
returned to the Plan and shall not become available for future distribution
under the Plan.
4. Administration and Grants of Options under the Plan.
(a) Procedure for Grants. All grants of Options to Outside Directors
under this Plan shall be automatic and nondiscretionary and shall be made
strictly in accordance with the following provisions:
(i) No person shall have any discretion to select which Outside
Directors shall be granted Options or to determine the number of Shares to be
covered by Options.
(ii) Each person who first becomes an Outside Director on or
after the IPO Effective Date, whether through election by the stockholders of
the Company or appointment by the Board to fill a vacancy shall be automatically
granted an Option to purchase up to 40,000 Shares (the "First Option") on the
date he or she first becomes an Outside Director; provided, however, that an
Inside Director who ceases to be an Inside Director but who remains a Director
shall not receive a First Option.
(iii) Each Outside Director shall be automatically granted an
Option to purchase 10,000 Shares (a "Subsequent Option") on each annual meeting
of the stockholders of the Company occurring after the end of the Company's
fiscal year 2000, if immediately after such meeting, he or she shall continue to
serve on the Board and shall have served on the Board for at least the preceding
six (6) months.
(iv) Notwithstanding the provisions of subsections (ii) and (iii)
hereof, any exercise of an Option granted before the Company has obtained
shareholder approval of the Plan in accordance with Section 16 hereof shall be
conditioned upon obtaining such shareholder approval of the Plan in accordance
with Section 16 hereof.
(v) The terms of a First Option granted hereunder shall be as
follows:
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<PAGE> 4
(A) the term of the First Option shall be ten (10) years.
(B) the First Option shall be exercisable only while the
Outside Director remains a Director of the Company, except as set forth in
Sections 8 and 10 hereof.
(C) the exercise price per Share shall be 100% of the Fair
Market Value per Share on the date of grant of the First Option.
(D) subject to Section 10 hereof, the First Option shall
become exercisable as to 25% of the Shares subject to the First Option on the
anniversary of its date of grant, and 1/36 of the Shares subject to the option
shall vest each month thereafter, provided that the Optionee continues to serve
as a Director on such dates.
(vi) The terms of a Subsequent Option granted hereunder shall be
as follows:
(A) the term of the Subsequent Option shall be ten (10)
years.
(B) the Subsequent Option shall be exercisable only while
the Outside Director remains a Director of the Company, except as set forth in
Sections 8 and 10 hereof.
(C) the exercise price per Share shall be 100% of the Fair
Market Value per Share on the date of grant of the Subsequent Option.
(D) subject to Section 10 hereof, the Subsequent Option
shall become exercisable as to 100% percent of the Shares subject to the
Subsequent Option on the fourth anniversary of its date of grant, provided that
the Optionee continues to serve as a Director on such dates.
(vii) In the event that any Option granted under the Plan would
cause the number of Shares subject to outstanding Options plus the number of
Shares previously purchased under Options to exceed the Pool, then the remaining
Shares available for Option grant shall be granted under Options to the Outside
Directors on a pro rata basis. No further grants shall be made until such time,
if any, as additional Shares become available for grant under the Plan through
action of the Board or the shareholders to increase the number of Shares which
may be issued under the Plan or through cancellation or expiration of Options
previously granted hereunder.
5. Eligibility. Options may be granted only to Outside Directors. All
Options shall be automatically granted in accordance with the terms set forth in
Section 4 hereof.
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate the Director's relationship with the Company at any time.
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<PAGE> 5
6. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board or its approval by the shareholders of the
Company as described in Section 16 of the Plan. It shall continue in effect for
a term of ten (10) years unless sooner terminated under Section 11 of the Plan.
7. Form of Consideration. The consideration to be paid for the Shares to
be issued upon exercise of an Option, including the method of payment, shall
consist of (i) cash, (ii) check, (iii) other shares which (x) 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 (y) have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised, (iv) consideration received
by the Company under a cashless exercise program implemented by the Company in
connection with the Plan, or (v) any combination of the foregoing methods of
payment.
8. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable at such times as are set forth in Section
4 hereof; provided, however, that no Options shall be exercisable until
shareholder approval of the Plan in accordance with Section 16 hereof has been
obtained.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 7 of the Plan. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such Shares, 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.
A share certificate for the number of Shares so acquired shall be issued to the
Optionee as soon as practicable after exercise of the Option. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date the stock certificate is issued, except as provided in Section 10 of
the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Continuous Status as a Director. Subject to
Section 10 hereof, in the event an Optionee's status as a Director terminates
(other than upon the Optionee's death or Disability), the Optionee may exercise
his or her Option, but only within three (3) months following
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<PAGE> 6
the date of such termination, and only to the extent that the Optionee was
entitled to exercise it on the date of such termination (but in no event later
than the expiration of its ten (10) year term). To the extent that the Optionee
was not entitled to exercise an Option on the date of such termination, and to
the extent that the Optionee does not exercise such Option (to the extent
otherwise so entitled) within the time specified herein, the Option shall
terminate.
(c) Disability of Optionee. In the event Optionee's status as a
Director terminates as a result of Disability, the Optionee may exercise his or
her Option, but only within twelve (12) months following the date of such
termination, and only to the extent that the Optionee was entitled to exercise
it on the date of such termination (but in no event later than the expiration of
its ten (10) year term). To the extent that the Optionee was not entitled to
exercise an Option on the date of termination, or if he or she does not exercise
such Option (to the extent otherwise so entitled) within the time specified
herein, the Option shall terminate.
(d) Death of Optionee. In the event of an Optionee's death, the
Optionee's estate or a person who acquired the right to exercise the Option by
bequest or inheritance may exercise the Option, but only within twelve (12)
months following the date of death, and only to the extent that the Optionee was
entitled to exercise it on the date of death (but in no event later than the
expiration of its ten (10) year term). To the extent that the Optionee was not
entitled to exercise an Option on the date of death, and to the extent that the
Optionee's estate or a person who acquired the right to exercise such Option
does not exercise such Option (to the extent otherwise so entitled) within the
time specified herein, the Option shall terminate.
9. Non-Transferability of Options. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
10. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
Asset Sale.
(a) Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of Shares covered by each outstanding
Option, the number of Shares which have been authorized for issuance under the
Plan but as to which no Options have yet been granted or which have been
returned to the Plan upon cancellation or expiration of an Option, as well as
the price per Share covered by each such outstanding Option, and the number of
Shares issuable pursuant to the automatic grant provisions of Section 4 hereof
shall be proportionately adjusted for any increase or decrease in the number of
issued Shares resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued Shares effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of Shares
subject to an Option.
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<PAGE> 7
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, to the extent that an Option has not
been previously exercised, it shall terminate immediately prior to the
consummation of such proposed action.
(c) Change of Control. In the event of a Change of Control, each
outstanding Option held by an Outside Director shall vest and become exercisable
in full as to all of the Optioned Stock, including Shares as to which the
Outside Director would not otherwise be vested or exercisable. If an Option
becomes fully vested and exercisable as provided in this paragraph, the
Administrator shall notify the Optionee in writing or electronically that the
Option shall be fully vested and exercisable for a period of fifteen (15) days
from the date of such notice, and the Option shall terminate upon the expiration
of such period.
11. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend,
alter, suspend, or discontinue the Plan, but no amendment, alteration,
suspension, or discontinuation shall be made which would impair the rights of
any Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with any applicable
law, regulation or stock exchange rule, the Company shall obtain shareholder
approval of any Plan amendment in such a manner and to such a degree as
required.
(b) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated.
12. Time of Granting Options. The date of grant of an Option shall, for
all purposes, be the date determined in accordance with Section 4 hereof.
13. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares, if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
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<PAGE> 8
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
14. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
15. Option Agreement. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
16. Shareholder Approval. The Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the degree and manner
required under applicable state and federal law and any stock exchange rules.
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<PAGE> 1
EXHIBIT 10.7
COPY
LEASE
BY AND BETWEEN
SILICON VALLEY PROPERTIES, LLC,
a Delaware limited liability company
as Landlord
and
NEW FOCUS, INC.,
a California corporation
as Tenant
For Premises located at
2580 Junction Avenue, San Jose, California
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY OF BASIC LEASE TERMS 1
ARTICLE 1 DEFINITIONS 1
ARTICLE 2 DEMISE, CONSTRUCTION, AND ACCEPTANCE 3
ARTICLE 3 RENT 4
ARTICLE 4 USE OF PREMISES 5
ARTICLE 5 TRADE FIXTURES AND ALTERATIONS 7
ARTICLE 6 REPAIR AND MAINTENANCE 9
ARTICLE 7 WASTE DISPOSAL AND UTILITIES 10
ARTICLE 8 COMMON OPERATING EXPENSES 12
ARTICLE 9 INSURANCE 14
ARTICLE 10 LIMITATION ON LANDLORD'S LIABILITY AND INDEMNITY 16
ARTICLE 11 DAMAGE TO PREMISES 17
ARTICLE 12 CONDEMNATION 18
ARTICLE 13 DEFAULT AND REMEDIES 19
ARTICLE 14 ASSIGNMENT AND SUBLETTING 21
ARTICLE 15 GENERAL PROVISIONS 25
</TABLE>
<PAGE> 3
SUMMARY OF BASIC LEASE TERMS
<TABLE>
<CAPTION>
SECTION TERMS (LEASE REFERENCE)
- ------- ----- -----------------
<S> <C> <C>
A. Lease Reference Date: December 23, 1999 (Introduction)
B. Landlord: SILICON VALLEY PROPERTIES, LLC (Introduction)
a Delaware limited liability company
C. Tenant: New Focus, Inc. (Introduction)
a California corporation
D. Premises: That area consisting of approximately (section 1.20)
51,985 square feet of gross leasable area
the address of which is 2580 Junction Avenue,
San Jose, California, within the Building
as shown on Exhibit A.
E. Project: The land and improvements shown on Exhibit A (section 1.21)
consisting of multiple commercial buildings
the aggregate gross leasable area of which
is approximately 259,521 square feet.
F. Building: The building in which the Premises are located (section 1.7)
known as 2580 Junction Avenue, San Jose,
California containing approximately
51,985 square feet of gross leasable area.
G. Tenant's Share: 100% of the Building (i.e., 51,985/51,985) (section 1.28)
20.03% of the Project (i.e., 51,985/259,521)
H. Tenant's Allocated Tenant shall be entitled to use (section 4.5)
Parking Stalls: the parking available to the Building stalls.
I. Scheduled March 15, 2000 (section 1.24)
Commencement Date:
J. Lease Term: Eighty-four (84) calendar months, plus if the (section 1.18)
Commencement Date is other than the first day
of a calendar month, the first month shall
include the remainder of the calendar month in
which the Commencement Date occurs plus the first
full calendar month thereafter; provided,
however, that the inclusion of any partial month
in the first full calendar month shall not
entitle Tenant to any additional free rent.
Any free rent shall be applied on a daily basis
(based on a 30 day month) so that Tenant does
not receive additional free rent if the first
month includes a full calendar month plus any
partial month. Base Monthly Rent and Additional
Rent for any partial month shall be prorated on
a daily basis.
</TABLE>
1
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C> <C>
K. Base Monthly Rent: Months (following the Commencement Date) (section 3.1)
Base Monthly Rent
1-3 (the "Free Rent Period") -0-
4-12 $94,342.38
13-24 $97,981.33
25-36 $101,765.84
37-48 $105,701.72
49-60 $109,795.05
61-72 $114,052.10
73-84 $118,479.44
During the Free Rent Period, no Base Monthly Rent
shall be due and payable, but all Additional
Rent, including, without limitation, "Tenant's
Share" of "Common Operating Expenses" (as such
terms are hereinafter defined) shall be due and
payable. If the Commencement Date is other than
the first day of a calendar month, then the Free
Rent Period shall be calculated on the basis of a
30 day month and applied on a daily basis.
L. Prepaid Rent: $94,342.38, plus Tenant's Share of Common (section 3.3)
Operating Expenses for one full month.
M. Security Deposit: $1,184,794.40, which may in the form of a Letter (section 3.5)
of Credit as as provided in Addendum No. 1
attached hereto.
N. Permitted Use: General office, administration, research and (section 4.1)
development and light manufacturing.
O. Permitted Tenant's $25,000.00 (section 5.2)
Alterations limit:
P. Tenant's Liability $3,000,000.00 (section 9.1)
Insurance Minimum:
Q. Landlord's Address: c/o The Martin Group (section 1.3)
2290 North First Street, Suite 108
San Jose, California 95131
Attn: Property Manager
With a copy to: Divco West Group, LLC
150 Almaden Blvd., Suite 700
San Jose, CA 95113
Attn.: Asset Manager
R. Tenant's Address: (section 1.3)
Before the
Commencement Date: 2630 Walsh Avenue
Santa Clara, CA 95051
Attn.: David Shoquist
From and after the
Commencement Date: at the Premises,
attn.: David Shoquist
S. Retained Real Estate Wayne Mascia Associates representing Tenant and (section 15.13)
Brokers: Colliers Parrish International, Inc. representing
Landlord.
T. Lease: This Lease includes the summary of the Basic (section 1.17)
Lease Terms, the Lease, and the following
exhibits and addenda:
</TABLE>
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<PAGE> 5
Exhibit A - Project Site Plan and Outline of the Premises
Exhibit B - Work Letter for Tenant Improvements
Exhibit C - Acceptance Agreement
Addendum No. 1
The foregoing Summary is hereby incorporated into and made a part of this
Lease. Each reference in this Lease to any terms of the Summary shall mean the
respective information set forth above and shall be construed to incorporate all
of the terms provided under the particular paragraph pertaining to such
information. In the event of any conflict between the Summary and the Lease, the
Summary shall control.
LANDLORD: TENANT:
SILICON VALLEY PROPERTIES, LLC, By: NEW FOCUS, INC.
a Delaware limited liability company a California corporation
By: Divco West Group, LLC, By:
a Delaware limited liability company ----------------------------------
Its Agent Name:
--------------------------------
Title:
-------------------------------
By: Dated: December __, 1999
----------------------------------
Name: Scott Smithers
Its: President
Dated: December __, 1999
3
<PAGE> 6
Project, including the parking areas, access and perimeter roads, pedestrian
sidewalks, landscaped areas, trash enclosures, recreation areas and the like.
1.10 Common Operating Expenses: The term "Common Operating Expenses" is
defined in paragraph8.2.
1.11 Effective Date: The term "Effective Date" shall mean the date the
last signatory to this Lease whose execution is required to make it binding on
the parties hereto shall have executed this Lease.
1.12 Event of Tenant's Default: The term "Event of Tenant's Default" is
defined in paragraph13.1.
1.13 Hazardous Materials: The terms "Hazardous Materials" and "Hazardous
Materials Laws" are defined in paragraph 7.2E.
1.14 Insured and Uninsured Peril: The terms "Insured Peril" and
"Uninsured Peril" are defined in paragraph 11.2E.
1.15 Law: The term "Law" shall mean any judicial decision, statute,
constitution, ordinance, resolution, regulation, rule, administrative order, or
other requirement of any municipal, county, state, federal or other government
agency or authority having jurisdiction over the parties to this Lease or the
Premises, or both, in effect either at the Effective Date or any time during the
Lease Term, including, without limitation, any Hazardous Material Law (as
defined in paragraph7.2E) and the Americans with Disabilities Act, 42 U.S.C.
section 12101 et. seq. and any rules, regulations, restrictions, guidelines,
requirements or publications promulgated or published pursuant thereto.
1.16 Lease: The term "Lease" shall mean the Summary and all elements of
this Lease identified in Section T of the Summary, all of which are attached
hereto and incorporated herein by this reference.
1.17 Lease Term: The term "Lease Term" shall mean the term of this Lease
which shall commence on the Commencement Date and continue for the period
specified in Section J of the Summary.
1.18 Lender: The term "Lender" shall mean any beneficiary, mortgagee,
secured party, lessor, or other holder of any Security Instrument.
1.19 Permitted Use: The term "Permitted Use" shall mean the use specified
in Section N of the Summary.
1.20 Premises: The term "Premises" shall mean that building area
described in Section D of the Summary that is within the Building.
1.21 Project: The term "Project" shall mean that real property and the
improvements thereon which are specified in Section E of the Summary, the
aggregate gross leasable area of which is referred to herein as the "Project
Gross Leasable Area."
1.22 Private Restriction: The term "Private Restrictions" shall mean all
recorded covenants, conditions and restrictions, private agreements, reciprocal
easement agreements, and any other recorded instruments affecting the use of the
Premises which (i) exist as of the Effective Date (and a copy of same have been
previously delivered to Tenant), or (ii) are recorded after the Effective Date
and are approved by Tenant.
1.23 Real Property Taxes: The term "Real Property Taxes" is defined in
paragraph 8.3.
1.24 Scheduled Commencement Date: The term "Scheduled Commencement Date"
shall mean the date specified in Section I of the Summary.
1.25 Security Instrument: The term "Security Instrument" shall mean any
underlying lease, mortgage or deed of trust which now or hereafter affects the
Project, and any renewal, modification, consolidation, replacement or extension
thereof.
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<PAGE> 7
1.26 Summary: The term "Summary" shall mean the Summary of Basic Lease
Terms executed by Landlord and Tenant that is part of this Lease.
1.27 Tenant's Alterations: The term "Tenant's Alterations" shall mean all
improvements, additions, alterations, and fixtures installed in the Premises by
Tenant at its expense which are not Trade Fixtures.
1.28 Tenant's Share: The term "Tenant's Share" shall mean the percentage
obtained by dividing Tenant's gross leasable area identified in Section D of the
Summary by the Building Gross Leasable Area, which as of the Effective Date is
the percentage identified in Section G of the Summary, and by the Project Gross
Leasable Area, which as of the Effective Date is the percentage identified in
Section G of the Summary.
1.29 Trade Fixtures: The term "Trade Fixtures" shall mean (i) Tenant's
inventory, furniture, signs, and business equipment, and (ii) anything affixed
to the Premises by Tenant at its expense for purposes of trade, manufacture,
ornament or domestic use (except replacement of similar work or material
originally installed by Landlord) which can be removed without material injury
to the Premises unless such thing has, by the manner in which it is affixed,
become an integral part of the Premises.
ARTICLE 2 DEMISE, CONSTRUCTION, AND ACCEPTANCE
2.1 Demise of Premises: Landlord hereby leases to Tenant, and Tenant
leases from Landlord, for the Lease Term upon the terms and conditions of this
Lease, the Premises for Tenant's own use in the conduct of Tenant's business
together with (i) the non-exclusive right to use the number of Tenant's
Allocated Parking Stalls within the Common Area (subject to the limitations set
forth in paragraph4.5), and (ii) the non-exclusive right to use the Common Area
for ingress to and egress from the Premises. Landlord reserves the use of the
exterior walls, the roof and the area beneath and above the Premises, together
with the right to install, maintain, use, and replace ducts, wires, conduits and
pipes leading through the Premises in locations which will not materially
interfere with Tenant's use of the Premises.
2.2 Commencement Date: The Lease Term shall commence on the Commencement
Date as defined in paragraph 1.8 hereof.
2.3 Construction of Improvements: Landlord shall construct certain
improvements that shall constitute or become part of the Premises if required
by, and then in accordance with, the terms of Exhibit B.
2.4 Delivery and Acceptance of Possession: The Scheduled Commencement
Date is the date estimated by the parties that will be thirty (30) days after
the date Landlord obtains possession of the Premises from the existing tenant.
Since the Tenant Improvements may not be Substantially Completed by the
Scheduled Commencement Date, Tenant will not be able to use all of the Premises
while the Tenant Improvements are being constructed. Subject to the scope of the
Tenant Improvements contained in the Construction Plans (as defined in Exhibit B
attached hereto), the parties contemplate that Tenant will be able to occupy
approximately one-half of the Premises while Landlord's contractor is
constructing the Tenant Improvements in the remainder of the Premises. Tenant
agrees to cooperate with Landlord's contractor in connection with the
construction of the Tenant Improvements and not to interfere with the work of
the contractor, including any work that may have to be done in the area of the
Premises being occupied by Tenant. Tenant acknowledges and accepts the various
inconveniences that may be associated with the use of any portion of the
Premises and Common Areas during the construction of the Tenant Improvements,
such as construction obstacles, noise and debris, the passage of work crews,
uneven air conditioning service and other typical conditions incident to the
construction of improvements. Tenant agrees that such inconveniences and
annoyances shall not give Tenant any rights against Landlord. Tenant shall
accept possession and enter into good faith occupancy of the entire Premises and
commence the operation of its business therein within 30 days after the Tenant
Improvements have been Substantially Completed. Tenant acknowledges that it has
had an opportunity to conduct, and has conducted, such inspections of the
Premises as it deems necessary to evaluate its condition. Except as otherwise
specifically provided herein, Tenant agrees to accept possession of the Premises
in its then existing condition, "as-is", including all patent defects, but
excluding all latent defects, which Landlord shall promptly repair after receipt
of written notice of such latent defect. Tenant agrees to provide notice
3
<PAGE> 8
to Landlord of any latent defects promptly after Tenant discovers such latent
defect. Tenant's taking possession of any part of the Premises shall be deemed
to be an acceptance by Tenant of any work of improvement done by Landlord in
such part as complete and in accordance with the terms of this Lease except for
defects of which Tenant has given Landlord written notice prior to the time
Tenant takes possession. After the Commencement Date and Substantial Completion
of the Tenant Improvements, Landlord and Tenant shall together execute an
acceptance agreement in the form attached as Exhibit C, appropriately completed.
Tenant's obligation to pay Base Monthly Rent and Additional Rent in accordance
with this Lease shall not be excused or delayed because of Tenant's failure to
execute such acceptance agreement.
2.5 Early Occupancy: Landlord agrees that Tenant may have early
occupancy of approximately one-half of the Premises in the area reasonably
approved by Landlord where the majority of the work for Tenant Improvements will
not be done to the extent such early occupancy is permitted under applicable
law. Such right to early occupancy shall commence on the day following the date
that Landlord obtains possession of the Premises from the existing tenant until
the Commencement Date (the "Early Occupancy Period") and Landlord agrees to
notify Tenant when such early occupancy is available. During the Early Occupancy
Period, Tenant may use such portion of the Premises it may occupy early to
install its Trade Fixtures and to extent permitted under applicable Law, for any
use permitted under this Lease; provided, however, that Tenant does not
interfere with the construction of the Tenant Improvements. During the Early
Occupancy Period, all of the terms and provisions of the Lease shall apply,
except the Lease Term shall not commence until the Commencement Date and Tenant
shall not be required to pay any Base Monthly Rent or Tenant's Share of Common
Operating Expenses; however, Tenant shall be obligated to pay for its utilities.
ARTICLE 3 RENT
3.1 Base Monthly Rent: Commencing on the Commencement Date (but subject
to the Free Rent Period) and continuing throughout the Lease Term, Tenant shall
pay to Landlord the Base Monthly Rent set forth in Section K of the Summary.
3.2 Additional Rent: Commencing on the Commencement Date and continuing
throughout the Lease Term, Tenant shall pay the following as additional rent
(the "Additional Rent"): (i) any late charges or interest due Landlord pursuant
to paragraph3.4; (ii) Tenant's Share of Common Operating Expenses as provided in
paragraph8.1; (iii) Landlord's share of any Subrent received by Tenant upon
certain assignments and sublettings as required by paragraph14.1; (iv) any legal
fees and costs due Landlord pursuant to paragraph15.9; and (v) any other charges
due Landlord pursuant to this Lease.
3.3 Payment of Rent: Concurrently with the execution of this Lease by
both parties, Tenant shall pay to Landlord the amount set forth in Section L of
the Summary as prepayment of rent for credit against the first installment(s) of
Base Monthly Rent. All rent required to be paid in monthly installments shall be
paid in advance ON the first day of each calendar month during the lease term.
if Section K of the Summary provides that the Base Monthly Rent is to be
increased during the Lease Term and if the date of such increase does not fall
on the first day of a calendar month, such increase shall become effective on
the first day of the next calendar month. All rent shall be paid in lawful money
of the United States, without any abatement, deduction or offset whatsoever
(except as specifically provided in paragraph11.4 and paragraph12.3), and
without any prior demand therefor. Rent shall be paid to Landlord at its address
set forth in Section Q of the Summary, or at such other place as Landlord may
designate from time to time. Tenant's obligation to pay Base Monthly Rent and
Tenant's Share of Common Operating Expenses shall be prorated at the
commencement and expiration of the Lease Term.
3.4 Late Charge, Interest and Quarterly Payments:
(a) Late Charge. Tenant acknowledges that the late payment by
Tenant of any installment of rent, or any other sum of money required to be paid
by Tenant under this Lease, will cause Landlord to incur certain costs and
expenses not contemplated under this Lease, the exact amount of such costs being
extremely difficult and impractical to fix. Such costs and expenses will
include, without limitation, attorneys' fees, administrative and collection
costs, and processing and accounting expenses and other costs and expenses
necessary and incidental thereto. If any Base Monthly Rent or Additional Rent is
not received by Landlord from Tenant when due such payment is due, then Tenant
shall immediately pay to Landlord a late charge equal to 10% of such delinquent
rent as
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<PAGE> 9
liquidated damages for Tenant's failure to make timely payment; provided,
however, that Landlord agrees that Tenant shall not have to pay such late charge
if it makes its payment in full within five (5) days after receipt of written
notice from Landlord, except that this notice and cure period shall only be
applicable for the first two times Tenant fails to pay any Base Monthly Rent or
Additional Rent when due during each calendar year. If Landlord has provided two
notices of a late payment or default during a calendar year, Landlord shall not
be obligated to provide any notice thereafter for the remainder of such calendar
year and such late charge shall be due if payment is not made when due without
any grace period or notice. In no event shall this provision for a late charge
be deemed to grant to Tenant a grace period or extension of time within which to
pay any rent or prevent Landlord from exercising any right or remedy available
to Landlord upon Tenant's failure to pay any rent due under this Lease in a
timely fashion, including any right to terminate this Lease pursuant to
paragraph13.2B.
(b) Interest. If any rent remains delinquent for a period in
excess of five (5) days then, in addition to such late charge, Tenant shall pay
to Landlord interest on any rent that is not paid when due at the Agreed
Interest Rate following the date such amount became due until paid.
(c) Quarterly Payments. If Tenant during any six (6) month period
shall be more than five (5) days delinquent in the payment of any rent or other
amount payable by Tenant hereunder on three (3) or more occasions, then,
notwithstanding anything herein to the contrary, Landlord may, by written notice
to Tenant, elect to require Tenant to pay all Base Monthly Rent and Additional
Rent quarterly in advance. Such right shall be in addition to and not in lieu of
any other right or remedy available to Landlord hereunder or at law on account
of Tenant's default hereunder
3.5 Security Deposit: On the Effective Date, Tenant shall deposit with
Landlord the amount set forth in Section M of the Summary as security for the
performance by Tenant of its obligations under this Lease, and not as prepayment
of rent (the "Security Deposit"). Landlord may from time to time apply such
portion of the Security Deposit as is reasonably necessary for the following
purposes: (i) to remedy any default by Tenant in the payment of rent; (ii) to
repair damage to the Premises caused by Tenant; (iii) to clean the Premises upon
termination of the Lease; and (iv) to remedy any other default of Tenant to the
extent permitted by Law and, in this regard, Tenant hereby waives any
restriction on the uses to which the Security Deposit may be put contained in
California Civil Code Section 1950.7. In the event the Security Deposit or any
portion thereof is so used, Tenant agrees to pay to Landlord promptly upon
demand an amount in cash sufficient to restore the Security Deposit to the full
original amount. Landlord shall not be deemed a trustee of the Security Deposit,
may use the Security Deposit in business, and shall not be required to segregate
it from its general accounts. Tenant shall not be entitled to any interest on
the Security Deposit. If Landlord transfers the Premises during the Lease Term,
Landlord may pay the Security Deposit to any transferee of Landlord's interest
in conformity with the provisions of California Civil Code Section 1950.7 and/or
any successor statute, in which event the transferring Landlord will be released
from all liability for the return of the Security Deposit.
3.6 Electronic Payment. If Tenant has failed to pay Base Monthly Rent or
Additional Rent three or more times as and when due, then Landlord shall have
the right, on not less than thirty (30) days prior written notice to Tenant (the
"Electronic Payment Notice"), to require Tenant to make subsequent payments of
Monthly Base Rent and Additional Rent due pursuant to the terms of this Lease by
means of a federal funds wire transfer or such other method of electronic funds
transfer as may be required by Landlord in its sole and absolute discretion (the
"Electronic Payment"). The Electronic Payment Notice shall set forth the proper
bank ABA number, account number and designation of the account to which such
Electronic Payment shall be made. Tenant shall promptly notify Landlord in
writing of any additional information that will be required to establish and
maintain Electronic Payment from Tenant's bank or financial institution.
Landlord shall have the right, after at least ten (10) days prior written notice
to Tenant, to change the name of the depository for receipt of any Electronic
Payment and to discontinue payment of any sum by Electronic Payment.
ARTICLE 4 USE OF PREMISES
4.1 Limitation on Use: Tenant shall use the Premises solely for the
Permitted Use specified in Section N of the Summary. There shall not be any
change in use without the prior written consent of Landlord which will not be
unreasonably withheld. Tenant shall not do anything in or about the Premises
which will (i) cause structural
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injury to the Building, or (ii) cause damage to any part of the Building except
to the extent reasonably necessary for the installation of Tenant's Trade
Fixtures and Tenant's Alterations, and then only in a manner which has been
first approved by Landlord in writing. Tenant shall not operate any equipment
within the Premises which will (i) materially damage the Building or the Common
Area, (ii) overload existing electrical systems or other mechanical equipment
servicing the Building, (iii) impair the efficient operation of the sprinkler
system or the heating, ventilating or air conditioning ("HVAC") equipment within
or servicing the Building, or (iv) damage, overload or corrode the sanitary
sewer system. Tenant shall not attach, hang or suspend anything from the
ceiling, roof, walls or columns of the Building or set any load on the floor in
excess of the load limits for which such items are designed nor operate hard
wheel forklifts within the Premises. Any dust, fumes, or waste products
generated by Tenant's use of the Premises shall be contained and disposed so
that they do not (i) create an unreasonable fire or health hazard, (ii) damage
the Premises, or (iii) result in the violation of any Law. Except as approved by
Landlord, Tenant shall not change the exterior of the Building or install any
equipment or antennas on or make any penetrations of the exterior or roof of the
Building. Tenant shall not commit any waste in or about the Premises, and Tenant
shall keep the Premises in a neat, clean, attractive and orderly condition, free
of any nuisances. If Landlord designates a standard window covering for use
throughout the Building, Tenant shall use this standard window covering to cover
all windows in the Premises, except that Tenant shall not be obligated to change
its window coverings that Landlord previously approved unless Tenant elects to
change such window coverings in the future. Tenant shall not conduct on any
portion of the Premises or the Project any sale of any kind, including any
public or private auction, fire sale, going-out-of-business sale, distress sale
or other liquidation sale.
4.2 Compliance with Regulations: Tenant shall not use the Premises in
any manner which violates any Laws or Private Restrictions which affect the
Premises. Tenant shall abide by and promptly observe and comply with all Laws
and Private Restrictions. Tenant shall not use the Premises in any manner which
will cause a cancellation of any insurance policy covering Tenant's Alterations
or any improvements installed by Landlord at its expense or which poses an
unreasonable risk of damage or injury to the Premises. Tenant shall not sell, or
permit to be kept, used, or sold in or about the Premises any article which may
be prohibited by the standard form of fire insurance policy. Tenant shall comply
with all reasonable requirements of any insurance company, insurance
underwriter, or Board of Fire Underwriters which are necessary to maintain the
insurance coverage carried by either Landlord or Tenant pursuant to this Lease.
Tenant shall not be deemed in breach of this section for failure to comply with
an applicable Law if such non-compliance with such Law by Tenant is due to the
failure of Landlord to perform its obligations under this Lease.
4.3 Outside Areas: No materials, supplies, tanks or containers,
equipment, finished products or semi-finished products, raw materials,
inoperable vehicles or articles of any nature shall be stored upon or permitted
to remain outside of the Premises except in fully fenced and screened areas
outside the Building which have been designed for such purpose and have been
approved in writing by Landlord for such use by Tenant.
4.4 Signs: Tenant shall not place on any portion of the Premises any
sign, placard, lettering in or on windows, banner, displays or other advertising
or communicative material which is visible from the exterior of the Building
without the prior written approval of Landlord. At its expense, Tenant may have
its name placed on the existing monument sign for the Building, provided the
design and location are approved by Landlord (which shall not be unreasonably
withheld) and it complies with all Laws. All such approved signs shall strictly
conform to all Laws, Private Restrictions, and Landlord's sign criteria then in
effect and shall be installed at the expense of Tenant. Tenant shall maintain
such signs in good condition and repair.
4.5 Parking: Tenant is allocated and shall have the non-exclusive right
to use not more than the number of Tenant's Allocated Parking Stalls contained
within the Project described in Section H of the Summary for its use and the use
of Tenant's Agents, the location of which may be designated from time to time by
Landlord, but such designation shall be done in a non-discriminatory manner.
Tenant shall not at any time use more parking spaces than the number so
allocated to Tenant or park its vehicles or the vehicles of others in any
portion of the Project not designated by Landlord as a non-exclusive parking
area. Tenant shall not have the exclusive right to use any specific parking
space. If Landlord grants to any other tenant the exclusive right to use any
particular parking space(s), Tenant shall not use such spaces. Landlord reserves
the right, after having given Tenant reasonable notice, to have any vehicles
owned by Tenant or Tenant's Agents utilizing parking spaces in excess of the
parking spaces allowed for Tenant's use to be towed away at Tenant's cost. All
trucks and delivery vehicles shall be (i) parked at the rear of
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the Building, (ii) loaded and unloaded in a manner which does not interfere with
the businesses of other occupants of the Project, and (iii) permitted to remain
on the Project only so long as is reasonably necessary to complete loading and
unloading. In the event Landlord elects or is required by any Law to limit or
control parking in the Project, whether by validation of parking tickets or any
other method, Tenant agrees to participate in such validation program under such
reasonable rules and regulations as are from time to time established by
Landlord, provided that there is no material resultant cost, expense or material
inconvenience to Tenant. So long as Tenant is in occupancy at the Premises,
Landlord agrees that it will not provide exclusive parking rights in the area
immediately adjacent to the Premises to other parties (except as required by
applicable Law) in an unreasonable discriminatory manner that will materially
and adversely affect Tenant's parking rights under this section.
4.6 Rules and Regulations: Landlord may from time to time promulgate
reasonable and nondiscriminatory rules and regulations applicable to all
occupants of the Project for the care and orderly management of the Project and
the safety of its tenants and invitees. Such rules and regulations shall be
binding upon Tenant upon delivery of a copy thereof to Tenant, and Tenant agrees
to abide by such rules and regulations. If there is a conflict between the rules
and regulations and any of the provisions of this Lease, the provisions of this
Lease shall prevail. Landlord shall not be responsible for the violation by any
other tenant of the Project of any such rules and regulations. Landlord agrees
to enforce such rules and regulations in a non-discriminatory manner against all
similarly situated tenants.
ARTICLE 5 TRADE FIXTURES AND ALTERATIONS
5.1 Trade Fixtures: Throughout the Lease Term, Tenant may provide and
install, and shall maintain in good condition, any Trade Fixtures required in
the conduct of its business in the Premises, except to the extent any Trade
Fixture will use, generate, store or dispose of any Hazardous Material in which
case the prior written consent of Landlord shall be required before such Trade
Fixture may be installed. All Trade Fixtures shall remain Tenant's property.
5.2 Tenant's Alterations: Construction by Tenant of Tenant's Alterations
shall be governed by the following:
A. Tenant shall not construct any Tenant's Alterations or
otherwise alter the Premises without Landlord's prior written approval. Tenant
shall be entitled, without Landlord's prior approval, to make Tenant's
Alterations (i) which do not affect the structural or exterior parts or water
tight character of the Building, and (ii) the reasonably estimated cost of
which, plus the original cost of any part of the Premises removed or materially
altered in connection with such Tenant's Alterations, together do not exceed the
Permitted Tenant Alterations Limit specified in Section O of the Summary per
work of improvement. In the event Landlord's approval for any Tenant's
Alterations is required, Tenant shall not construct the Leasehold Improvement
until Landlord has approved in writing the plans and specifications therefor,
and such Tenant's Alterations shall be constructed substantially in compliance
with such approved plans and specifications by a licensed contractor first
approved by Landlord. All Tenant's Alterations constructed by Tenant shall be
constructed by a licensed contractor in accordance with all Laws using new
materials of good quality. If Landlord has not responded to Tenant's request for
approval of any Tenant's Alterations within twenty (20) days after Landlord's
receipt of such written request together with all other information required
under this Lease, Tenant may provide a second written request and the failure of
Landlord to respond to such second request within ten (10) days after receipt of
same shall be deemed an approval of such proposed Tenant's Alteration.
B. Tenant shall not commence construction of any Tenant's
Alterations until (i) all required governmental approvals and permits have been
obtained, (ii) all requirements regarding insurance imposed by this Lease have
been satisfied, (iii) Tenant has given Landlord at least five days' prior
written notice of its intention to commence such construction, and (iv) if
reasonably requested by Landlord, Tenant has obtained contingent liability and
broad form builders' risk insurance in an amount reasonably satisfactory to
Landlord if there are any perils relating to the proposed construction not
covered by insurance carried pursuant to Article 9.
C. All Tenant's Alterations shall remain the property of Tenant
during the Lease Term but shall not be altered or removed from the Premises,
except as provided herein. At the expiration or sooner
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termination of the Lease Term, all Tenant's Alterations shall be surrendered to
Landlord as part of the realty and shall then become Landlord's property, and
Landlord shall have no obligation to reimburse Tenant for all or any portion of
the value or cost thereof; provided, however, that if Landlord requires Tenant
to remove any Tenant's Alterations, Tenant shall so remove such Tenant's
Alterations prior to the expiration or sooner termination of the Lease Term.
Notwithstanding the foregoing, Tenant shall not be obligated to remove any
Tenant's Alterations with respect to which the following is true: (i) Tenant was
required, or elected, to obtain the approval of Landlord to the installation of
the Leasehold Improvement in question; (ii) at the time Tenant requested
Landlord's approval, Tenant requested of Landlord in writing that Landlord
inform Tenant of whether or not Landlord would require Tenant to remove such
Leasehold Improvement at the expiration of the Lease Term; and (iii) at the time
Landlord granted its approval, it did not inform Tenant that it would require
Tenant to remove such Leasehold Improvement at the expiration of the Lease Term.
5.3 Alterations Required by Law: Tenant shall make any alteration,
addition or change of any sort to the Premises that is required by any Law
because of (i) Tenant's particular use or change of use of the Premises; (ii)
Tenant's application for any permit or governmental approval; or (iii) Tenant's
construction or installation of any Tenant's Alterations or Trade Fixtures. Any
other alteration, addition, or change required by Law which is not the
responsibility of Tenant pursuant to the foregoing shall be made by Landlord
(subject to Landlord's right to reimbursement from Tenant specified in
paragraph5.4).
5.4 Amortization of Certain Capital Improvements: Tenant shall pay
Additional Rent in the event Landlord reasonably elects or is required to make
any of the following kinds of capital improvements to the Project: (i) capital
improvements required to be constructed in order to comply with any Law
(excluding any Hazardous Materials Law) not in effect or applicable to the
Project as of the Effective Date; (ii) modification of existing or construction
of additional capital improvements or building service equipment for the purpose
of reducing the consumption of utility services or Common Operating Expenses of
the Project, but only to the extent of the amount of any savings in Common
Operating Expenses; (iii) replacement of capital improvements or building
service equipment existing as of the Effective Date when required because of
normal wear and tear; and (iv) restoration of any part of the Building or Common
Areas of the Project that has been damaged by any peril to the extent the cost
thereof is not of a type covered by insurance proceeds actually recovered by
Landlord up to a maximum amount per occurrence of 10% of the then replacement
cost of the Project. The amount of Additional Rent Tenant is to pay with respect
to each such capital improvement shall be determined as follows:
A. All costs paid by Landlord to construct such improvements
(including financing costs) shall be amortized over the useful life of such
improvement (as reasonably determined by Landlord in accordance with generally
accepted accounting principles) with interest on the unamortized balance at the
then prevailing market rate Landlord would pay if it borrowed funds to construct
such improvements from an institutional lender, and Landlord shall inform Tenant
of the monthly amortization payment required to so amortize such costs, and
shall also provide Tenant with the information upon which such determination is
made.
B. As Additional Rent, Tenant shall pay at the same time the
Base Monthly Rent is due an amount equal to Tenant's Share of that portion of
such monthly amortization payment fairly allocable to the Building (as
reasonably determined by Landlord) for each month after such improvements are
completed until the first to occur of (i) the expiration of the Lease Term (as
it may be extended), or (ii) the end of the term over which such costs were
amortized.
5.5 Mechanic's Liens: Tenant shall keep the Project free from any liens
and shall pay when due all bills arising out of any work performed, materials
furnished, or obligations incurred by Tenant or Tenant's Agents relating to the
Project. If any claim of lien is recorded (except those caused by Landlord or
Landlord's Agents), Tenant shall bond against or discharge the same within 10
days after the same has been recorded against the Project. Should any lien be
filed against the Project or any action be commenced affecting title to the
Project, the party receiving notice of such lien or action shall immediately
give the other party written notice thereof.
5.6 Taxes on Tenant's Property: Tenant shall pay before delinquency any
and all taxes, assessments, license fees and public charges levied, assessed or
imposed against Tenant or Tenant's estate in this Lease or the property of
Tenant situated within the Premises which become due during the Lease Term. If
any tax or other charge
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is assessed by any governmental agency because of the execution of this Lease,
such tax shall be paid by Tenant. On demand by Landlord, Tenant shall furnish
Landlord with satisfactory evidence of these payments.
ARTICLE 6 REPAIR AND MAINTENANCE
6.1 Tenant's Obligation to Maintain: Except as otherwise provided in
paragraph6.2, paragraph11.1, and paragraph12.3, Tenant shall be responsible for
the following during the Lease Term:
A. Tenant shall clean and maintain in good order, condition, and
repair and replace when necessary the Premises and every part thereof, through
regular inspections and servicing, including, but not limited to: (i) all
plumbing and sewage facilities (including all sinks, toilets, faucets and
drains), and all ducts, pipes, vents or other parts of the HVAC or plumbing
system; (ii) all fixtures, interior walls, floors, carpets and ceilings; (iii)
all windows, doors, entrances, plate glass, showcases and skylights (including
cleaning both interior and exterior surfaces); (iv) all electrical facilities
and all equipment (including all lighting fixtures, lamps, bulbs, tubes, fans,
vents, exhaust equipment and systems); and (v) any automatic fire extinguisher
equipment in the Premises.
B. With respect to utility facilities serving the Premises
(including electrical wiring and conduits, gas lines, water pipes, and plumbing
and sewage fixtures and pipes), Tenant shall be responsible for the maintenance
and repair of any such facilities which serve only the Premises, including all
such facilities that are within the walls or floor, or on the roof of the
Premises, and any part of such facility that is not within the Premises, but
only up to the point where such facilities join a main or other junction (e.g.,
sewer main or electrical transformer) from which such utility services are
distributed to other parts of the Project as well as to the Premises. Tenant
shall replace any damaged or broken glass in the Premises (including all
interior and exterior doors and windows) with glass of the same kind, size and
quality. Tenant shall repair any damage to the Premises (including exterior
doors and windows) caused by vandalism or any unauthorized entry.
C. Tenant shall (i) maintain, repair and replace when necessary
all HVAC equipment which services only the Premises, and shall keep the same in
good condition through regular inspection and servicing, and (ii) maintain
continuously throughout the Lease Term a service contract for the maintenance of
all such HVAC equipment with a licensed HVAC repair and maintenance contractor
approved by Landlord, which contract provides for the periodic inspection and
servicing of the HVAC equipment at least once every 60 days during the Lease
Term. Notwithstanding the foregoing, Landlord may elect at any time to assume
responsibility for the maintenance, repair and replacement of such HVAC
equipment which serves only the Premises. Tenant shall maintain continuously
throughout the Lease Term a service contract for the washing of all windows
(both interior and exterior surfaces) in the Premises with a contractor approved
by Landlord, which contract provides for the periodic washing of all such
windows at least once every 90 days during the Lease Term. Tenant shall furnish
Landlord with copies of all such service contracts, which shall provide that
they may not be canceled or changed without at least 30 days' prior written
notice to Landlord.
D. All repairs and replacements required of Tenant shall be
promptly made with new materials of like kind and quality. If the work affects
the structural parts of the Building or if the estimated cost of any item of
repair or replacement is in excess of the Permitted Tenant's Alterations Limit,
then Tenant shall first obtain Landlord's written approval of the scope of the
work, plans therefor, materials to be used, and the contractor.
6.2 Landlord's Obligation to Maintain: Landlord shall repair, maintain
and operate the Common Area and repair and maintain the roof, exterior and
structural parts of the building(s) located on the Project so that the same are
kept in good order and repair. If there is central HVAC or other building
service equipment and/or utility facilities serving portions of the Common Area
and/or both the Premises and other parts of the Building, Landlord shall
maintain and operate (and replace when necessary) such equipment. Landlord shall
not be responsible for repairs required by an accident, fire or other peril or
for damage caused to any part of the Project by any act or omission of Tenant or
Tenant's Agents except as otherwise required by Article 11. Landlord may engage
contractors of its choice to perform the obligations required of it by this
Article, and the necessity of any expenditure to perform such obligations shall
be at the sole discretion of Landlord.
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6.3 Control of Common Area: Landlord shall at all times have exclusive
control of the Common Area. Landlord shall have the right, without the same
constituting an actual or constructive eviction and without entitling Tenant to
any abatement of rent, to: (i) close any part of the Common Area to whatever
extent required in the opinion of Landlord's counsel to prevent a dedication
thereof or the accrual of any prescriptive rights therein; (ii) temporarily
close the Common Area to perform maintenance or for any other reason deemed
sufficient by Landlord; (iii) change the shape, size, location and extent of the
Common Area; (iv) eliminate from or add to the Project any land or improvement,
including multi-deck parking structures; (v) make changes to the Common Area
including, without limitation, changes in the location of driveways, entrances,
passageways, doors and doorways, elevators, stairs, restrooms, exits, parking
spaces, parking areas, sidewalks or the direction of the flow of traffic and the
site of the Common Area; (vi) remove unauthorized persons from the Project;
and/or (vii) change the name or address of the Building or Project. Tenant shall
keep the Common Area clear of all obstructions created or permitted by Tenant.
If in the opinion of Landlord unauthorized persons are using any of the Common
Area by reason of the presence of Tenant in the Building, Tenant, upon demand of
Landlord, shall restrain such unauthorized use by appropriate proceedings. In
exercising any such rights regarding the Common Area, (i) Landlord shall make a
reasonable effort to minimize any disruption to Tenant's business, and (ii)
Landlord shall not exercise its rights to control the Common Area in a manner
that would materially interfere with Tenant's use of the Premises without first
obtaining Tenant's consent. Landlord shall have no obligation to provide guard
services or other security measures for the benefit of the Project. Tenant
assumes all responsibility for the protection of Tenant and Tenant's Agents from
acts of third parties; provided, however, that nothing contained herein shall
prevent Landlord, at its sole option, from providing security measures for the
Project.
ARTICLE 7 WASTE DISPOSAL AND UTILITIES
7.1 Waste Disposal: Tenant shall store its waste either inside the
Premises or within outside trash enclosures that are fully fenced and screened
in compliance with all Private Restrictions, and designed for such purpose. All
entrances to such outside trash enclosures shall be kept closed, and waste shall
be stored in such manner as not to be visible from the exterior of such outside
enclosures. Tenant shall cause all of its waste to be regularly removed from the
Premises at Tenant's sole cost. Tenant shall keep all fire corridors and
mechanical equipment rooms in the Premises free and clear of all obstructions at
all times.
7.2 Hazardous Materials: Landlord and Tenant agree as follows with
respect to the existence or use of Hazardous Materials on the Project:
A. Any handling, transportation, storage, treatment, disposal or
use of Hazardous Materials by Tenant and Tenant's Agents after the Effective
Date in or about the Project shall strictly comply with all applicable Hazardous
Materials Laws. Tenant shall indemnify, defend upon demand with counsel
reasonably acceptable to Landlord, and hold harmless Landlord from and against
any liabilities, losses, claims, damages, lost profits, consequential damages,
interest, penalties, fines, monetary sanctions, attorneys' fees, experts' fees,
court costs, remediation costs, investigation costs, and other expenses which
result from or arise in any manner whatsoever out of the use, storage,
treatment, transportation, release, or disposal of Hazardous Materials on or
about the Project by Tenant or Tenant's Agents after the Effective Date.
B. If the presence of Hazardous Materials on the Project caused
or permitted by Tenant or Tenant's Agents after the Effective Date results in
contamination or deterioration of water or soil resulting in a level of
contamination greater than the levels established as acceptable by any
governmental agency having jurisdiction over such contamination, then Tenant
shall promptly take any and all action necessary to investigate and remediate
such contamination if required by Law or as a condition to the issuance or
continuing effectiveness of any governmental approval which relates to the use
of the Project or any part thereof. Tenant shall further be solely responsible
for, and shall defend, indemnify and hold Landlord and its agents harmless from
and against, all claims, costs and liabilities, including attorneys' fees and
costs, arising out of or in connection with any investigation and remediation
required hereunder to return the Project to its condition existing prior to the
appearance of such Hazardous Materials. Landlord acknowledges and agrees that
Tenant shall not be responsible for any contamination of the Project by
Hazardous Materials by any third party other than Tenant's Agents. Landlord
agrees that it shall not deposit, dispose, generate or use any Hazardous
Materials in the Project in violation of the applicable
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Environmental Laws and that is shall otherwise comply with all Hazardous
Material Laws at the Project to the extent required under applicable Law.
C. Landlord and Tenant shall each give written notice to the
other as soon as reasonably practicable of (i) any communication received from
any governmental authority concerning Hazardous Materials which relates to the
Project, and (ii) any contamination of the Project by Hazardous Materials which
constitutes a violation of any Hazardous Materials Law. Tenant may use small
quantities of household or office chemicals such as adhesives, lubricants, and
cleaning fluids in order to conduct its business at the Premises and such other
Hazardous Materials as are necessary for the operation of Tenant's business of
which Landlord receives notice prior to such Hazardous Materials being brought
onto the Premises and which Landlord consents in writing may be brought onto the
Premises. At any time during the Lease Term, Tenant shall, within five days
after written request therefor received from Landlord, disclose in writing all
Hazardous Materials that are being used by Tenant on the Project, the nature of
such use, and the manner of storage and disposal.
D. Landlord may cause testing wells to be installed on the
Project, and may cause the ground water to be tested to detect the presence of
Hazardous Material by the use of such tests as are then customarily used for
such purposes. If Tenant so requests, Landlord shall supply Tenant with copies
of such test results. The cost of such tests and of the installation,
maintenance, repair and replacement of such wells shall be paid by Tenant if
such tests disclose the existence of facts which give rise to liability of
Tenant pursuant to its indemnity given in paragraph7.2A and/or paragraph7.2B.
E. As used herein, the term "Hazardous Material," means any
hazardous or toxic substance, material or waste which is or becomes regulated by
any local governmental authority, the State of California or the United States
Government. The term "Hazardous Material," includes, without limitation,
petroleum products, asbestos, PCB's, and any material or substance which is (i)
listed under Article 9 or defined as hazardous or extremely hazardous pursuant
to Article 11 of Title 22 of the California Administrative Code, Division 4,
Chapter 20, (ii) defined as a "hazardous waste" pursuant to Section 1004 of the
Federal Resource Conservation and Recovery Act, 42 U.S.C. 6901 et seq. (42
U.S.C. 6903), or (iii) defined as a "hazardous substance" pursuant to Section
101 of the Comprehensive Environmental Response; Compensation and Liability Act,
42 U.S.C. 9601 et seq. (42 U.S.C. 9601). As used herein, the term "Hazardous
Material Law" shall mean any statute, law, ordinance, or regulation of any
governmental body or agency (including the U.S. Environmental Protection Agency,
the California Regional Water Quality Control Board, and the California
Department of Health Services) which regulates the use, storage, release or
disposal of any Hazardous Material.
F. The obligations of Landlord and Tenant under this
paragraph7.2 shall survive the expiration or earlier termination of the Lease
Term. The rights and obligations of Landlord and Tenant with respect to issues
relating to Hazardous Materials are exclusively established by this
paragraph7.2. In the event of any inconsistency between any other part of this
Lease and this paragraph7.2, the terms of this paragraph7.2 shall control.
7.3 Utilities: Tenant shall promptly pay, as the same become due, all
charges for water, gas, electricity, telephone, sewer service, waste pick-up and
any other utilities, materials or services furnished directly to or used by
Tenant on or about the Premises during the Lease Term, including, without
limitation, (i) meter, use and/or connection fees, hook-up fees, or standby fee
(excluding any connection fees or hook-up fees which relate to making the
existing electrical, gas, and water service available to the Premises as of the
Commencement Date), and (ii) penalties for discontinued or interrupted service.
If any utility service is not separately metered to the Premises, then Tenant
shall pay its pro rata share of the cost of such utility service with all others
served by the service not separately metered. However, if Landlord determines
that Tenant is using a disproportionate amount of any utility service not
separately metered, then Landlord at its election may (i) periodically charge
Tenant, as Additional Rent, a sum equal to Landlord's reasonable estimate of the
cost of Tenant's excess use of such utility service, or (ii) install a separate
meter (at Tenant's expense) to measure the utility service supplied to the
Premises.
7.4 Compliance with Governmental Regulations: Landlord and Tenant shall
comply with all rules, regulations and requirements promulgated by national,
state or local governmental agencies or utility suppliers concerning the use of
utility services, including any rationing, limitation or other control. Tenant
shall not be entitled to terminate this Lease nor to any abatement in rent by
reason of such compliance.
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ARTICLE 8 COMMON OPERATING EXPENSES
8.1 Tenant's Obligation to Reimburse: As Additional Rent, Tenant shall
pay Tenant's Share (specified in Section G of the Summary) of all Common
Operating Expenses; provided, however, if the Project contains more than one
building, then Tenant shall pay Tenant's Share of all Common Operating Expenses
fairly allocable to the Building, including (i) all Common Operating Expenses
paid with respect to the maintenance, repair, replacement and use of the
Building, and (ii) a proportionate share (based on the Building Gross Leasable
Area as a percentage of the Project Gross Leasable Area) of all Common Operating
Expenses which relate to the Project in general are not fairly allocable to any
one building that is part of the Project. Tenant shall pay such share of the
actual Common Operating Expenses incurred or paid by Landlord but not
theretofore billed to Tenant within 10 days after receipt of a written bill
therefor from Landlord, on such periodic basis as Landlord shall designate, but
in no event more frequently than once a month. Alternatively, Landlord may from
time to time require that Tenant pay Tenant's Share of Common Operating Expenses
in advance in estimated monthly installments, in accordance with the following:
(I) Landlord shall deliver to Tenant Landlord's reasonable estimate of the
Common Operating expenses it anticipates will be paid or incurred for the
Landlord's fiscal year in question; (ii) during such Landlord's fiscal year
Tenant shall pay such share of the estimated Common Operating Expenses in
advance in monthly installments as required by Landlord due with the
installments of Base Monthly Rent; and (iii) within 90 days after the end of
each Landlord's fiscal year, Landlord shall furnish to Tenant a statement in
reasonable detail of the actual Common Operating Expenses paid or incurred by
Landlord during the just ended Landlord's fiscal year and thereupon there shall
be an adjustment between Landlord and Tenant, with payment to Landlord or credit
by Landlord against the next installment of Base Monthly Rent, as the case may
require, within 10 days after delivery by Landlord to Tenant of said statement,
so that Landlord shall receive the entire amount of Tenant's Share of all Common
Operating Expenses for such Landlord's fiscal year and no more. Tenant shall
have the right at its expense, exercisable upon reasonable prior written notice
to Landlord, to inspect at Landlord's office during normal business hours
Landlord's books and records as they relate to Common Operating Expenses. Such
inspection must be within 30 days of Tenant's receipt of Landlord's annual
statement for the same, and shall be limited to verification of the charges
contained in such statement. Tenant may not withhold payment of such bill
pending completion of such inspection.
Since the Project consists of multiple buildings, certain Common
Operating Expenses may pertain to a particular building and other Common
Operating Expenses to the Project as a whole (such as Common Operating Expenses
for the Common Areas of the Project). Common Operating Expenses applicable to
any particular building within the Project shall be allocated to the building in
question whose tenants shall be responsible for payment of their respective
proportionate shares in the pertinent building and other Common Operating
Expenses applicable to the Project (such as the Common Areas of the Project)
shall be charged to each building in the Project (including the Building) with
the tenants in each such building being responsible for paying their respective
proportionate shares in such building of such costs to the extent required under
the applicable leases. Landlord shall in good faith attempt to allocate such
Common Operating Expenses to the buildings (including the Building) and such
allocation shall be binding on Tenant.
8.2 Common Operating Expenses Defined: The term "Common Operating
Expenses" shall mean the following:
A. All costs and expenses paid or incurred by Landlord in doing
the following (including payments to independent contractors providing services
related to the performance of the following): (i) maintaining, cleaning and
repairing the roof (including repair of leaks) and the exterior surfaces
(including painting) of all buildings located on the Project; (ii) maintenance
of the liability, fire, property damage, earthquake and other insurance covering
the Project carried by Landlord pursuant to paragraph9.2 (including the
prepayment of premiums for coverage of up to one year); (iii) maintaining,
repairing and operating the HVAC equipment, utility facilities and other
building service equipment; (iv) providing utilities to the Common Area
(including lighting, trash removal and water for landscaping irrigation); (v)
complying with all applicable Laws and Private Restrictions; (vi) operating,
maintaining, repairing, cleaning, painting and restriping the Common Area; (vii)
replacement or installation of lighting fixtures, directional or other signs and
signals, irrigation systems, trees, shrubs, ground cover and other plant
materials, and all landscaping in the Common Area; and (viii) providing security
(provided, however, that Landlord shall not be obligated to provide security and
if it does, Landlord may discontinue such service at any time and in
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any event Landlord shall not be responsible for any act or omission of any
security personnel); and (ix) replacing the roof, replacing the HVAC system, and
resurfacing of the parking and sidewalk areas in the Common Area (as opposed to
re-sealing which shall be treated as an expense and included in Common Operating
Expenses), the cost of which shall be amortized over the useful life of the
improvement together with interest as provided in 5.4 hereof; and (x) other
capital improvements as provided in paragraph5.4 hereof;
B. The following costs: (i) Real Property Taxes as defined in
paragraph8.3; (ii) the amount of any commercially reasonable "deductible" paid
by Landlord with respect to damage caused by any Insured Peril; (iii) the cost
to repair damage caused by an Uninsured Peril up to a maximum amount in any 12
month period equal to 2% of the replacement cost of the buildings or other
improvements damaged; and (iv) that portion of all compensation (including
benefits and premiums for workers' compensation and other insurance) paid to or
on behalf of employees of Landlord or its property manager at or below the grade
of general or property manager but only to the extent they are involved in the
performance of the work described by paragraph8.2A that is fairly allocable to
the Project;
C. Fees for management services rendered by either Landlord or a
third party manager engaged by Landlord (which may be a party affiliated with
Landlord), except that the total amount charged for management services and
included in Tenant's Share of Common Operating Expenses shall not exceed the
monthly rate of 5% of the Base Monthly Rent.
D. All additional costs and expenses incurred by Landlord with
respect to the operation, protection, maintenance, repair and replacement of the
Project which would be considered a current expense (and not a capital
expenditure) pursuant to generally accepted accounting principles.
E. Common Operating Expenses shall not include any of the
following:
(1) payments on any loans or ground leases affecting the
Project;
(2) depreciation of any buildings within the Project;
(3) the cost of tenant improvements installed for the
exclusive use of other tenants of the Project;
(4) Repairs or other work occasioned by any casualty of
the type to the extent for which insurance is maintained by Landlord (or
required under this Lease to be maintained by Landlord), and for which insurance
recovery is obtained by Landlord, to the extent of the amount of the insurance
recovery with Landlord agreeing to use its commercially reasonable efforts to
obtain such recovery;
(5) Repairs or other work occasioned by the exercise of
the right of eminent domain;
(6) Marketing costs, leasing commissions, finder's fees,
attorney fees, costs and disbursements and other expenses incurred in connection
with negotiations with prospective tenants or for the sale or refinancing of the
Building or the Project, or legal fees incurred in connection with this Lease;
(7) Costs incurred due to violation by Landlord of this
Lease;
(8) Amounts paid to subsidiaries or other affiliates of
Landlord (i.e., persons or companies controlled by, under common control with,
or which control, Landlord) for services on or to the Building, to the extent
only that the costs of such services exceed competitive costs of such services
were they not so rendered by a subsidiary or other affiliate of Landlord;
(10) Any costs, fines or penalties incurred due to
violation by Landlord of any governmental rule or authority;
(11) Charitable or political contributions;
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(12) Costs associated with the operation of the business
of the entity which constitutes Landlord, as the same are distinguished from the
costs of operation of the Building or the Project, including, without
limitation, accounting (other than for an audit) and legal matters, costs of
defending any lawsuits with any mortgage, costs of selling, syndicating,
financing, mortgaging or hypothecating any of Landlord's interest in the
Building or the Project and costs of any disputes between Landlord and its
employees;
(13) Costs for special services provide to other tenants
of the Project and not provided, available or offered to Tenant; and
(14) Costs to remediate any Hazardous Materials at the
Project.
8.3 Real Property Taxes Defined: The term "Real Property Taxes" shall
mean all taxes, assessments, levies, and other charges of any kind or nature
whatsoever, general and special, foreseen and unforeseen (including all
installments of principal and interest required to pay any existing or future
general or special assessments for public improvements, services or benefits,
and any increases resulting from reassessments resulting from a change in
ownership, new construction, or any other cause), now or hereafter imposed by
any governmental or quasi-governmental authority or special district having the
direct or indirect power to tax or levy assessments, which are levied or
assessed against, or with respect to the value, occupancy or use of all or any
portion of the Project (as now constructed or as may at any time hereafter be
constructed, altered, or otherwise changed) or Landlord's interest therein, the
fixtures, equipment and other property of Landlord, real or personal, that are
an integral part of and located on the Project, the gross receipts, income, or
rentals from the Project, or the use of parking areas, public utilities, or
energy within the Project, or Landlord's business of leasing the Project. If at
any time during the Lease Term the method of taxation or assessment of the
Project prevailing as of the Effective Date shall be altered so that in lieu of
or in addition to any Real Property Tax described above there shall be levied,
assessed or imposed (whether by reason of a change in the method of taxation or
assessment, creation of a new tax or charge, or any other cause) an alternate or
additional tax or charge (i) on the value, use or occupancy of the Project or
Landlord's interest therein, or (ii) on or measured by the gross receipts,
income or rentals from the Project, on Landlord's business of leasing the
Project, or computed in any manner with respect to the operation of the Project,
then any such tax or charge, however designated, shall be included within the
meaning of the term "Real Property Taxes" for purposes of this Lease. If any
Real Property Tax is based upon property or rents unrelated to the Project, then
only that part of such Real Property Tax that is fairly allocable to the Project
shall be included within the meaning of the term "Real Property Taxes".
Notwithstanding the foregoing, the term "Real Property Taxes" shall not include
estate, inheritance, transfer, gift or franchise taxes of Landlord or the
federal or state net income tax imposed on Landlord's income from all sources.
ARTICLE 9 INSURANCE
9.1 Tenant's Insurance: Tenant shall maintain insurance complying with
all of the following:
A. Tenant shall procure, pay for and keep in full force and
effect the following:
(1) Commercial general liability insurance, including
property damage, against liability for personal injury, bodily injury, death and
damage to property occurring in or about, or resulting from an occurrence in or
about, the Premises with combined single limit coverage of not less than the
amount of Tenant's Liability Insurance Minimum specified in Section P of the
Summary, which insurance shall contain a "contractual liability" endorsement
insuring Tenant's performance of Tenant's obligation to indemnify Landlord
contained in paragraph 10.3;
(2) Fire and property damage insurance in so-called "all
risk" form insuring Tenant's Trade Fixtures and Tenant's Alterations for the
full actual replacement cost thereof;
(3) Business interruption insurance with limits of
liability representing at least approximately six months of income, business
auto liability covering owned, non-owned and hired vehicles with a limit of not
less than $1,000,000 per accident, insurance protecting against liability under
workers' compensation laws with limits at least as required by statute,
insurance for all plate glass in the Premises, and such other insurance
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that is either (i) required by any Lender, or (ii) reasonably required by
Landlord and customarily carried by tenants of similar property in similar
businesses.
B. Where applicable and required by Landlord, each policy of
insurance required to be carried by Tenant pursuant to this paragraph9.1: (i)
shall name Landlord and such other parties in interest as Landlord reasonably
designates as additional insured; (ii) shall be primary insurance which provides
that the insurer shall be liable for the full amount of the loss up to and
including the total amount of liability set forth in the declarations without
the right of contribution from any other insurance coverage of Landlord; (iii)
shall be in a form satisfactory to Landlord; (iv) shall be carried with
companies reasonably acceptable to Landlord; (v) shall provide that such policy
shall not be subject to cancellation, lapse or change except after at least 30
days prior written notice to Landlord so long as such provision of 30 days
notice is reasonably obtainable, but in any event not less than 10 days prior
written notice; (vi) shall not have a "deductible" in excess of such amount as
is approved by Landlord; (vii) shall contain a cross liability endorsement; and
(viii) shall contain a "severability" clause. If Tenant has in full force and
effect a blanket policy of liability insurance with the same coverage for the
Premises as described above, as well as other coverage of other premises and
properties of Tenant, or in which Tenant has some interest, such blanket
insurance shall satisfy the requirements of this paragraph9.1.
C. A copy of each paid-up policy evidencing the insurance
required to be carried by Tenant pursuant to this paragraph9.1 (appropriately
authenticated by the insurer) or a certificate of the insurer, certifying that
such policy has been issued, providing the coverage required by this
paragraph9.1, and containing the provisions specified herein, shall be delivered
to Landlord prior to the time Tenant or any of its Agents enters the Premises
and upon renewal of such policies, but not less than 5 days prior to the
expiration of the term of such coverage. Landlord may, at any time, and from
time to time, inspect and/or copy any and all insurance policies required to be
procured by Tenant pursuant to this paragraph9.1. If any Lender or insurance
advisor reasonably determines at any time that the amount of coverage required
for any policy of insurance Tenant is to obtain pursuant to this paragraph9.1 is
not adequate, then Tenant shall increase such coverage for such insurance to
such amount as such Lender or insurance advisor reasonably deems adequate, not
to exceed the level of coverage for such insurance commonly carried by
comparable businesses similarly situated.
9.2 Landlord's Insurance: Landlord shall have the following obligations
and options regarding insurance:
A. Landlord shall maintain a policy or policies of fire and
property damage insurance in so-called "all risk" form insuring Landlord (and
such others as Landlord may designate) against loss of rents for a period of not
less than 12 months and from physical damage to the Project with coverage of not
less than the full replacement cost thereof. Landlord may so insure the Project
separately, or may insure the Project with other property owned by Landlord
which Landlord elects to insure together under the same policy or policies.
Landlord shall have the right, but not the obligation, in its sole and absolute
discretion, to obtain insurance for such additional perils as Landlord deems
appropriate, including, without limitation, coverage for damage by earthquake
and/or flood. All such coverage shall contain "deductibles" which Landlord deems
appropriate, which in the case of earthquake and flood insurance, may be up to
10% of the replacement value of the property insured or such higher amount as is
then commercially reasonable. Landlord shall not be required to cause such
insurance to cover any Trade Fixtures or Tenant's Alterations of Tenant.
B. Landlord may maintain a policy or policies of commercial
general liability insurance insuring Landlord (and such others as are designated
by Landlord) against liability for personal injury, bodily injury, death and
damage to property occurring or resulting from an occurrence in, on or about the
Project, with combined single limit coverage in such amount as Landlord from
time to time determines is reasonably necessary for its protection.
C. Tenant's Obligation to Reimburse: If Landlord's insurance
rates for the Building are increased at any time during the Lease Term as a
result of the nature of Tenant's use of the Premises, Tenant shall reimburse
Landlord for the full amount of such increase immediately upon receipt of a bill
from Landlord therefor.
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9.3 Release and Waiver of Subrogation: The parties hereto release each
other, and their respective agents and employees, from any liability for injury
to any person or damage to property that is caused by or results from any risk
insured against under any valid and collectible insurance policy carried or
required to be carried by either of the parties which contains or could have
contained if requested by the party that obtained such insurance a waiver of
subrogation by the insurer and is in force at the time of such injury or damage;
subject to the following limitations: (i) the foregoing provision shall not
apply to the commercial general liability insurance described by subparagraphs
paragraph9.1A and paragraph9.2B; (ii) such release shall apply to liability
resulting from any risk insured against or covered by self-insurance maintained
or provided by Tenant to satisfy the requirements of paragraph9.1 to the extent
permitted by this Lease; and (iii) Tenant shall not be released from any such
liability to the extent any damages resulting from such injury or damage are not
covered by the recovery obtained by Landlord from such insurance, but only if
the insurance in question permits such partial release in connection with
obtaining a waiver of subrogation from the insurer. This release shall be in
effect only so long as the applicable insurance policy contains a clause to the
effect that this release shall not affect the right of the insured to recover
under such policy. Each party shall use reasonable efforts to cause each
insurance policy obtained by it to provide that the insurer waives all right of
recovery by way of subrogation against the other party and its agents and
employees in connection with any injury or damage covered by such policy.
However, if any insurance policy cannot be obtained with such a waiver of
subrogation, or if such waiver of subrogation is only available at additional
cost and the party for whose benefit the waiver is to be obtained does not pay
such additional cost, then the party obtaining such insurance shall notify the
other party of that fact and thereupon shall be relieved of the obligation to
obtain such waiver of subrogation rights from the insurer with respect to the
particular insurance involved.
ARTICLE 10 LIMITATION ON LANDLORD'S LIABILITY AND INDEMNITY
10.1 Limitation on Landlord's Liability: Landlord shall not be liable to
Tenant, nor shall Tenant be entitled to terminate this Lease or to any abatement
of rent (except as expressly provided otherwise herein), for any injury to
Tenant or Tenant's Agents, damage to the property of Tenant or Tenant's Agents,
or loss to Tenant's business resulting from any: (i) failure, interruption or
installation of any HVAC or other utility system or service; (ii) failure to
furnish or delay in furnishing any utilities or services when such failure or
delay is caused by fire or other peril, the elements, labor disturbances of any
character, or any other accidents or other conditions beyond the reasonable
control of Landlord; (iii) limitation, curtailment, rationing or restriction on
the use of water or electricity, gas or any other form of energy or any services
or utility serving the Project; (iv) vandalism or forcible entry by unauthorized
persons or the criminal act of any person; or (v) penetration of water into or
onto any portion of the Premises or the Building through roof leaks or
otherwise.
10.2 Limitation on Tenant's Recourse: If Landlord is a corporation,
trust, partnership, joint venture, unincorporated association or other form of
business entity: (i) the obligations of Landlord shall not constitute personal
obligations of the officers, directors, trustees, partners, joint venturers,
members, owners, stockholders, or other principals or representatives of such
business entity; and (ii) Tenant shall not have recourse to the assets of such
officers, directors, trustees, partners, joint venturers, members, owners,
stockholders, principals or representatives except to the extent of their
interest in the Project. Tenant shall have recourse only to the interest of
Landlord in the Project for the satisfaction of the obligations of Landlord and
shall not have recourse to any other assets of Landlord for the satisfaction of
such obligations.
10.3 Indemnification of Landlord: Tenant shall hold harmless, indemnify
and defend Landlord, and its employees, agents and contractors, with competent
counsel reasonably satisfactory to Landlord (and Landlord agrees to accept
counsel that any insurer requires be used), from all liability, penalties,
losses, damages, costs, expenses, causes of action, claims and/or judgments
arising by reason of any death, bodily injury, personal injury or property
damage resulting from (i) any cause or causes whatsoever (other than the willful
misconduct or gross negligence of Landlord of which Landlord has had notice and
a reasonable time to cure, but which Landlord has failed to cure) occurring in
or about or resulting from an occurrence in or about the Premises during the
Lease Term, (ii) the negligence or willful misconduct of Tenant or its agents,
employees and contractors, wherever the same may occur, or (iii) an Event of
Tenant's Default. Landlord shall hold harmless, indemnify and defend Tenant from
all liability, penalties, losses, damages, costs, expenses, causes of action,
claims and/or judgments arising by reason of any death, bodily injury, personal
injury or property damage resulting from the active negligence or willful
misconduct of
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Landlord in the Common Areas. The provisions of this paragraph10.3 shall survive
the expiration or sooner termination of this Lease.
ARTICLE 11 DAMAGE TO PREMISES
11.1 Landlord's Duty to Restore: If the Premises are damaged by any
peril after the Effective Date, Landlord shall restore the Premises unless the
Lease is terminated by Landlord pursuant to paragraph11.2 or by Tenant pursuant
to paragraph11.3. All insurance proceeds available from the fire and property
damage insurance carried by Landlord pursuant to paragraph9.2 shall be paid to
and become the property of Landlord. If this Lease is terminated pursuant to
either paragraph11.2 or paragraph11.3, then all insurance proceeds available
from insurance carried by Tenant which covers loss to property that is
Landlord's property or would become Landlord's property on termination of this
Lease shall be paid to and become the property of Landlord. If this Lease is not
so terminated, then upon receipt of the insurance proceeds (if the loss is
covered by insurance) and the issuance of all necessary governmental permits,
Landlord shall commence and diligently prosecute to completion the restoration
of the Premises, to the extent then allowed by Law, to substantially the same
condition in which the Premises were immediately prior to such damage; provided,
however, that Landlord's restoration obligation is limited to the extent of the
applicable insurance proceeds it receives. Landlord's obligation to restore
shall be limited to the Premises and interior improvements constructed by
Landlord as they existed as of the Commencement Date, excluding any Tenant's
Alterations, Trade Fixtures and/or personal property constructed or installed by
Tenant in the Premises. Tenant shall forthwith replace or fully repair all
Tenant's Alterations and Trade Fixtures installed by Tenant and existing at the
time of such damage or destruction.
11.2 Landlord's Right to Terminate: Landlord shall have the right to
terminate this Lease in the event any of the following occurs, which right may
be exercised only by delivery to Tenant of a written notice of election to
terminate within 30 days after the date of such damage:
A. The Premises are damaged by any peril and, in the reasonable
opinion of Landlord's architect or construction consultant, the restoration of
the Premises cannot be substantially completed within 270 days after the date of
such damage; or
B. The Building is damaged by an Uninsured Peril to such an
extent that the estimated cost to restore exceeds 2% of the then actual
replacement cost thereof; provided, however, that Landlord may not terminate
this Lease pursuant to this paragraph11.2B if one or more tenants of the Project
agree in writing to pay the amount by which the cost to restore the damage
exceeds such amount and subsequently deposit such amount with Landlord within 30
days after Landlord has notified Tenant of its election to terminate this Lease;
C. The Premises are damaged by any peril within 12 months of the
last day of the Lease Term to such an extent that the estimated cost to restore
equals or exceeds an amount equal to six times the Base Monthly Rent then due;
provided, however, that Landlord may not terminate this Lease pursuant to this
paragraph11.2C if Tenant, at the time of such damage, has a then valid express
written option to extend the Lease Term and Tenant exercises such option to
extend the Lease Term within 15 days following the date of such damage; or
D. Either the Project or the Building is damaged by any peril
and, because of the Laws then in force, (i) cannot be restored at reasonable
cost to substantially the same condition in which it was prior to such damage,
or (ii) cannot be used for the same use being made thereof before such damage if
restored as required by this Article.
E. As used herein, the following terms shall have the following
meanings: (i) the term "Insured Peril" shall mean a peril actually insured
against (or required to be insured by Landlord under this Lease) for which the
insurance proceeds actually received by Landlord are sufficient (except for any
"deductible" amount specified by such insurance) to restore the Project under
then existing building codes to the condition existing immediately prior to the
damage and Landlord agrees to use its commercially reasonable efforts to collect
such insurance proceeds (which efforts shall not be deemed to include the
commencement of any litigation or arbitration or other action or proceeding
against the insurance carrier or any lender); and (ii) the term "Uninsured
Peril" shall mean any peril which is not an Insured Peril. Notwithstanding the
foregoing, if the "deductible" for earthquake or
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flood insurance exceeds 2% of the replacement cost of the improvements insured,
such peril shall be deemed an "Uninsured Peril".
11.3 Tenant's Right to Terminate: If the Premises are damaged by any
peril andLandlord does not elect to terminate this Lease or is not entitled to
terminate this Lease pursuant to paragraph11.2, then as soon as reasonably
practicable, but in no event later than 45 days after the date of the damage,
Landlord shall furnish Tenant with the written opinion of Landlord's architect
or construction consultant as to when the restoration work required of Landlord
may be completed. Tenant shall have the right to terminate this Lease in the
event any of the following occurs, which right may be exercised only by delivery
to Landlord of a written notice of election to terminate within 10 business days
after Tenant receives from Landlord the estimate of the time needed to complete
such restoration.
A. The Premises are damaged by any peril and, in the reasonable
opinion of Landlord's architect or construction consultant, the restoration of
the Premises cannot be substantially completed within 270 days after the date of
such damage; or
B. The Premises are damaged by any peril within 12 months of the
last day of the Lease Term and, in the reasonable opinion of Landlord's
architect or construction consultant, the restoration of the Premises cannot be
substantially completed within 90 days after the date of such damage and such
damage renders unusable more than 30% of the Premises.
11.4 Abatement of Rent: In the event of damage to the Premises which
does not result in the termination of this Lease, the Base Monthly Rent and the
Additional Rent shall be temporarily abated during the period of restoration in
proportion to the degree to which Tenant's use of the Premises is impaired by
such damage. Tenant shall not be entitled to any compensation or damages from
Landlord for loss of Tenant's business or property or for any inconvenience or
annoyance caused by such damage or restoration. Tenant hereby waives the
provisions of California Civil Code Sections 1932(2) and 1933(4) and the
provisions of any similar law hereinafter enacted.
ARTICLE 12 CONDEMNATION
12.1 Landlord's Termination Right: Landlord shall have the right to
terminate thisLease if, as a result of a taking by means of the exercise of the
power of eminent domain (including a voluntary sale or transfer by Landlord to a
condemnor under threat of condemnation), (i) all or any part of the Premises is
so taken, (ii) more than 10% of the Building Leasable Area is so taken, or (iii)
more than 50% of the Common Area is so taken. Any such right to terminate by
Landlord must be exercised within a reasonable period of time, to be effective
as of the date possession is taken by the condemnor.
12.2 Tenant's Termination Right: Tenant shall have the right to
terminate this Lease if, as a result of any taking by means of the exercise of
the power of eminent domain (including any voluntary sale or transfer by
Landlord to any condemnor under threat of condemnation), (i) 10% or more of the
Premises is so taken and that part of the Premises that remains cannot be
restored within a reasonable period of time and thereby made reasonably suitable
for the continued operation of the Tenant's business, or (ii) there is a taking
affecting the Common Area and, as a result of such taking, Landlord cannot
provide parking spaces within reasonable walking distance of the Premises equal
in number to at least 80% of the number of spaces allocated to Tenant by
paragraph2.1, whether by rearrangement of the remaining parking areas in the
Common Area (including construction of multi-deck parking structures or
restriping for compact cars where permitted by Law) or by alternative parking
facilities on other land. Tenant must exercise such right within a reasonable
period of time, to be effective on the date that possession of that portion of
the Premises or Common Area that is condemned is taken by the condemnor.
12.3 Restoration and Abatement of Rent: If any part of the Premises or
the CommonArea is taken by condemnation and this Lease is not terminated, then
Landlord shall restore the remaining portion of the Premises and Common Area and
interior improvements constructed by Landlord as they existed as of the
Commencement Date, excluding any Tenant's Alterations, Trade Fixtures and/or
personal property constructed or installed by Tenant. Thereafter, except in the
case of a temporary taking, as of the date possession is taken the Base Monthly
Rent shall be reduced in the same proportion that the floor area of that part of
the Premises so taken (less any addition thereto by reason of any
reconstruction) bears to the original floor area of the Premises.
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12.4 Temporary Taking: If any portion of the Premises is temporarily
taken for oneyear or less, this Lease shall remain in effect. If any portion of
the Premises is temporarily taken by condemnation for a period which exceeds one
year or which extends beyond the natural expiration of the Lease Term, and such
taking materially and adversely affects Tenant's ability to use the Premises for
the Permitted Use, then Tenant shall have the right to terminate this Lease,
effective on the date possession is taken by the condemnor.
12.5 Division of Condemnation Award: Any award made as a result of
anycondemnation of the Premises or the Common Area shall belong to and be paid
to Landlord, and Tenant hereby assigns to Landlord all of its right, title and
interest in any such award; provided, however, that Tenant shall be entitled to
receive any condemnation award that is made directly to Tenant for the following
so long as the award made to Landlord is not thereby reduced: (i) for the taking
of personal property or Trade Fixtures belonging to Tenant, (ii) for the
interruption of Tenant's business or its moving costs, (iii) for loss of
Tenant's goodwill; or (iv) for any temporary taking where this Lease is not
terminated as a result of such taking. The rights of Landlord and Tenant
regarding any condemnation shall be determined as provided in this Article, and
each party hereby waives the provisions of California Code of Civil Procedure
Section 1265.130 and the provisions of any similar law hereinafter enacted
allowing either party to petition the Superior Court to terminate this Lease in
the event of a partial taking of the Premises.
ARTICLE 13 DEFAULT AND REMEDIES
13.1 Events of Tenant's Default: Tenant shall be in default of its
obligations under this Lease if any of the following events occurs (an "Event of
Tenant's Default"):
A. Tenant shall have failed to pay Base Monthly Rent or
Additional Rent when due, and such failure is not cured within 5 days after
delivery of written notice from Landlord specifying such failure to pay; or
B. Tenant shall have failed to perform any term, covenant, or
condition of this Lease except those requiring the payment of Base Monthly Rent
or Additional Rent, and Tenant shall have failed to cure such breach within 30
days after written notice from Landlord specifying the nature of such breach
where such breach could reasonably be cured within said 30 day period, or if
such breach could not be reasonably cured within said 30 day period, Tenant
shall have failed to commence such cure within said 30 day period and thereafter
continue with due diligence to prosecute such cure to completion within such
time period as is reasonably needed; or
C. Tenant shall have sublet the Premises or assigned its
interest in the Lease in violation of the provisions contained in Article 14; or
D. Tenant shall have abandoned the Premises; or
E. The occurrence of the following: (i) the making by Tenant of
any general arrangements or assignments for the benefit of creditors; (ii)
Tenant becomes a "debtor" as defined in 11 USC section101 or any successor
statute thereto (unless, in the case of a petition filed against Tenant, the
same is dismissed within 60 days); (iii) the appointment of a trustee or
receiver to take possession of substantially all of Tenant's assets located at
the Premises or of Tenant's interest in this Lease, where possession is not
restored to Tenant within 30 days; or (iv) the attachment, execution or other
judicial seizure of substantially all of Tenant's assets located at the Premises
or of Tenant's interest in this Lease, where such seizure is not discharged
within 30 days; provided, however, in the event that any provision of this
Section 13.1E is contrary to any applicable Law, such provision shall be of no
force or effect; or
F. Tenant shall have failed to deliver documents required of it
pursuant to paragraph15.4 or paragraph15.6 within the time periods specified
therein; or
G. Any two (2) failures by Tenant to observe and perform any
provision of this Lease during any twelve (12) month period of the term, as such
may be extended, shall constitute, at the option of Landlord, a separate and
noncurable default.
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Any written notice of default sent by Landlord to Tenant may be in a
form required under applicable statutory or regulatory provisions (and no
further notice shall be required should Landlord elect to terminate this Lease
as set forth below).
13.2 Landlord's Remedies: If an Event of Tenant's Default occurs,
Landlord shall have the following remedies, in addition to all other rights and
remedies provided by any Law or otherwise provided in this Lease, to which
Landlord may resort cumulatively or in the alternative:
A. Landlord may keep this Lease in effect and enforce by an
action at law or in equity all of its rights and remedies under this Lease,
including (i) the right to recover the rent and other sums as they become due by
appropriate legal action, (ii) the right to make payments required of Tenant or
perform Tenant's obligations and be reimbursed by Tenant for the cost thereof
with interest at the Agreed Interest Rate from the date the sum is paid by
Landlord until Landlord is reimbursed by Tenant, and (iii) the remedies of
injunctive relief and specific performance to compel Tenant to perform its
obligations under this Lease. Notwithstanding anything contained in this Lease,
in the event of a breach of an obligation by Tenant which results in a condition
which poses an imminent danger to safety of persons or damage to property, or a
threat to insurance coverage, then if Tenant does not cure such breach within 3
days after delivery to it of written notice from Landlord identifying the
breach, Landlord may cure the breach of Tenant and be reimbursed by Tenant for
the cost thereof with interest at the Agreed Interest Rate from the date the sum
is paid by Landlord until Landlord is reimbursed by Tenant.
B. Landlord may terminate this Lease by giving Tenant written
notice of termination, in which event this Lease shall terminate on the date set
forth for termination in such notice. Any termination under this paragraph13.2C
shall not relieve Tenant from its obligation to pay sums then due Landlord or
from any claim against Tenant for damages or rent previously accrued or then
accruing. In no event shall any one or more of the following actions by
Landlord, in the absence of a written election by Landlord to terminate this
Lease, constitute a termination of this Lease: (i) appointment of a receiver or
keeper in order to protect Landlord's interest hereunder; (ii) consent to any
subletting of the Premises or assignment of this Lease by Tenant, whether
pursuant to the provisions hereof or otherwise; or (iii) any other action by
Landlord or Landlord's Agents intended to mitigate the adverse effects of any
breach of this Lease by Tenant, including without limitation any action taken to
maintain and preserve the Premises or any action taken to relet the Premises or
any portions thereof to the extent such actions do not affect a termination of
Tenant's right to possession of the Premises.
C. In the event Tenant breaches this Lease and abandons the
Premises, this Lease shall not terminate unless Landlord gives Tenant written
notice of its election to so terminate this Lease. No act by or on behalf of
Landlord intended to mitigate the adverse effect of such breach, including any
efforts to lease the Premises, shall constitute a termination of Tenant's right
to possession unless Landlord gives Tenant written notice of termination. Should
Landlord not terminate this Lease by giving Tenant written notice, Landlord may
enforce all its rights and remedies under this Lease, including the right to
recover the rent as it becomes due under the Lease as provided in California
Civil Code Section 1951.4.
D. In the event Landlord terminates this Lease, Landlord shall
be entitled, at Landlord's election, to damages in an amount as set forth in
California Civil Code Section 1951.2 as in effect on the Effective Date. For
purposes of computing damages pursuant to California Civil Code Section 1951.2,
(i) an interest rate equal to the Agreed Interest Rate shall be used where
permitted, and (ii) the term "rent" includes Base Monthly Rent and Additional
Rent. Such damages shall include:
(1) The worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that Tenant proves could be reasonably
avoided, computed by discounting such amount at the discount rate of the Federal
Reserve Bank of San Francisco at the time of award plus one percent (1%); and
(2) Any other amount necessary to compensate Landlord
for all detriment proximately caused by Tenant's failure to perform Tenant's
obligations under this Lease, or which in the ordinary course of things would be
likely to result therefrom, including the following: (i) expenses for cleaning,
repairing or
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restoring the Premises; (ii) expenses for altering, remodeling or otherwise
improving the Premises for the purpose of reletting, including installation of
leasehold improvements (whether such installation be funded by a reduction of
rent, direct payment or allowance to a new tenant, or otherwise); (iii) broker's
fees, advertising costs and other expenses of reletting the Premises; (iv) costs
of carrying the Premises, such as taxes, insurance premiums, utilities and
security precautions; (v) expenses in retaking possession of the Premises; and
(vi) attorney's fees and court costs incurred by Landlord in retaking possession
of the Premises and in releasing the Premises or otherwise incurred as a result
of Tenant's default.
E. Nothing in this 13.2 shall limit Landlord's right to
indemnification from Tenant as provided in paragraph7.2 and paragraph10.3. Any
notice given by Landlord in order to satisfy the requirements of paragraph13.1A
or paragraph13.1B above shall also satisfy the notice requirements of California
Code of Civil Procedure Section 1161 regarding unlawful detainer proceedings.
13.3 Waiver: One party's consent to or approval of any act by the other
party requiring the first party's consent or approval shall not be deemed to
waive or render unnecessary the first party's consent to or approval of any
subsequent similar act by the other party. The receipt by Landlord of any rent
or payment with or without knowledge of the breach of any other provision hereof
shall not be deemed a waiver of any such breach unless such waiver is in writing
and signed by Landlord. No delay or omission in the exercise of any right or
remedy accruing to either party upon any breach by the other party under this
Lease shall impair such right or remedy or be construed as a waiver of any such
breach theretofore or thereafter occurring. The waiver by either party of any
breach of any provision of this Lease shall not be deemed to be a waiver of any
subsequent breach of the same or of any other provisions herein contained.
13.4 Limitation On Exercise of Rights: At any time that an Event of
Tenant's Default has occurred and remains uncured, (i) it shall not be
unreasonable for Landlord to deny or withhold any consent or approval requested
of it by Tenant which Landlord would otherwise be obligated to give, and (ii)
Tenant may not exercise any option to extend, right to terminate this Lease, or
other right granted to it by this Lease which would otherwise be available to
it.
13.5 Waiver by Tenant of Certain Remedies: Tenant waives the provisions
ofSections 1932(1), 1941 and 1942 of the California Civil Code and any similar
or successor law regarding Tenant's right to terminate this Lease or to make
repairs and deduct the expenses of such repairs from the rent due under this
Lease. Tenant hereby waives any right of redemption or relief from forfeiture
under the laws of the State of California, or under any other present or future
law, including the provisions of Sections 1174 and 1179 of the California Code
of Civil Procedure.
ARTICLE 14 ASSIGNMENT AND SUBLETTING
14.1 Transfer By Tenant: The following provisions shall apply to any
assignment,subletting or other transfer by Tenant or any subtenant or assignee
or other successor in interest of the original Tenant (collectively referred to
in this paragraph14.1 as "Tenant"):
A. Tenant shall not do any of the following (collectively
referred to herein as a "Transfer"), whether voluntarily, involuntarily or by
operation of law, without the prior written consent of Landlord, which consent
shall not be unreasonably withheld: (i) sublet all or any part of the Premises
or allow it to be sublet, occupied or used by any person or entity other than
Tenant; (ii) assign its interest in this Lease; (iii) mortgage or encumber the
Lease (or otherwise use the Lease as a security device) in any manner; or (iv)
materially amend or modify an assignment, sublease or other transfer that has
been previously approved by Landlord. Tenant shall reimburse Landlord for all
reasonable costs and attorney's fees incurred by Landlord in connection with the
evaluation, processing, and/or documentation of any requested Transfer, whether
or not Landlord's consent is granted. Landlord's reasonable costs shall include
the cost of any review or investigation performed by Landlord or consultant
acting on Landlord's behalf of Hazardous Materials (as defined in Section 7.2E
of this Lease) used, stored, released, or disposed of by the potential Subtenant
or Assignee. Any Transfer so approved by Landlord shall not be effective until
Tenant has delivered to Landlord an executed counterpart of the document
evidencing the Transfer which (i) is in a form reasonably approved by Landlord,
(ii) contains the same terms and conditions as stated in Tenant's notice given
to Landlord pursuant to paragraph14.1B, and (iii) in the case of an assignment
of the Lease, contains the agreement of
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the proposed transferee to assume all obligations of Tenant under this Lease
arising after the effective date of such Transfer and to remain jointly and
severally liable therefor with Tenant. Any attempted Transfer without Landlord's
consent shall constitute an Event of Tenant's Default and shall be voidable at
Landlord's option. Landlord's consent to any one Transfer shall not constitute a
waiver of the provisions of this paragraph14.1 as to any subsequent Transfer or
a consent to any subsequent Transfer. No Transfer, even with the consent of
Landlord, shall relieve Tenant of its personal and primary obligation to pay the
rent and to perform all of the other obligations to be performed by Tenant
hereunder. The acceptance of rent by Landlord from any person shall not be
deemed to be a waiver by Landlord of any provision of this Lease nor to be a
consent to any Transfer.
B. At least 30 days before a proposed Transfer is to become
effective, Tenant shall give Landlord written notice of the proposed terms of
such Transfer and request Landlord's approval, which notice shall include the
following: (i) the name and legal composition of the proposed transferee; (ii) a
current financial statement of the transferee, financial statements of the
transferee covering the preceding three years if the same exist, and (if
available) an audited financial statement of the transferee for a period ending
not more than one year prior to the proposed effective date of the Transfer, all
of which statements are prepared in accordance with generally accepted
accounting principles; (iii) the nature of the proposed transferee's business to
be carried on in the Premises; (iv) all consideration to be given on account of
the Transfer; (v) a current financial statement of Tenant; and (vi) an
accurately filled out response to Landlord's standard hazardous materials
questionnaire. Tenant shall provide to Landlord such other information as may be
reasonably requested by Landlord within seven days after Landlord's receipt of
such notice from Tenant. Landlord shall respond in writing to Tenant's request
for Landlord's consent to a Transfer within the later of (i) 20 days of receipt
of such request together with the required accompanying documentation, or (ii)
10 days after Landlord's receipt of all information which Landlord reasonably
requests within seven days after it receives Tenant's first notice regarding the
Transfer in question. If Landlord fails to respond in writing within said
period, then Tenant shall provide a second written notice to Landlord requesting
such consent and if Landlord fails to respond within 7 days after receipt of
such second notice, then Landlord will be deemed to have consented to such
Transfer. Tenant shall immediately notify Landlord of any modification to the
proposed terms of such Transfer, which shall also be subject Landlord's consent
in accordance with the same process for obtaining Landlord's initial consent to
such Transfer.
C. In the event that Tenant seeks to make any Transfer, Landlord
shall have the right to terminate this Lease or, in the case of a sublease of
less than all of the Premises, terminate this Lease as to that part of the
Premises proposed to be so sublet, either (i) on the condition that the proposed
transferee immediately enter into a direct lease of the Premises with Landlord
(or, in the case of a partial sublease, a lease for the portion proposed to be
so sublet) on the same terms and conditions contained in Tenant's notice, or
(ii) so that Landlord is thereafter free to lease the Premises (or, in the case
of a partial sublease, the portion proposed to be so sublet) to whomever it
pleases on whatever terms are acceptable to Landlord. If Landlord elects to so
terminate this Lease, Tenant shall have the right to rescind its request for
consent to the Transfer and not enter into or consummate the Transfer upon
written notice to Landlord within five (5) days after receipt of notice from
Landlord to recapture and terminate, in which case Landlord recapture and
termination notice shall not be effective as to such initially proposed
Transfer. In the event Landlord elects to so terminate this Lease, then (i) if
such termination is conditioned upon the execution of a lease between Landlord
and the proposed transferee, Tenant's obligations under this Lease shall not be
terminated until such transferee executes a new lease with Landlord, enters into
possession and commences the payment of rent, and (ii) if Landlord elects simply
to terminate this Lease (or, in the case of a partial sublease, terminate this
Lease as to the portion to be so sublet), the Lease shall so terminate in its
entirety (or as to the space to be so sublet) fifteen (15) days after Landlord
has notified Tenant in writing of such election. Upon such termination, Tenant
shall be released from any further obligation under this Lease if it is
terminated in its entirety, or shall be released from any further obligation
under the Lease with respect to the space proposed to be sublet in the case of a
proposed partial sublease. In the case of a partial termination of the Lease,
the Base Monthly Rent and Tenant's Share shall be reduced to an amount which
bears the same relationship to the original amount thereof as the area of that
part of the Premises which remains subject to the Lease bears to the original
area of the Premises. Landlord and Tenant shall execute a cancellation and
release with respect to the Lease to effect such termination.
Notwithstanding the foregoing, Landlord shall not have
the right to recapture the portion of the Premises covered by any sublease that
individually or in the aggregate of all subleases is for less than 20% of the
square footage of the Premises if (i) such subleases are executed prior to the
second annual anniversary of the
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Commencement Date of this Lease, and (ii) Tenant is occupying and actively
conducting its business in the balance of the Premises. While such subleases
shall not be subject to Landlord's right to recapture, they shall be subject to
all of the other provisions of Article 14 of this Lease (any such sublease under
this paragraph shall be referred to herein as a "Special Sublease").
D. If Landlord consents to a Transfer proposed by Tenant, Tenant
may enter into such Transfer, and if Tenant does so, the following shall apply:
(1) Tenant shall not be released of its liability for
the performance of all of its obligations under the Lease.
(2) If Tenant assigns its interest in this Lease, then
Tenant shall pay to Landlord 80% of all Subrent (as defined in
paragraph14.1D(5)) received by Tenant over and above (i) the assignee's
agreement to assume the obligations of Tenant under this Lease, and (ii) all
Permitted Transfer Costs related to such assignment. In the case of assignment,
the amount of Subrent owed to Landlord shall be paid to Landlord on the same
basis, whether periodic or in lump sum, that such Subrent is paid to Tenant by
the assignee. All Permitted Transfer Costs shall be amortized on a straight line
basis over the term of such sublease (including any extension options) for
purposes of calculating the amount due Landlord hereunder.
(3) If Tenant sublets any part of the Premises, then
with respect to the space so subleased, Tenant shall pay to Landlord 80% of the
positive difference, if any, between (i) all Subrent paid by the subtenant to
Tenant, less (ii) the sum of all Base Monthly Rent and Additional Rent allocable
to the space sublet and all Permitted Transfer Costs related to such sublease.
Such amount shall be paid to Landlord on the same basis, whether periodic or in
lump sum, that such Subrent is paid to Tenant by its subtenant. All Permitted
Transfer Costs shall be amortized on a straight line basis over the term of such
sublease (including any extension options) for purposes of calculating the
amount due Landlord hereunder.
(4) Tenant's obligations under this paragraph14.1D shall
survive any Transfer, and Tenant's failure to perform its obligations hereunder
shall be an Event of Tenant's Default. At the time Tenant makes any payment to
Landlord required by this paragraph14.1D, Tenant shall deliver an itemized
statement of the method by which the amount to which Landlord is entitled was
calculated, certified by Tenant as true and correct. Landlord shall have the
right at reasonable intervals to inspect Tenant's books and records relating to
the payments due hereunder. Upon request therefor, Tenant shall deliver to
Landlord copies of all bills, invoices or other documents upon which its
calculations are based. Landlord may condition its approval of any Transfer upon
obtaining a certification from both Tenant and the proposed transferee of all
Subrent and other amounts that are to be paid to Tenant in connection with such
Transfer.
(5) As used in this paragraph14.1D, the term "Subrent"
shall mean any consideration of any kind received, or to be received, by Tenant
as a result of the Transfer, if such sums are related to Tenant's interest in
this Lease or in the Premises, including payments from or on behalf of the
transferee (in excess of the then fair market value thereof) for Tenant's
assets, fixtures, leasehold improvements, inventory, accounts, goodwill,
equipment, furniture, and general intangibles. As used in this paragraph14.1D,
the term "Permitted Transfer Costs" shall mean (i) all reasonable leasing
commissions paid to third parties not affiliated with Tenant in order to obtain
the Transfer in question, and (ii) all reasonable attorney's fees incurred by
Tenant with respect to the Transfer in question.
E. If Tenant is a corporation, the following shall be deemed a
voluntary assignment of Tenant's interest in this Lease: (i) any dissolution,
merger, consolidation, or other reorganization of or affecting Tenant, whether
or not Tenant is the surviving corporation; and (ii) if the capital stock of
Tenant is not publicly traded, the sale or transfer to one person or entity (or
to any group of related persons or entities) stock possessing more than 50% of
the total combined voting power of all classes of Tenant's capital stock issued,
outstanding and entitled to vote for the election of directors. If Tenant is a
partnership, limited liability company or other entity any withdrawal or
substitution (whether voluntary, involuntary or by operation of law, and whether
occurring at one time or over a period of time) of any partner, member or other
party owning 25% or more (cumulatively) of any interest in
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the capital or profits of the partnership, limited liability company or other
entity or the dissolution of the partnership, limited liability company or other
entity, shall be deemed a voluntary assignment of Tenant's interest in this
Lease.
F. Notwithstanding anything contained in paragraph14.1, so long
as Tenant otherwise complies with the provisions of paragraph14.1 Tenant may
sublease all or part of the Premises or assign its interest in this Lease to any
corporation which controls, is controlled by, or is under common control with
the original Tenant to this Lease by means of an ownership interest of more than
50% (a "Permitted Transfer") without Landlord's prior written consent, and
Landlord shall not be entitled to terminate the Lease pursuant to paragraph14.1C
or to receive any part of any Subrent resulting therefrom that would otherwise
be due it pursuant to paragraph14.1D.
G. The consent of Landlord to a Transfer may not be unreasonably
withheld, provided that it is agreed to be reasonable for Landlord to consider
any of the following reasons, which list is not exclusive, in electing to deny
consent:
(1) The financial strength, credit, character and
business or professional standing of the proposed transferee at the time of the
proposed Transfer is not at least equal to that of Tenant at the time of
execution of this Lease, provided, however that this requirement shall not be
applicable for any subtenant in a Special Sublease (as defined in
paragraph14.1C);
(2) A proposed transferee who would significantly and
adversely impact or affect the common facilities or the utility, efficiency or
effectiveness of any utility or telecommunication system serving the Building or
the Project;
(3) A proposed transferee whose occupancy will require a
variation in the terms of this Lease (including, without limitation, a variation
in the use clause);
(4) The existence of any default by Tenant under any
provision of this Lease;
(5) A proposed transferee who is or is likely to be, or
whose business is or is likely to be, subject to compliance with additional laws
or other governmental requirements beyond those to which Tenant or Tenant's
business is subject and which would require Landlord to construct or make
improvements or changes to the Building or areas outside of the Premises;
(6) Either the proposed transferee, or any person or
entity which directly or indirectly, controls, is controlled by, or is under
common control with, the proposed transferee or an affiliate of the proposed
transferee, (i) occupies space in the Building at the time of the request for
consent, or (ii) is negotiating with Landlord to lease space in the Building or
in the Project at such time;
(7) the proposed Transferee is a governmental agency or
until or an existing tenant in the Project;
(8) The proposed transferee's use would materially
increase the expenses associated with operating, maintaining and repairing the
Building or the Project;
(9) The rent proposed to be charged by Tenant to the
proposed transferee during the term of such Transfer, calculated using a present
value analysis, is less than ninety-five percent (95%) of the rent then being
quoted by Landlord, at the proposed time of such Transfer, for comparable space
in the Building or any other building in the Project for a comparable term,
calculated using a present value system, or
(10) the proposed Transferee will use, store or handle
Hazardous Materials (defined below) in or about the Premises of a type, nature
or quantity not then acceptable to Landlord
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H. Reasonable Restriction. The restrictions on Transfer
described in this Lease are acknowledged by Tenant to be reasonable for all
purposes, including, without limitation, the provisions of California Civil Code
(the "Code") Section 1951.4(b)(2).
14.2 Transfer By Landlord: Landlord and its successors in interest shall
have the right to transfer their interest in this Lease and the Project at any
time and to any person or entity. In the event of any such transfer, the
Landlord originally named herein (and, in the case of any subsequent transfer,
the transferor) from the date of such transfer, shall be automatically relieved,
without any further act by any person or entity, of all liability for the
performance of the obligations of the Landlord hereunder which may accrue after
the date of such transfer. After the date of any such transfer, the term
"Landlord" as used herein shall mean the transferee of such interest in the
Premises.
ARTICLE 15 GENERAL PROVISIONS
15.1 Landlord's Right to Enter: Landlord and its agents may enter the
Premises at any reasonable time after giving at least 24 hours' prior notice to
Tenant (and immediately in the case of emergency) for the purpose of: (i)
inspecting the same; (ii) posting notices of non-responsibility; (iii) supplying
any service to be provided by Landlord to Tenant; (iv) showing the Premises to
prospective purchasers, mortgagees or tenants; (v) making necessary alterations,
additions or repairs; (vi) performing Tenant's obligations when Tenant has
failed to do so after written notice from Landlord; (vii) placing upon the
Premises ordinary "for lease" signs or "for sale" signs; and (viii) responding
to an emergency. Landlord shall have the right to use any and all means Landlord
may deem necessary and proper to enter the Premises in an emergency. Any entry
into the Premises obtained by Landlord in accordance with this paragraph15.1
shall not be a forcible or unlawful entry into, or a detainer of, the Premises,
or an eviction, actual or constructive, of Tenant from the Premises, provided
that Landlord exercises its rights of entry in a commercially reasonable manner
so as to not unreasonably interfere with Tenant's use and occupancy of the
Premises; however, Landlord shall not be obligated to perform work outside of
normal business hours or incur any additional costs in connection therewith.
15.2 Surrender of the Premises: Upon the expiration or sooner
termination of this Lease, Tenant shall vacate and surrender the Premises to
Landlord in the same condition as existed at the Commencement Date, except for
(i) reasonable wear and tear, (ii) damage caused by any peril or condemnation,
and (iii) contamination by Hazardous Materials for which Tenant is not
responsible pursuant to paragraph7.2A or paragraph7.2B. In this regard, normal
wear and tear shall be construed to mean wear and tear caused to the Premises by
the natural aging process which occurs in spite of prudent application of the
reasonable standards for maintenance, repair and janitorial practices, and does
not include items of neglected or deferred maintenance. In any event, Tenant
shall cause the following to be done prior to the expiration or the sooner
termination of this Lease: (i) all interior walls shall be painted or cleaned so
that they appear freshly painted; (ii) all tiled floors shall be cleaned and
waxed; (iii) all carpets shall be cleaned and shampooed; (iv) all broken,
marred, stained or nonconforming acoustical ceiling tiles shall be replaced; (v)
all interior and exterior windows shall be washed; (vi) the HVAC system shall be
serviced by a reputable and licensed service firm and left in good operating
condition and repair as so certified by such firm; and (vii) the plumbing and
electrical systems and lighting shall be placed in good order and repair
(including replacement of any burned out, discolored or broken light bulbs,
ballasts, or lenses). Tenant shall, prior to the expiration or sooner
termination of this Lease, (i) remove any Tenant's Alterations which Tenant is
required to remove pursuant to paragraph5.2C and repair all damage caused by
such removal, and (ii) return the Premises or any part thereof to its original
configuration existing as of the time the Premises were delivered to Tenant. If
the Premises are not so surrendered at the termination of this Lease, Tenant
shall be liable to Landlord for all reasonable costs incurred by Landlord in
returning the Premises to the required condition, plus interest on all costs
incurred at the Agreed Interest Rate. Tenant shall indemnify Landlord against
loss or liability resulting from delay by Tenant in so surrendering the
Premises, including, without limitation, any claims made by any succeeding
tenant or losses to Landlord due to lost opportunities to lease to succeeding
tenants.
15.3 Holding Over: This Lease shall terminate without further notice at
theexpiration of the Lease Term. Any holding over by Tenant after expiration of
the Lease Term shall not constitute a renewal or extension of the Lease or give
Tenant any rights in or to the Premises except as expressly provided in this
Lease. Any holding over after such expiration with the written consent of
Landlord shall be construed to be a tenancy from month to
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month on the same terms and conditions herein specified insofar as applicable
except that Base Monthly Rent shall be increased to an amount equal to 150% of
the greater of (a) the Base Monthly Rent payable during the last full calendar
month of the Lease Term, or (b) the then prevailing fair market rent.
15.4 Subordination: The following provisions shall govern the
relationship of thisLease to any Security Instrument:
A. The Lease is subject and subordinate to all Security
Instruments existing as of the Effective Date. However, if any Lender so
requires, this Lease shall become prior and superior to any such Security
Instrument.
B. At Landlord's election, this Lease shall become subject and
subordinate to any Security Instrument created after the Effective Date.
Notwithstanding such subordination, Tenant's right to quiet possession of the
Premises shall not be disturbed so long as Tenant is not in default and performs
all of its obligations under this Lease, unless this Lease is otherwise
terminated pursuant to its terms.
C. Tenant shall upon request execute any document or instrument
required by any Lender to make this Lease either prior or subordinate to a
Security Instrument, which may include such other matters as the Lender
customarily and reasonably requires in connection with such agreements,
including provisions that the Lender not be liable for (i) the return of any
security deposit unless the Lender receives it from Landlord, and (ii) any
defaults on the part of Landlord occurring prior to the time the Lender takes
possession of the Project in connection with the enforcement of its Security
Instrument, except for defaults in the performance of repair and maintenance
obligations by Landlord under this Lease which continue to exist after the date
the Lender so takes possession of the Project and has received notice of such
defaults (which shall be subject to the applicable cure periods for such
Lender). Tenant's failure to execute any such document or instrument within 10
days after written demand therefor shall constitute an Event of Tenant's
Default.
D. SNDA. Landlord has informed Tenant that the Project is
currently encumbered by a Security Instrument. At Tenant's sole cost and
expense, Landlord shall request the beneficiary (or its servicer) of the
existing Security Instrument that encumbers the Premises as of the date hereof
issue its subordination, non-disturbance and attornment agreement ("SNDA"),
pursuant to which such beneficiary agrees to recognize this Lease in the event
of default under such Security Instrument or sale under such Security
Instrument, so long as Tenant is not in default hereunder. Landlord's sole
obligation under this section is to request such SNDA. Tenant is responsible for
paying all costs and expenses for such SNDA, including, without limitation, the
lender attorneys' fees and disbursements. Obtaining the SNDA is not a condition
precedent or subsequent to the Lease, nor a breach of Landlord's obligation. The
failure of such lender to issue its SNDA shall not relieve Tenant of any of its
obligations under the Lease.
15.5 Mortgagee Protection and Attornment: In the event of any default on
the part of the Landlord, Tenant will use reasonable efforts to give notice by
certified mail to any Lender whose name has been provided to Tenant and, so long
as Tenant's use and occupancy is no being materially affected by such default,
shall offer such Lender a reasonable opportunity to cure the default, including
time to obtain possession of the Premises by power of sale or judicial
foreclosure or other appropriate legal proceedings, if such should prove
necessary to effect a cure. Tenant shall attorn to any purchaser of the Premises
at any foreclosure sale or private sale conducted pursuant to any Security
Instrument encumbering the Premises, or to any grantee or transferee designated
in any deed given in lieu of foreclosure, who agrees with Tenant to be bound as
Landlord under this Lease.
15.6 Estoppel Certificates and Financial Statements: At all times during
the LeaseTerm, each party agrees, following any request by the other party,
promptly to execute and deliver to the requesting party within 15 days following
delivery of such request an estoppel certificate: (i) certifying that this Lease
is unmodified and in full force and effect or, if modified, stating the nature
of such modification and certifying that this Lease, as so modified, is in full
force and effect, (ii) stating the date to which the rent and other charges are
paid in advance, if any, (iii) acknowledging that there are not, to the
certifying party's knowledge, any uncured defaults on the part of any party
hereunder or, if there are uncured defaults, specifying the nature of such
defaults, and (iv) certifying such other information about the Lease as may be
reasonably required by the requesting party. A failure to deliver an estoppel
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certificate within 15 days after delivery of a request therefor shall be a
conclusive admission that, as of the date of the request for such statement: (i)
this Lease is unmodified except as may be represented by the requesting party in
said request and is in full force and effect, (ii) there are no uncured defaults
in the requesting party's performance, and (iii) no rent has been paid more than
30 days in advance. At any time during the Lease Term Tenant shall, upon 15
days' prior written notice from Landlord, provide Tenant's most recent financial
statement and financial statements covering the 24 month period prior to the
date of such most recent financial statement to any existing Lender or to any
potential Lender or buyer of the Premises. Such statements shall be prepared in
accordance with generally accepted accounting principles and, if such is the
normal practice of Tenant, shall be audited by an independent certified public
accountant.
15.7 Intentionally Deleted.
15.8 Notices: Any notice required or desired to be given regarding this
Lease shall be in writing and may be given by personal delivery, by courier
service, or by mail. A notice shall be deemed to have been given (i) on the
third business day after mailing if such notice was deposited in the United
States mail, certified or registered, postage prepaid, addressed to the party to
be served at its Address for Notices specified in Section Q or Section R of the
Summary (as applicable), (ii) when delivered if given by personaldelivery, and
(iii) in all other cases when actually received at the party's Address for
Notices. Either party may change its address by giving notice of the same in
accordance with this 15.8, provided, however, that any address to which notices
may be sent must be a California address.
15.9 Attorneys' Fees: In the event either Landlord or Tenant shall bring
any action or legal proceeding for an alleged breach of any provision of this
Lease, to recover rent, to terminate this Lease or otherwise to enforce, protect
or establish any term or covenant of this Lease, the prevailing party shall be
entitled to recover as a part of such action or proceeding, or in a separate
action brought for that purpose, reasonable attorneys' fees, court costs, and
experts' fees as may be fixed by the court.
15.10 Corporate Authority: Each entity executing this Lease on behalf of
such entity represents and warrants to the other that the person signing on
behalf of such entity is duly authorized to execute and deliver this Lease on
behalf of such entity in accordance with organizational documents for such
entity and that this Lease is binding upon such entity in accordance with its
terms, and that the entity has full right and authority to enter into this
Lease.
15.11 Miscellaneous: Should any provision of this Lease prove to be
invalid or illegal, such invalidity or illegality shall in no way affect, impair
or invalidate any other provision hereof, and such remaining provisions shall
remain in full force and effect. Time is of the essence with respect to the
performance of every provision of this Lease in which time of performance is a
factor. The captions used in this Lease are for convenience only and shall not
be considered in the construction or interpretation of any provision hereof. Any
executed copy of this Lease shall be deemed an original for all purposes. This
Lease shall, subject to the provisions regarding assignment, apply to and bind
the respective heirs, successors, executors, administrators and assigns of
Landlord and Tenant. "Party" shall mean Landlord or Tenant, as the context
implies. This Lease shall be construed and enforced in accordance with the laws
of the State of California. The language in all parts of this Lease shall in all
cases be construed as a whole according to its fair meaning, and not strictly
for or against either Landlord or Tenant. When the context of this Lease
requires, the neuter gender includes the masculine, the feminine, a partnership
or corporation or joint venture, and the singular includes the plural. The terms
"shall", "will" and "agree" are mandatory. The term "may" is permissive. When a
party is required to do something by this Lease, it shall do so at its sole cost
and expense without right of reimbursement from the other party unless a
provision of this Lease expressly requires reimbursement. Landlord and Tenant
agree that (i) the gross leasable area of the Premises includes any enclosed
atriums, depressed loading docks, covered entrances or egresses, and covered
loading areas, (ii) each has had an opportunity to determine to its satisfaction
the actual area of the Project and the Premises, (iii) all measurements of area
contained in this Lease are conclusively agreed to be correct and binding upon
the parties, even if a subsequent measurement of any one of these areas
determines that it is more or less than the amount of area reflected in this
Lease, and (iv) any such subsequent determination that the area is more or less
than shown in this Lease shall not result in a change in any of the computations
of rent, improvement allowances, or other matters described in this Lease where
area is a factor. Where a party hereto is obligated not to perform any act, such
party is also obligated to
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<PAGE> 32
restrain any others within its control from performing said act, including the
Agents of such party. Landlord shall not become or be deemed a partner or a
joint venturer with Tenant by reason of the provisions of this Lease.
15.12 Termination by Exercise of Right: If this Lease is terminated
pursuant to its terms by the proper exercise of a right to terminate
specifically granted to Landlord or Tenant by this Lease, then this Lease shall
terminate 30 days after the date the right to terminate is properly exercised
(unless another date is specified in that part of the Lease creating the right,
in which event the date so specified for termination shall prevail), the rent
and all other charges due hereunder shall be prorated as of the date of
termination, and neither Landlord nor Tenant shall have any further rights or
obligations under this Lease except for those that have accrued prior to the
date of termination or those obligations which this Lease specifically provides
are to survive termination. This paragraph15.12 does not apply to a termination
of this Lease by either party as a result of a default by the other party.
15.13 Brokerage Commissions: Each party hereto (i) represents and
warrants to the other that it has not had any dealings with any real estate
brokers, leasing agents or salesman, or incurred any obligations for the payment
of real estate brokerage commissions or finder's fees which would be earned or
due and payable by reason of the execution of this Lease, other than to the
Retained Real Estate Brokers described in Section S of the Summary, and (ii)
agrees to indemnify, defend, and hold harmless the other party from any claim
for any such commission or fees which result from the actions of the
indemnifying party. Landlord shall be responsible for the payment of any
commission owed to the Retained Real Estate Brokers if there is a separate
written commission agreement between Landlord and the Retained Real Estate
Brokers for the payment of a commission as a result of the execution of this
Lease.
15.14 Force Majeure: Any prevention, delay or stoppage due to strikes,
lock-outs, inclement weather, labor disputes, inability to obtain labor,
materials, fuels or reasonable substitutes therefor, governmental restrictions,
regulations, controls, action or inaction, civil commotion, fire or other acts
of God, and other causes beyond the reasonable control of either party (except
financial inability) shall excuse the performance by such party, for a period
equal to the period of any said prevention, delay or stoppage, of any obligation
hereunder.
15.15 Entire Agreement: This Lease constitutes the entire agreement
between the parties, and there are no binding agreements or representations
between the parties except as expressed herein. Tenant acknowledges that neither
Landlord nor Landlord's Agents has made any legally binding representation or
warranty as to any matter except those expressly set forth herein, including any
warranty as to (i) whether the Premises may be used for Tenant's intended use
under existing Law, (ii) the suitability of the Premises or the Project for the
conduct of Tenant's business, or (iii) the condition of any improvements. There
are no oral agreements between Landlord and Tenant affecting this Lease, and
this Lease supersedes and cancels any and all previous negotiations,
arrangements, brochures, agreements and understandings, if any, between Landlord
and Tenant or displayed by Landlord to Tenant with respect to the subject matter
of this Lease. This instrument shall not be legally binding until it is executed
by both Landlord and Tenant. No subsequent change or addition to this Lease
shall be binding unless in writing and signed by Landlord and Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease with
the intent to be legally bound thereby, to be effective as of the Effective
Date.
LANDLORD: TENANT:
By: SILICON VALLEY PROPERTIES, LLC, By: NEW FOCUS, INC.
a Delaware limited liability company a California corporation
By: Divco West Group, LLC, By:
--------------------------
a Delaware limited liability company Name:
------------------------
Its Agent Title:
-----------------------
By: Dated: December __, 1999
----------------------------
Name: Scott Smithers
Its: President
Dated: December __, 1999
28
<PAGE> 33
[EXHIBIT OMITTED]
<PAGE> 34
EXHIBIT B
WORK LETTER FOR TENANT IMPROVEMENTS
1. Defined Terms. All defined terms referred to in this Exhibit shall
have the same meaning as defined in that certain Lease by and between Silicon
Valley Properties, LLC, a Delaware limited liability company, as Landlord, and
New Focus, Inc., a California corporation, as Tenant (the "Lease") to which this
Exhibit is a part, except where expressly defined to the contrary.
2. Construction of the Tenant Improvements. Landlord shall construct the
Tenant Improvements in accordance with this exhibit and the construction
contract to be executed by Landlord and its contractor(s). The construction
contract for constructing the Tenant Improvements and the contractor(s) to
perform the work shall be approved and/or selected, as the case may be, by
Landlord at its sole and absolute discretion without the consent of Tenant.
3. Additional Definitions. Each of the following terms shall have the
following meaning: "Construction Budget" - A estimate of the Construction Costs
for the Tenant Improvements prepared by Landlord after or in connection with the
preparation of the Construction Plans.
"Construction Costs" - All costs and expenses approved by Landlord to
construct the Tenant Improvements, including all fees and expenses for:
(a) architectural/space planning services utilized by Landlord
in the preparation of any space plan;
(b) architects, engineers and consultants in the preparation of
the Preliminary Plans, Construction Plans, including mechanical, electrical,
plumbing and structural drawings and of all other aspects of the Construction
Plans, and for processing governmental applications and applications for
payment, observing construction of the work, and other customary engineering,
architectural, interior design and space planning services;
(c) surveys, reports, environmental and other tests and
investigations of the site and any improvements thereon;
(d) labor, materials, equipment and fixtures supplied by the
general contractor, its subcontractors and/or materialmen;
(e) the furnishing and installation of all heating, ventilation
and air conditioning duct work, terminal boxes, distributing defusers and
accessories required for completing the heating, ventilation and
air-conditioning system in the Premises, including costs of meter and key
control for after-hour usage, if required by Landlord;
(f) all electrical circuits, wiring, lighting fixtures, and tube
outlets furnished and installed throughout the Premises, including costs of
meter and key control for after-hour electrical power usage;
(g) all window and floor coverings in the Premises;
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<PAGE> 35
(h) all fire and life safety control systems, such as fire
walls, sprinklers and fire alarms, including piping, wiring and accessories
installed within the Premises;
(i) all plumbing, fixtures, pipes and accessories installed
within the Premises;
(j) fees charged by the city and/or county where the Building is
located (including, without limitation, fees for building permits and plan
checks) required for the Tenant improvement work in the Premises;
(k) supervision and administration expense, including the
construction supervision fee payable to Landlord's agent and property manager
and/or representative equal to seven (7%) of the Construction Costs;
(l) all taxes, fees, charges and levies by governmental and
quasi-governmental agencies for authorization, approvals, licenses and permits;
and all sales, use and excise taxes for the materials supplied and services
rendered in connection with the installation and construction of the Tenant
Improvements; and
(m) all costs and expenses incurred to comply with all laws,
rules, regulations or ordinances of any governmental authority for any work at
the Building or Project in order to construct the Tenant Improvements.
The term Construction Costs shall not include any fees, costs,
expenses, compensation or other consideration payable to Tenant, or any of its
officers, directors, employees or affiliates, or the cost of any of Tenant's
furniture, artifacts, trade fixtures, telephone and computer systems and related
facilities, or equipment.
"Construction Plans" - The complete plans and specifications for
the construction of the Tenant Improvements consisting of all architectural,
engineering, mechanical and electrical drawings and specifications which are
required to obtain all building permits, licenses and certificates from the
applicable governmental authority(ies) for the construction of the Tenant
Improvements. The Construction Plans shall be prepared by duly licensed and/or
registered architectural and/or engineering professionals selected by Landlord
in its sole and absolute discretion, and in all respects shall be in substantial
compliance with all applicable laws, rules, regulations, building codes for the
city and county where the Building is located.
"Force Majeure Delays" - Any delay, other than a Tenant Delay,
by Landlord in completing the Tenant Improvements by reason of (i) any strike,
lockout or other labor trouble or industrial disturbance (whether or not on the
part of the employees of either party hereto), (ii) governmental preemption of
priorities or other controls in connection with a national or other public
emergency, civil disturbance, riot, war, sabotage, blockade, embargo, inability
to secure customary materials, supplies or labor through ordinary sources by
reason of regulation or order of any government or regulatory body, or (iii)
shortages of fuel, materials, supplies or labor, (iv) lightning, earthquake,
fire, storm, tornado, flood, washout explosion, inclement weather or any other
similar industry-wide or Building-wide cause beyond the reasonable control of
Landlord, or (v) any other cause, whether similar or dissimilar to the above,
beyond Landlord's reasonable control. The time for performance of any obligation
of Landlord to construct Landlord's work under this Work Letter or the Lease
shall be extended at Landlord's election by the period of any delay caused by
any of the foregoing events.
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<PAGE> 36
"Landlord's Allowance" - The amount of $519,850.00 to be paid by
Landlord for the Construction Costs for the Tenant Improvements, which sum shall
be paid directly to the contracting parties entitled to payment. Any unused
portion of Landlord's Allowance for the Tenant Improvements shall remain the
property of Landlord, and Tenant shall have no interest in said funds.
"Substantial Completion," "Substantially Complete,"
"Substantially Completed"- The terms Substantial Completion, Substantially
Completed and Substantially Complete shall mean when the following have occurred
or would have occurred but for Tenant Delays:
(a) Landlord has delivered to Tenant a written notice
stating that the Tenant Improvements have been Substantially Completed
substantially in accordance with the Construction Plans, except "punch list"
items which may be completed without materially impairing Tenant's use of the
Premises or a material portion thereof; and
(b) Landlord has obtained from the appropriate
governmental authority a temporary, conditional or final certificate of
occupancy or signed building permit (or equivalent), if one is required, for the
Tenant Improvements permitting occupancy of the Premises by Tenant.
"Tenant Delay" - Any delay incurred by Landlord in the
completion of the Tenant Improvements due to (i) a delay by Tenant, or by any
person employed or engaged by Tenant, in approving or delivering to Landlord any
plans, schedules or information, including, without limitation, the Preliminary
Plans and the Construction Plans beyond the applicable time period set forth in
this Exhibit, if any; (ii) a delay in the performance of work in the Premises by
Tenant or any person employed by Tenant; (iii) any changes requested by Tenant
in or to previously approved work or in the Construction Plans; (iv) requests
for materials and finishes which are not readily available, and/or delays in
delivery of any materials specified by Tenant through change orders; (v) the
failure of Tenant to pay as and when due under this Work Letter all Construction
Costs and other costs and expenses to construct the Tenant Improvements in
excess of Landlord's Allowance; (vi) interference with the construction of the
Tenant Improvements; (vii) any delay attributable to the failure of Tenant to
pay, when due, any amounts required to be paid by Tenant pursuant to this
Exhibit or otherwise provided in the Lease.
"Tenant Improvements" - The improvements to be installed by
Landlord in the Premises substantially in accordance with the Construction
Plans.
4. Preparation of Preliminary Plans and Construction Plans.
4.1 Preliminary Plans. Concurrent with its execution of the
Lease, Tenant shall submit to Landlord or its architect or designer all
additional information, including occupancy requirements for the Tenant
Improvements in the Premises ("Information"), necessary to enable the architect,
designer or contractor to prepare a preliminary plans for the Tenant
Improvements containing all demising walls, corridors, entrances, exits, doors,
interior partitions, and the locations of all offices, conference rooms,
computer rooms, and other rooms and layout. Landlord shall be entitled to rely
upon all plans, drawings and information supplied by or for Tenant in preparing
the preliminary plans. Landlord shall cause the architect to prepare the
preliminary plans as soon as is commercially reasonable after the architect's
receipt of the Information. Within five (5) days after receipt of the
preliminary plans, Tenant shall notify Landlord in writing that (i) Tenant
approved such preliminary plans; or (ii) Tenant disapproves such preliminary
plans in the particular instances specified by Tenant in such notice (including,
without limitation, the specific changes requested by Tenant), but such
disapproval shall constitute a Tenant Delay. Tenant shall not unreasonably
withhold its approval to the preliminary plans. The failure of Tenant to provide
such written notice within said five (5) day period shall be deemed as
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<PAGE> 37
approval by Tenant of such preliminary plans. The preliminary plans approved by
the parties as provided above shall be referred to as the "Preliminary Plans."
4.2 Construction Plans. After approval of the Preliminary Plans,
Landlord shall cause the architect to prepare as soon as is commercially
reasonable the Construction Plans for the construction of the Tenant
Improvements and deliver the same to Tenant as soon as reasonably possible.
Within five (5) days after receipt of the Construction Plans, Tenant shall
notify Landlord in writing that (i) Tenant approved the Construction Plans; or
(ii) Tenant disapproves the Construction Plans because they vary in design from
the Preliminary Plans approved by Landlord and Tenant in the particular
instances specified by Tenant in such notice (including, without limitation, the
specific changes requested by Tenant), but such disapproval shall constitute a
Tenant Delay.. The failure of Tenant to provide such written notice within said
five (5) day period shall be deemed as approval by Tenant of such plans.
5. Approval of the Construction Budget. After approval of the
Construction Plans by Landlord and Tenant as provided above, Landlord shall
prepare the Construction Budget for the Construction Costs as soon as is
commercially reasonable. The Construction Budget shall not be subject to the
prior written approval of Tenant, unless the estimated Construction Costs exceed
the amount of Landlord's Allowance. If the Construction Budget reflects
Construction Costs in excess of Landlord's Allowance, Landlord shall deliver a
copy of such Construction Budget to Tenant for its review and approval, which
shall not be unreasonably withheld. Tenant shall notify Landlord in writing
within five (5) days after receipt of the Construction Budget that (a) Tenant
approves the Construction Budget, or (b) that Tenant disapproves of the
Construction Budget because it varies from the Construction Plans or contains
specific costs not contained within the meaning of Construction Costs. Such
disapproval shall constitute a Tenant Delay. The failure of Tenant to provide
such written notice within said five (5) day period shall be deemed an approval
by Tenant.
6. Building Permits. After approval by Landlord and Tenant of the
Construction Plans and Construction Budget as provided above, Landlord or its
contractor shall submit as soon as is commercially reasonable the Construction
Plans to the appropriate governmental body for plan checking and a building
permit. Landlord, with Tenant's cooperation, shall cause to be made any change
in the Construction Plans necessary to obtain the building permit and to the
extent the aggregate amount of the Construction Costs exceeds the amount of
Landlord's Allowance, Tenant shall be responsible for such additional costs,
notwithstanding the amount previously specified in the Construction Budget
approved by Landlord and Tenant.
7. Payment. Landlord shall pay for the Construction Costs for the Tenant
Improvements, not to exceed the amount of Landlord's Allowance. Tenant
acknowledges and agrees that it shall be responsible for payment of all
Construction Costs in excess of Landlord's Allowance and shall pay to Landlord
within ten (10) days after request from Landlord the amount of such excess
Construction Costs.
8. Changes. Any changes in the Construction Plans or Construction
Budget, including, without limitation, any changes required by any applicable
law, rule, regulation or ordinance, shall require the prior written consent of
Landlord in its sole and absolute discretion. Any changes requested by Tenant
and approved by Landlord shall be prepared by Landlord's architect, engineer or
contractor. The cost of such changes, including the cost to revise the
Construction Plans, obtain any additional permits and construct any additional
improvements required as a result thereof, and the cost for materials and labor,
and all other additional costs incurred by Landlord from resulting delays in
completing the Tenant Improvements, shall be paid out of Landlord's Allowance
(only to the extent funds are available and not committed for payment of other
Construction Costs). If such costs for changes exceed the
4
<PAGE> 38
Landlord's Allowance, such excess costs shall be paid by Tenant, at its sole
cost and expense, to Landlord within ten (10) days after Tenant's receipt of
notice from Landlord. If Landlord does not receive such payment within said ten
(10) day period, Landlord shall have the right, in addition to any other rights
or remedies available under the Lease, at law or in equity, to (i) discontinue
all or any portion of the work until it receives said payment; (ii) proceed with
the other work not affected by such change until such payment is received; (iii)
proceed with the work contemplated with such change; or (iv) proceed with the
work without making such change; in which case the commencement or completion of
such work shall not be deemed a waiver of Tenant's obligation to pay for same or
any additional costs or expenses incurred as a result thereof. Any delay caused
as a result of such a change or request for a change shall constitute a Tenant
Delay. The cost of a change order and any resulting delay in connection and
additional cost incurred as a result thereof shall be determined by Landlord's
architect, which determination shall be binding upon the parties.
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<PAGE> 39
Deposit to amount required under the Lease and this Addendum. The use,
application or retention of the Letter of Credit, or any portion thereof, by
Landlord shall not prevent Landlord from exercising any other right or remedy
provided by this Lease or by law, it being intended that Landlord shall not
first be required to use all or any part of the Letter of Credit or cash portion
of the Security Deposit, and such use shall not operate as a limitation on any
recovery to which Landlord may otherwise be entitled. Tenant shall not be
entitled to any interest on the cash portion of the Security Deposit. The
exercise of any rights of Landlord to the Security Deposit shall not constitute
a waiver of nor relieve Tenant from any liability or obligation for any default
by Tenant. If Landlord draws upon the entire amount of the Letter of Credit,
Tenant may deliver a replacement Letter of Credit to Landlord, instead of
depositing cash with Landlord, equal to the original amount of the Letter of
Credit.
2.2 Reduction after Time. The amount of the Security Deposit may
be reduced to (a) $710,876.64 after the first annual anniversary of the
Commencement, (b) $473,917.76 after the second annual anniversary of the
Commencement Date, (c) $236,958.88 after the third anniversary of the
Commencement Date, and (b) $118,479.44 after the fourth annual anniversary of
the Commencement Date; provided that a default or breach by Tenant of any
provision of the Lease does not exist and no such default or breach occurred
during the year immediately prior to the effective date of the reduction under
this section. If Tenant is entitled to reduce the amount of the Security Deposit
pursuant to this paragraph and Tenant delivers to Landlord written notice of its
request to so reduce the amount of the Security Deposit, then Tenant may, not
less than (10) days after Landlord's receipt of such notice, either obtain and
deliver a new or amended Letter of Credit to replaced or amend, as the case may
be, the then existing Letter of Credit, in an amount equal to requirement amount
of the Security Deposit.
2
<PAGE> 40
restrain any others within its control from performing said act, including the
Agents of such party. Landlord shall not become or be deemed a partner or a
joint venturer with Tenant by reason of the provisions of this Lease.
15.12 Termination by Exercise of Right: If this Lease is terminated
pursuant to its terms by the proper exercise of a right to terminate
specifically granted to Landlord or Tenant by this Lease, then this Lease shall
terminate 30 days after the date the right to terminate is properly exercised
(unless another date is specified in that part of the Lease creating the right,
in which event the date so specified for termination shall prevail), the rent
and all other charges due hereunder shall be prorated as of the date of
termination, and neither Landlord nor Tenant shall have any further rights or
obligations under this Lease except for those that have accrued prior to the
date of termination or those obligations which this Lease specifically provides
are to survive termination. This paragraph 15.12 does not apply to a termination
of this Lease by either party as a result of a default by the other party.
15.13 Brokerage Commissions: Each party hereto (i) represents and
warrants to the other that it has not had any dealings with any real estate
brokers, leasing agents or salesmen, or incurred any obligations for the payment
of real estate brokerage commissions or finder's fees which would be earned or
due and payable by reason of the execution of this Lease, other than to the
Retained Real Estate Brokers described in Section S of the Summary, and (ii)
agrees to indemnify, defend, and hold harmless the other party from any claim
for any such commission or fees which result from the actions of the
indemnifying party. Landlord shall be responsible for the payment of any
commission owed to the Retained Real Estate Brokers if there is a separate
written commission agreement between Landlord and the Retained Real Estate
Brokers for the payment of a commission as a result of the execution of this
Lease.
15.14 Force Majeure: Any prevention, delay or stoppage due to strikes,
lock-outs, inclement weather, labor disputes, inability to obtain labor,
materials, fuels or reasonable substitutes therefor, governmental restrictions,
regulations, controls, action or inaction, civil commotion, fire or other acts
of God, and other causes beyond the reasonable control of either party (except
financial inability) shall excuse the performance by such party, for a period
equal to the period of any said prevention, delay or stoppage, of any obligation
hereunder.
15.15 Entire Agreement: This Lease constitutes the entire agreement
between the parties, and there are no binding agreements or representations
between the parties except as expressed herein. Tenant acknowledges that neither
Landlord nor Landlord's Agents has made any legally binding representation or
warranty as to any matter except those expressly set forth herein, including any
warranty as to (i) whether the Premises may be used for Tenant's intended use
under existing Law, (ii) the suitability of the Premises or the Project for the
conduct of Tenant's business, or (iii) the condition of any improvements. There
are no oral agreements between Landlord and Tenant affecting this Lease, and
this Lease supersedes and cancels any and all previous negotiations,
arrangements, brochures, agreements and understandings, if any, between Landlord
and Tenant or displayed by Landlord to Tenant with respect to the subject matter
of this Lease. This instrument shall not be legally binding until it is executed
by both Landlord and Tenant. No subsequent change or addition to this Lease
shall be binding unless in writing and signed by Landlord and Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease with
the intent to be legally bound thereby, to be effective as of the Effective
Date.
LANDLORD: TENANT:
By: SILICON VALLEY PROPERTIES, LLC, By: NEW FOCUS, INC.
a Delaware limited liability company a California corporation
By: Divco West Group, LLC, By: /s/ Signature Illegible
a Delaware limited liability company Name: [??Text Illegible??]
Its Agent Title: V.OP. Operations
By: ___________________ Dated: December ___, 1999
Name: Scott Smithers
Its: President
28
<PAGE> 1
EXHIBIT 10.9
UNIVERSITY SCIENCE CENTER LEASE
-------------------------------
This Lease concerns space in the University Science Center ("Center") at 555
Science Drive, Madison, Wisconsin 53711
Date: 5/22/96
-------
Landlord: University Science Center Partnership
Address: 1265 WARF Building, 610 Walnut Street, Madison, Wisconsin 53705-2336
Tenant: Focused Research, Inc.
Address: 555 Science Drive, Suite Z
Term: May 1, 1996 through April 30, 1997. Focused Research will have the
right to terminate the agreement at any time during the term with two
months written notice.
Renewal Options:
Leased Premises: 180 square feet as shown on Attachment A
Rent: $270.00 monthly
Security Deposit:
Additional Services and Rights: Tenant will have the right to reserve the MGE
Innovation Center Conference Room and the right to use the fax and
copy machine at the reimbursed rates charged to Center tenants.
Special Provisions:
This Lease Agreement includes the General Conditions attached hereto and made a
part hereof and any reasonable policies and procedures promulgated from time to
time by Landlord and provided to Tenant.
Executed as of the day and date first above written.
<TABLE>
<S> <C>
LANDLORD: TENANT:
University Science Center Partnership Focused Research, Inc.
By: /s/ Signature Illegible By: /s/ Signature Illegible
------------------------------------------ -------------------------------
Wayne F. McGown, Assistant Rob Marsland, Senior Scientist
Secretary/Treasurer, University Research
Park Facilities Corp., Managing Partner STATE OF WISCONSIN )
) ss.
STATE OF WISCONSIN ) COUNTY OF DANE )
) ss.
COUNTY OF DANE ) Personally came before me
</TABLE>
this ___________ day of ________________, 1996, ___________________of the
Personally came before me this______ day of such above-named corporation, to me
known to be ____________________, 1996, Wayne F. McGown, Assistant officer of
said corporation, and acknowledged that he Secretary/Treasurer of the
above-named corporation, executed the foregoing instrument as such officer as to
me known to be such officer of said corporation, the deed of said corporation,
by its authority and acknowledged that he executed the foregoing instrument as
such officer as the deed of said corporation, by its authority.
/s/ Notary Public, Dane County, Wisconsin
<PAGE> 2
General Conditions
Premises. Landlord, in consideration of the rent to be paid and the covenants to
be performed by Tenant, does hereby
(a) Demise and lease unto Tenant, and Tenant hereby rents from Landlord space
in that part of the Center illustrated on Exhibit "A" (the "Premises").
(b) Agree to permit Tenant equal access and common use of the Common Areas
illustrated on Exhibit A.
Termination. The foregoing section notwithstanding, Landlord may terminate this
Lease upon no less than ninety (90) days written notice to Tenant. This Lease
shall thereupon terminate at the end of the calendar month after the passage of
such ninety (90) days. Surrender of Premises. At the expiration of or any
termination of this Lease, Tenant shall surrender the Premises in the same
condition as at the commencement of the term, reasonable wear and tear excepted,
and shall surrender all keys to Landlord. Tenant's obligations hereunder shall
survive expiration or termination of the Lease.
Past Due Rent. If Tenant fails to pay rent when the same is due, the unpaid
amount shall, at Landlord's option and without waiving any other right of
Landlord, bear interest from the due date to the date of payment at eighteen
percent (18%) per annum.
Alterations, Improvements and Changes. Tenant, at its own expense, shall have
the right to make such alterations, improvements and changes to the Premises as
it may deem necessary, PROVIDED that prior to making any alterations,
improvements or changes, Tenant shall obtain Landlord's prior written approval
of plans and specifications. Landlord may withhold its consent to any
improvements or alterations for reasons other than the financial ability of the
Tenant if such reasons are such as would be similarly relied upon by a
reasonably prudent businessman then leasing a quantity of space comparable in
size to the Premises. Tenant shall in no event make any alteration, improvements
or changes which will decrease the value of the Premises or adversely affect the
structural integrity of the building within which the Premises are located.
Tenant shall promptly pay all contractors and materialmen for work and supplies
and shall not permit any lien to attach to the Premises. Should any lien attach
or should a "Notice of Intent to File Lien" be mailed to or served upon Tenant
or Landlord as a result of material or services supplied or performed at the
request of Tenant, Tenant shall immediately bond against the same or discharge
the lien within ten (10) days thereafter. In any and all events Tenant shall and
does hold Landlord harmless against the lien.
Disposition of Improvements. Notwithstanding their disposition, provided
elsewhere in this Lease, all alterations, improvements, changes or additions
shall be the property of Landlord, and Tenant shall have only a leasehold
interest therein.
Maintenance by Tenant. Tenant shall, at its own cost and without any expense to
Landlord or claim against Landlord for reimbursement, keep, maintain and repair
the Premises, in the same condition as the Premises existed as of the
commencement of this Lease, including all improvements of every kind which may
be a part thereof (except structural repairs to the building, its roof, heating,
air conditioning and ventilating systems) and shall repair, restore, and replace
any improvements or landscaping which may be destroyed or damaged other than by
reason of the willful act or negligence of Landlord or its agents.
Reconstruction of Damaged Premises. In the event that any buildings or
improvements on the Premises shall be partially or totally destroyed by fire or
other casualty so as to make the Premises totally untenantable, rent and other
charges due from Tenant under the Lease shall abate to the extent that and in
proportion as Tenant's operations are curtailed by such fire or other casualty.
Within a reasonable time, Landlord shall repair the Premises in a manner and to
at least a condition equal to that prior to the damage or destruction. If
repairs are not complete within a reasonable time, Tenant shall have the right
to terminate this Lease. In the event that Tenant shall elect to terminate this
Lease, Tenant shall have no further obligations under this Lease. Any and all
insurance proceeds paid to Landlord or Tenant shall be earmarked for repair and
restoration of the damages to the Premises. In any event, Tenant shall have no
obligation to repair or replace the Premises.
Utilities. Landlord shall pay for and provide all normal capacity utilities
except telephone service.
Fees, Assessments and Real Property Taxes. Tenant shall pay and discharge, as
they become due, promptly and before delinquency, all charges, license fees,
whether general or
<PAGE> 3
special, ordinary or extraordinary, of every nature and kind whatsoever which
may be levied, assessed, charged or in respect of Tenant's operations on and
occupancy of the Premises except real estate taxes.
Personal Property Taxes. Tenant shall promptly pay and discharge, as they become
due and before any delinquency whatsoever, all personal property taxes,
assessments, rates, license fees, municipal liens, levies, excises or imports of
every nature and kind levied, assessed, charged or imposed on or against
Tenant's leasehold interest or personal property of any kind owned or placed in
the Premises by Tenant.
Condition and Use. Tenant shall use the Premises solely for office and
laboratory use and uses incidental thereto and for no other purpose without
Landlord's prior written permission, which permission may be withheld by
Landlord in the exercise of its reasonable business judgment. No use shall be
permitted, or acts done, which may cause a cancellation of any insurance policy
covering the Premises nor shall Tenant sell, permit to be kept, used or sold in
or about the Premises any article which may be prohibited from the standard form
of fire insurance policy. Tenant shall, at its own expense, comply with all
requirements pertaining to the Premises imposed by any insurance company for the
continued maintenance of insurance required by this Lease. Tenant is fully
familiar with the physical condition of the Premises, Improvements and equipment
and has received the same in good order and condition. Landlord makes no
representation or warranty with respect to the condition of the Premises,
Improvements and equipment, or its fitness or availability for any particular
use, and Landlord shall not be liable for any latent or patent defect. By
execution of this Lease, Tenant accepts the Premises, improvements and equipment
"as is".
Waste and Nuisance. Tenant shall comply with all applicable laws affecting the
Premises and Tenant's business and use of such Premises. Tenant shall not
commit, or permit to be committed, any waste or nuisance on the Premises.
Right of Entry. Tenant shall permit Landlord, its agents and employees, upon
reasonable prior notice, to enter the Premises at all reasonable times for the
purpose of inspecting the same or for the purpose of posting notices of
availability for rent without any rebate or abatement of rent and without any
liability for any loss of occupation or quiet enjoyment of the Premises.
Use of Common Areas. Landlord and Tenant shall not take any action to obstruct
the Common Areas as depleted on Exhibit A, and each shall make reasonable
efforts to prevent obstruction of such Common Areas by their employees, agents,
customers, licensees, invitees, tenants and subtenants. Landlord agree to
include in any leases which provide for the lease of all or part of the Common
Areas, a provision or provisions which will restrict its tenants from
obstructing the Common Areas and require any such tenants to make reasonable
efforts to prevent obstruction of the Common Areas.
No Right to Encumber. Tenant shall not encumber, by mortgage, chattel or real
estate security agreement, deed of trust or any other similar security documents
or documents of transfer and conveyance, its leasehold interest and estate in
the Premises.
Casualty Insurance. Landlord shall, at all times during the term of this Lease,
at Landlord's sole expense, keep the Premises insured against loss or damage by
fire and extended coverage hazards.
Public Liability Insurance. Tenant shall, at all times during the term of this
Lease, at Tenant's sole expense, keep in full force and effect a policy of
public liability and property damage insurance with respect to the Premises and
all business operated thereon, with limits of public liability not less than One
Million Dollars ($1,000,000.00) for injury of or death to any one person, and
One Million Dollars ($1,000,000.00) for injury or death in any one occurrence,
and property damage liability Insurance in the amount of One Million Dollars
($1,000,000.00). Such coverages may be increased by Landlord in the event
standard insurance coverages for similar premises in the City of Madison
increase for the same or similar uses.
Loss and Damage. Tenant shall be solely responsible for carrying personal
property insurance sufficient to cover loss of all personal property on the
Premises. Landlord shall not be liable for any damage to or loss of property of
Tenant or others located on the Premises except to the extent such damage or
loss was caused by Landlord's negligent or willful act. Landlord shall not be
liable for any injury or damage to persons or property resulting from fire,
explosion, falling plaster, steam, gas, electricity, water, rain, snow or leaks
from any part of the Premises, or from pipes, appliances or plumbing works, or
from any other place, or by dampness, or by any other cause of any nature except
to the extent such injury or damage was caused by Landlord's negligent or
willful act. Landlord shall not be liable for any such damage caused by persons
on the Premises, occupants of adjacent property or the public, or caused by
construction of any private, public, or quasi-public work except to the extent
such damage was caused by Landlord's own negligent or willful act. Landlord
shall not be liable for any latent defect in the Premises.
<PAGE> 4
Disposition of Improvements. Notwithstanding their disposition, provided
elsewhere in this Lease, all alterations, improvements, changes or additions
shall be the property of Landlord, and Tenant shall have only a leasehold
interest therein.
Maintenance by Tenant. Tenant shall, at its own cost and without any expense to
Landlord or claim against Landlord for reimbursement, keep, maintain and repair
the Premises, in the same condition as the Premises existed as of the
commencement of this Lease, including all improvements of every kind which may
be a part thereof (except structural repairs to the building, its roof, heating,
air conditioning and ventilating systems) and shall repair, restore, and replace
any improvements or landscaping which may be destroyed or damaged other than by
reason of the willful act or negligence of Landlord or its agents.
Reconstruction of Damaged Premises. In the event that any buildings or
improvements on the Premises shall be partially or totally destroyed by fire or
other casualty so as to make the Premises totally untenantable, rent and other
charges due from Tenant under the Lease shall abate to the extent that and in
proportion as Tenant's operations are curtailed by such fire or other casualty.
Within a reasonable time, Landlord shall repair the Premises in a manner and to
at least a condition equal to that prior to the damage or destruction. If
repairs are not complete within a reasonable time, Tenant shall have the right
to terminate this Lease. In the event that Tenant shall elect to terminate this
Lease, Tenant shall have no further obligations under this Lease. Any and all
insurance proceeds paid to Landlord or Tenant shall be earmarked for repair and
restoration of the damages to the Premises. In any event, Tenant shall have no
obligation to repair or replace the Premises.
Utilities. Landlord shall pay for and provide all normal capacity utilities
except telephone service.
Fees, Assessments and Real Property Taxes. Tenant shall pay and discharge, as
they become due, promptly and before delinquency, all charges, license fees,
whether general or special, ordinary or extraordinary, of every nature and kind
whatsoever which may be levied, assessed, charged or in respect of Tenant's
operations on and occupancy of the Premises except real estate taxes.
Personal Property Taxes. Tenant shall promptly pay and discharge, as they become
due and before any delinquency whatsoever, all personal property taxes,
assessments, rates, license fees, municipal liens, levies, excises or imports of
every nature and kind levied, assessed, charged or imposed on or against
Tenant's leasehold interest or personal property of any kind owned or placed in
the Premises by Tenant.
Condition and Use. Tenant shall use the Premises solely for office and
laboratory use and uses incidental thereto and for no other purpose without
Landlord's prior written permission, which permission may be withheld by
Landlord in the exercise of its reasonable business judgment. No use shall be
permitted, or acts done, which may cause a cancellation of any insurance policy
covering the Premises nor shall Tenant sell, permit to be kept, used or sold in
or about the Premises any article which may be prohibited from the standard form
of fire insurance policy. Tenant shall, at its own expense, comply with all
requirements pertaining to the Premises imposed by any insurance company for the
continued maintenance of insurance required by this Lease. Tenant is fully
familiar with the physical condition of the Premises, improvements and equipment
and has received the same in good order and condition. Landlord makes no
representation or warranty with respect to the condition of the Premises,
improvements and equipment, or its fitness or availability for any particular
use, and Landlord shall not be liable for any latent or patent defect. By
execution of this Lease, Tenant accepts the Premises, improvements and equipment
"as is".
Waste and Nuisance. Tenant shall comply with all applicable laws affecting the
Premises and Tenant's business and use of such Premises. Tenant shall not
commit, or permit to be committed, any waste or nuisance on the Premises.
Right of Entry. Tenant shall permit Landlord, its agents and employees, upon
reasonable prior notice, to enter the Premises at all reasonable times for the
purpose of inspecting the same or for the purpose of posting notices of
availability for rent without any rebate or abatement of rent and without any
liability for any loss of occupation or quiet enjoyment of the Premises.
Use of Common Areas. Landlord and Tenant shall not take any action to obstruct
the Common Areas as depleted on Exhibit A, and each shall make reasonable
efforts to prevent obstruction of such Common Areas by their employees, agents,
customers, licensees,
<PAGE> 5
invitees, tenants and subtenants. Landlord agrees to include in any leases which
provide for the lease of all or part of the Common Areas, a provision or
provisions which will restrict its tenants from obstructing the Common Areas and
require any such tenants to make reasonable efforts to prevent obstruction of
the Common Areas.
No Right to Encumber. Tenant shall not encumber, by mortgage, chattel or real
estate security agreement, deed of trust or any other similar security documents
or documents of transfer and conveyance, its leasehold interest and estate in
the Premises.
Casualty Insurance. Landlord shall, at all times during the term of this Lease,
at Landlord's sole expense, keep the Premises insured against loss or damage by
fire and extended coverage hazards.
Public Liability Insurance. Tenant shall, at all times during the term of this
Lease, at Tenant's sole expense, keep in full force and effect a policy of
public liability and property damage insurance with respect to the Premises and
all business operated thereon, with limits of public liability not less than One
Million Dollars ($1,000,000.00) for injury of or death to any one person, and
One Million Dollars ($1,000,000.00) for injury or death in any one occurrence,
and property damage liability insurance in the amount of One Million Dollars
($1,000,000.00). Such coverages may be increased by Landlord in the event
standard insurance coverages for similar premises in the City of Madison
increase for the same or similar uses.
Loss and Damage. Tenant shall be solely responsible for carrying personal
property insurance sufficient to cover loss of all personal property on the
Premises. Landlord shall not be liable for any damage to or loss of property of
Tenant or others located on the Premises except to the extent such damage or
loss was caused by Landlord's negligent or willful act. Landlord shall not be
liable for any injury or damage to persons or property resulting from fire,
explosion, falling plaster, steam, gas, electricity, water, rain, snow or leaks
from any part of the Premises, or from pipes, appliances or plumbing works, or
from any other place, or by dampness, or by any other cause of any nature except
to the extent such injury or damage was caused by Landlord's negligent or
willful act. Landlord shall not be liable for any such damage caused by persons
on the Premises, occupants of adjacent property or the public, or caused by
construction of any private, public, or quasi-public work except to the extent
such damage was caused by Landlord's own negligent or willful act. Landlord
shall not be liable for any latent defect in the Premises.
Certificates of Insurance. Tenant and Landlord shall, with respect to any
insurance coverage required in this Lease, furnish the other with certificates
of insurance evidencing required insurance coverage, which certificates shall
state that the other party will be notified in writing ten (10) days prior to
cancellation, material change or non-renewal of insurance.
Indemnification of Landlord. Tenant shall indemnify and save Landlord harmless
against and from all liabilities, obligations, damages, penalties, claims,
costs, charges and expenses, including reasonable architects' and attorneys'
fees, which may be imposed upon or incurred by or asserted against Landlord by
reason of any of the following:
(a) Any negligent or willful act on the part of Tenant, or any of its agents,
contractors, servants, employees, subtenants, licensees or invitees.
(b) Any failure by Tenant to perform or comply with any of the covenants,
agreements, terms or conditions contained in this Lease on its part to be
performed or complied with.
(c) Any tax attributable to the execution, delivery or recording of this Lease
or any modification hereof. In case any action or proceeding is brought
against Landlord by reason of any such claim, Tenant, upon written notice
of Landlord, will, at Tenant's expense, resist or defend such action or
proceeding by counsel approved by Landlord in writing. The obligations of
Tenant under this section shall survive any termination of this Lease. If
Landlord does not approve of counsel designated by Tenant, then Landlord
may designate counsel of its choice who shall defend at the expense of
Tenant.
Indemnification of Tenant. Landlord shall indemnify and save Tenant harmless
against and from all liabilities, obligations, damages, penalties, claims,
costs, charges and expenses, including reasonable architects' and attorneys'
fees, which may be imposed upon or incurred by or asserted against Tenant by
reason of any of the following:
(a) Any negligent or willful act on the part of Landlord, or any of its agents,
contractors, servants, employees, subtenants, licensees or invitees.
(b) Any failure by Landlord to perform or comply with any of the covenants,
agreements, terms or conditions contained in this Lease on its part to be
performed or complied with.
<PAGE> 6
In case any action or proceeding is brought against Landlord by reason of any
such claim, Landlord, upon written notice of tenant, will, at landlord expense,
resist of defend such action or proceeding by counsel approved by Tenant in
writing. The obligations of Landlord under this sections shall survive any
termination of this Lease. If Tenant does not approve of counsel designated by
Landlord, then Tenant may designate counsel of its choice who shall defend at
the expense of Landlord.
Landlord's Payment. In the event of Tenant's failure to pay any required
Insurance premiums when the same are due, Landlord may, In addition to and
without waiving its other rights, pay the same on Tenant's behalf, and Tenant
shall be liable to and obligated to repay Landlord the amount advanced, plus
eighteen percent (18%) Interest per annum computed on the principle amount of
such payment by Landlord at the time and place rent in next due. next due.
Waiver of Subrogation. Landlord and Tenant for themselves and their successors
hereby mutually release and discharge each other from all liability arising by
subrogation or otherwise on account of any loss or damage caused by or arising
out of any fire or other Insured casualty, however caused.
Total Condemnation. In the event the Premises, or such part of the Premises as
will render the remainder unsuitable for Tenant's use, shall be appropriated or
taken under the power of eminent domain by any public or quasi-public authority,
this Lease, except as herein provided, shall terminate and expire as of the date
of taking.
Partial Condemnation. In the event of partial condemnation, not rendering the
remainder of the Premises unsuitable for Tenant's use, this Lease shall remain
in full force and effect, with the exception that rent, additional rent, utility
charges and any other tenant expenses or charges under this Lease shall be
adjusted to reasonably reflect the portion of the Premises, if any, lost by
condemnation.
Condemnation Award. In the event of partial condemnation of the Premises and
this Lease is not terminated, then Tenant shall have the right to make claim
against the condemning or taking authority for the unamortized cost of
improvements placed on the Premises by Tenant and located thereon at all the
time of the taking or appropriation.
Notice of Default. Tenant shall not be deemed to be in default hereunder in the
payment of rent or the payment of any other moneys as herein required or in the
furnishing of any bond or insurance policy when required herein unless Landlord
first gives Tenant written notice of such default and Tenant falls to cure the
default within three (3) days of receipt of such notice, except if Landlord
shall have twice previously given Tenant notice of default during the term
hereof, Landlord shall not be required to give any further notice. Except as to
the provisions or events referred to in the preceding sentence of this section,
Tenant shall not be deemed to be in default hereunder unless Landlord shall
first give to Tenant thirty (30) days written notice of default, and Tenant
fails to cure such default within such thirty (30) day period or, if the default
is of such a nature that it cannot be cured within thirty (30) days, Tenant
fails to commerce to cure such default within such period of thirty (30) days of
fails thereafter to proceed to the curing of such default with all possible
diligence.
Default. In the event of any breach of this Lease by Tenant, Landlord, in
addition to the other rights or remedies it may have, shall have the immediate
right of re-entry and may remove all persons and property from the Premises.
Tenant's property may, in such event, be removed by Landlord and stored in a
public warehouse or elsewhere at the cost of, and for the account of, Tenant.
Should Landlord elect to re-enter as herein provided, or should it take
possession pursuant to legal proceedings or pursuant to any notice provided for
by law, Landlord may either terminate this Lease or it may from time to time,
without terminating this Lease re-let the Premises, or any part thereof, for
such term or terms and at such rental or rentals and on such other terms and
conditions as Landlord, in its sole discretion, may deem advisable, with the
right to make alterations and repairs to the Premises. On each such re-letting:
(a) Tenant shall be immediately liable to pay to Landlord, in addition to any
indebtedness other than rent due hereunder, the expenses of such re-letting
and of such alterations and repairs incurred by Landlord, and in the
amount, if any, by which the rent reserved in this Lease for the period of
such re-letting (up to, but not beyond, the term of this Lease) exceeds the
amount agreed to be paid as rent for the Premises for such period on such
re-letting; or
(b) At the option of Landlord, rents received by Landlord from such re-letting
shall be applied first, to the payment of any indebtedness, other than rent
due hereunder from Tenant to Landlord; second, to the payment of any
expenses of re-letting and alterations and repairs; third, to the payment
of rent due and unpaid hereunder. The residue, if any, shall be held by
Landlord and applied in payment of future rent payments as the same may
become due and payable hereunder.
<PAGE> 7
If Tenant has been credited with any rent to be received by such re-letting
under option (a), hereof, and such rent shall not be promptly paid to Landlord
by the new tenant, or if such rentals received from such re-letting under option
(b), hereof, during any month is less than that to be paid during that month by
Tenant hereunder, Tenant shall pay any such deficiency to Landlord. Such
deficiency shall be calculated and paid monthly. No such re-entry or taking
possession of the Premises by Landlord shall be construed as an election on the
part of Landlord to terminate this Lease unless a written notice of such
intention is given to Tenant or unless the termination thereof is decreed by a
court of competent jurisdiction. Notwithstanding any such re-letting without
termination, Landlord may, at any time thereafter, elect to terminate this Lease
for any breach, in addition to any other remedy it may have, Landlord may
recover from Tenant all damages incurred by reason of such breach, including the
worth at the time of such termination of the excess, if any, of the amount of
rent and charges equivalent to rent reserved in this Lease for the remainder of
the stated term over the then reasonable rental value of the Premises for the
remainder of the stated term, all of which amounts shall be immediately due and
payable from Tenant to Landlord.
Tenant's Assignment. Tenant shall not assign this Lease, in whole or in part,
without the prior written consent of Landlord. The consent by Landlord to any
assignment shall not constitute a waiver of the necessity for consent to any
subsequent assignment. Notwithstanding any assignment, Tenant shall remain fully
liable on this Lease.
Subletting. Tenant may not sublet all, or any part, of the Premises nor permit
any concessionaires or license to operate from the Premises without the prior
written consent of Landlord. The consent by Landlord to sublet shall not
constitute a waiver of the necessity for consent to any subsequent subletting.
Notwithstanding any subletting. Tenant shall remain fully liable on this Lease.
Tenant shall provide Landlord with copies of all subleases and with such
Information with respect thereto as Landlord may reasonably require.
Assignment of Subleases. Tenant hereby irrevocably assigns to Landlord all rents
and other charges due, or to become due, from any subleases of Tenant, together
with the right to collect and receive such rents and other charges, provided
that, so long as Tenant is not in default under this Lease, Tenant shall have
the right to collect such rents and other charges.
Landlord's Assignment. Landlord shall have the right to assign or transfer its
interests in this Lease at any time without the consent of Tenant, provided that
the assignee or transferee assumes and agrees to be bound by the terms of this
Lease and further provided that Landlord notifies Tenant of such assignment and
provides Tenant with an executed copy of the transfer instrument immediately
upon occurrence.
Subordination Agreements. Upon Landlord's request, Tenant shall execute and
deliver to Landlord all documents required to subordinate Tenant's right
hereunder to the lien of any mortgages or of any other method of financing or
refinancing now or hereafter in force against the Premises. Upon Landlord's
request, Tenant shall obtain and deliver to Landlord similar subordination
agreements executed by Tenant's sublessees.
Estoppel Certificates. Upon Landlord's request, Tenant shall execute and deliver
to Landlord a written estoppel certificate:
(a) Certifying that this Lease is in full force and effect and has not been
modified (or stating such modifications);
(b) Specifying the dates on which rent and other charges have been paid;
(c) Stating whether or not, to the knowledge of Tenant, Landlord is in default
under the Lease (and the nature of the default);
(d) Stating the commencement and termination dates of this Lease;
(e) Stating whether or not any options to renew have been exercised; and
(f) Stating any such other information as Landlord may reasonably require.
Upon Landlord's request, Tenant shall obtain and deliver to Landlord similar
estoppel certificates executed by Tenant's sublessees.
Accord and Satisfaction: No payment received by Landlord of a leaser amount than
the rent or other charges shall be deemed to be other than on account of the
earliest stipulated rent or other charges not shall any statement on a check or
any letter accompanying a payment of rent or other charges be deemed an accord
and satisfaction. Landlord may accept payment without prejudice to Landlord's
right to recover the balance of rent or other charges or pursue any remedy in
this Lease.
Entire Agreement. This Lease and Exhibit A attached hereto and incorporated
herein by reference, set forth all covenants, promises, agreements, conditions
[?? Text Illegible ??]
<PAGE> 8
shall not be deemed to be in default hereunder unless Landlord shall first give
to Tenant thirty (30) days written notice of default, and Tenant fails to cure
such default within such thirty (30) day period or, if the default is of such a
nature that it cannot be cured within thirty (30) days, Tenant fails to commence
to cure such default within such period of thirty (30) days of fails thereafter
to proceed to the curing of such default with all possible diligence.
Default. In the event of any breach of this Lease by Tenant, Landlord, in
addition to the other rights or remedies it may have, shall have the immediate
right of re-entry and may remove all persons and properly from the Premises.
Tenant's properly may, in such event, be removed by Landlord and stored in
public warehouse or elsewhere at the cost of, and for the account of, Tenant.
Should Landlord elect to re-enter as herein provided, or should it take
possession pursuant to legal proceedings or pursuant to any notice provided for
by law, Landlord may either terminate this Lease or it may from time to time,
without terminating this Lease re-let the Premises, or any part thereof, for
such term or terms and at such rental or rentals and on such other terms and
conditions as Landlord, in its sole discretion, may deem advisable, with the
right to make alterations and repairs to the Premises. On each such re-letting:
(a) Tenant shall be immediately liable to pay to Landlord, in addition to any
indebtedness other than rent due hereunder, the expenses of such re-letting
and of such alterations and repairs incurred by Landlord, and in the
amount, if any, by which the rent reserved in this Lease for the period of
such re-letting (up to, but not beyond, the term of this Lease) exceeds the
amount agreed to be paid as rent for the Premises for such period on such
re-letting; or
(b) At the option of Landlord, rents received by Landlord from such re-letting
shall be applied first, to the payment of any indebtedness, other than rent
due hereunder from Tenant to Landlord; second, to the payment of any
expenses of re-letting and alterations and repairs; third, to the payment
of rent due and unpaid hereunder. The residue, if any, shall be held by
Landlord and applied in payment of future rent payments as the same may
become due and payable hereunder.
If Tenant has been credited with any rent to be received by such re-letting
under option (a), hereof, and such rent shall not be promptly paid to Landlord
by the new tenant, or if such rentals received from such re-letting under option
(b), hereof, during any month is less than that to be paid during that month by
Tenant hereunder, Tenant shall pay any such deficiency to Landlord. Such
deficiency shall be calculated and paid monthly. No such re-entry or taking
possession of the Premises by Landlord shall be construed as an election on the
part of Landlord to terminate this Lease unless a written notice of such
intention is given to Tenant or unless the termination thereof is decreed by a
court of competent jurisdiction. Notwithstanding any such re-letting without
termination, Landlord may, at any time thereafter, elect to terminate this Lease
for any breach, in addition to any other remedy it may have, Landlord may
recover from Tenant all damages incurred by reason of such breach, including the
worth at the time of such termination of the excess, if any, of the amount of
rent and charges equivalent to rent reserved in this Lease for the remainder of
the stated term over the then reasonable rental value of the Premises for the
remainder of the stated term, all of which amounts shall be immediately due and
payable from Tenant to Landlord.
TENANT'S ASSIGNMENT. Tenant shall not assign this Lease, in whole or in part,
without the prior written consent of Landlord. The consent by Landlord to any
assignment shall not constitute a waiver of the necessity for consent to any
subsequent assignment. Notwithstanding any assignment, Tenant shall remain fully
liable on this Lease.
Subletting. Tenant may not sublet all, or any part, of the Premises nor permit
any concessionaries or licensee to operate from the Premises the prior written
consent of Landlord. The consent by Landlord to sublet shall not constitute a
waiver of the necessity for consent to any subsequent subletting.
Notwithstanding any subletting. Tenant shall remain fully liable on this Lease.
Tenant shall provide Landlord with copies of all subleases and with such
information with respect thereto as Landlord may reasonably require.
Assignment of Subleases. Tenant hereby Irrevocably assigns to Landlord all rents
and other charges due, or to become due, from any subleases of Tenant, together
with the right to collect and receive such rents and other charges, provided
that, so long as Tenant is not in default under this Lease, Tenant shall have
the right to collect such rents and other charges.
LANDLORD'S ASSIGNMENT. Landlord shall have the right to assign or transfer its
interests in this Lease at any time without the consent of Tenant provided that
the assignee or transferee assumes and agrees to be bound by the terms of this
Lease and further provided that Landlord notifies Tenant of such assignment and
provides Tenant with an executed copy of the transfer instrument immediately
upon occurrence.
<PAGE> 9
SUBORDINATION AGREEMENTS. Upon Landlord's request, Tenant shall execute and
deliver to Landlord all documents required to subordinate Tenant's right
hereunder to the lien of any mortgages or of any other method of financing or
refinancing now or hereafter in force against the Premises. Upon Landlord's
request, Tenant shall obtain and deliver to Landlord similar subordination
agreements executed by Tenant's sublessees.
Estoppel Certificates. Upon Landlord's request, Tenant shall execute and deliver
to Landlord a written estoppel certificate:
(a) Certifying that this Lease is in full force and effect and has not been
modified (or stating such modifications);
(b) Specifying the dates on which rent and other charges have been paid;
(c) Stating whether or not, to the knowledge of Tenant, Landlord is in default
under the Lease (and the nature of the default);
(d) Stating the commencement and termination dates of this Lease;
(e) Stating whether or not any options to renew have been exercised; and
(f) Stating any such other information as Landlord may reasonably require.
Upon Landlord's request, Tenant shall obtain and deliver to Landlord similar
estoppel certificates executed by Tenant's sublessees.
ACCORD AND SATISFACTION. No payment received by Landlord of a lesser amount than
the rent or other charges shall be deemed to be other than on account of the
earliest stipulated rent or other charges nor shall any statement on a check or
any letter accompanying a payment of rent or other charges be deemed an accord
and satisfaction. Landlord may accept payment without prejudice to Landlord's
right to recover the balance of rent or other charges or pursue any remedy in
this Lease.
Entire Agreement. This Lease and Exhibit A attached hereto and incorporated
herein by reference, set forth all covenants, promises, agreement conditions and
understanding between Landlord and Tenant concerning the Premises. There are no
covenants, promises, agreements, conditions or understandings, either oral or
written, between Landlord and Tenant other than herein set forth. No subsequent
change or addition to this Lease shall be binding upon Landlord or Tenant unless
reduced to writing and signed by them.
No Partnership. Landlord shall not by the execution of this Lease as the
creation of the Landlord/Tenant relationship created by this Lease in become or
be construed as or deemed to be a partner, joint venturer or member of a joint
enterprise with Tenant.
Force Majeure. If either party is delayed from the performance of any act
required hereunder by reason of labor difficulties, restrictive governmental
regulations, riots, insurrection, war or like reasons not the fault of the party
delayed, then the period for performance of the act shall be extended for a
period equivalent to the period of the delay. This section shall not excuse
Tenant from prompt payment of rent, additional rent or any other payments
required by this Lease.
Waiver. The waiver by Landlord of any breach of any term, covenant or condition
herein shall not be deemed a waiver of the term, covenant or condition. The
acceptance of rent by Landlord shall not be deemed a waiver of any preceding
breach by Tenant of any covenant herein, other than the failure of Tenant to pay
the rent so accepted. No covenant, term or condition of this Lease shall be
waived by Landlord, unless the waiver is in writing signed by Landlord.
Notices. Any notices given or required to be given to Landlord shall be mailed,
with appropriate postage, to the addresses set forth on the cover page of this
Lease.
Partial Invalidity. If any provision of this Lease or any specific application
shall be invalid or unenforceable, the remainder of this Lease, the application
of the provision in other circumstances, shall not be affected, and each
provision of this Lease shall be valid and enforceable to the fullest extent
permitted by law.
Warranty of Title. Landlord warrants and represents that it holds the Premises
pursuant to a ground lease and has full right to make this Lease, and that
Tenant shall have quiet and peaceable possession of the Premises as long as
Tenant is not in default hereunder.
Remedies Cumulative. All remedies conferred on Landlord by this Lease shall be
deemed cumulative and no one exclusive of the other or of any other remedy
conferred by law.
Binding Effect. The covenants and agreements contained in this Lease shall bind
the respective successors, heirs and legal representatives of the parties
hereto.
<PAGE> 10
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<PAGE> 11
AMENDMENT 1
UNIVERSITY SCIENCE CENTER PARTNERSHIP/FOCUSED RESEARCH, INC.
LEASE DATED 11/13/95
University Science Center Partnership and Focused Research Inc. agree to add
approximately 720 leaseable square feet in suite B at 555 Science Drive to the
1,050 square feet currently leased in suites D and E.
The Address in the lease is amended to: 555 Science Drive, Suite B, D and E.
The leased premises is amended to increase the total to 1,770 square feet.
The monthly rent is amended to: $1,981.88 monthly through December 1996; $3,084
beginning January 1, 1997; $3,106.13 beginning December 1, 1997; and for the
option term: $3,163 beginning December 1, 1998 and $3,186 beginning December 1,
1999.
All other lease terms and conditions remain the same.
This amendment is effective December 1, 1996.
LANDLORD:
University Science Center Partnership
By: /s/ Signature Illegible DATE: 10/29/96
------------------------------------------------ --------
Wayne McGown, Assistant Secretary Treasurer
University Research Park Facilities Corp.,
Managing Partner
TENANT
Focused Research, Inc.
By: /s/ Signature Illegible DATE: 10/17/96
------------------------------------------------- --------
Rob Marsland, Vice President
1265 WARF Building 610 Walnut Street Madison WI 53705-2336 (608) 262-3677 FAX
(608) 265-2886
<PAGE> 12
ATTACHMENT A1
[CHART OMITTED]
