<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 2000
REGISTRATION NO. 333-31396
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 7
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NEW FOCUS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3674 33-0404910
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</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:
<TABLE>
<S> <C>
JUDITH M. O'BRIEN, ESQ. JOHN B. MONTGOMERY, ESQ.
ALISANDE M. ROZYNKO, ESQ. JOHN HAYES, ESQ.
MARGO M. EAKIN, ESQ. LAURA M. DE PETRA, ESQ.
EDWARD F. VERMEER, ESQ. LORA D. BLUM, ESQ.
WILSON SONSINI GOODRICH & ROSATI BROBECK PHLEGER & HARRISON LLP
PROFESSIONAL CORPORATION TWO EMBARCADERO PLACE
650 PAGE MILL ROAD 2200 GENG ROAD
PALO ALTO, CA 94304 PALO ALTO, CA 94303
(650) 493-9300 (650) 424-0160
</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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<CAPTION>
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PROPOSED
TITLE OF EACH CLASS OF MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED BE REGISTERED PER SHARE OFFERING PRICE(1)(2) REGISTRATION FEE(3)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par
value.................. 5,750,000 $18.00 $103,500,000 $27,324
- -------------------------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Includes 750,000 shares which the underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of Rule 457(a) of the Securities Act of
1933 solely for the purpose of computing the amount of the registration fee.
(3) $24,288 of the registration fee 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.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND 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 MAY 17, 2000
5,000,000
Shares
[New focus Logo]
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 $16.00 and $18.00 per share. Our common stock has been approved for
listing on The Nasdaq Stock Market's National Market under the symbol "NUFO."
The underwriters have an option to purchase up to 650,000 additional shares
from us and up to an additional 100,000 shares from the selling stockholder
identified in this prospectus to cover over-allotments of shares. We will not
receive any of the proceeds from shares of common stock sold by the selling
stockholder.
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
U.S. BANCORP PIPER JAFFRAY
CIBC WORLD MARKETS
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 name of the company.
Under the heading is a diagram of a typical optical network containing terminals
represented by blue boxes with text "Optical Networking Equipment" 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 name of the
company.
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 gigabits per second
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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<CAPTION>
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>
<CAPTION>
PAGE
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<S> <C>
BUSINESS.............................. 35
MANAGEMENT............................ 50
CERTAIN TRANSACTIONS.................. 63
PRINCIPAL AND SELLING STOCKHOLDERS.... 67
DESCRIPTION OF CAPITAL STOCK.......... 69
SHARES ELIGIBLE FOR FUTURE SALE....... 71
UNDERWRITING.......................... 73
NOTICE TO CANADIAN RESIDENTS.......... 75
LEGAL MATTERS......................... 76
EXPERTS............................... 76
ADDITIONAL INFORMATION................ 76
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 optical 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 sell our products to over 50
customers including Agilent Technologies, Alcatel USA, Avanex Corporation,
Corning Incorporated, Corvis Corporation, JDS Uniphase Corporation, Lucent
Technologies, and Nortel Networks Corporation.
The increase in data traffic, coupled with demand for enhanced services and
improved connection times, has increased demand for communications networks
capable of handling large volumes of traffic. 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 optical networks to enable the transmission of
an increased amount of information at very high speeds over extended distances.
Fiber amplifiers enhance the strength of optical signals. Our wavelength
management products, which process and control the many wavelengths on an
optical fiber, 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, or
products that process both optical and electrical signals, that enable
interconnections between equipment in a network service provider's site at 10
gigabits per second. Our high performance tunable laser modules, or laser
modules that have a dynamically adjustable wavelength, enable rapid development,
manufacturing and testing of fiber optic components and systems. We also offer
advanced photonics, or optical, 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 reincorporated in
Delaware in May 2000. 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.................. 5,000,000 shares
Common stock to be outstanding after
this offering......................... 58,342,884 shares
Use of proceeds....................... General corporate purposes, including
working capital, capital
expenditures, and potential
acquisitions.
Nasdaq National Market symbol......... NUFO
The total number of outstanding shares of our common stock as of March 31,
2000 is 53,342,884, excluding:
- 4,487,000 shares issuable upon exercise of outstanding stock options with
a weighted average exercise price of $0.60 per share;
- 4,247,000 shares reserved for future issuance under our stock plans; 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
November 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.
<TABLE>
<CAPTION>
THREE-MONTH PERIOD
NINE-MONTH PERIOD ENDED ENDED
FISCAL YEAR ENDED MARCH 31, --------------------------- ---------------------
------------------------------------- DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1996 1997 1998 1999 1998 1999 1999 2000
------- ------- ------- ------- ------------ ------------ --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenues................... $10,394 $10,543 $15,482 $17,285 $12,544 $18,101 $ 4,741 $ 9,782
Cost of net revenues........... 5,095 5,946 8,186 9,225 6,625 12,525 2,600 10,786
Gross profit (loss)............ 5,299 4,597 7,296 8,060 5,919 5,576 2,141 (1,004)
Operating income (loss)........ 678 (1,449) 27 (4,666) (3,168) (7,594) (1,498) (12,685)
Net income (loss).............. 457 (1,661) (286) (4,971) (3,375) (7,677) (1,596) (12,461)
Historical net income (loss)
per share:
Basic(1)..................... $ 0.45 $ (1.52) $ (0.25) $ (2.18) $ (1.50) $ (3.11) $ (0.66) $ (2.12)
======= ======= ======= ======= ======= ======= ======= ========
Diluted(1)................... $ 0.02 $ (1.52) $ (0.25) $ (2.18) $ (1.50) $ (3.11) $ (0.66) $ (2.12)
======= ======= ======= ======= ======= ======= ======= ========
Weighted average shares:
Basic(1)................... 1,011 1,096 1,148 2,284 2,245 2,468 2,406 5,891
======= ======= ======= ======= ======= ======= ======= ========
Diluted(1)................. 18,768 1,096 1,148 2,284 2,245 2,468 2,406 5,891
======= ======= ======= ======= ======= ======= ======= ========
Pro forma net loss per share:
Basic and diluted(1)......... $ (0.24) $ (0.07) $ (0.26)
======= ======= ========
Weighted average shares(1)... 32,223 23,143 47,830
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 2000
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED(2)
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<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $12,392 $ 90,287
Working capital........................................... 16,461 94,356
Total assets.............................................. 40,386 118,281
Long term debt, less current portion...................... 315 315
Total stockholders' equity................................ 28,868 106,763
</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
$17.00 per share, less estimated underwriting discounts and commissions and
estimated offering expenses and the exercise of warrants to purchase 121,140
shares of common stock at an exercise price of $1.20 per share prior to the
offering.
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 $12.5 million for the three-month period ended
March 31, 2000, $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 March 31, 2000, we had an accumulated
deficit of $28.0 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 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 DECLINES IN OUR STOCK
PRICE.
We have only recently begun selling our fiber optic products to the
telecommunications industry, and we have only generated revenues 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 our 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 cause
quarterly fluctuations in our net revenues and may result in volatility or a
decline in our stock price.
WE DEPEND ON A FEW KEY CUSTOMERS AND THE LOSS OF THESE CUSTOMERS OR A
SIGNIFICANT REDUCTION IN SALES TO THESE CUSTOMERS COULD SIGNIFICANTLY REDUCE OUR
REVENUES.
In the three-month period ended March 31, 2000, Corvis Corporation and
Agilent Technologies accounted for 17.8% and 14.3% of our net revenues,
respectively. In the nine-month period ended December 31, 1999, none of our
customers accounted for more than 10% of our net revenues. We anticipate that
our operating results will continue to depend on sales to a relatively small
number of customers. The loss of any of these customers or a significant
reduction in sales to these customers could adversely affect our revenues.
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.
7
<PAGE> 10
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. For example, any downturn in our customers' business could
significantly decrease sales of our products to these customers. The loss of any
of our key customers or a significant reduction in sales to these customers
could significantly reduce our net revenues.
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, SALES
OF OUR PRODUCTS MAY DECLINE, AND OUR NET REVENUES MAY BE ADVERSELY AFFECTED.
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, which would
adversely affect our revenues.
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 DEMAND FOR OUR PRODUCTS MAY DECLINE, WHICH
WOULD ADVERSELY IMPACT OUR REVENUES.
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 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 revenues in this emerging
market will depend on:
- 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, the sales of our products
may decline, which would adversely impact our revenues.
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
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 and we must develop and introduce new products and product
enhancements with higher margins. If we cannot maintain our gross margins, our
financial position may be harmed and our stock price may decline.
8
<PAGE> 11
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 151 employees and at March
31, 2000, we had a total of 578 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. We anticipate that we will
require a significant amount of additional space in Northern California to
facilitate our growth over the next twelve months. In May 2000, we entered into
a lease for 59,000 square feet in San Jose, California and entered into
negotiations to lease an additional facility of 130,000 square feet in San Jose,
California to facilitate our anticipated growth over the next twelve months. The
commercial real estate market in Northern California is extremely competitive
and we may not be able to obtain this space on reasonable terms, if at all. If
we are unable to obtain this additional space we will have to obtain additional
space elsewhere in Northern California and our failure to obtain such additional
space could adversely impact our ability to expand our business and operations
and increase our revenues. 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
adversely impact our ability to manufacture and sell our products, which could
reduce our revenues.
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 needs of our
customers as scheduled, our net revenues may decline.
COMPETITION MAY INCREASE, WHICH COULD REDUCE OUR SALES AND GROSS MARGINS, OR
CAUSE US TO LOSE MARKET SHARE.
Competition in the optical networking market in which we compete is
intense. We face competition from public companies, including E-Tek Dynamics,
JDS Uniphase Corporation, Lucent Technologies and Nortel Networks Corporation.
Many of our competitors 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, 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
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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 IF DEMAND FOR THESE PRODUCTS DECLINES OR
FAILS TO DEVELOP AS WE EXPECT OUR NET REVENUES WILL DECLINE.
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 and
the three-month period ended March 31, 2000, we derived 13.9% and 22.0%,
respectively, of our net revenues from our tunable laser module products. We
expect that net revenues from a limited number of products will continue to
account for a substantial portion of our total net revenues. 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 reduce our net
revenues.
WE MUST EXPAND SUBSTANTIALLY OUR SALES ORGANIZATION IN ORDER TO INCREASE MARKET
AWARENESS AND SALES OF OUR PRODUCTS OR OUR REVENUES MAY NOT INCREASE.
The sale of our products requires long and involved efforts targeted at
several key departments within our prospective customers' organizations. Sales
of our products require the prolonged efforts of executive personnel and
specialized systems and applications engineers working together with a small
number of dedicated salespersons. Currently, our sales 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 sales operations,
we may not be able to increase market awareness or sales of our products, which
would prevent us from increasing our revenues.
OUR PRODUCTS ARE DEPLOYED IN LARGE AND COMPLEX SYSTEMS AND MAY CONTAIN DEFECTS
THAT ARE NOT DETECTED UNTIL AFTER OUR PRODUCTS HAVE BEEN INSTALLED, WHICH COULD
DAMAGE OUR REPUTATION AND CAUSE US TO LOSE CUSTOMERS.
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, and our customers may discover defects in our
products only 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 cause our
net revenues to decline.
THE LONG SALES CYCLES FOR OUR PRODUCTS MAY CAUSE REVENUES AND OPERATING RESULTS
TO VARY FROM QUARTER TO QUARTER, WHICH COULD CAUSE VOLATILITY IN OUR STOCK
PRICE.
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
recognize revenue until a product has been shipped to a customer, all
significant vendor obligations have been performed and collection is considered
probable.
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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 our 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 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, which could cause volatility in our stock price.
WE DEPEND ON KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
CHANGING MARKET, AND IF WE ARE UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL OR
RETAIN EXISTING 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.
In order to implement our business plan, 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. 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, which
could adversely impact our ability to manufacture and sell our products.
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.
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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 three-month period ended March 31, 2000, 29.6% 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 the following risks:
- 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 the future. Accordingly, we
could experience the risks of fluctuating currencies and may choose to engage in
currency hedging activities to reduce these risks.
WE MAY BECOME INVOLVED IN COSTLY AND TIME-CONSUMING LITIGATION THAT MAY
SUBSTANTIALLY INCREASE OUR COSTS AND THEREBY HARM OUR BUSINESS.
We may from time to time become involved in various lawsuits and legal
proceedings which arise in the ordinary course of our business. For example, in
March 2000, a former employee filed a complaint against us. We believe that this
claim is without merit and that the resolution of this claim will not have a
material adverse effect on our financial condition. As a result, we have not
accrued for the possible unfavorable outcome of this litigation. However,
litigation is subject to inherent uncertainties, and an adverse result in this
or other matters that may arise from time to time may adversely impact our
operating results or financial condition. Any litigation to which we are subject
could require significant involvement of our senior management and may divert
management's attention from our business and operations. For more information
about current legal proceedings, see "Business -- Legal Proceedings."
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 NET REVENUES.
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. We could experience difficulties and disruptions in the
manufacture of our products while we
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transition to these new facilities, which could prevent us from achieving timely
delivery of products and could result in lost revenues. We could also face the
inability to procure and install the necessary capital equipment, a shortage of
raw materials we use in our products, a lack of availability of manufacturing
personnel to work in our facilities, difficulties in achieving adequate yields
from new manufacturing lines and an 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. For example, we recently experienced a
disruption in the manufacture of some of our products due to changes in our
manufacturing processes, which resulted in reduced manufacturing yields and
delays in the shipment of our products. If we experience similar disruptions in
the future, it may result in lower yields or delays of our product shipments,
which could adversely affect our revenues, gross margins and results of
operations. 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 profitability.
For a more detailed discussion about our manufacturing, see "Business --
Manufacturing."
OUR PLANS TO BEGIN MANUFACTURING OPERATIONS IN CHINA SUBJECT US TO RISKS
INHERENT IN DOING BUSINESS IN CHINA, WHICH MAY HARM OUR MANUFACTURING CAPACITY
AND OUR NET REVENUES.
We have a manufacturing facility located in Shenzhen, China that we expect
to become operational in 2000. In addition, in April 2000, we acquired a second
facility in Shenzhen, China. These facilities and our ability to operate the
facilities 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. These manufacturing facilities are located on land leased from China's
government by Shenzhen New and High-Tech Village Development Co. and the
Shenzhen Libaoyi Industry Development Co., Ltd. under land use certificates and
agreements each with terms of 50 years. We lease one of our manufacturing
facilities from Shenzhen New and High-Tech Village Development Co. under a lease
agreement that will expire in November 2002, subject to our option to renew for
an additional three-year period. We purchased approximately 43% of a second
facility in Shenzhen, China and leased the remainder of the facility for a term
of five years from Shenzhen Libaoyi Industry Development Co., Ltd. with an
option to purchase the leased portion of the facility during the first three
years of the lease term. Our assets and facilities 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. Reforms of this kind 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
facilities in 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 materials and
exported products. We are required to pay income tax in China, subject to
certain tax holidays. We may become subject to other taxes in China or may be
required to pay customs duties in the future. In the event that we are required
to pay other taxes in China or customs duties, our results of operations could
be materially and adversely affected.
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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 the
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 revenues.
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 typically purchase our components and materials through purchase orders,
and in general we have no guaranteed supply arrangements with any of these
suppliers. 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
International Corporation, the world's only commercial supplier of this type of
garnet crystal. In addition, Fujian Casix Laser, Inc., or Casix, has been our
sole supplier of yttrium vanadate crystals to date. JDS Uniphase Corporation,
one of our competitors, recently announced that it had acquired Casix. We have
no agreements with Casix to continue to supply us with yttrium vanadate crystals
other than purchase orders which have been accepted by Casix. In May 2000, we
entered into a three-year supply agreement with Fuzhou Conet Communication,
Inc., or Conet, to supply us with yttrium vanadate crystals. Conet has only
recently begun production of these crystals, and we cannot assure you that Conet
will be able to manufacture crystals that meet our specifications or will be
able to meet our anticipated supply requirements. If our relationship with Casix
or Conet, or both, terminates, we may not be able to find another manufacturer
that can meet our specifications and anticipated supply requirements. We may
fail to obtain required components 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
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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 revenues. For example,
we recently experienced a disruption in the manufacture of some of our products
due to changes in our manufacturing processes which resulted in reduced
manufacturing yields and delays in the shipment of our products. 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 manufacturing techniques involve substantial
manual labor. In addition, we may experience manufacturing delays and reduced
manufacturing yields upon introducing new products to our manufacturing lines.
In order to improve 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.
U.S.A. Kaifa Technology, Inc., recently acquired by E-Tek Dynamics, Inc.,
filed a complaint against us in December 1999 in the United States District
Court for the Northern District of California, 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 several of Kaifa's claims. On the same
date, our employees named in the complaint also filed motions to dismiss Kaifa's
complaints against them. For more information about current legal proceedings,
see "Business -- Legal Proceedings."
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WE COULD BECOME SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS,
WHICH COULD BE COSTLY AND SUBJECT US TO SIGNIFICANT LIABILITY.
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
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 ability to manufacture
and sell our products 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, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO MANUFACTURE AND
SELL OUR PRODUCTS.
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 ability to manufacture and sell
our products.
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. 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.
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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 anticipated 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 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 sooner than anticipated. In the event we are required, or elect, 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, WHICH COULD CAUSE OUR STOCK PRICE TO
FALL BELOW THE INITIAL PUBLIC OFFERING PRICE.
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 AND CAUSE OUR STOCK
PRICE TO DECLINE.
Upon completion of this offering and assuming no exercise of the
underwriters' over-allotment option, 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 60.0% of
our outstanding common stock based on shares outstanding as of April 30, 2000.
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 and cause our
stock price to decline. For a full presentation of the equity ownership of these
stockholders, see "Principal and Selling Stockholders."
PROVISIONS OF OUR CHARTER DOCUMENTS, DELAWARE LAW AND CHANGE OF CONTROL
AGREEMENTS MAY HAVE ANTI-TAKEOVER EFFECTS THAT COULD PREVENT A CHANGE IN
CONTROL, WHICH MAY CAUSE OUR STOCK PRICE TO DECLINE.
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;
17
<PAGE> 20
- 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 due to:
- changes in financial estimates by securities analysts;
- changes in market valuations of other optical networking companies;
- 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 Nasdaq Stock Market's National Market has experienced extreme
volatility that has often been unrelated to the performance of particular
companies. Future 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 $77,750,000 from the
sale of the 5,000,000 shares of common stock or approximately $88,000,000 if the
underwriters' over-allotment option is exercised in full, at an assumed initial
public offering price of $17 per share, after deducting underwriting discounts
and commissions and estimated offering expenses payable by us. We will receive
no proceeds from the sale of shares by the selling stockholder.
We intend to use the net proceeds from this offering primarily for general
corporate purposes, including the repayment of approximately $10.0 million in
debt under a facility which we are currently negotiating, capital expenditures
of approximately $45 million, primarily for the purchase of equipment and the
acquisition of and improvements to our United States and China facilities, and
working capital. 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 for
the foreseeable future.
20
<PAGE> 23
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000:
- 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 5,000,000
shares of common stock at an assumed initial public offering price of
$17.00 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>
MARCH 31, 2000
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, less current portion...................... $ 315 $ 315 $ 315
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,
11,282,600 issued and outstanding (actual);
80,000,000 authorized, 53,221,744 issued and
outstanding (pro forma); 250,000,000 authorized,
58,342,884 shares issued and outstanding (pro forma
as adjusted)......................................... 11 53 58
Additional paid-in capital................................ 90,646 90,646 168,536
Notes receivable from stockholders........................ (4,128) (4,128) (4,128)
Deferred compensation..................................... (29,732) (29,732) (29,732)
Accumulated deficit....................................... (27,971) (27,971) (27,971)
-------- -------- --------
Total stockholders' equity......................... 28,868 28,868 106,763
-------- -------- --------
Total capitalization............................... $ 29,183 $ 29,183 $107,078
======== ======== ========
</TABLE>
The total number of outstanding shares of our common stock as of March 31,
2000 is 53,342,884, excluding:
- 4,487,000 shares issuable upon exercise of outstanding stock options with
a weighted average exercise price of $0.60 per share;
- 4,247,000 shares reserved for future issuance under our stock plans; 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 March 31,
2000, including proceeds of $145,000 from the assumed exercise of warrants to
purchase 121,140 shares of common stock prior to this offering, was $28,733,000
or $0.54 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 March 31,
2000, assuming 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 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 5,000,000 shares of
common stock offered hereby at an assumed initial public offering price of
$17.00 per share less underwriting discounts and commissions and estimated
offering expenses, our pro forma net tangible book value as of March 31, 2000,
would have been $106,483,000 or approximately $1.83 per share. This represents
an immediate increase in net tangible book value of $1.29 per share to existing
stockholders and an immediate dilution in net tangible book value of $15.17 per
share to new investors, or approximately 89% of the assumed initial public
offering price of $17.00 per share. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $17.00
Pro forma net tangible book value per share at March 31,
2000................................................... $0.54
Increase in net tangible book value per share attributable
to this offering....................................... 1.29
-----
Pro forma net tangible book value per share after this
offering.................................................. 1.83
------
Dilution in net tangible book value per share to new
investors................................................. $15.17
======
</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 $17.00 per share,
and the issuance of 121,140 shares of common stock from the assumed exercise of
warrants prior to this offering, as of March 31, 2000, 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....................... 53,342,884 91.4% $ 55,902,000 39.7% $ 1.05
New investors............................... 5,000,000 8.6 85,000,000 60.3 17.00
----------- ----- ------------ -----
Total..................................... 58,342,884 100.0% $140,902,000 100.0%
=========== ===== ============ =====
</TABLE>
The foregoing discussion and table are based on the number of shares of
common stock outstanding after this offering and excludes the following:
- 4,487,000 shares issuable upon exercise of outstanding stock options as
of March 31, 2000, with a weighted average exercise price of $0.60 per
share;
- 4,247,000 shares reserved for issuance under our stock plans; 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 March 31, 2000, assuming exercise and payment of all outstanding
options, net tangible book value per share would be $1.74 representing dilution
of $15.26 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. The
consolidated statement of operations data for the three-month periods ended
March 31, 1999 and March 31, 2000 and the consolidated balance sheet data as of
March 31, 2000 are unaudited. In the opinion of management, all necessary
adjustments, consisting only of normal recurring adjustments, have been included
to present fairly the unaudited quarterly results when read in conjunction with
the audited financial statements and notes thereto appearing elsewhere 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 NINE-MONTH THREE-MONTH THREE-MONTH
FISCAL YEAR ENDED MARCH 31, PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
------------------------------------- DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1996 1997 1998 1999 1998 1999 1999 2000
------- ------- ------- ------- ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenues................ $10,394 $10,543 $15,482 $17,285 $12,544 $18,101 $ 4,741 $ 9,782
Cost of net revenues........ 5,095 5,946 8,186 9,225 6,625 12,525 2,600 10,786
------- ------- ------- ------- ------- ------- ------- --------
Gross profit.............. 5,299 4,597 7,296 8,060 5,919 5,576 2,141 (1,004)
Operating expenses:
Research and
development............. 1,724 3,115 3,721 7,379 5,250 7,352 2,129 3,609
Sales and marketing....... 1,289 1,662 2,193 2,987 2,113 2,982 874 1,100
General and
administrative.......... 1,608 1,269 1,355 2,360 1,724 2,704 636 1,424
Deferred compensation..... -- -- -- -- -- 132 -- 5,548
------- ------- ------- ------- ------- ------- ------- --------
Total operating
expenses........... 4,621 6,046 7,269 12,726 9,087 13,170 3,639 11,681
------- ------- ------- ------- ------- ------- ------- --------
Operating income (loss)..... 678 (1,449) 27 (4,666) (3,168) (7,594) (1,498) (12,685)
Interest and other income,
net....................... (200) (210) (303) (303) (207) (81) (96) 224
------- ------- ------- ------- ------- ------- ------- --------
Income (loss) before
provision for income
taxes..................... 478 (1,659) (276) (4,969) (3,375) (7,675) (1,594) (12,461)
Provision for income
taxes..................... 21 2 10 2 -- 2 2 --
------- ------- ------- ------- ------- ------- ------- --------
Net income (loss)........... $ 457 $(1,661) $ (286) $(4,971) $(3,375) $(7,677) $(1,596) $(12,461)
======= ======= ======= ======= ======= ======= ======= ========
Historical net income (loss)
per share:
Basic..................... $ 0.45 $ (1.52) $ (0.25) $ (2.18) $ (1.50) $ (3.11) $ (0.66) $ (2.12)
======= ======= ======= ======= ======= ======= ======= ========
Diluted................... $ 0.02 $ (1.52) $ (0.25) $ (2.18) $ (1.50) $ (3.11) $ (0.66) $ (2.12)
======= ======= ======= ======= ======= ======= ======= ========
Weighted average shares:
Basic................... 1,011 1,096 1,148 2,284 2,245 2,468 2,406 5,891
======= ======= ======= ======= ======= ======= ======= ========
Diluted................. 18,768 1,096 1,148 2,284 2,245 2,468 2,406 5,891
======= ======= ======= ======= ======= ======= ======= ========
Pro forma net loss per
share:
Basic and diluted......... $ (0.24) $ (0.07) $ (0.26)
======= ======= ========
Weighted average shares... 32,223 23,143 47,830
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------- DECEMBER 31, MARCH 31,
1996 1997 1998 1999 1999 2000
------ ------ ------- ------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 376 $ 250 $ 196 $ 51 $28,067 $12,392
Working capital........................................... 2,066 616 (1,166) 479 29,026 16,461
Total assets.............................................. 5,186 5,564 8,197 8,240 44,852 40,386
Long-term debt, less current portion...................... 60 129 79 588 368 315
Total stockholders' equity (net capital deficiency)....... 1,229 (431) (702) (1,183) 35,013 28,868
</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 optical
products principally for research and commercial applications. In January 1997,
we began development of a high performance tunable laser module, a laser module
with a dynamically adjustable wavelength, 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 optical
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. For the three-month period ended
March 31, 2000, sales of our telecom products accounted for 49.9% 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 Agilent
Technologies, Alcatel USA, Avanex Corporation, Corning Incorporated, Corvis
Corporation, JDS Uniphase Corporation, Lucent Technologies, and Nortel Networks
Corporation. In the nine-month period ended December 31, 1999, none of our
customers accounted for more than 10% of our net revenues. In the three-month
period ended March 31, 2000, Corvis Corporation and Agilent Technologies
accounted for 17.8% and 14.3% of our net revenues, respectively. None of our
other customers accounted for more than 10% of our net revenues for the
three-month period ended March 31, 2000.
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, principally in Europe. We market and sell our commercial
photonics products through a combination of catalog sales, international
distributors and direct sales primarily in the United States, Europe and Asia.
For the nine-month period ended December 31, 1999, 28.7% of international sales
were from telecom products and 71.3% were from commercial photonics products.
For the three-month period ended March 31, 2000, 44.1% of international sales
were from telecom products and 55.9% were from commercial photonics products.
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
24
<PAGE> 27
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 and development projects. For fiscal years 1998 and
1999, the nine-month period ended December 31, 1999 and the three-month period
ended March 31, 2000, we received an aggregate of $5.8 million for research and
development activities, which was used to offset research and development costs.
Of this amount, funding from government agency contracts accounted for $4.6
million. Under the terms of these contracts, we were reimbursed for
substantially all of our costs incurred under the related projects. Research and
development funding from corporate customers provided $1.2 million of which
Agilent Technologies, accounted for $1.0 million. Agilent Technologies funded a
portion of the development of a tunable laser product. 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 $35.4 million through March 31, 2000,
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.
25
<PAGE> 28
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>
THREE-MONTH
NINE-MONTH PERIOD ENDED
FISCAL YEAR ENDED FISCAL YEAR ENDED PERIOD ENDED ----------------------
MARCH 31, MARCH 31, DECEMBER 31, MARCH 31, MARCH 31,
1998 1999 1999 1999 2000
----------------- ----------------- ------------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS DATA:
Net revenues................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of net revenues........ 52.9 53.4 69.2 54.8 110.3
----- ----- ----- ----- ------
Gross profit................ 47.1 46.6 30.8 45.2 (10.3)
----- ----- ----- ----- ------
Operating expenses:
Research and
development............ 24.0 42.7 40.6 44.9 36.9
Sales and marketing...... 14.2 17.3 16.5 18.4 11.2
General and
administrative......... 8.8 13.6 14.9 13.4 14.6
Deferred compensation.... -- -- 0.7 -- 56.7
----- ----- ----- ----- ------
Total operating
expenses.......... 47.0 73.6 72.7 76.7 119.4
----- ----- ----- ----- ------
Operating income (loss)..... 0.1 (27.0) (41.9) (31.5) (129.7)
Interest and other income,
net...................... (2.0) (1.8) (0.5) (2.1) 2.3
----- ----- ----- ----- ------
Loss before provision for
income taxes............. (1.9) (28.8) (42.4) (33.6) (127.4)
Provision for income
taxes.................... -- -- -- 0.1 --
----- ----- ----- ----- ------
Net loss.................... (1.9)% (28.8)% (42.4)% (33.7)% (127.4)%
===== ===== ===== ===== ======
</TABLE>
THREE MONTH PERIODS ENDED MARCH 31, 2000 AND MARCH 31, 1999
Net Revenues
Net revenues increased from $4.7 million for the three-month period ended
March 31, 1999 to $9.8 million for the three-month period ended March 31, 2000,
of which $4.9 million, or 49.9% of total net revenues, were from sales of our
telecom products. Substantially all of our sales for the three-month period
ended March 31, 1999 were generated from sales of commercial photonics products.
The increase in net revenues was primarily as a result of increased sales of our
telecom products.
Gross Margin
Gross margin, including amortization of deferred stock compensation,
decreased from a positive 45.2% in the three-month period ended March 31, 1999
to a negative 23.4% in the three-month period ended March 31, 2000. Excluding
$1.3 million of amortization of deferred stock compensation for the three-month
period ended March 31, 2000, gross margin decreased from a positive 45.2% in the
three-month period ended March 31, 1999 to a negative 10.3% in the three-month
period ended March 31, 2000. This decrease in gross margin was primarily a
result of increased manufacturing overhead costs of approximately $2.3 million
associated with the expansion of our telecom manufacturing operations
domestically and internationally and costs of approximately $1.7 million
associated with the transition to volume manufacturing of new telecom products.
Increased manufacturing overhead costs included increases in payroll and related
costs for additional manufacturing personnel of approximately $1.0 million,
higher materials costs for manufacturing prototyping of approximately $196,000,
and higher depreciation costs related to increased investment in plant and
equipment of approximately $203,000.
26
<PAGE> 29
Research and Development Expenses
Research and development expenses, including amortization of deferred stock
compensation, increased from 44.9% of net revenues, or $2.1 million, in the
three-month period ended March 31, 1999, to 47.3%, or $4.6 million in the
three-month period ended March 31, 2000. Excluding $1.0 million of amortization
of deferred stock compensation for the three-month period ended March 31, 2000,
research and development expenses decreased from 44.9% of net revenues, or $2.1
million, in the three-month period ended March 31, 1999 to 36.9% of net
revenues, or $3.6 million, in the three-month period ended March 31, 2000.
Research and development expenses decreased as a percentage of net revenues as a
result of increased sales.
Sales and Marketing Expenses
Sales and marketing expenses, including amortization of deferred stock
compensation, decreased from 18.4% of net revenues, or $874,000, in the
three-month period ended March 31, 1999 to 13.3% of net revenues, or $1.3
million, in the three-month period ended March 31, 2000. Excluding $205,000 of
amortization of deferred stock compensation for the three-month period ended
March 31, 2000, sales and marketing expenses decreased as a percentage of net
revenues from 18.4% or $874,000, in the three-month period ended March 31, 1999
to 11.2% of net revenues, or $1.1 million, in the three-month period ended March
31, 2000.
General and Administrative Expenses
General and administrative expenses, including amortization of deferred
stock compensation, increased from 13.4% of net revenues, or $636,000, in the
three-month period ended March 31, 1999 to 45.7% of net revenues, or $4.5
million, in the three-month period ended March 31, 2000. Excluding $3.1 million
of amortization of deferred stock compensation for the three-month period ended
March 31, 2000, general and administrative expenses increased from 13.4% of net
revenues, or $636,000, in the three-month period ended March 31, 1999 to 14.6%
of net revenues, or $1.4 million, in the three-month period ended March 31,
2000. The increase was primarily due to increased staffing and associated
expenses necessary to manage and support our increased scale of operations.
Interest and Other Income, Net
Interest and other income totaled a net interest expense of $96,000 for the
three-month period ended March 31, 1999 compared to a net interest and other
income of $224,000 for the three-month period ended March 31, 2000. Interest
expense totalled $99,000 and $5,000 in the three-month period ended March 31,
1999 and the three-month period ended March 31, 2000, respectively. Interest
income totaled $3,000 and $236,000 in the three-month period ended March 31,
1999 and three-month period ended March 31, 2000.
Income Taxes
The provision for income taxes of approximately $2,000 for the three-month
period ended March 31, 1999 consists of current state minimum taxes. Due to our
loss position, there was no provision for income taxes for the three-month
period ended March 31, 2000.
FISCAL YEARS ENDED MARCH 31, 1998 AND 1999 AND THE NINE-MONTH PERIOD ENDED
DECEMBER 31, 1999
Net Revenues
Net revenues increased from $15.5 million in fiscal 1998 to $17.3 million
in fiscal 1999 as a result of increased 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 increased to $18.1
million, primarily as a result of sales of our telecom products, which were $5.0
million, or 27.6% of total net revenues.
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Gross Margin
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, including amortization of deferred stock compensation, decreased to
30.5% for the nine-month period ended December 31, 1999. Excluding $62,000 of
amortization of deferred stock based compensation for the nine-month period
ended December 31, 1999, 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 of approximately
$472,000 in payroll and related costs for additional manufacturing personnel,
higher materials costs for manufacturing prototyping of approximately $279,000,
and higher depreciation costs of approximately $127,000 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 in fiscal 2000 to decrease as compared to the nine-month period
ended December 31, 1999.
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, including
amortization of deferred stock compensation expenses were 40.9% of net revenues,
or $7.4 million, for the nine-month period ended December 31, 1999. Excluding
$54,000 of amortization of deferred stock compensation for the nine-month period
ended December 31, 1999, 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 increase in the sales and
marketing expenses in each of these periods was attributable primarily to the
hiring of additional sales and marketing personnel and to the expansion of our
sales and marketing efforts. In the nine-month period ended December 31, 1999 we
increased our sales and marketing headcount by 14% and we increased our spending
for marketing communication materials, including catalogs, and customer and
technical service system improvements.
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 15.0% of net
revenues including amortization of deferred stock compensation, 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.
Interest and Other Income, Net
Interest and other income totalled a net expense of $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
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amounts totalling $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 the 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.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, certain data
from our consolidated statement of operations and the 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>
THREE-MONTH PERIOD ENDED
------------------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1998 1998 1998 1999 1999 1999 1999 2000
-------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <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 $ 9,782
Cost of net revenues.......... 2,097 2,181 2,347 2,600 2,821 4,367 5,337 10,786
------ ------ ------- ------- ------- ------- ------- --------
Gross profit (loss)......... 1,821 2,070 2,028 2,141 1,760 2,308 1,508 (1,004)
------ ------ ------- ------- ------- ------- ------- --------
Operating expenses:
Research and development.... 1,233 1,633 2,384 2,129 1,592 2,259 3,501 3,609
Sales and marketing......... 683 732 698 874 926 930 1,126 1,100
General and
administrative............ 569 605 550 636 605 940 1,159 1,424
Deferred compensation....... -- -- -- -- 9 29 94 5,548
------ ------ ------- ------- ------- ------- ------- --------
Total operating
expenses................ 2,485 2,970 3,632 3,639 3,132 4,158 5,880 11,681
------ ------ ------- ------- ------- ------- ------- --------
Operating loss................ (664) (900) (1,604) (1,498) (1,372) (1,850) (4,372) (12,685)
Interest and other income,
net......................... (92) (70) (45) (96) (95) 33 (19) 224
------ ------ ------- ------- ------- ------- ------- --------
Loss before provision for
income taxes................ (756) (970) (1,649) (1,594) (1,467) (1,817) (4,391) (12,461)
Provision for income taxes.... -- -- -- 2 -- -- 2 --
------ ------ ------- ------- ------- ------- ------- --------
Net loss...................... $ (756) $ (970) $(1,649) $(1,596) $(1,467) $(1,817) $(4,393) $(12,461)
====== ====== ======= ======= ======= ======= ======= ========
Net loss per share............ $(0.38) $(0.41) $ (0.69) $ (0.66) $ (0.61) $ (0.74) $ (1.74) $ (2.12)
====== ====== ======= ======= ======= ======= ======= ========
Shares used in computing net
loss per share.............. 1,990 2,354 2,396 2,406 2,419 2,455 2,530 5,891
====== ====== ======= ======= ======= ======= ======= ========
</TABLE>
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<TABLE>
<CAPTION>
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1998 1998 1998 1999 1999 1999 1999 2000
-------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of net revenues.......... 53.6 51.3 53.6 54.8 61.6 65.4 78.0 110.3
------ ------ ------- ------- ------- ------- ------- -------
Gross profit (loss)......... 46.4 48.7 46.4 45.2 38.4 34.6 22.0 (10.3)
------ ------ ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development.... 31.5 38.4 54.5 44.9 34.8 33.8 51.1 36.9
Sales and marketing......... 17.4 17.2 16.0 18.4 20.2 13.9 16.4 11.2
General and
administrative............ 14.5 14.2 12.6 13.4 13.2 14.1 16.9 14.6
Deferred compensation....... -- -- -- -- 0.2 0.4 1.4 56.7
------ ------ ------- ------- ------- ------- ------- -------
Total operating
expenses................ 63.4 69.8 83.1 76.7 68.4 62.2 85.8 119.4
------ ------ ------- ------- ------- ------- ------- -------
Operating loss................ (17.0) (21.1) (36.7) (31.5) (30.0) (27.6) (63.8) (129.7)
Interest and other income,
net......................... (2.3) (1.7) (1.0) (2.1) (2.0) 0.4 (0.3) 2.3
------ ------ ------- ------- ------- ------- ------- -------
Loss before provision for
income taxes................ (19.3) (22.8) (37.7) (33.6) (32.0) (27.2) (64.1) (127.4)
Provision for income taxes.... -- -- -- 0.1 -- -- 0.1 --
------ ------ ------- ------- ------- ------- ------- -------
Net loss...................... (19.3)% (22.8)% (37.7)% (33.7)% (32.0)% (27.2)% (64.2)% (127.4)%
====== ====== ======= ======= ======= ======= ======= =======
</TABLE>
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 eight quarters ended March 31, 2000.
Net revenues increased in each of the previous eight quarters, with the
exception of a decrease in the three-month period 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 three most recent quarters. Net revenues
from our telecom products were $450,000, or 9.8% of net revenues, for the
three-month period ended June 30, 1999, $2.0 million, or 30.3% of net revenues,
for the three-month period ended September 30, 1999, $2.5 million, or 36.9% of
net revenues, for the three-month period ended December 31, 1999 and $4.9
million, or 49.9%, of net revenues, for the three-month period ended March 31,
2000. 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 $4.9 million over the last eight quarters.
Gross margins as a percentage of net revenues decreased in each of the
previous eight quarters, with the exception of an increase in the three-month
period ended September 30, 1998. In the three-month period ended March 31, 2000,
we experienced a significant decrease in gross margin percentages primarily as a
result of increased manufacturing costs associated with the expansion of our
telecom manufacturing operations domestically and internationally and the
transition to volume manufacturing of new telecom products. Manufacturing
overhead spending for telecom products increased during each of the four
quarters from the three-month period ended March 31, 1999, to the three-month
period ended March 31, 2000, as we added manufacturing employees, expanded
production facilities and invested in additional manufacturing equipment.
Research and development expenses increased in each of the previous eight
quarters, with the exception of a decrease in the three-month period ended March
31, 1999, and the three-month period 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
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<PAGE> 33
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 eight
quarters, with the exception of a small decrease in the three-month period 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 eight
quarters, with the exception of the three-month periods ended December 31, 1998,
and June 30, 1999. During the three-month periods ended September 30, 1999,
December 31, 1999 and March 31, 2000, 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 Dr. Milton Chang,
one of our founders and a member of our board of directors.
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 $5.7 million of cash
used in operations, $5.8 million used to purchase equipment and the net
repayment of debt of approximately $4.3 million. 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 and decreased by $12.6 million for the
three-month period ended March 31, 2000.
Cash used in operating activities was $583,000 in fiscal 1998, $3.9 million
in fiscal 1999 $5.7 million in the nine-month period ended December 31, 1999,
$594,000 for the three-month period ended March 31, 1999 and $9.4 million for
the three-month period ended March 31, 2000. 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 operating activities for three-month period ended March 31, 2000 was
primarily due to our net loss of $12.5 million, increases in inventories of $2.5
million and increases in accounts receivable of $1.6 million partially offset by
non-cash charges of $6.1 million and increases in accounts payable of $1.7
million.
Cash used in investing activities was $379,000 in fiscal 1998, $1.4 million
in fiscal 1999, $5.7 million in the nine-month period ended December 31, 1999,
$501,000 for the three-month period ended March 31, 1999 and $6.8 million for
the three-month period ended March 31, 2000. In each period 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, $926,000 in the three-month period ended March 31, 1999 and $503,000
in the three-month period ended March 31, 2000. Cash generated by
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<PAGE> 34
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 $5.5 million of repayments of our bank lending facilities,
an equipment loan and promissory notes. Cash generated by financing activities
in the three-month period ended March 31, 2000 was primarily due to proceeds of
$560,000 from the exercise of stock options.
We entered into an equipment loan facility with Western Technology
Investment for a maximum of $2,000,000, under which our right to borrow has
expired. The loan facility bears interest at 8.4% per annum and has a
termination payment of 10% of the original principal amount. Certain equipment
we own secures the loan facility. Under the terms of this loan facility we are
restricted from paying cash dividends, until the time we have completed a
qualified initial public offering of not less than $20,000,000. At March 31,
1999, we had borrowed $800,000 under this facility of which $750,000, $598,000
and $543,000 was outstanding at March 31, 1999, December 31, 1999 and March 31,
2000, respectively.
We expect to incur approximately $45 million of capital expenditures over
the next twelve months to purchase equipment and expand our operations and
manufacturing capacity in the United States and China. In April 2000, we entered
into an agreement to acquire a second manufacturing facility in Shenzhen, China.
Pursuant to the agreement, we purchased approximately 43% of the second facility
in Shenzhen for approximately $3.7 million and leased the remainder of the
facility for a term of five years from the Shenzhen Libaoyi Industry Development
Co., Ltd. with an option to purchase the leased portion of the facility during
the first three years of the lease term.
In April 2000, we entered into negotiations for a senior term loan facility
with Credit Suisse First Boston, New York branch. The facility will provide for
a maximum borrowing of $10.0 million and will bear interest at the prime
interest rate plus 1 1/2% per year. We will be required to pay a non-refundable
arrangement fee of $250,000. In addition, the lender will receive additional
compensation up to $1 million based upon our achievement of certain revenue
targets. The loan will be secured by substantially all of our assets. The
principal and accrued interest on the loan is due in full six months after the
closing of this offering; provided, however, in the event this offering is not
completed within 3 months of the closing of this loan facility, the entire
principal amount and accrued interest on the loan will become due.
In May 2000, we entered into negotiations to lease an additional 130,000
square feet of space in San Jose, California from Lincoln-RECP Hellyer Opco,
LLC. Under the terms of the proposed lease we would be obligated for future
minimum lease payments of approximately $25.0 million over the seven year lease
term. In addition, we are required to provide an irrevocable letter of credit
for $3.5 million as collateral for the performance of our obligations under the
lease. In connection with the lease, we anticipate issuing a two-year warrant to
Lincoln-RECP Hellyer Opco, LLC to purchase 30,000 shares of our common stock
with an exercise price equal to our initial public offering price. The warrant
will be issued concurrent with the pricing of our initial public offering and
will have an exercise price equal to the offering price to the public set forth
in our final prospectus and will be non-forfeitable and immediately exercisable.
Also in May 2000 we entered into a sublease for an additional 59,000 square feet
of space in San Jose, California from Komag, Incorporated. Under the terms of
the sublease we are obligated for approximately $10.1 million in lease payments
over the eight year sublease term. In connection with the sublease we will issue
a two-year warrant to Komag, Incorporated to purchase 20,000 shares of our
common stock concurrent with the pricing of our initial public offering which
will have an exercise price equal to the offering price to the public set forth
in our final prospectus and will be non-forfeitable and immediately exercisable.
In May 2000, we entered into a three-year supply agreement with Fuzhou
Conet Communication, Inc. to supply us with yttrium vanadate crystals and agreed
to advance $3.5 million to Conet against future orders of these crystals.
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<PAGE> 35
We believe that the anticipated 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,
additional financing will be necessary. In that event, 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 March 31, 2000, 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.
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.
While we expect our international revenues and expenses to be denominated
predominately in U.S. dollars, a portion of our international revenues and
expenses may be denominated in foreign currencies in the future. Accordingly, we
could experience the risks of fluctuating currencies and may choose to engage in
currency hedging activities to reduce these risks.
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. This problem could
result in miscalculations, data corruption, system failures or disruptions of
operations. Any difficulties of this kind 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 the
dedication of these resources, or an increase in litigation costs relating to
losses suffered by our customers due to the Year 2000 problems.
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<PAGE> 36
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> 37
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 optical 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.
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, 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. These 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 the bandwidth of an optical
network proportional to the number of different wavelengths that are
transmitted.
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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 enhances the strength of optical signals, resulting 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 be increased by reducing the spacing between channels with dense
wavelength division multiplexing, or DWDM, which is a technology that increases
network capacity by transmitting data simultaneously on many densely packed
wavelengths along the same optical fiber. According to Ryan, Hankin & Kent, 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 and OC-768. 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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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. 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. 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, which process
and control the many wavelengths on an optical fiber, 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 effectively double the capacity
of DWDM systems by doubling the number of channels operating on a single fiber.
Our WDM couplers 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
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appropriate sections of a fiber 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, or lasers
with dynamically adjustable wavelengths, 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 opportunities to collaborate with
these companies to provide the required products, solve implementation problems
and aid in the design of future systems architecture. In
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addition, we believe our ability to design and offer our customers innovative
fiber optic products for their system 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 counts Shipping
(C-Band) - Low loss - Longer reach
- ----------------------------------------------------------------------------------------------------
Optical Circulators - Wide wavelength range - Increased channel counts Beta testing
(L-Band) - Low loss - 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
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very low losses to accommodate many optical channels. The wide wavelength
range enables next-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. Isolators are fiber optic devices that ensure that light
is transmitted in the correct direction. Isolator arrays are multiple
isolators in a single package. 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 cooling - Cost-effectiveness
- ---------------------------------------------------------------------------------------------------------
WDM Couplers - Low loss - Longer reach Beta testing
- Cost-effective all-fiber product - Cost-effectiveness
- 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 combine signals from two fibers onto
a single fiber in the same wavelength range. Thus, DWDM interleavers
effectively double the capacity of DWDM systems by doubling the number of
channels transmitted on a single 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 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. 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 vertical cavity
surface emitting laser-based transceivers, or VCSEL, which are lasers
that emit light perpendicular to the semiconductor surface. These lasers
do not require external modulation or active cooling and are 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. Swept-wavelength lasers continuously and
linearly scan wavelengths. 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
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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.
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,
or products that position fiber optic and optical parts, are used for advanced
manufacturing of fiber optic components and for research and development of
high-speed network products. As another example, photodetectors, which are
devices that convert optical signals to electrical signals, 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 fiber Shipping
opto-mechanics optic manufacturing
- ----------------------------------------------------------------------------------------------------
Picomotors - Precise positioning - Enables development of Shipping
next-generation products
- ----------------------------------------------------------------------------------------------------
Photodetectors - High speeds - Enables development of high Shipping
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, or capability to develop fiber optic devices that process only
optical signals, 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 new materials, geometries and
functionality, and in 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 all-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.
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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 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, photodetector 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
and 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. For the
three-month period ended March 31, 2000, Corvis Corporation and Agilent
Technologies accounted for 17.8% and 14.3% of our net revenues, respectively.
None of our other customers accounted for more than 10% of our net revenues for
the three-month period ended March 31, 2000.
The following is a list of our telecom product customers that represented
more than $500,000 of revenue in the twelve months ended March 31, 2000 and a
list of our commercial photonics product customers that represented more than
$150,000 of revenue in the twelve months ended March 31, 2000:
<TABLE>
<S> <C>
TELECOM PRODUCTS: COMMERCIAL PHOTONICS PRODUCTS:
Agilent Technologies Applied Laser Technology
Alcatel USA BFI Optilas
Avanex Corporation Corning Incorporated
Corning Incorporated ERIM International
Corvis Corporation GSI Lumonics
JDS Uniphase Corporation INDECO
Jet Propulsion Laboratory
KLA-Tencor Corporation
Optima Research
Positive Light
Sandia National Laboratories
Schlumberger Technology Corporation
</TABLE>
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
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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 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.
CUSTOMER AGREEMENTS
In December 1996, we entered into a development agreement with
Hewlett-Packard GmbH, now Agilent Technologies Deutschland GmbH, for the
development of tunable laser modules meeting
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<PAGE> 47
specifications established by Agilent. Pursuant to this development agreement,
as amended in November 1997 and December 1999, we agreed to develop tunable
laser modules for Agilent and Agilent agreed to make installment payments to us
to cover part of the development costs of the tunable laser modules with each
installment payment payable upon the completion of specified development phases.
In addition, the agreement provides for an initial price to Agilent per tunable
laser module purchased, with increases or decreases in the price based upon
increases or decreases in Agilent's list prices to its customers. Pursuant to
this agreement, Agilent has an irrevocable, exclusive, transferable right to
manufacture and distribute the product developed by us, and Agilent may
manufacture the product itself or have the tunable laser modules manufactured by
a third party. We may not sell the tunable laser modules developed under our
contract with Agilent to anyone other than Agilent without Agilent's prior
written consent.
In January 2000, we entered into a memorandum of agreement with Alcatel USA
in which Alcatel commits to purchase from us a minimum percentage of Alcatel's
demand for one of our products. The memorandum of agreement is subject to final
approval by internal management of Alcatel and to the negotiation of a final
purchase agreement by Alcatel and us. Alcatel's management may withhold their
approval of the final purchase agreement and Alcatel would have no liability or
obligation to purchase any of our products.
In January 2000, we entered into an agreement with Corning Incorporated,
pursuant to which Corning agrees to pay certain negotiated prices for our
products during the term of the agreement and offers price protection to Corning
should Corning receive offers from one of our competitors for similar quantity
and quality goods under like terms and conditions. Corning is not obligated to
purchase any minimum amounts of our products under the terms of the agreement,
and they may stop placing orders with us at any time, regardless of any forecast
they may have previously provided. The agreement terminates by its terms in
December 2000, unless we agree with Corning to extend the term for another one
year period.
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. Our support services include customer service and
technical support. Our customer service representatives assist customers with
orders, returns and other administrative functions. Our technical support
engineers provide customers with answers to technical and product related
questions as well as application support relating to the use of our products in
the customer's applications. These engineers also help to define the features
that are required for our products to be successful in specific applications.
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 two facilities 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.
In May 2000, we entered into a three-year supply agreement with Fuzhou
Conet Communication, Inc., or Conet, to supply us with yttrium vandate crystals.
Pursuant to this supply agreement, we have agreed to advance Conet RMB 29
million, or approximately U.S.$3.5 million, against future orders. The
advancement will be repaid in full by May 31, 2003 to the extent that any amount
remains outstanding. The agreement provides that Conet will devote specified
manufacturing capacity to meet our anticipated supply requirements based on our
projections, and we have agreed to place our orders for yttrium vandate
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<PAGE> 48
crystals with Conet, up to their manufacturing capacity. Our agreement may be
terminated if either party materially breaches the agreement or upon the consent
of both parties.
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
standards developed by Telcordia, a company that provides certain centralized
research and standard coordination for Regional Bell Operating Companies. Our
products are designed to be fully compliant with standards for quality and
interoperability with existing installation and maintenance systems. 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 gross 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, $8.4 million for the nine-month period ended
December 31, 1999 and $4.1 million for the three-month period ended March 31,
2000.
COMPETITION
Competition in the optical networking market in which we provide products
is intense. We face competition from companies, including E-Tek Dynamics, JDS
Uniphase Corporation, Lucent Technologies and Nortel Networks Corporation. Some
of our competitors, including JDS Uniphase Corporation, Lucent Technologies and
Nortel Networks Corporation are also our customers. Lucent Technologies and
Nortel Networks Corporation are vertically integrated and provide both entire
fiber optic systems and the components that comprise fiber optic systems. We
compete with these companies with respect to the development, marketing and sale
of fiber optic components. In some cases, we supply test equipment and photonics
tools to competitors of our fiber optics components business.
Many of our competitors 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
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<PAGE> 49
support of their products. In addition, 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, 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 as
of March 31, 2000 we have been granted 26 U.S. patents and one European patent.
As of March 31, 2000, we have 28 U.S. utility filings, of which three have been
allowed by the U.S. Patent and Trademark Office, 12 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. The expiration dates
of our patents range from May 25, 2009 to September 15, 2017.
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. Our confidentiality agreements
generally prohibit the disclosure or use of the technology being evaluated or
licensed. From time to time we license our technology to various third parties
pursuant to non-exclusive license agreements that prohibit the disclosure or use
of the technology except as set forth in the agreements. 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 U.S.A. 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
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future will not claim infringement by us with respect to our products and our
associated technology. The Kaifa claim and other claims of this kind 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.
Royalty or licensing agreements of this kind, if required, may not be available
on terms acceptable to us, if at all. A successful claim of product infringement
against us and failure or inability by us to license the infringed or similar
technology could 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 March 31, 2000, we had a total of 578 employees located in both the
United States and the People's Republic of China. Of the total, 421 were in
manufacturing, 77 were in research and development, 27 were engaged in sales and
marketing, 53 were in administration. 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 are also
expanding our operations in California to a second facility of 52,000 square
feet in San Jose. In May 2000, we entered into an eight-year sublease with
Komag, Incorporated for 59,000 square feet in San Jose. Under this sublease we
have obligations for $10.1 million in lease payments over the eight year term.
In addition, in May 2000 we entered into negotiations to lease an additional
facility of 130,000 square feet, also in San Jose. Under this proposed lease we
would incur approximately $25.0 million in lease payments over the seven year
term.
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.
We have established a manufacturing facility in Shenzhen, China located on
land leased from China's government by the Shenzhen New and High-Tech Village
Development Co. under land use certificates and agreements with terms of 50
years. We lease this manufacturing facility from the Shenzhen New and High-Tech
Village Development Co. 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 this facility in Shenzhen, China is approximately 20,000 square feet.
In addition, in April 2000 we entered into an agreement to acquire a second
facility in Shenzhen, China. We purchased approximately 43% of this facility in
Shenzhen and will lease the remainder of the facility for a term of five years
from the Shenzhen Libaoyi Industry Development Co., Ltd. with an option to
purchase the leased portion of the facility during the first three years of the
lease term. The size of this facility is approximately 268,000 square feet.
LEGAL PROCEEDINGS
On December 8, 1999, U.S.A. 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. On December 30, 1999, Kaifa filed a first amended complaint adding
state law claims against us and adding as defendants ten individuals currently
employed by us. In addition to maintaining its original claim of patent
infringement against us, Kaifa asserted claims of intentional and negligent
interference with contract against us, trade secret misappropriation against all
of the defendants, unfair competition against all of the defendants, and breach
of contract against several of the individual defendants. Kaifa seeks a
declaratory judgment, damages, preliminary and permanent injunctive relief,
specific enforcement of the individual defendants' alleged contractual
obligations, and attorneys' fees.
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On February 23, 2000, we filed a motion to dismiss Kaifa's state law claims
against us. On the same date, the individual defendants filed motions to dismiss
Kaifa's claims against them. On April 27, 2000, Kaifa voluntarily dismissed its
claims against two of the individual defendants. On May 3, 2000, the court
dismissed Kaifa's claim of negligent interference with contract against us and
both of Kaifa's claims against another individual defendant. The court denied
the remaining motions to dismiss. Kaifa's second amended complaint is due to be
filed on June 2, 2000.
We intend to defend the action vigorously. A claim construction hearing
regarding the asserted patent claims is scheduled for January 2001, and trial is
scheduled for October 2001. 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.
A former employee filed a lawsuit against us in Santa Clara Superior Court
on March 10, 2000 alleging three causes of action of wrongful termination in
violation of public policy, breach of the covenant of good faith and fair
dealing, and fraud. The former employee's claims stem from the termination of
his employment with us in February 2000. The former employee seeks unspecified
general and special damages, punitive damages, attorneys' fees and costs in the
form of cash and shares of our common stock. We plan to vigorously defend
against these claims.
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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 April 19, 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
Nicola Pignati....................... 50 Chief Operating Officer
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, Supply Chain Management
Dr. Milton Chang..................... 57 Chairman of the Board of Directors
Dr. David L. Lee..................... 50 Director
John Dexheimer(1).................... 45 Director
Dr. Winston S. Fu(1)................. 34 Director
R. Clark Harris(1)(2)................ 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.
Nicola Pignati joined us in April 2000 as our Chief Operating Officer.
Prior to joining us, Mr. Pignati was President, Chief Executive Officer, and
Founder of MMC Technology, Incorporated since April 1996. From September 1994 to
April 1996, Mr. Pignati was Vice President of Operations at Conner Peripherals,
which was subsequently acquired by Seagate Technology, Incorporated. Mr. Pignati
received both a B.S. and an M.S. in mechanical engineering from San Jose State
University.
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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.
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 our Vice President of Supply Chain Management joined us in
January 1998. 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 IRIDEX Corporation, Agility
Communications, Inc., Acturus Engineering, LightConnect, Inc., Lightwave
Electronics, Inc., Yesvideo.com and Gadzoox Networks, Inc. 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.
Dr. David L. Lee has served as one of our directors since April 2000. Dr.
Lee has been President and Chief Operating Officer and a director of Global
Crossing Ltd. since its inception in March 1997. He has also been a managing
director of Pacific Capital Group since 1989. Prior to joining Pacific Capital
Group, Dr. Lee was Group Vice President of Finance and Acquisitions at TRW
Information Systems Group. Dr. Lee is a graduate of McGill University and holds
a Ph.D. in Physics and a Ph.D. in Economics from the California Institute of
Technology. Dr. Lee is a Certified Public Accountant.
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 the non-managing member of Presidio Management Group VI, LLC, the general
partner of 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. Prior to that, Dr. Fu served as the director of product
marketing and
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various other positions at Vixel Corporation. 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 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, an 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, Dexheimer 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. Harris 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 our board who are members of
the compensation committee or who has served on our compensation committee
during our last fiscal year is currently, or has ever been at any time since our
formation, one of our officers or employees. Dr. Chang served on our
compensation committee during the nine-month period ended December 31, 1999. 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
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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."
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, Supply Chain
Management
Paul G. Smith.................... $133,538(3) $23,072 -- -- -- --
Vice President, General
Manager, Telecom
Laurie Conner(4)................. $119,231(5) $ -- -- -- -- --
Dr. Timothy Day.................. $111,007(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 $227,869.
(2) George Yule's annual compensation for the twelve months ended December 31,
1999, was $192,580.
(3) Paul Smith's annual compensation for the twelve months ended December 31,
1999, was $193,533.
(4) We entered into a separation release agreement with Laurie Conner on
December 16, 1999, pursuant to which Ms. Conner's employment relationship
with us terminated as of February 15, 2000, and she continued to receive
salary through her termination date.
(5) Laurie Conner's annual compensation for the twelve months ended December
31, 1999, was $155,000.
(6) Dr. Day's annual compensation for the twelve months ended December 31,
1999, was $167,814.
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.
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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 unexercised in-the-money
options is based on an assumed initial offering price of $17.00 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 $13,781,261 $19,293,739
George Yule......................... 103,334 196,666 $ 1,700,344 $ 3,234,656
Paul G. Smith....................... 133,334 266,666 $ 2,183,344 $ 4,366,656
Laurie Conner....................... 85,000 215,000 $ 1,391,875 $ 3,520,625
Dr. Timothy Day..................... 527,334 162,666 $ 8,899,832 $ 2,677,668
</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
the capacity as an officer, director, employee or other agent, 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 those 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
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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.
STOCK PLANS
1990 Incentive Stock Option Plan
Our 1990 Incentive Stock Option Plan provides for the grant of incentive
stock options to employees, including officers and employee directors, and for
the grant of nonstatutory stock options and stock purchase rights to employees,
directors and consultants. The 1990 Incentive Stock Option Plan was adopted by
our board of directors and approved by our stockholders in July 1990 and amended
on May 1998.
We have reserved an aggregate of 9,900,000 shares of our common stock for
issuance under this plan. As of March 31, 2000, 6,914,868 shares had been issued
pursuant to the exercise of options, options to purchase 2,877,744 shares of
common stock were outstanding and 107,388 shares were available for future
grant.
Administration. Our board of directors or a committee of our board of
directors administers the 1990 Incentive Stock Option Plan. The administrator of
our 1990 Incentive Stock Option Plan has the power to determine, among other
things:
- the terms of the options or stock purchase rights granted, including the
exercise price of the option or stock purchase right;
- the number of shares subject to each option or stock purchase right;
- the exercisability of each option or stock purchase right; and
- the form of consideration payable upon the exercise of each option or
stock purchase right.
Options. The exercise price of all incentive stock options granted under
the 1990 Incentive Stock Option Plan must be at least equal to the fair market
value of the common stock on the date of grant. The exercise price of
nonstatutory stock options and stock purchase rights granted under the 1990
Incentive Stock Option Plan is determined by the administrator, but with respect
to nonstatutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Internal Revenue Code,
the exercise price must be at least equal to the fair market value of our common
stock on the date of grant. With respect to any participant who owns stock
representing more than 10% of the voting power of all classes of our outstanding
capital stock, the exercise price of any incentive stock option granted must be
at least equal 110% of the fair market value on the grant date and the term of
the incentive stock option must not exceed five years. The term of all other
options granted under the 1990 Incentive Stock Option Plan may not exceed 10
years.
Options granted under the 1990 Incentive Stock Option Plan must generally
be exercised within 30 days after the end of the optionee's status as an
employee, director or consultant of ours, or within 12 months after the
optionee's termination by death or disability, but in no event later than the
expiration of the option's term.
Transferability of Options. Options and stock purchase rights granted under
the 1990 Incentive Stock Option Plan are generally not transferable by the
optionee, and each option and stock purchase right is exercisable during the
lifetime of the optionee only by the optionee.
Stock Purchase Rights. In the case of stock purchase rights, unless the
administrator determines otherwise, the restricted stock purchase agreement
shall grant us a repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's employment or consulting relationship with us for
any reason, including death or disability. The purchase price for shares
repurchased under the restricted stock purchase agreement shall be the original
price paid by the purchaser and may be paid by cancellation of any indebtedness
of the purchaser to us. The repurchase option shall lapse at a rate determined
by the administrator.
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Adjustments upon Merger or Asset Sale. The 1990 Incentive Stock Option Plan
provides that in the event of our merger with or into another corporation, or a
sale of substantially all of our assets, each option and stock purchase right
shall be assumed or an equivalent option substituted for by the successor
corporation. If the outstanding options and stock purchase rights are not
assumed or substituted for by the successor corporation, the options will
terminate as of the closing date of the merger.
Amendment and Termination of the 1990 Incentive Stock Option Plan. The
board will have the authority to amend, suspend or terminate the 1990 Incentive
Stock Option Plan, as long as this action does not affect any shares of common
stock previously issued and sold or any option previously granted under the 1990
Incentive Stock Option Plan.
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 and any shares returned to the plan shall
be reserved for issuance under the 2000 Stock Plan following the completion of
this offering.
1998 Stock Plan
Our 1998 Stock Plan provides for the grant of incentive stock options to
employees, including officers and employee directors, and for the grant of
nonstatutory stock options and stock purchase rights to employees, directors and
consultants. The 1998 Stock Plan was adopted by our board of directors in 1998
and approved by our stockholders in June 1999.
We have reserved an aggregate of 800,000 shares of our common stock for
issuance under this plan. As of March 31, 2000, 21,732 shares had been issued
pursuant to the exercise of options, options to purchase 323,868 shares of
common stock were outstanding and 454,400 shares were available for future
grant.
Administration. Our board of directors or a committee of our board of
directors administers the 1998 Stock Plan. The administrator of our 1998 Stock
Plan has the power to determine, among other things:
- the terms of the options or stock purchase rights granted, including the
exercise price of the option or stock purchase right;
- the number of shares subject to each option or stock purchase right;
- the exercisability of each option or stock purchase right; and
- the form of consideration payable upon the exercise of each option or
stock purchase right.
Options. The exercise price of all incentive stock options granted under
the 1998 Stock Plan must be at least equal to the fair market value of the
common stock on the date of grant. The exercise price of nonstatutory stock
options and stock purchase rights granted under the 1998 Stock Plan is
determined by the administrator, but with respect to nonstatutory stock options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Internal Revenue Code, the exercise price must be at least
equal to the fair market value of our common stock on the date of grant. With
respect to any participant who owns stock representing more than 10% of the
voting power of all classes of our outstanding capital stock, the exercise price
of any incentive stock option granted must be at least equal 110% of the fair
market value on the grant date and the term of the incentive stock option must
not exceed five years. The term of all other options granted under the 1998
Stock Plan may not exceed 10 years.
Options granted under the 1998 Stock Plan must generally be exercised
within 30 days after the end of the optionee's status as an employee, director
or consultant of ours, or within 12 months after the optionee's termination by
death or disability, but in no event later than the expiration of the option's
term.
Transferability of Options. Options and stock purchase rights granted under
the 1998 Stock Plan are generally not transferable by the optionee, and each
option and stock purchase right is exercisable during the lifetime of the
optionee only by the optionee.
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Stock Purchase Rights. In the case of stock purchase rights, unless the
administrator determines otherwise, the restricted stock purchase agreement
shall grant us a repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's employment or consulting relationship with us for
any reason, including death or disability. The purchase price for shares
repurchased under the restricted stock purchase agreement shall be the original
price paid by the purchaser and may be paid by cancellation of any indebtedness
of the purchaser to us. The repurchase option shall lapse at a rate determined
by the administrator.
Adjustments upon Merger or Asset Sale. The 1998 Stock Plan provides that in
the event of our merger with or into another corporation, or a sale of
substantially all of our assets, each option and stock purchase right shall be
assumed or an equivalent option substituted for by the successor corporation. If
the outstanding options and stock purchase rights are not assumed or substituted
for by the successor corporation, the options shall terminate as of the date of
merger.
Amendment and Termination of the 1998 Stock Plan. The administrator will
have the authority to amend, suspend or terminate the 1998 Stock Plan, as long
as this action does not affect any shares of common stock previously issued and
sold or any option previously granted under the 1998 Stock Plan.
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.
1999 Stock Plan
Our 1999 Stock Plan provides for the grant of incentive stock options to
employees, including officers and employee directors, and for the grant of
nonstatutory stock options and stock purchase rights to employees, directors and
consultants. The 1999 Stock Plan was adopted by our board of directors in
December 1999 and approved by our stockholders in February 2000.
We have reserved an aggregate of 5,400,000 shares of our common stock for
issuance under this plan. As of March 31, 2000, 2,630,000 shares had been issued
pursuant to the exercise of options and stock purchase rights, options to
purchase 1,285,600 shares of common stock were outstanding and 1,484,400 shares
were available for future grant.
Administration. Our board of directors or a committee of our board of
directors administers the 1999 Stock Plan. The administrator of our 1999 Stock
Plan has the power to determine, among other things:
- the terms of the options or stock purchase rights granted, including the
exercise price of the option or stock purchase right;
- the number of shares subject to each option or stock purchase right;
- the exercisability of each option or stock purchase right; and
- the form of consideration payable upon the exercise of each option or
stock purchase right.
Options. The exercise price of all incentive stock options granted under
the 1999 Stock Plan must be at least equal to the fair market value of the
common stock on the date of grant. The exercise price of nonstatutory stock
options and stock purchase rights granted under the 1999 Stock Plan is
determined by the administrator, but with respect to nonstatutory stock options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Internal Revenue Code, the exercise price must be at least
equal to the fair market value of our common stock on the date of grant. With
respect to any participant who owns stock representing more than 10% of the
voting power of all classes of our outstanding capital stock, the exercise price
of any incentive stock option granted must be at least equal 110% of the fair
market value on the grant date and the term of the incentive stock option must
not exceed five years. The term of all other options granted under the 1999
Stock Plan may not exceed 10 years.
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Options granted under the 1999 Stock Plan must generally be exercised
within 30 days after the end of the optionee's status as an employee, director
or consultant of ours, or within 12 months after the optionee's termination by
death or disability, but in no event later than the expiration of the option's
term.
Transferability of Options. Options and stock purchase rights granted under
the 1999 Stock Plan are generally not transferable by the optionee, and each
option and stock purchase right is exercisable during the lifetime of the
optionee only by the optionee.
Stock Purchase Rights. In the case of stock purchase rights, unless the
administrator determines otherwise, the restricted stock purchase agreement
shall grant us a repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's employment or consulting relationship with us for
any reason, including death or disability. The purchase price for shares
repurchased under the restricted stock purchase agreement shall be the original
price paid by the purchaser and may be paid by cancellation of any indebtedness
of the purchaser to us. The repurchase option shall lapse at a rate determined
by the administrator.
Adjustments upon Merger or Asset Sale. The 1999 Stock Plan provides that in
the event of our merger with or into another corporation, or a sale of
substantially all of our assets, each option and stock purchase right shall be
assumed or an equivalent option substituted for by the successor corporation. If
the outstanding options and stock purchase rights are not assumed or substituted
for by the successor corporation, the optionees will become fully vested in and
have the right to exercise the options or stock purchase rights. If an option or
stock purchase right becomes fully vested and exercisable in the event of a
merger or sale of assets, the administrator must notify the optionee that the
option or stock purchase right is fully exercisable for a period of 15 days from
the date of the notice, and the option or stock purchase right will terminate
upon the expiration of the 15-day period.
Amendment and Termination of the 1999 Stock Plan. The administrator will
have the authority to amend, suspend or terminate the 1999 Stock Plan, as long
as this action does not affect any shares of common stock previously issued and
sold or any option previously granted under the 1999 Stock Plan.
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.
2000 Stock Plan
Our 2000 Stock Plan provides for the grant of incentive stock options to
employees, including officers and employee directors, and for the grant of
nonstatutory stock options and stock purchase rights to employees, directors and
consultants. The 2000 Stock Plan was adopted by our board of directors in
February 2000 and approved by our stockholders in April 2000.
As of March 31, 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 a lesser amount as our board of directors
may determine.
Administration. Our board of directors or a committee of our board of
directors administers the 2000 Stock Plan. The administrator of our 2000 Stock
Plan has the power to determine, among other things:
- the terms of the options or stock purchase rights granted, including the
exercise price of the option or stock purchase right;
- the number of shares subject to each option or stock purchase right;
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- the exercisability of each option or stock purchase right; and
- the form of consideration payable upon the exercise of each option or
stock purchase right.
Options. The exercise price of all incentive stock options granted under
the 2000 Stock Plan must be at least equal to the fair market value of the
common stock on the date of grant. The exercise price of nonstatutory stock
options and stock purchase rights granted under the 2000 Stock Plan is
determined by the administrator, but with respect to nonstatutory stock options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Internal Revenue Code, the exercise price must be at least
equal to the fair market value of our common stock on the date of grant. With
respect to any participant who owns stock representing more than 10% of the
voting power of all classes of our outstanding capital stock, the exercise price
of any incentive stock option granted must be at least equal 110% of the fair
market value on the grant date and the term of the incentive stock option must
not exceed five years. The term of all other options granted under the 2000
Stock Plan may not exceed 10 years.
During any fiscal year, each optionee may be granted options to purchase a
maximum of 1,000,000 shares. In addition, in connection with an optionee's
initial employment with us, the optionee may be granted an option covering an
additional 1,000,000 shares.
Options granted under the 2000 Stock Plan must generally be exercised
within three months after the end of the optionee's status as an employee,
director or consultant of ours, or within 12 months after the optionee's
termination by death or disability, but in no event later than the expiration of
the option's term.
Transferability of Options. Options and stock purchase rights granted under
the 2000 Stock Plan are generally not transferable by the optionee, and each
option and stock purchase right is exercisable during the lifetime of the
optionee only by the optionee.
Stock Purchase Rights. In the case of stock purchase rights, unless the
administrator determines otherwise, the restricted stock purchase agreement
shall grant us a repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's employment or consulting relationship with us for
any reason, including death or disability. The purchase price for shares
repurchased under the restricted stock purchase agreement shall be the original
price paid by the purchaser and may be paid by cancellation of any indebtedness
of the purchaser to us. The repurchase option shall lapse at a rate determined
by the administrator.
Adjustments upon Merger or Asset Sale. The 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, each option and stock purchase right shall be
assumed or an equivalent option substituted for by the successor corporation. If
the outstanding options and stock purchase rights are not assumed or substituted
for by the successor corporation, the optionees will become fully vested in and
have the right to exercise the options or stock purchase rights. If an option or
stock purchase right becomes fully vested and exercisable in the event of a
merger or sale of assets, the administrator must notify the optionee that the
option or stock purchase right is fully exercisable for a period of 15 days from
the date of the notice, and the option or stock purchase right will terminate
upon the expiration of the 15-day period.
Amendment and Termination of the 2000 Stock Plan. The administrator will
have the authority to amend, suspend or terminate the 2000 Stock Plan, as long
as this action does not affect any shares of common stock previously issued and
sold or any option previously granted under the 2000 Stock Plan. Unless earlier
terminated, the 2000 Stock Plan will terminate automatically 10 years from the
date of obtaining stockholder approval of the plan in April 2000.
2000 Employee Stock Purchase Plan
Our 2000 Employee Stock Purchase Plan was adopted by our board of directors
in February 2000 and approved by our stockholders in April 2000, but it will not
become effective until the date of this offering. A total of 1,000,000 shares of
our common stock has been reserved for issuance under the 2000 Employee
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Stock Purchase Plan, plus automatic annual increases beginning on January 1,
2001 equal to the lesser of 1,000,000 shares, 1.25% of the outstanding shares on
that date or an amount determined by our board of directors.
Structure of the 2000 Employee Stock Purchase Plan. The 2000 Employee Stock
Purchase Plan, which is intended to qualify under Section 423 of the Internal
Revenue Code, contains consecutive, six-month offering periods. The offering
periods generally start on the first trading day on or after January 31 and July
31 of each year, except for the first offering period, which commences on the
first trading day on or after the effective date of this offering and ends on
the last trading day on or before July 30, 2002.
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 that 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.
Purchases. The 2000 Employee Stock Purchase Plan permits participants to
purchase our common stock through payroll deductions of up to 15% of the
participant's "compensation." Compensation is defined as the participant's base
straight time gross earnings and commissions, exclusive of payments for shift
premium, bonuses, incentive compensation, incentive payments and other
compensation. The maximum number of shares a participant may purchase during
each purchase period is 5,000 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the 2000 Employee Stock Purchase Plan is generally 85% of the
lower of the fair market value of the common stock either:
- at the beginning of the offering period; or
- at the end of the offering period.
Participants may end their participation at any time during an offering
period, and they will be paid their payroll deductions to date. Participation
ends automatically upon termination of employment with us.
Transferability of Rights. Rights granted under the 2000 Employee Stock
Purchase Plan are not transferable by a participant other than by will, the laws
of descent and distribution or as otherwise provided under the 2000 Employee
Stock Purchase Plan.
Merger or Asset Sale. The 2000 Employee Stock Purchase Plan provides that,
in the event we merge with or into another corporation or if there is a sale of
substantially all of our assets, each outstanding option may be assumed or
substituted for by the successor corporation. If the successor corporation
refuses to assume or substitute for the outstanding options, the offering period
then in progress will be shortened and a new exercise date will be set.
Amendment and Termination of the 2000 Employee Stock Purchase Plan. The
2000 Employee Stock Purchase Plan will terminate in 2010. Our board of directors
has the authority to amend or terminate the 2000 Employee Stock Purchase Plan,
except that no action may impair any outstanding rights to purchase stock under
the 2000 Employee Stock Purchase Plan.
2000 Director Option Plan
Our 2000 Director Option Plan provides for automatic grants of stock
options to our non-employee directors. The 2000 Director Option Plan was adopted
by our board of directors in February 2000 and approved by our stockholders in
April 2000. A total of 200,000 shares of our common stock have been reserved for
issuance under the 2000 Director Option Plan.
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Option Grants. The 2000 Director Option Plan generally provides for an
automatic initial grant of an option to purchase 25,000 shares of our common
stock to each non-employee director on the date when the person first becomes a
non-employee director on or after the closing of this public offering, whether
through election by our stockholders or appointment by our board of directors to
fill a vacancy.
After the initial grant, each non-employee director will automatically be
granted subsequent options to purchase 5,000 shares of our common stock each
year on the date of our annual stockholders' meeting, if on that date he or she
has served on our board of directors for at least six months. Each initial
option grant and each subsequent option grant shall have a term of 10 years.
Each initial option grant will vest as to 25% of the shares subject to the
option on the anniversary of its date of grant and 1/36 of the shares shall vest
each month thereafter, provided the individual remains our outside director on
this date. Each subsequent option grant will fully vest on the anniversary of
its date of grant. The exercise price of all options will be 100% of the fair
market value per share of our common stock on the date of grant.
Options granted under the 2000 Director Option Plan must be exercised
within three months of the end of the optionee's tenure as a director of the
Company, or within 12 months after the director's termination by death or
disability, but in no event later than the expiration of the option's 10 year
term.
Transferability of Options. No option granted under the 2000 Director
Option Plan is transferable by the optionee other than by will or the laws of
descent and distribution, and each option is exercisable, during the lifetime of
the optionee, only by the optionee.
Merger, Asset Sale and Change of Control. The 2000 Director Option Plan
provides that in the event of our merger with or into another corporation, or a
sale of substantially all of our assets, the successor corporation shall assume
each option or substitute an equivalent option. If outstanding options are not
assumed or substituted for by the successor corporation, each option will become
fully exercisable for a period of thirty days from the date our board of
directors notifies the optionee of the option's full exercisability, after which
period the option shall terminate. In the event of a change of control each
outstanding option will become fully vested and exercisable.
Amendment and Termination of the 2000 Director Option Plan. The
administrator will have the authority to amend, suspend or terminate the 2000
Director Option Plan, so long as no action affects any shares of common stock
previously issued and sold or any option previously granted under the 2000
Director Option Plan. Unless terminated sooner, the 2000 Director Option Plan
will terminate automatically 10 years from the effective date of 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 (b) have at least six months of service with us. 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
Internal Revenue 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 Internal Revenue 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.
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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.
Dr. Bao-Tong Ma. In October 1999, Dr. Bao-Tong Ma accepted our offer of
employment. The terms of Dr. Ma's employment provide that if we terminate his
employment without cause prior to the first anniversary of employment, Dr. Ma
would receive his salary until the earlier of 24 months or new employment. Dr.
Ma's stock options would cease to vest upon termination. If Dr. Ma's employment
is terminated after the first anniversary of employment, but prior to the second
anniversary, Dr. Ma would continue to receive his salary for 12 months. If Dr.
Ma's employment is terminated after the second anniversary, but prior to the
third anniversary, Dr. Ma would continue to receive his salary for six months.
If Dr. Ma's employment is terminated following the third anniversary of
employment, he will not receive any severance.
In January 2000, we amended our stock option agreements with Kenneth E.
Westrick, George Yule, Paul G. Smith, Dr. Robert A. Marsland 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.
In April 2000, we hired Nicola Pignati and pursuant to the terms of his
employment granted him an option to purchase 500,000 shares of our common stock
and to pay for the shares with a promissory note. The option vests in accordance
with our standard 5-year vesting schedule, provided, however, that in the event
of a public offering of our common stock, 100,000 of the shares subject to the
option will vest upon termination of the underwriters' lockup. In addition, in
the event Mr. Pignati is terminated without cause, provided that he signs a full
waiver and release of claims, he will receive a severance pay amount equal to
twelve months' salary plus any scheduled bonuses.
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<PAGE> 65
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>
George Yule is our Vice President of Supply Chain Management and John
Dexheimer is one of our directors.
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>
Kenneth E. Westrick is our President, Chief Executive Officer and one of
our directors. Morgenthaler Venture Partners V, L.P. is a venture capital firm
that holds in excess of 5% of our common stock and of which Mr. Pavey, one of
our directors, is a partner. U.S. Venture Partners VI, L.P. is a venture capital
firm that together with its affiliated entities holds in excess of 5% of our
common stock and of which Dr. Winston Fu, one of our directors is the
non-managing member of Presidio Management Group VI, LLC, the general partner of
U.S. Venture Partners VI, L.P.
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>
R. 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>
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<PAGE> 66
R. Clark Harris is one of our directors. Morgenthaler Venture Partners V,
L.P. is a venture capital firm that holds in excess of 5% of our common stock
and of which Mr. Pavey, one of our directors, is a partner, and U.S. Venture
Partners is a venture capital firm that together with its affiliated entities
holds in excess of 5% of our common stock and of which Dr. Winston Fu, one of
our directors, is the non managing member of Presidio Management Group VI, LLC,
the general partner of U.S. Venture Partners VI, L.P.
LOANS FROM SHAREHOLDER
From April 1991 to September 1997, Dr. Milton Chang loaned us a total of
$1,815,000. 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
days written request. This agreement was terminated in December 1999.
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. Each
of these loans was issued in connection with the exercise of stock options which
had previously been granted by the board of directors pursuant to our stock
option plans at the fair market value of our common stock on the date of grant,
as determined in good faith by our board of directors, based upon market
conditions, results of operations and recent sales of our preferred stock to
third party investors. 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 E. 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 pursuant to the
exercise of a stock option granted to him on September 30, 1997 at $.4625 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 G. Smith, our Vice
President, General Manager, Telecom, secured by a stock pledge, in connection
with the purchase of 400,000 shares of our common stock pursuant to the exercise
of a stock option granted to him on May 4, 1998 at $.625 per share and the
purchase on the same date of 200,000 shares of our common stock pursuant to the
exercise of a stock option granted to him on January 11, 2000 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 Dr. 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 pursuant to
the exercise of a stock option granted to him on January 11, 2000 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,
Supply Chain Management, secured by a stock pledge, in connection with the
purchase of 200,000 shares of our common stock pursuant to the exercise of a
stock option granted to him on January 28, 1998 at $.5125 and 100,000 shares of
our common stock pursuant to the exercise of a stock option granted to him on
July 17, 1998 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 January 12, 2000, we loaned $137,232 to Dr. Robert A. Marsland, our Vice
President, Focused Research, Inc. secured by a stock pledge, in connection with
the purchase of 400,000 shares of our common stock pursuant to the exercise of a
stock option granted to him on July 29, 1990 at $.0025 per share and 70,000
shares of our common stock pursuant to the exercise of a stock option granted to
him on
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<PAGE> 67
October 8, 1998 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 January 12, 2000, we loaned $255,483 to Dr. Timothy Day, our Chief
Technology Officer and Vice President, Engineering, Telecom, secured by a stock
pledge, in connection with the purchase of 400,000 shares of our common stock
pursuant to the exercise of a stock option granted to him on July 29, 1990 at
$.0025 per share, 100,000 shares of our common stock pursuant to the exercise of
a stock option granted to him on November 21, 1996 at $.4625 per share, 120,000
shares of our common stock pursuant to the exercise of a stock option granted to
him on January 28, 1998 at $.5125 per share and 70,000 shares of our common
stock pursuant to the exercise of a stock option granted to him on October 8,
1998 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 purchase of 300,000 shares of our common stock pursuant to the exercise
of a stock option granted to him on February 9, 2000 at $1.25 per share. The
note is interest-free and is due and payable on February 8, 2005. The entire
principal amount on this note remains outstanding.
On February 18, 2000 we loaned $125,000 to Paul G. Smith, our Vice
President, General Manager, Telecom, secured by a stock pledge, in connection
with the purchase of 100,000 shares of our common stock pursuant to the exercise
of a stock option granted to him on February 9, 2000 at $1.25 per share. The
note is interest-free and is due and payable on February 17, 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 Focused Research Inc., secured by a stock pledge, in connection with
the purchase of 100,000 shares of our common stock pursuant to the exercise of a
stock option granted to him on February 9, 2000 at $1.25 per share. The note is
interest-free and is due and payable on February 8, 2005. The entire principal
amount on this note remains outstanding.
On February 9, 2000 we loaned $375,000 to Dr. Timothy Day, our Chief
Technical Officer and Vice President Engineering, secured by a stock pledge, in
connection with the purchase of 300,000 shares of our common stock pursuant to
the exercise of a stock option granted to him on February 9, 2000 at $1.25 per
share. The note is interest-free and is due and payable on February 8, 2005. The
entire principal amount on this note remains outstanding.
On February 9, 2000 we loaned $750,000 to William L. Potts, Jr., our Chief
Financial Officer, secured by a stock pledge, in connection with the purchase of
600,000 shares of our common stock pursuant to the exercise of a stock option
granted to him on February 9, 2000 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 $84,770, $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 a cash payment
of $618,731 and warrants to purchase 111,972 shares of Series E Preferred Stock
at an exercise price of $1.20 per share.
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<PAGE> 68
INDEMNIFICATION
We will enter into indemnification agreements with each of our directors
and officers. These 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> 69
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of April 30, 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 current executive officers named in the compensation table
above;
- each of our directors; and
- all directors and executive officers as a group.
As of April 30, 2000, there were 53,640,927 shares of our common stock
outstanding, assuming that all outstanding preferred stock has been converted
into common stock. Except as otherwise indicated, we believe that the beneficial
owners of the common stock listed below, based on the information furnished by
the owners, have sole voting power and investment power with respect to their
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 April 30, 2000 are
deemed outstanding, while the 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)................................... 2,597,334 4.8% 4.4%
Dr. Timothy Day(2)....................................... 1,110,000 2.1 1.9
Dr. Robert A. Marsland(3)................................ 670,000 1.2 1.1
Nicola Pignati(4)........................................ 500,000 * *
Paul G. Smith(5)......................................... 700,000 1.3 1.2
Dr. Bao-Tong Ma(6)....................................... 500,000 * *
William L. Potts, Jr.(7)................................. 600,000 1.1 1.0
George Yule(8)........................................... 327,000 * *
Dr. Milton Chang(9)...................................... 10,471,856 19.5 17.8
John Dexheimer(10)....................................... 263,639 * *
Dr. Winston S. Fu(11).................................... 6,384,614 11.9 10.9
R. Clark Harris(12)...................................... 64,000 * *
Robert Pavey(13)......................................... 6,384,614 11.9 10.9
Dr. David L. Lee(14)..................................... -- -- --
All directors and officers as a group (14 persons)(15)... 30,573,057 57.0 52.1
5% STOCKHOLDERS
Dr. Milton Chang(9)...................................... 10,471,856 19.5 17.8
Morgenthaler Ventures Partners V, L.P.................... 6,384,614 11.9 10.9
Entities associated with U.S. Venture Partners(11)....... 6,384,614 11.9 10.9
London Pacific Life & Annuity Company.................... 4,615,386 8.6 7.9
</TABLE>
- ------------------------
* Denotes less than one percent of the outstanding stock.
(1) Includes 1,033,332 shares 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.
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<PAGE> 70
(2) Includes 443,333 shares subject to our right of repurchase, which lapses
over time. If the underwriters' over-allotment option is exercised in full,
Dr. Day will sell 100,000 shares in this offering and will beneficially own
1,010,000 shares (1.7%) after the offering.
(3) Includes 149,000 shares subject to our right of repurchase, which lapses
over time.
(4) Includes 500,000 shares subject to an option exercisable within 60 days of
April 30, 2000.
(5) Includes 540,000 shares subject to our right of repurchase, which lapses
over time.
(6) Includes 500,000 shares subject to our right of repurchase, which lapses
over time.
(7) Includes 600,000 shares subject to our right of repurchase, which lapses
over time.
(8) Includes 176,666 shares subject to our right of repurchase, which lapses
over time.
(9) Includes 800,000 shares held by Chang Partners, a California limited
partnership, of which Dr. Chang is a general partner.
(10) Includes 26,667 shares subject to an option, which is exercisable within 60
days of April 30, 2000.
(11) Includes 5,937,690 shares held by U.S. Venture Partners VI, L.P., 185,154
shares held by USVP VI Entrepreneurs Partners, L.P., 166,000 shares held by
USVP VI Affiliates Fund, L.P. and 95,770 shares held by 2180 Associates
Fund VI, L.P. Dr. Fu is a non-managing member of Presidio Management Group
VI, LLC, the general partner of U.S. Venture Partners entities. Dr. Fu
disclaims beneficial ownership of shares held by these entities, except to
the extent of his pecuniary interest in these entities.
(12) Includes 2,667 shares subject to an option exercisable within 60 days of
April 30, 2000.
(13) 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 this entity.
(14) Dr. Lee was appointed to our board of directors on April 19, 2000, and
granted an option to purchase 25,000 shares of our common stock at an
exercise price of $5.00 per share.
(15) Includes an aggregate of 29,334 shares subject to options exercisable
within 60 days of April 30, 2000 and 3,442,331 shares subject to our right
of repurchase, which lapses over time.
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<PAGE> 71
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 April 30, 2000, and assuming the conversion of all outstanding shares
of preferred stock into common stock, there were 53,640,927 shares of common
stock outstanding which were held of record by approximately 340 stockholders.
There will be 58,640,927 shares of common stock outstanding, assuming no
exercise of the underwriters' over-allotment option and no exercise of
outstanding options after April 30, 2000, after giving effect to the sale of our
common stock in this offering. In addition to 5,051,344 shares issuable upon
exercise of outstanding options under our 1990 Incentive Stock Option Plan, 1998
Stock Plan and 1999 Stock Plan, as of April 30, 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
any dividends, 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, the holders of 35,196,140 shares, assuming
conversion of all outstanding shares of preferred stock, 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 account of
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<PAGE> 72
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 Act 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 proposals of this kind because, among other
things, negotiation of proposals of this kind 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 EquiServe LP.
NASDAQ STOCK MARKET NATIONAL MARKET LISTING
Our common stock has been approved for listing on The Nasdaq Stock Market's
National Market under the symbol "NUFO."
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<PAGE> 73
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 sales of this kind 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, other than shares sold in this offering, 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 market 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 58,640,927 shares of common
stock outstanding, (assuming conversion of all of the currently outstanding
shares of preferred stock), based on shares outstanding as of April 30, 2000,
and assuming no exercise of the underwriters' over-allotment option and no
exercise of outstanding options. All of the 5,000,000 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 53,640,927 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 53,640,927 shares, 44,113,061 shares will become
eligible for sale 180 days after the effective date subject to Rules 144 and
701.
As of April 30, 2000, there were a total of 5,051,344 shares of common
stock subject to outstanding options under our 1990 Incentive Stock Option Plan,
1998 Stock Plan and our 1999 Stock Plan, 638,937 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
1,384,380 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 586,409 shares immediately after this offering; or
71
<PAGE> 74
- 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 that 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 those 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 those 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.
72
<PAGE> 75
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated May , 2000 we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, Chase Securities Inc.,
U.S. Bancorp Piper Jaffray Inc. and CIBC World Markets Corp. 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........................................
U.S. Bancorp Piper Jaffray Inc..............................
CIBC World Markets Corp.....................................
--------
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 and the selling stockholder have granted to the underwriters a 30-day
option to purchase on a pro rata basis up to 650,000 additional shares from us
and 100,000 additional shares from the selling stockholder 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
and the selling stockholder will pay.
<TABLE>
<CAPTION>
Per Share Total
------------------------------- -------------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts and
Commissions paid by us................... $ $ $ $
Expenses payable by us..................... $ $ $ $
Underwriting Discounts and Commissions paid
by the selling stockholder............... $ $ $ $
Expenses payable by the selling
stockholder.............................. $ $ $ $
</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.
73
<PAGE> 76
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
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 300,000 shares of the common stock for employees, directors and
certain of our customers and vendors who have expressed an interest in
purchasing common stock in the offering. None of such shares will be subject to
lockup agreements with the underwriters. 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 and the selling stockholder 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.
Our common stock has been approved for listing 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.
A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters for
sale to their online brokerage account holders. Internet distributions will be
allocated by the underwriters that will make Internet distributions on the same
basis as other allocations.
74
<PAGE> 77
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 and the selling
stockholder 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, the selling stockholder 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 and the selling stockholder 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.
75
<PAGE> 78
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, Palo Alto, 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. 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.
76
<PAGE> 79
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> 80
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 May 8, 2000
F-2
<PAGE> 81
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, MARCH 31, MARCH 31,
1999 1999 2000 2000
--------- ------------ ----------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 51 $ 28,067 $ 12,392
Accounts receivable, less allowance for doubtful accounts
of $135 at March 31, 1999 $160 at December 31, 1999 and
$663 at March 31, 2000.................................. 2,064 3,102 4,797
Unbilled receivables...................................... 192 121 32
Inventories............................................... 3,654 6,217 8,748
Prepaid expenses and other current assets................. 141 243 913
------- -------- --------
Total current assets.................................. 6,102 37,750 26,882
Fixed assets, net........................................... 1,880 6,895 11,810
Other assets, net of accumulated amortization of $29 at
March 31, 1999, $56 at December 31, 1999 and $67 at March
31, 2000.................................................. 258 207 1,694
------- -------- --------
Total assets.......................................... $ 8,240 $ 44,852 $ 40,386
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Loans payable to bank..................................... $ 1,755 $ -- $ --
Accounts payable.......................................... 1,788 5,658 7,391
Accrued expenses.......................................... 1,567 2,540 2,758
Deferred research and development funding................. 250 250 --
Current portion of long-term debt......................... 263 276 272
------- -------- --------
Total current liabilities............................. 5,623 8,724 10,421
Notes payable to stockholder/director....................... 2,305 -- --
Accrued interest to stockholder/director.................... 117 -- --
Long-term debt, less current portion........................ 588 368 315
Deferred rent............................................... 790 747 782
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 and March 31,
2000 (liquidation preference of $99,340 at December
31, 1999 and March 31, 2000).......................... 21 42 42 $ --
Common stock, $0.001 par value:
Authorized shares -- 80,000,000
Issued and outstanding shares -- 2,410,380 at March 31,
1999, 2,578,824 at December 31, 1999, 11,282,600 at
March 31, 2000 and 53,221,744 pro forma............... 2 2 11 53
Additional paid-in capital................................ 6,627 51,168 90,646 90,646
Notes receivable from stockholders........................ -- -- (4,128) (4,128)
Deferred compensation..................................... -- (689) (29,732) (29,732)
Accumulated deficit....................................... (7,833) (15,510) (27,971) (27,971)
------- -------- -------- --------
Total stockholders' equity (net capital deficiency)... (1,183) 35,013 28,868 $ 28,868
------- -------- -------- ========
Total liabilities and stockholders' equity (net
capital deficiency)................................ $ 8,240 $ 44,852 $ 40,386
======= ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 82
NEW FOCUS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS ENDED
YEARS ENDED MARCH 31, ENDED --------------------------
---------------------- DECEMBER 31, MARCH 31, MARCH 31,
1998 1999 1999 1999 2000
--------- --------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues....................... $15,482 $17,285 $18,101 $ 4,741 $ 9,782
Cost of net revenues(1)............ 8,186 9,225 12,525 2,600 10,786
------- ------- ------- ------- --------
Gross profit....................... 7,296 8,060 5,576 2,141 (1,004)
Operating expenses:
Research and development(2)...... 6,188 9,115 8,386 2,714 4,144
Less funding received from
research and development
contracts..................... (2,467) (1,736) (1,034) (585) (535)
------- ------- ------- ------- --------
Net research and development..... 3,721 7,379 7,352 2,129 3,609
Sales and marketing(3)........... 2,193 2,987 2,982 874 1,100
General and administrative(4).... 1,355 2,360 2,704 636 1,424
Deferred compensation............ -- -- 132 -- 5,548
------- ------- ------- ------- --------
Total operating expenses...... 7,269 12,726 13,170 3,639 11,681
------- ------- ------- ------- --------
Operating income (loss)............ 27 (4,666) (7,594) (1,498) (12,685)
Interest expense................... (328) (327) (176) (99) (5)
Other income, net.................. 25 24 95 3 229
------- ------- ------- ------- --------
Loss before provision for income
taxes............................ (276) (4,969) (7,675) (1,594) (12,461)
Provision for income taxes......... 10 2 2 2 --
------- ------- ------- ------- --------
Net loss...................... $ (286) $(4,971) $(7,677) $(1,596) $(12,461)
======= ======= ======= ======= ========
Historical basic and diluted net
loss per share................... $ (0.25) $ (2.18) $ (3.11) $ (0.66) $ (2.12)
======= ======= ======= ======= ========
Shares used to compute historical
basic and diluted net loss per
share............................ 1,148 2,284 2,468 2,406 5,891
======= ======= ======= ======= ========
Pro forma basic and diluted net
loss per share................... $ (0.24) $ (0.07) $ (0.26)
======= ======= ========
Shares used to compute pro forma
basic and diluted net loss per
share............................ 32,223 23,143 47,830
======= ======= ========
</TABLE>
- -------------------------
(1) Excluding $62 and $1,283 in amortization of deferred stock based
compensation for the nine months ended December 31, 1999 and three months
ended March 31, 2000, respectively
(2) Excluding $54 and $1,013 in amortization of deferred stock based
compensation for the nine months ended December 31, 1999 and three months
ended March 31, 2000, respectively
(3) Excluding $10 and $205 in amortization of deferred stock based compensation
for the nine months ended December 31, 1999 and three months ended March 31,
2000, respectively
(4) Excluding $6 and $3,047 in amortization of deferred stock based compensation
for the nine months ended December 31, 1999 and three months ended March 31,
2000, respectively
See accompanying notes.
F-4
<PAGE> 83
NEW FOCUS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
------------------- ------------------- PAID-IN FROM DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION
---------- ------ ---------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997........ 16,160,000 $16 1,127,180 $ 1 $ 2,128 $ -- $ --
Issuance of common stock from
exercise of options.......... -- -- 157,716 -- 16 -- --
Repurchase of common stock..... -- -- (8,996) -- (1) -- --
Net loss....................... -- -- -- -- -- -- --
---------- --- ---------- --- ------- ------- --------
Balance at March 31, 1998........ 16,160,000 16 1,275,900 1 2,143 -- --
Issuance of Series C preferred
stock, net of issuance cost
of $16....................... 600,000 1 -- -- 493 -- --
Issuance of Series D preferred
stock, net of issuance cost
of $54....................... 3,977,000 4 -- -- 3,919 -- --
Issuance of common stock from
exercise of options.......... -- -- 1,443,444 1 187 -- --
Repurchase of common stock..... -- -- (308,964) -- (193) -- --
Warrant issued to long-term
creditor..................... -- -- -- -- 78 -- --
Net loss....................... -- -- -- -- -- -- --
---------- --- ---------- --- ------- ------- --------
Balance at March 31, 1999........ 20,737,000 21 2,410,380 2 6,627 -- --
Issuance of Series E preferred
stock, net of issuance cost
of $489...................... 10,857,616 11 -- -- 12,526 -- --
Issuance of Series F preferred
stock, net of issuance cost
of $28....................... 1,113,800 1 -- -- 1,307 -- --
Issuance of Series G preferred
stock, net of issuance cost
of $160...................... 9,230,728 9 -- -- 29,832 -- --
Issuance of common stock from
exercise of options.......... -- -- 168,444 -- 55 -- --
Deferred compensation.......... -- -- -- -- 821 -- (821)
Amortization of deferred
compensation................. -- -- -- -- -- -- 132
Net loss....................... -- -- -- -- -- -- --
---------- --- ---------- --- ------- ------- --------
Balance at December 31, 1999..... 41,939,144 42 2,578,824 2 51,168 -- (689)
Issuance of common stock from
exercise of options
(unaudited).................. -- -- 8,587,776 9 4,679 (4,128) --
Issuance of stock in connection
with business acquisition
(unaudited).................. -- -- 116,000 -- 1,508 -- (1,300)
Deferred compensation
(unaudited).................. -- -- -- -- 33,291 -- (33,291)
Amortization of deferred
compensation (unaudited)..... -- -- -- -- -- -- 5,548
Net loss (unaudited)........... -- -- -- -- -- -- --
---------- --- ---------- --- ------- ------- --------
Balance at March 31, 2000
(unaudited).................... 41,939,144 $42 11,282,600 $11 $90,646 $(4,128) $(29,732)
========== === ========== === ======= ======= ========
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
----------- --------
<S> <C> <C>
Balance at March 31, 1997........ $ (2,576) $ (431)
Issuance of common stock from
exercise of options.......... -- 16
Repurchase of common stock..... -- (1)
Net loss....................... (286) (286)
-------- --------
Balance at March 31, 1998........ (2,862) (702)
Issuance of Series C preferred
stock, net of issuance cost
of $16....................... -- 494
Issuance of Series D preferred
stock, net of issuance cost
of $54....................... -- 3,923
Issuance of common stock from
exercise of options.......... -- 188
Repurchase of common stock..... -- (193)
Warrant issued to long-term
creditor..................... -- 78
Net loss....................... (4,971) (4,971)
-------- --------
Balance at March 31, 1999........ (7,833) (1,183)
Issuance of Series E preferred
stock, net of issuance cost
of $489...................... -- 12,537
Issuance of Series F preferred
stock, net of issuance cost
of $28....................... -- 1,308
Issuance of Series G preferred
stock, net of issuance cost
of $160...................... -- 29,841
Issuance of common stock from
exercise of options.......... -- 55
Deferred compensation.......... -- --
Amortization of deferred
compensation................. -- 132
Net loss....................... (7,677) (7,677)
-------- --------
Balance at December 31, 1999..... (15,510) 35,013
Issuance of common stock from
exercise of options
(unaudited).................. -- 560
Issuance of stock in connection
with business acquisition
(unaudited).................. -- 208
Deferred compensation
(unaudited).................. -- --
Amortization of deferred
compensation (unaudited)..... -- 5,548
Net loss (unaudited)........... (12,461) (12,461)
-------- --------
Balance at March 31, 2000
(unaudited).................... $(27,971) $ 28,868
======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 84
NEW FOCUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED MARCH NINE MONTHS --------------------------
31, ENDED
------------------ DECEMBER 31, MARCH 31, MARCH 31,
1998 1999 1999 1999 2000
------- ------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss........................................ $ (286) $(4,971) $(7,677) $(1,596) $(12,461)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of fixed assets.................. 475 588 756 173 548
Amortization of intangibles................... 41 10 27 3 11
Amortization of deferred compensation......... -- -- 132 -- 5,548
Deferred rent................................. 184 -- (43) -- 35
Changes in operating assets and liabilities:
Accounts receivable and unbilled
receivables.............................. (1,231) 372 (967) (83) (1,606)
Inventories................................. (1,515) 184 (2,563) 73 (2,531)
Prepaid expenses and other current assets... (78) 93 (102) 275 (670)
Accounts payable............................ 1,137 (884) 3,870 352 1,733
Accrued expenses and accrued interest to
stockholder.............................. 440 697 856 209 218
Deferred research and development funding... 250 -- -- -- (250)
------- ------- ------- ------- --------
Net cash used in operating activities........... (583) (3,911) (5,711) (594) (9,425)
INVESTING ACTIVITIES
Acquisition of property and equipment........... (396) (1,359) (5,771) (280) (5,463)
Decrease (increase) in other assets............. 17 2 24 (221) (1,290)
------- ------- ------- ------- --------
Net cash used in investing activities........... (379) (1,357) (5,747) (501) (6,753)
FINANCING ACTIVITIES
Proceeds from notes payable to stockholders..... 400 200 -- -- --
Proceeds from issuance of preferred stock....... -- 4,217 43,686 -- --
Proceeds from equipment loan.................... -- 800 -- 800 --
Proceeds from capital lease obligations......... -- 35 -- -- --
Payments on notes payable....................... (19) (21) (2,305) -- --
Payments on bank loan........................... (828) (1,772) (3,000) (900) --
Proceeds from bank loans........................ 1,395 1,755 1,245 1,055 --
Payments on equipment loan...................... -- (50) (195) (41) (57)
Payments under capital lease obligations........ (55) (36) (12) -- --
Proceeds from exercise of stock options......... 16 188 55 12 560
Repurchase of common stock...................... (1) (193) -- -- --
------- ------- ------- ------- --------
Net cash provided by financing activities....... 908 5,123 39,474 926 503
------- ------- ------- ------- --------
Increase (decrease) in cash..................... (54) (145) 28,016 (169) (15,675)
Cash at beginning of period..................... 250 196 51 220 28,067
------- ------- ------- ------- --------
Cash at end of period........................... $ 196 $ 51 $28,067 $ 51 $ 12,392
======= ======= ======= ======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest.......................... $ 174 $ 155 $ 188 $ 99 $ 5
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES
Promissory note payable converted to equity..... $ -- $ 200 $ -- $ -- $ --
Interest on note converted to principal......... $ -- $ 680 $ -- $ -- $ --
Warrant issued to long-term creditor............ $ -- $ 78 $ -- $ 78 $ --
Stock issued in business acquisition............ $ -- $ -- $ -- $ -- $ 208
</TABLE>
See accompanying notes.
F-6
<PAGE> 85
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
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 subsidiaries. All intercompany transactions and balances have been
eliminated.
During 1999, the Company changed its year end to December 31, 1999 from
March 31, 2000. Beginning in 2000, the Company maintains a fifty-two/fifty-three
week fiscal year cycle ending on the Sunday closest to December 31. For
convenience, the accompanying financial statements have been shown as ending on
the last day of the calendar month.
As of March 31, 2000, the Company had working capital of $16,461,000. For
the nine-month period ended December 31, 1999 and the three-month period ended
March 31, 2000, the Company used cash of $5.7 million and $9.4 million,
respectively in its operating activities. Management believes that, to the
extent existing resources and anticipated revenues are insufficient to fund the
Company's planned activities, additional debt or equity financing will be
available from existing investors and others.
Cash Equivalents
Cash equivalents consist of a money market fund. For purposes of the
accompanying statements of cash flows, the Company considers all 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,
December 31, 1999, and March 31, 2000.
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, MARCH 31,
1999 1999 2000
--------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Raw Materials............................. $1,994 $3,247 $4,827
Work in Progress.......................... 372 1,283 2,457
Finished Goods............................ 1,288 1,687 1,464
------ ------ ------
Total..................................... $3,654 $6,217 $8,748
====== ====== ======
</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.
F-7
<PAGE> 86
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
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.
At March 31, 2000 the Company had a $1,000,000 advance to a supplier to be
applied against future purchases.
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.
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, the nine-month period
ended December 31, 1999 and for the three-month periods ended March 31, 1999 and
March 31, 2000 were approximately $316,000, $342,000, $257,000, $92,000 and
$58,000, 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, the nine-month period
ended December 31, 1999 and the three-month periods ended March 31, 1999 and
March 31, 2000 were $6,188,000, $9,115,000, $8,386,000, $2,714,000 and
$4,144,000, respectively. Funding earned under the contractual terms of the
research and development contracts is netted against research and development
costs, which were $2,467,000, $1,736,000, $1,034,000, $585,000 and $535,000 for
the fiscal years ended March 31, 1998 and 1999, the nine-month period ended
December 31, 1999, and for the three-month periods ended March 31, 1999 and
March 31, 2000, 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 March 31, 2000. The
unaudited pro forma stockholders' equity reflects this conversion.
F-8
<PAGE> 87
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
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, the nine-months ended December 31, 1999, and the
three-months ended March 31, 1999 and March 31, 2000.
Interim Financial Information
The interim financial information at March 31, 2000 and for the three-month
periods ended March 31, 1999 and March 31, 2000 is unaudited but, in the opinion
of management, includes all adjustments, consisting only of normal recurring
accruals, which the Company considers necessary for a fair presentation of the
financial position and results of operations for the interim periods. The
results of operations for the three-month periods ended March 31, 2000 are not
necessarily indicative of the results to be expected for the full fiscal year.
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 REVENUE AND CREDIT AND OTHER RISKS
The Company sells to a large number of companies in the telecommunications
and photonics research markets. 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
F-9
<PAGE> 88
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
of default by these institutions to the extent of the amount recorded on the
balance sheet. As of December 31, 1999 and March 31, 2000 all money market funds
are invested in a single fund.
For the three-month period ended March 31, 2000, Corvis Corporation and
Agilent Technologies accounted for 17.8% and 14.3% of net revenues,
respectively. There were no customers which accounted for more than 10% of net
revenues for the years ended March 31, 1998 and 1999, the nine-month period
ended December 31, 1999 and the three-month period ended March 31, 1999.
The Company currently purchases several key components and materials used
in the manufacturing process from a single or limited source supplier. Any
interruption or delay in the supply of any of these components or materials, or
the ability to obtain these components and materials from alternate sources at
acceptable prices and within a reasonable amount of time would impair the
Company's ability to meet scheduled product deliveries and could cause customers
to cancel orders.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
1999 1999 2000
--------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Manufacturing and development equipment........... $ 2,250 $ 6,404 $ 9,917
Computer software and equipment................... 1,282 1,787 2,424
Office equipment.................................. 166 259 625
Leasehold improvements............................ 213 1,120 2,076
Construction in Progress.......................... -- 91 82
------- ------- -------
3,911 9,661 15,124
Less accumulated depreciation and amortization.... (2,031) (2,766) (3,314)
------- ------- -------
$ 1,880 $ 6,895 $11,810
======= ======= =======
</TABLE>
4. DEBT
Note payable to stockholder/director
The Company had unsecured promissory notes payable to Dr. Milton Chang, one
of the founders and a member of the Board of Directors. On July 21, 1998, the
principal and interest outstanding was rolled over into 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 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 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.
F-10
<PAGE> 89
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
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, under which the right to borrow
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, and $543,000 was outstanding at
March 31, 1999, December 31, 1999, and March 31, 2000 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 from fiscal 2000 through
fiscal 2007. Net rental expense for these leases aggregated $444,000, $440,000,
$383,000, $99,000 and $220,000 for the fiscal years ended March 31, 1998 and
1999, the nine-month period ended December 31, 1999, and the three-month periods
ended March 31, 1999 and March 31, 2000 respectively. These amounts are net of
$230,000, $255,000, $91,000, $68,000 and $0 of sublease income for the fiscal
years ended March 31, 1998 and 1999, the nine-month period ended December 31,
1999 and the three-month periods ended March 31, 1999 and March 31, 2000.
Future minimum lease payments under noncancelable operating leases are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ ---------
<S> <C> <C>
2000................................. $ 1,405 $ 1,668
2001................................. 1,964 2,691
2002................................. 2,016 2,748
2003................................. 2,061 2,798
2004................................. 2,132 2,874
Thereafter........................... 3,340 4,188
------- --------
Total minimum payments............... $12,918 $ 16,967
======= ========
</TABLE>
In the three-month periods ended March 31, 2000 the Company entered into
new leases in Wisconsin and China.
F-11
<PAGE> 90
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
Litigation
On December 8, 1999, U.S.A. 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, for the Northern District of
California. In addition to maintaining its original claim of patent infringement
against the Company, Kaifa has asserted other claims against the Company and
several of its employees, including claims 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, specific enforcement of the individual defendants' alleged
contractual obligation and attorney's fees. On February 23, 2000, the Company
filed a motion to dismiss several of Kaifa's claims against it. On the same
date, certain of the employees named in the complaint also filed a motion to
dismiss Kaifa's complaint against them. On May 3, 2000 the court dismissed
Kaifa's claim of negligent interference with contract against the Company and
both of Kaifa's claims against another individual defendant. The court denied
the remaining motions to dismiss. Kaifa's second amended complaint is due to be
filed on June 2, 2000. A claim construction hearing regarding the asserted
patent claims is scheduled for January 2001, and trial is scheduled for October
2001. 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 period 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-12
<PAGE> 91
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
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 three-month 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-13
<PAGE> 92
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
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-14
<PAGE> 93
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
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
---------- ----------
Balance at December 31, 1999............................. 5,882,000 8,439,000 $0.45
Granted................................................ (3,916,000) 3,916,000 $0.92
Exercised.............................................. -- (7,787,000) $0.60
Cancelled.............................................. 81,000 (81,000) $0.60
---------- ---------- -----
Balance at March 31, 2000................................ 2,047,000 4,487,000 $0.60
========== ========== =====
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>
F-15
<PAGE> 94
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
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.
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
$0.375 - $0.4625 2,927,000 7.48 years $0.45 1,445,000 $0.45
$0.5125 715,000 8.09 years $0.51 269,000 $0.51
$0.625 3,396,000 8.79 years $0.63 775,000 $0.63
--------- ---------
$0.0025 - $0.625 8,439,000 7.04 years $0.45 3,881,000 $0.33
========= =========
</TABLE>
In addition, non-plan 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
were exercised during the three-month period ended March 31, 2000.
Deferred Compensation
During the nine-month period ended December 31, 1999, and the three-month
period ended March 31, 2000 the Company recorded aggregate deferred compensation
of $821,000 and $34,591,000 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, and the three-month periods ended March
31, 1999 and March 31, 2000 the Company amortized $132,000, $0 and $5,548,000,
respectively 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
F-16
<PAGE> 95
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
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>
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
F-17
<PAGE> 96
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
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.
Common Stock
Common stock reserved for future issuance is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ ----------
<S> <C> <C>
Stock option plan:
Outstanding options................................ 8,439,000 4,487,000
Reserved for future grants......................... 5,882,000 2,047,000
---------- ----------
14,321,000 6,534,000
Warrants for Series D preferred stock................ 140,000 140,000
Warrants for Series E preferred stock................ 121,000 121,000
Nonplan stock options granted........................ 800,000 --
Convertible preferred stock.......................... 41,939,000 41,939,000
---------- ----------
57,321,000 48,734,000
========== ==========
</TABLE>
9. SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
Through March 31, 1998, the Company operated as one segment. For the year
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.
F-18
<PAGE> 97
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
The Company does not segregate assets or interest expense by segment.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1999
-----------------------------
TELECOM CPG TOTAL
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
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>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1999
-----------------------------
TELECOM CPG TOTAL
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues from external customers............................ $ 45 $ 4,696 $ 4,741
Depreciation expense........................................ $ 38 $ 135 $ 173
Operating segment profit (loss)............................. $(2,088) $ 590 $(1,498)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 2000
-----------------------------
TELECOM CPG TOTAL
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues from external customers............................ $ 4,885 $ 4,897 $ 9,782
Depreciation expense........................................ $ 319 $ 229 $ 548
Operating segment profit (loss)............................. $(7,794) $ 657 $(7,137)
</TABLE>
Operating segment profit and loss excludes amortization of deferred stock
based compensation.
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED ENDED
MARCH 31, DECEMBER 31, MARCH 31, MARCH 31,
1999 1999 1999 2000
----------- ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
LOSS
Total loss for reportable segments...... $(4,666) $(7,462) $(1,498) $ (7,137)
Other income (expense), net............. (303) (81) (96) 224
Amortization of deferred compensation... -- (132) -- (5,548)
------- ------- ------- --------
Loss before income taxes................ $(4,969) $(7,675) $(1,594) $(12,461)
======= ======= ======= ========
GEOGRAPHIC INFORMATION
REVENUES
United States........................... $12,445 $13,214 $ 3,100 $ 6,886
Asia.................................... 2,247 1,629 868 568
Europe.................................. 2,593 3,258 773 2,328
------- ------- ------- --------
Consolidated total.................... $17,285 $18,101 $ 4,741 $ 9,782
======= ======= ======= ========
</TABLE>
F-19
<PAGE> 98
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
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 computation of basic net loss per share
until the time-based vesting restrictions have lapsed.
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS THREE MONTHS
YEARS ENDED ENDED ENDED ENDED
MARCH 31, DECEMBER 31, MARCH 31, MARCH 31,
---------------- ------------ ------------ ------------
1998 1999 1999 1999 2000
------ ------- ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net loss (numerator)..................... $ (286) $(4,971) $(7,677) $(1,596) $(12,461)
====== ======= ======= ======= ========
Shares used in computing historical basic
and diluted net loss per share
(denominator):
Weighted average common shares
outstanding............................ 1,148 2,284 2,468 2,406 9,384
Less shares subject to repurchase........ -- -- -- -- (3,493)
------ ------- ------- ------- --------
Denominator for basic and diluted net
loss per share......................... 1,148 2,284 2,468 2,406 5,891
------ ------- ------- ------- --------
Conversion of preferred stock (pro
forma)................................. 29,755 20,737 41,939
------- ------- --------
Denominator for pro forma basic and
diluted net loss per share............. 32,223 23,143 47,830
======= ======= ========
Historical basic and diluted net loss per
share.................................. $(0.25) $ (2.18) $ (3.11) $ (0.66) $ (2.12)
====== ======= ======= ======= ========
Pro forma basic and diluted net loss per
share.................................. $ (0.24) $ (0.07) $ (0.26)
======= ======= ========
</TABLE>
The Company has excluded the impact of all convertible preferred stock,
common shares subject to repurchase, 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,
27,351,000, 38,193,000, 30,626,000 and 50,180,000 for the years ended March 31,
1998, 1999, the nine-month period ended December 31, 1999, the three-month
periods ended March 31, 1999, and March 31, 2000, respectively.
11. INTERIM FINANCIAL RESULTS (UNAUDITED)
The following table provides financial information for the nine-month
period 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>
F-20
<PAGE> 99
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
12. SUBSEQUENT EVENTS
For the three-month period ended March 31, 2000 the Company made full
recourse loans aggregating approximately $4.1 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 the Company at the original
exercise price if the officer's employment is terminated. At March 31, 2000,
$4.1 million of this amount is included in stockholders' equity and the
remaining $0.4 million has been included in "Other Assets".
In February 2000, the Board of Directors adopted the 2000 Stock Plan (2000
Plan), which was approved by the stockholders in April 2000. The Plan provides
for the grant of stock options to purchase shares of common stock to employees,
directors and consultants. A total of 1,000,000 shares of common stock has been
reserved for issuance plus any shares reserved for issuance under the 1998 and
1999 Stock Plans and any shares returned to the 1998 and 1999 Stock Plans. The
number of shares of common stock reserved for issuance will increase annually
beginning in fiscal 2001.
In February 2000, the Board of Directors adopted the 2000 Director Option
Plan (Directors' Plan), which was approved by the stockholders in April 2000, to
provide for the automatic grant of options to purchase shares of common stock to
non-employee directors who are not employees or consultants of the Company's
affiliates. 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. The Director's Plan generally provides for an
automatic initial grant of an option to purchase 25,000 shares of common stock
to each non-employee director on the date when the person first becomes a
non-employee director on, or after the closing of the initial public offering,
whether through election by the Company's stockholders or appointment by the
Company's Board of Directors to fill a vacancy. In addition, upon the date of
each annual stockholders' meeting subsequent to the date of each non-employee
director's 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.
In February 2000, the Company's Board of Directors approved the 2000
Employee Stock Purchase Plan (Purchase Plan), which was approved by the
Company's stockholders in April 2000. The Purchase Plan will not become
effective until the date of the offering. A total of 1,000,000 shares of common
stock have been reserved for issuance. The number of shares of common stock
reserved for issuance will increase annually beginning in fiscal 2001. 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 for any offering will be no more than 24 months except for the
first purchase period for which the offering period 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.
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. On May 8,
2000 the Company's reincorporation in the state of Delaware was completed. 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 series of preferred stock. The Company's
reincorporation has been reflected in the consolidated financial statements for
all periods presented.
F-21
<PAGE> 100
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
On February 28, 2000, the Company issued 116,000 shares of the Company's
common stock in connection with a business acquisition. A shareholder/employee
of the acquired company received approximately 100,000 of the shares which vest
20% after one year and 1/60 each month thereafter provided the
shareholder/employee is an employee of the Company. The unvested shares are
subject to repurchase by the Company at $5.00 per share if the employee is
terminated. Under Emerging Issues Task Force No. 95-8, "Accounting for
Contingent Consideration Paid to Shareholders of an Acquired Enterprise in a
Purchase Business Combination," this arrangement is, in substance, compensation
for post-combination services rather than additional purchase price. The
$1,300,000 value of approximately 100,000 shares issued was recorded in deferred
compensation and is being amortized into expenses over the vesting period. The
purchase price of $208,000, which is the fair market value of the remaining
approximately 16,000 shares resulted in intangible assets. The acquisition was
accounted for under the purchase method.
On March 10, 2000, a former employee filed a lawsuit against the Company in
Santa Clara Superior Court alleging three causes of action for wrongful
termination in violation of public policy, breach of the covenant of good faith
and fair dealing and fraud. The claims stem from the termination of his
employment with the Company in February 2000. The former employee seeks
unspecified general and special damages, punitive damages, attorneys' fees and
costs in the form of cash and shares of the Company's common stock. The Company
filed a motion to dismiss two of the causes of action for breach of contract and
fraud. A hearing on the motion to dismiss is scheduled for May 16, 2000. The
Company plans to vigorously defend against these claims. The Company has not
accrued any liability related to this lawsuit.
In April 2000, the Company entered into an agreement to acquire a
manufacturing facility in Shenzhen, China. Pursuant to the agreement, the
Company purchased approximately 43% of the facility in Shenzhen for
approximately US$3.7 million and leased the remainder of the facility for a term
of five years from the Shenzhen Libaoyi Industry Development Co., Ltd. with an
option to purchase the leased portion of the facility during the first three
years of the lease term.
In April 2000, the Company entered into negotiations for a senior term loan
facility with Credit Suisse First Boston, New York branch. The facility will
provide for a maximum borrowing of $10,000,000 and will bear interest at the
prime interest rate plus 1 1/2% per year. The Company will be required to pay a
non-refundable arrangement fee of $250,000. In addition, the lender will receive
additional compensation up to $1 million based upon the Company's achievement of
certain revenue targets. The loan will be secured by substantially all of the
Company's assets. The principal and accrued interest on the loan is due in full
six months after the closing of this offering. In the event this offering is not
completed within three months of the closing of this loan facility, the entire
principal amount and accrued interest on the loan will become due.
In April 2000 the Company granted options to purchase 811,475 shares of
common stock. The deferred stock compensation related to these option grants is
approximately $8,900,000.
In May 2000, the Company entered into a three-year supply agreement with
Fuzhou Conet Communication, Inc. ("Conet") to supply the Company with yttrium
vanadate crystals. Under the agreement, the Company will purchase a portion of
its requirements for this crystal from Conet and Conet will commit specified
production capacity to the manufacture of the Company's orders. Additionally,
the Company agreed to advance a total of U.S.$3,500,000 to Conet against future
orders.
In May 2000, the Company entered into negotiations to lease an additional
130,000 square feet of space. Future minimum lease payments under the proposed
lease would be approximately $25,000,000 over the seven year lease term. In
addition, under the terms of the proposed lease, the Company would provide an
irrevocable letter of credit for $3,500,000 as collateral for the performance of
the Company's obligations under the lease. In connection with the lease, the
Company anticipates issuing a two-year warrant to the
F-22
<PAGE> 101
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
lessor to purchase 30,000 shares of the Company's common stock with an exercise
price equal to the Company's initial public offering price. The warrant will be
issued concurrent with the pricing of the Company's initial public offering and
will have an exercise price equal to the offering price to the public and will
be non-forfeitable and immediately exercisable. Also in May 2000 the Company
entered into a sublease for an additional 59,000 square feet of space in San
Jose, California. Under the terms of the sublease the Company is obligated for
approximately $10.1 million over the eight year sublease term. In connection
with the sublease the Company will issue a two-year warrant to the lessor to
purchase 20,000 shares of the Company's common stock concurrent with the pricing
of the Company's initial public offering and with an exercise price equal to the
Company's initial public offering price and will be non-forfeitable and
immediately exercisable.
F-23
<PAGE> 102
Newfocus Logo
<PAGE> 103
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........................................ $ 27,324
NASD filing fee............................................. 9,700
Nasdaq National Market listing fee.......................... 94,000
Printing and engraving costs................................ 300,000
Legal fees and expenses..................................... 500,000
Accounting fees and expenses................................ 300,000
Blue Sky fees and expenses.................................. 3,000
Transfer Agent and Registrar fees........................... 30,000
Miscellaneous expenses...................................... 35,976
----------
Total....................................................... $1,300,000
==========
</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.
The Registrant's Certificate of Incorporation provides for the
indemnification of directors to the fullest extent permissible under Delaware
law.
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 Dr. Milton
Chang at a purchase price of $.005 per share. On April 18, 1990, the Board
of Directors granted Dr. Chang an option
II-1
<PAGE> 104
outside of our Stock Option Plan for 800,000 shares of our Common Stock at
an exercise price of $.0025. Dr. Chang exercised this option on January 19,
2000. Each transaction was exempt from registration in reliance on Section
4(2) of the Securities Act.
(2) From February 28, 1997 through March 31, 2000, (the most recent practicable
date) we granted stock options to acquire an aggregate of 6,438,000,
422,000 and 3,916,400 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. Each transaction
pursuant to our 1990 Incentive Stock Option Plan and our 1999 Stock Plan,
was exempt from registration requirements in reliance on Rule 701
promulgated under Section 3(b) under the Securities Act. Each transaction
pursuant to our 1998 Stock Plan was exempt from registration in reliance on
Section 4(2) of the Securities Act.
(3) From April, 1991 through February, 1992, we issued 8,640,000 shares of
Series A preferred stock to Dr. Milton Chang pursuant to a series of
put-option agreements at a price of $.1250. This transaction was exempt
from registration requirements in reliance on Section 4(2) of the
Securities Act.
(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. This transaction was exempt from
registration in reliance on Section 4(2) of the Securities Act.
(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. This transaction was exempt from registration
in reliance on Section 4(2) of the Securities Act.
(6) On July 24, 1998, we sold 600,000 shares of Series C Preferred Stock
pursuant to a compensatory stock option plan established for the Company's
employees for $.85 per share for an aggregate purchase price of $510,000.
This transaction was 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.
(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. This transaction was exempt from
registration in reliance on Section 4(2) of the Securities Act.
(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. The
issuance of this warrant was exempt from registration in reliance on
Section 4(2) of the Securities Act.
(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. This transaction was exempt from registration in
reliance on Regulation D promulgated under the Securities Act.
(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. The
issuance of the shares was exempt from registration in reliance on Rule 701
promulgated under Section 3(b) under the Securities Act as shares issued
pursuant to a compensatory benefit plan or a written contract relating to
compensation.
(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. This transaction was exempt from registration
requirements in reliance on Regulation D promulgated under the Securities
Act.
(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. This transaction was
II-2
<PAGE> 105
exempt from registration requirements in reliance on Regulation D
promulgated under the Securities Act.
(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. The issuance of the warrants were exempt from registration
requirements in reliance on Section 4(2) of the Securities Act.
(14) On February 28, 2000, we issued 116,000 shares of our common stock to six
persons in connection with the acquisition of UBU Communications, Inc. This
transaction was exempt from registration requirements in reliance on
Section 4(2) of the Securities Act.
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. 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.
4.5 Form of warrant to Purchase Common Stock between Registrant
and Lincoln-RECP Hellyer Opco, LLC, a Delaware LLC.
4.6 Form of warrant to purchase Common Stock between Registrant
and Komag, Incorporated.
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, William L. Potts,
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.
</TABLE>
II-3
<PAGE> 106
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.8+ Agreement on Terms and Conditions of Purchase and Sale of
Optical Components between Registrant and Corning,
Incorporated 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 7, 2000.
10.15** Loan and Security Financing Agreement between Registrant and
Venture Lending and Leasing II, Inc.
10.16** Shenzhen Real Estate Sales and Purchase Contract by and
between the Registrant and Shenzhen Libaoyi Industry
Development Co., Ltd., dated April 6, 2000.
10.17** Shenzhen Futian Free Trade Zone Premises lease by and
between Registrant and Shenzhen Libaoyi Industry Development
Co., Ltd., dated April 6, 2000.
10.18+ Supply Contract by and between the Registrant and Fuzhou
Conet Communication, Inc.
10.19 Sublease Agreement between the Registrant and Komag,
Incorporated, dated May 16, 2000.
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>
- -------------------------
+ The Registrant has requested confidential treatment with respect to certain
portions of this Exhibit. The omitted portions have been separately filed
with the Commission.
** Previously filed.
(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
II-4
<PAGE> 107
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-5
<PAGE> 108
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 7 to the 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 17th day of May, 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 Amendment No. 7 to the 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 May 17, 2000
- -------------------------------------------------------- Officer and Director
Kenneth E. Westrick (Principal Executive
Officer)
* Chief Financial Officer May 17, 2000
- -------------------------------------------------------- (Principal Financial and
William L. Potts, Jr. Accounting Officer)
Director May 17, 2000
- --------------------------------------------------------
Dr. David L. Lee
* Director May 17, 2000
- --------------------------------------------------------
Dr. Milton Chang
* Director May 17, 2000
- --------------------------------------------------------
John Dexheimer
* Director May 17, 2000
- --------------------------------------------------------
Dr. Winston Fu
* Director May 17, 2000
- --------------------------------------------------------
R. Clark Harris
* Director May 17, 2000
- --------------------------------------------------------
Robert D. Pavey
*By: /s/ KENNETH E. WESTRICK
------------------------------------------------
Kenneth E. Westrick
Attorney-in-fact
</TABLE>
II-6
<PAGE> 109
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.
4.5 Form of warrant to Purchase Common Stock between Registrant
and Lincoln-RECP Hellyer Opco, LLC, a Delaware LLC.
4.6 Form of warrant to purchase Common Stock between Registrant
and Komag, Incorporated.
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, William L. Potts,
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 between Registrant and Corning,
Incorporated 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 7, 2000.
10.15** Loan and Security Financing Agreement between Registrant and
Venture Lending and Leasing II, Inc.
10.16** Shenzhen Real Estate Sales and Purchase Contract by and
between the Registrant and Shenzhen Libaoyi Industry
Development Co., Ltd., dated April 6, 2000.
10.17** Shenzhen Futian Free Trade Zone Premises lease by and
between Registrant and Shenzhen Libaoyi Industry Development
Co., Ltd., dated April 6, 2000.
10.18+ Supply Contract by and between the Registrant and Fuzhou
Conet Communication, Inc.
10.19 Sublease Agreement between the Registrant and Komag,
Incorporated, dated May 16, 2000.
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>
- -------------------------
+ The Registrant has requested confidential treatment with respect to certain
portions of this Exhibit. The omitted portions have been separately filed
with the Commission.
** Previously filed.
<PAGE> 1
EXHIBIT 1.1
5,750,000 SHARES
NEW FOCUS, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
May ___, 2000
Credit Suisse First Boston Corporation
Chase Securities, Inc.
CIBC World Markets
U.S. Bancorp Piper Jaffray, Inc.
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010-3629
Dear Sirs:
1. Introductory. New Focus, Inc., a Delaware corporation ("Company"),
proposes to issue and sell 5,000,000 shares ("Firm Securities") of its common
stock ("Securities"). The Company also proposes to issue and sell to the
Underwriters, at the option of the Underwriters, an aggregate of not more than
650,000 additional shares and Timothy Day (the "Selling Stockholder") also
proposes to sell to the Underwriters, at the option of the Underwriters, an
aggregate of not more than 100,000 outstanding shares of the Securities as set
forth below (such 750,000 shares being hereinafter referred to as the "Optional
Securities"). The Firm Securities and the Optional Securities are herein
collectively called the "Offered Securities". As part of the offering
contemplated by this Agreement, Credit Suisse First Boston Corporation ("CSFB"
or the "Designated Underwriter") has agreed to reserve out of the Firm
Securities purchased by it under this Agreement, up to shares, for sale to the
Company's directors, officers, employees and other parties associated with the
Company (collectively, "Participants"), as set forth in the Prospectus (as
defined herein) under the heading "Underwriting" (the "Directed Share Program").
The Firm Securities to be sold by the Designated Underwriter pursuant to the
Directed Share Program (the "Directed Shares") will be sold by the Designated
Underwriter pursuant to this Agreement at the public offering price. Any
Directed Shares not subscribed for by the end of the business day on which this
Agreement is executed will be offered to the public by the Underwriters as set
forth in the Prospectus. The Company and the Selling Stockholder hereby agree
with the several Underwriters named in Schedule A hereto ("Underwriters") as
follows:
<PAGE> 2
2. Representations and Warranties of the Company and the Selling
Stockholder. The Company represents and warrants to, and agrees with, the
several Underwriters that:
(a) A registration statement (No. 333- 31396) relating to the Offered
Securities, including a form of prospectus, has been filed with the
Securities and Exchange Commission ("Commission") and either (i) has been
declared effective under the Securities Act of 1933 ("Act") and is not
proposed to be amended or (ii) is proposed to be amended by amendment or
post-effective amendment. If such registration statement ("initial
registration statement") has been declared effective, either (i) an
additional registration statement ("additional registration statement")
relating to the Offered Securities may have been filed with the Commission
pursuant to Rule 462(b) ("Rule 462(b)") under the Act and, if so filed, has
become effective upon filing pursuant to such Rule and the Offered
Securities all have been duly registered under the Act pursuant to the
initial registration statement and, if applicable, the additional
registration statement or (ii) such an additional registration statement is
proposed to be filed with the Commission pursuant to Rule 462(b) and will
become effective upon filing pursuant to such Rule and upon such filing the
Offered Securities will all have been duly registered under the Act
pursuant to the initial registration statement and such additional
registration statement. If the Company does not propose to amend the
initial registration statement or if an additional registration statement
has been filed and the Company does not propose to amend it, and if any
post-effective amendment to either such registration statement has been
filed with the Commission prior to the execution and delivery of this
Agreement, the most recent amendment (if any) to each such registration
statement has been declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c) ("Rule 462(c)") under the Act
or, in the case of the additional registration statement, Rule 462(b). For
purposes of this Agreement, "Effective Time" with respect to the initial
registration statement or, if filed prior to the execution and delivery of
this Agreement, the additional registration statement means (i) if the
Company has advised the Representatives that it does not propose to amend
such registration statement, the date and time as of which such
registration statement, or the most recent post-effective amendment thereto
(if any) filed prior to the execution and delivery of this Agreement, was
declared effective by the Commission or has become effective upon filing
pursuant to Rule 462(c), or (ii) if the Company has advised the
Representatives that it proposes to file an amendment or post-effective
amendment to such registration statement, the date and time as of which
such registration statement, as amended by such amendment or post-effective
amendment, as the case may be, is declared effective by the Commission. If
an additional registration statement has not been filed prior to the
execution and delivery of this Agreement but the Company has advised the
Representatives that it proposes to file one, "Effective Time" with respect
to such additional registration statement means the date and time as of
which such registration statement is filed and becomes effective pursuant
to Rule 462(b). "Effective Date" with respect to the initial registration
statement or the additional registration statement (if any) means the date
of the Effective Time thereof. The initial registration statement, as
amended at its Effective Time, including all information contained in the
additional registration statement (if any) and deemed to be a part of the
initial registration
2
<PAGE> 3
statement as of the Effective Time of the additional registration statement
pursuant to the General Instructions of the Form S-1 and including all
information (if any) deemed to be a part of the initial registration
statement as of its Effective Time pursuant to Rule 430A(b) ("Rule
430A(b)") under the Act, is hereinafter referred to as the "Initial
Registration Statement". The additional registration statement, as amended
at its Effective Time, including the contents of the initial registration
statement incorporated by reference therein and including all information
(if any) deemed to be a part of the additional registration statement as of
its Effective Time pursuant to Rule 430A(b), is hereinafter referred to as
the "Additional Registration Statement". The Initial Registration Statement
and the Additional Registration Statement are herein referred to
collectively as the "Registration Statements" and individually as a
"Registration Statement". The form of prospectus relating to the Offered
Securities, as first filed with the Commission pursuant to and in
accordance with Rule 424(b) ("Rule 424(b)") under the Act or (if no such
filing is required) as included in a Registration Statement, is hereinafter
referred to as the "Prospectus". No document has been or will be prepared
or distributed in reliance on Rule 434 under the Act.
(b) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (i) on the Effective
Date of the Initial Registration Statement, the Initial Registration
Statement conformed in all material respects to the requirements of the Act
and the rules and regulations of the Commission promulgated thereunder
("Rules and Regulations") and did not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, (ii) on
the Effective Date of the Additional Registration Statement (if any), each
Registration Statement conformed, or will conform, in all material respects
to the requirements of the Act and the Rules and Regulations and did not
include, or will not include, any untrue statement of a material fact and
did not omit, or will not omit, to state any material fact required to be
stated therein or necessary to make the statements therein not misleading
and (iii) on the date of this Agreement, the Initial Registration Statement
and, if the Effective Time of the Additional Registration Statement is
prior to the execution and delivery of this Agreement, the Additional
Registration Statement each conforms, and at the time of filing of the
Prospectus pursuant to Rule 424(b) or (if no such filing is required) at
the Effective Date of the Additional Registration Statement in which the
Prospectus is included, each Registration Statement and the Prospectus will
conform, in all material respects to the requirements of the and the Rules
and Regulations, and neither of such documents includes, or will include,
any untrue statement of a material fact or omits, or will omit, to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading. If the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of this
Agreement: on the Effective Date of the Initial Registration Statement, the
Initial Registration Statement and the Prospectus will conform in all
material respects to the requirements of the Act and the Rules and
Regulations, neither of such documents will include any untrue statement of
a material fact or will omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading,
and no Additional Registration Statement has been or will be filed. The two
preceding sentences do not apply to statements in or omissions from a
Registration Statement or the Prospectus based upon written information
furnished to the Company by any Underwriter through the Representatives
specifically for use therein, it being understood and agreed that the only
such information is that described in Section 7(c) hereof.
3
<PAGE> 4
(c) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware, with
power and authority (corporate and other) to own its properties and conduct
its business as described in the Prospectus; and the Company is duly
qualified to do business as a foreign corporation in good standing in all
other jurisdictions in which its ownership or lease of property or the
conduct of its business requires such qualification, except where the
failure to so qualify would not have a material adverse effect on the
condition (financial or other), business, properties, or results of
operations of the Company and its subsidiaries taken as a whole (a
"Material Adverse Effect").
(d) Each subsidiary of the Company has been duly incorporated and is
an existing corporation in good standing under the laws of the jurisdiction
of its incorporation, with power and authority (corporate and other) to own
its properties and conduct its business as described in the Prospectus; and
each subsidiary of the Company is duly qualified to do business as a
foreign corporation in good standing in all other jurisdictions in which
its ownership or lease of property or the conduct of its business requires
such qualification; all of the issued and outstanding capital stock of each
subsidiary of the Company has been duly authorized and validly issued and
is fully paid and nonassessable; and the capital stock of each subsidiary
owned by the Company, directly or through subsidiaries, is owned free from
liens, encumbrances and defects.
(e) The Offered Securities and all other outstanding shares of
capital stock of the Company have been duly authorized; all outstanding
shares of capital stock of the Company are, and, when the Offered
Securities have been delivered and paid for in accordance with this
Agreement on each Closing Date (as defined below), such Offered Securities
will have been, validly issued, fully paid and nonassessable and will
conform to the description thereof contained in the Prospectus; and the
stockholders of the Company have no preemptive rights with respect to the
Securities.
(f) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person that would
give rise to a valid claim against the Company or any Underwriter for a
brokerage commission, finder's fee or other like payment in connection with
this offering.
(g) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting
such person the right to require the Company to file a registration
statement under the Act with respect to any securities of the Company owned
or to be owned by such person or to require the Company to include such
securities in the securities registered pursuant to a Registration
Statement or in any securities being registered pursuant to any other
registration statement filed by the Company under the Act.
(h) The Offered Securities have been approved for quotation on the
Nasdaq Stock Market's National Market subject to notice of issuance.
(i) No consent, approval, authorization, or order of, or filing with,
any governmental agency or body or any court is required for the
consummation of the
4
<PAGE> 5
transactions contemplated by this Agreement in connection with the issuance
and sale of the Offered Securities by the Company, except such as have been
obtained and made under the Act and such as may be required under state
securities laws.
(j) The execution, delivery and performance of this Agreement, and
the issuance and sale of the Offered Securities will not result in a breach
or violation of any of the terms and provisions of, or constitute a default
under, any statute, any rule, regulation or order of any governmental
agency or body or any court, domestic or foreign, having jurisdiction over
the Company or any subsidiary of the Company or any of their properties, or
any material agreement or instrument to which the Company or any such
subsidiary is a party or by which the Company or any such subsidiary is
bound or to which any of the properties of the Company or any such
subsidiary is subject (except where any such breaches, violations or
defaults individually or in the aggregate would not have a Material Adverse
Effect), or the charter or by-laws of the Company or any such subsidiary,
and the Company has full power and authority to authorize, issue and sell
the Offered Securities as contemplated by this Agreement.
(k) This Agreement has been duly authorized, executed and delivered
by the Company.
(l) Except as disclosed in the Prospectus, the Company and its
subsidiaries have good and marketable title to all real properties and all
other properties and assets owned by them, in each case free from liens,
encumbrances and defects that would materially affect the value thereof or
materially interfere with the use made or to be made thereof by them; and
except as disclosed in the Prospectus, the Company and its subsidiaries
hold any leased real or personal property under valid and enforceable
leases with no exceptions that would materially interfere with the use made
or to be made thereof by them.
(m) The Company and its subsidiaries possess adequate certificates,
authorities or permits issued by appropriate governmental agencies or
bodies necessary to conduct the business now operated by them and have not
received any notice of proceedings relating to the revocation or
modification of any such certificate, authority or permit that, if
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a Material Adverse Effect.
(n) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent that
might have a Material Adverse Effect.
(o) The Company and its subsidiaries own, possess or can acquire on
reasonable terms, adequate trademarks, trade names and other rights to
inventions, know-how, patents, copyrights, confidential information and
other intellectual property (collectively, "Intellectual Property Rights")
necessary to conduct the business now operated by them, or presently
employed by them, and except as disclosed in the Prospectus have not
received any notice of infringement of or conflict with asserted rights of
others with respect to any Intellectual Property Rights that, if determined
5
<PAGE> 6
adversely to the Company or any of its subsidiaries, would individually or
in the aggregate have a Material Adverse Effect.
(p) Except as disclosed in the Prospectus, neither the Company nor
any of its subsidiaries (i) is in violation of any statute, any rule,
regulation, decision or order of any governmental agency or body or any
court, domestic or foreign, relating to the use, disposal or release of
hazardous or toxic substances or relating to the protection or restoration
of the environment or human exposure to hazardous or toxic substances
(collectively, "environmental laws"), (ii) owns or operates any real
property contaminated with any substance that is subject to any
environmental laws, (iii) is liable for any off-site disposal or
contamination pursuant to any environmental laws, or (iv) is subject to any
claim relating to any environmental laws, which violation, contamination,
liability or claim would individually or in the aggregate have a Material
Adverse Effect; and the Company is not aware of any pending investigation
which might lead to such a claim.
(q) Except as disclosed in the Prospectus, there are no pending
actions, suits or proceedings against or affecting the Company, any of its
subsidiaries or any of their respective properties that, if determined
adversely to the Company or any of its subsidiaries, would individually or
in the aggregate have a Material Adverse Effect, or would materially and
adversely affect the ability of the Company to perform its obligations
under this Agreement, or which are otherwise material in the context of the
sale of the Offered Securities; and, no such actions, suits or proceedings
are, to the Company's knowledge, threatened or contemplated.
(r) The financial statements included in each Registration Statement
and the Prospectus present fairly the financial position of the Company and
its consolidated subsidiaries as of the dates shown and their results of
operations and cash flows for the periods shown, and such financial
statements have been prepared in conformity with the generally accepted
accounting principles in the United States applied on a consistent basis
and the schedules included in each Registration Statement present fairly
the information required to be stated therein.
(s) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus there has
been no material adverse change, nor any development or event involving a
prospective material adverse change in the condition (financial or other),
business, properties or results of operations of the Company and its
subsidiaries taken as a whole, and, except as disclosed in or contemplated
by the Prospectus, there has been no dividend or distribution of any kind
declared, paid or made by the Company on any class of its capital stock.
(t) The Company is not and, after giving effect to the offering and
sale of the Offered Securities and the application of the proceeds thereof
as described in the Prospectus, will not be an "investment company" as
defined in the Investment Company Act of 1940.
(u) Furthermore, the Company represents and warrants to the
Underwriters
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<PAGE> 7
that (i) the Registration Statement, the Prospectus and any preliminary
prospectus comply, and any further amendments or supplements thereto will
comply, with any applicable laws or regulations of foreign jurisdictions in
which the Prospectus or any preliminary prospectus, as amended or
supplemented, if applicable, are distributed in connection with the
Directed Share Program, and that (ii) no authorization, approval, consent,
license, order, registration or qualification of or with any government,
governmental instrumentality or court, other than such as have been
obtained, is necessary under the securities law and regulations of foreign
jurisdictions in which the Directed Shares are offered outside the United
States.
(v) The Company has not offered, or caused the Underwriters to offer,
any Offered Securities to any person pursuant to the Directed Share Program
with the specific intent to unlawfully influence (i) a customer or supplier
of the Company to alter the customer's or supplier's level or type of
business with the Company or (ii) a trade journalist or publication to
write or publish favorable information about the Company or its products.
The Selling Stockholder represents and warrants to, and agrees with, the several
Underwriters that:
(a) The Selling Stockholder has and on each Closing Date hereinafter
mentioned will have valid and unencumbered title to the Offered Securities
to be delivered by the Selling Stockholder on such Closing Date and full
right, power and authority to enter into this Agreement and to sell,
assign, transfer and deliver the Offered Securities to be delivered by the
Selling Stockholder on such Closing Date hereunder; and upon the delivery
of and payment for the Offered Securities on each Closing Date hereunder
the several Underwriters will acquire valid and unencumbered title to the
Offered Securities to be delivered by the Selling Stockholder on such
Closing Date.
(b) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (A) on the Effective
Date of the Initial Registration Statement, the Initial Registration
Statement conformed in all respects to the requirements of the Act and the
Rules and Regulations and did not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, (B) on
the Effective Date of the Additional Registration Statement (if any), each
Registration Statement conformed, or will conform, in all respects to the
requirements of the Act and the Rules and Regulations did not include, or
will not include, any untrue statement of a material fact and did not omit,
or will not omit, to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, and (C) on the
date of this Agreement, the Initial Registration Statement and, if the
Effective Time of the Additional Registration Statement is prior to the
execution and delivery of this Agreement, the Additional Registration
Statement each conforms, and at the time of filing of the Prospectus
pursuant to Rule 424(b) or (if no such filing is required) at the Effective
Date of the Additional Registration Statement in which the Prospectus is
included, each Registration Statement and the Prospectus will conform, in
all respects to the requirements of the Act and the Rules and Regulations,
and neither of such documents includes, or will include, any untrue
statement of a material fact or omits, or will omit, to state any material
fact required to be stated therein or necessary to make the
7
<PAGE> 8
statements therein not misleading. If the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of this
Agreement: on the Effective Date of the Initial Registration Statement, the
Initial Registration Statement and the Prospectus will conform in all
respects to the requirements of the Act and the Rules and Regulations,
neither of such documents will include any untrue statement of a material
fact or will omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading. The two
preceding sentences apply only to the extent that any statements in or
omissions from a Registration Statement or the Prospectus are based on
written information furnished to the Company by the Selling Stockholder
specifically for use therein.
(c) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Selling Stockholder and any person
that would give rise to a valid claim against the Selling Stockholder or
any Underwriter for a brokerage commission, finder's fee or other like
payment in connection with this offering.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and the Underwriters agree, severally and not jointly, to purchase
from the Company, at a purchase price of $ per share, the respective numbers of
shares of Firm Securities set forth opposite the names of the Underwriters in
Schedule A hereto.
The Company will deliver the Firm Securities to the Representatives for the
accounts of the Underwriters, against payment of the purchase price in Federal
(same day) funds by official bank check or checks or wire transfer to an account
at a bank acceptable to Credit Suisse First Boston Corporation ("CSFBC") drawn
to the order of the Company at the office of Wilson Sonsini Goodrich & Rosati,
P.C., 650 Page Mill Road Palo Alto, California 94304, at [ ] A.M., New York
time, on [ ], 2000, or at such other time not later than seven full business
days thereafter as CSFBC and the Company determine, such time being herein
referred to as the "First Closing Date". For purposes of Rule 15c6-1 under the
Securities Exchange Act of 1934, the First Closing Date (if later than the
otherwise applicable settlement date) shall be the settlement date for payment
of funds and delivery of securities for all the Offered Securities sold pursuant
to the offering. The certificates for the Firm Securities to be delivered will
be in definitive form, in such denominations and registered in such names as
CSFBC requests and will be made available for checking and packaging at the
office of Wilson, Sonsini, Goodrich & Rosati, P.C. at least 24 hours prior to
the First Closing Date.
In addition, upon written notice from CSFBC given to the Company and the
Selling Stockholder from time to time not more than 30 days subsequent to the
date of the Prospectus, the Underwriters may purchase all or less than all of
the Optional Securities at the purchase price per Security to be paid for the
Firm Securities. The Company and the Selling Stockholder agree, severally and
not jointly, to sell to the Underwriters the respective numbers of Optional
Securities obtained by multiplying the number of Optional Securities specified
in such notice by a fraction the numerator of which is 650,000 in the case of
the Company and 100,000 in the case of the Selling Stockholder and the
denominator of which is the total number of Optional Securities
8
<PAGE> 9
(subject to adjustment by CSFBC to eliminate fractions). Such Optional
Securities shall be purchased from the Company and the Selling Stockholder for
the account of each Underwriter in the same proportion as the number of Firm
Securities set forth opposite such Underwriter's name bears to the total number
of Firm Securities (subject to adjustment by CSFBC to eliminate fractions) and
may be purchased by the Underwriters only for the purpose of covering
over-allotments made in connection with the sale of the Firm Securities. No
Optional Securities shall be sold or delivered unless the Firm Securities
previously have been, or simultaneously are, sold and delivered. The right to
purchase the Optional Securities or any portion thereof may be exercised from
time to time and to the extent not previously exercised may be surrendered and
terminated at any time upon notice by CSFBC to the Company and the Selling
Stockholder.
Certificates in negotiable form for the Offered Securities to be sold by
the Selling Stockholder hereunder have been placed in custody, for delivery
under this Agreement, under a Custody Agreement made with ,
as custodian ("CUSTODIAN"). The Selling Stockholder agrees that the shares
represented by the certificates held in custody for the Selling Stockholder
under such Custody Agreement are subject to the interests of the Underwriters
hereunder, that the arrangements made by the Selling Stockholder for such
custody are to that extent irrevocable, and that the obligations of the Selling
Stockholder hereunder shall not be terminated by operation of law, whether by
the death of the Selling Stockholder or the occurrence of any other event, or in
the case of a trust, by the death of any trustee or trustees or the termination
of such trust. If the Selling Stockholder or any such trustee or trustees should
die, or if any other such event should occur, or if any of such trusts should
terminate, before the delivery of the Offered Securities hereunder, certificates
for such Offered Securities shall be delivered by the Custodian in accordance
with the terms and conditions of this Agreement as if such death or other event
or termination had not occurred, regardless of whether or not the Custodian
shall have received notice of such death or other event or termination.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Company and the Custodian
will deliver the Optional Securities being purchased on each Optional Closing
Date to the Representative for the accounts of the several Underwriters, against
payment of the purchase price therefor in Federal (same day) funds by official
bank check or checks or wire transfer to an account at a bank acceptable to
CSFBC drawn to the order of the Company or the Selling Stockholder at the office
of Wilson Sonsini Goodrich & Rosati, P.C. The certificates for the Optional
Securities being purchased on each Optional Closing Date will be in definitive
form, in such denominations and registered in such names as CSFBC requests upon
reasonable notice prior to such Optional Closing Date and will be made available
for checking and packaging at the office of Wilson Sonsini Goodrich & Rosati,
P.C. a reasonable time in advance of such Optional Closing Date.
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<PAGE> 10
Date. Such payment will be made on each Closing Date with respect to the Offered
Securities purchased on such Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company and the Selling Stockholder. The
Company agrees with the several Underwriters and the Selling Stockholder that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will
file the Prospectus with the Commission pursuant to and in accordance with:
Subparagraph (1) (or, if applicable and if consented to by CSFBC,
subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the second
business day following the execution and delivery of this Agreement or (B) the
fifteenth business day after the Effective Date of the Initial Registration
Statement.
The Company will advise CSFBC promptly of any such filing pursuant to Rule
424(b). If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement and an additional
registration statement is necessary to register a portion of the Offered
Securities under the Act but the Effective Time thereof has not occurred as
of such execution and delivery, the Company will file the additional
registration statement or, if filed, will file a post-effective amendment
thereto with the Commission pursuant to and in accordance with Rule 462(b)
on or prior to 10:00 P.M., New York time, on the date of this Agreement or,
if earlier, on or prior to the time the Prospectus is printed and
distributed to any Underwriter, or will make such filing at such later date
as shall have been consented to by CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to amend
or supplement the initial or any additional registration statement as filed
or the related prospectus or the Initial Registration Statement, the
Additional Registration Statement (if any) or the Prospectus and will not
effect such amendment or supplementation without CSFBC's consent, and the
Company will also advise CSFBC promptly of the effectiveness of each
Registration Statement (if its Effective Time is subsequent to the
execution and delivery of this Agreement) and of any amendment or
supplementation of a Registration Statement or the Prospectus and of the
institution by the Commission of any stop order proceedings in respect of a
Registration Statement and will use its best efforts to prevent the
issuance of any such stop order and to obtain as soon as possible its
lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs as a result of which
the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary at any time to
amend
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<PAGE> 11
the Prospectus to comply with the Act, the Company will promptly notify
CSFBC of such event and will promptly prepare and file with the Commission,
at its own expense, an amendment or supplement which will correct such
statement or omission or an amendment which will effect such compliance.
Neither CSFBC's consent to, nor the Underwriters' delivery of, any such
amendment or supplement shall constitute a waiver of any of the conditions
set forth in Section 6.
(d) As soon as practicable, but not later than the Availability Date
(as defined below), the Company will make generally available to its
security holders an earnings statement covering a period of at least 12
months beginning after the Effective Date of the Initial Registration
Statement (or, if later, the Effective Date of the Additional Registration
Statement) which will satisfy the provisions of Section 11(a) of the Act.
For the purpose of the preceding sentence, "Availability Date" means the
45th day after the end of the fourth fiscal quarter following the fiscal
quarter that includes such Effective Date, except that, if such fourth
fiscal quarter is the last quarter of the Company's fiscal year,
"Availability Date" means the 90th day after the end of such fourth fiscal
quarter.
(e) The Company will furnish to the Representatives copies of each
Registration Statement (4 of which will be signed and will include all
exhibits), each related preliminary prospectus, and, so long as a
prospectus relating to the Offered Securities is required to be delivered
under the Act in connection with sales by any Underwriter or dealer, the
Prospectus and all amendments and supplements to such documents, in each
case in such quantities as CSFBC requests. The Prospectus shall be so
furnished on or prior to 3:00 P.M., New York time, on the business day
following the later of the execution and delivery of this Agreement or the
Effective Time of the Initial Registration Statement. All other documents
shall be so furnished as soon as available. The Company will pay the
expenses of printing and distributing to the Underwriters all such
documents.
(f) The Company will arrange for the qualification of the Offered
Securities for sale under the laws of such jurisdictions as CSFBC
designates and will continue such qualifications in effect so long as
required for the distribution of the Offered Securities.
(g) During the period of 5 years hereafter, the Company will furnish
to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year, a
copy of its annual report to stockholders for such year; and the Company
will furnish to the Representatives (i) as soon as available, a copy of
each report and any definitive proxy statement of the Company filed with
the Commission under the Securities Exchange Act of 1934 (the "Exchange
Act") or mailed to stockholders, and (ii) from time to time, such other
information concerning the Company as CSFBC may reasonably request.
(h) The Company will pay all expenses incident to the performance of
its obligations under this Agreement, for any filing fees and other
expenses (including fees and disbursements of counsel) incurred in
connection with qualification of the Offered Securities for sale under the
laws of such jurisdictions as CSFBC designates and the
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<PAGE> 12
printing of memoranda relating thereto for the filing fee incident to, and
the reasonable fees and disbursements of counsel to the Underwriters in
connection with, the review by the National Association of Securities
Dealers, Inc. (the "NASD") of the Offered Securities, for any travel
expenses of the Company's officers and employees and any other expenses of
the Company in connection with attending or hosting meetings with
prospective purchasers of the Offered Securities, for any transfer taxes on
the sale by the Selling Stockholder of the Offered Securities to the
Underwriters and for expenses incurred in distributing preliminary
prospectuses and the Prospectus (including any amendments and supplements
thereto) to the Underwriters.
(i) For a period of 180 days after the effective date of the
Registration Statement, the Company will not offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, or file with the
Commission a registration statement under the Act relating to, any
additional shares of its Securities or securities convertible into or
exchangeable or exercisable for any shares of its Securities, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of CSFBC, except issuances of
Securities pursuant to the conversion or exchange of convertible or
exchangeable securities or the exercise of warrants or options, in each
case outstanding on the date hereof, grants of employee stock options
pursuant to the terms of a plan in effect on the date hereof, issuances of
Securities pursuant to the exercise of such options or the exercise of any
other employee stock options outstanding on the date hereof; other than a
registration statement on Form S-8.
(j) In connection with the Directed Share Program, the Company will
ensure that the Directed Shares will be restricted to the extent required
by the NASD or the NASD rules from sale, transfer, assignment, pledge or
hypothecation for a period of three months following the date of the
effectiveness of the Registration Statement. The Designated Underwriter
will notify the Company as to which Participants will need to be so
restricted. The Company will direct the transfer agent to place stop
transfer restrictions upon such securities for such period of time.
(k) The Company will pay all fees and disbursements of counsel
incurred by the Underwriters in connection with the Directed Shares Program
and all stamp duties, similar taxes or duties or other taxes, if any,
incurred by the Underwriters in connection with the Directed Share Program.
(j) The Selling Stockholder agrees to deliver to CSFBC, attention:
Transactions Advisory Group on or prior to the First Closing Date a
properly completed and executed United States Treasury Department Form W-9
(or other applicable form or statement specified by Treasury Department
regulations in lieu thereof).
(k) The Selling Stockholder agrees, for a period of 180 days after
the date of the initial public offering of the Offered Securities, not to
offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, any additional shares of the Securities of the Company or
securities convertible into or exchangeable or exercisable for any shares
of Securities, enter into a 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
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<PAGE> 13
consequences of ownership of the Securities, whether any such
aforementioned transaction is to be settled by delivery of the Securities
or such other securities, in cash or otherwise, or publicly disclose the
intention to make any such offer, sale, pledge or disposition, or enter
into any such transaction, swap, hedge or other arrangement, without, in
each case, the prior written consent of CSFBC.
Furthermore, the Company covenants with the Underwriters that the Company
will comply with all applicable securities and other applicable laws, rules and
regulations in each foreign jurisdiction in which the Directed Shares are
offered in connection with the Directed Share Program.
6. Conditions of the Obligations of the Underwriters. The obligations of
the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Stockholder herein, to the
accuracy of the statements of Company officers made pursuant to the provisions
hereof, to the performance by the Company and the Selling Stockholder of their
obligations hereunder and to the following additional conditions precedent:
(a) The Representatives shall have received a letter, dated the date
of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, shall be on or prior to the date of this Agreement or, if the
Effective Time of the Initial Registration Statement is subsequent to the
execution and delivery of this Agreement, shall be prior to the filing of
the amendment or post-effective amendment to the registration statement to
be filed shortly prior to such Effective Time), of Ernst & Young LLP
confirming that they are independent public accountants within the meaning
of the Act and the applicable published Rules and Regulations thereunder
and stating to the effect that:
(i) in their opinion the financial statements and schedules
examined by them and included in the Registration Statements comply as
to form in all material respects with the applicable accounting
requirements of the Act and the related published Rules and
Regulations;
(ii) on the basis of a reading of the latest available interim
financial statements of the Company, inquiries of officials of the
Company who have responsibility for financial and accounting matters
and other specified procedures, nothing came to their attention that
caused them to believe that:
(A) at the date of the latest available balance sheet read
by such accountants, or at a subsequent specified date not more
than three business days prior to the date of this Agreement,
there was any change in the capital stock or any increase in
short-term indebtedness or long-term debt of the Company and its
consolidated subsidiaries or, at the date of the latest available
balance sheet read by such accountants, there was any decrease in
consolidated net current assets or net assets, as compared with
amounts shown on the latest balance sheet included in the
Prospectus; or
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<PAGE> 14
(B) for the period from the closing date of the latest
income statement included in the Prospectus to the closing date
of the latest available income statement read by such accountants
there were any decreases, as compared with the corresponding
period of the previous year in consolidated net sales or net
operating loss in the total or per share amounts of consolidated
net loss;
except in all cases set forth in clauses (A) and (B) above for
changes, increases or decreases which the Prospectus discloses have
occurred or may occur or which are described in such letter; and
(iii) they have compared specified dollar amounts (or percentages
derived from such dollar amounts) and other financial information
contained in the Registration Statements (in each case to the extent
that such dollar amounts, percentages and other financial information
are derived from the general accounting records of the Company and its
subsidiaries subject to the internal controls of the Company's
accounting system or are derived directly from such records by
analysis or computation) with the results obtained from inquiries, a
reading of such general accounting records and other procedures
specified in such letter and have found such dollar amounts,
percentages and other financial information to be in agreement with
such results, except as otherwise specified in such letter.
For purposes of this subsection 6(a), (i) if the Effective Time of the
Initial Registration Statement is subsequent to the execution and delivery
of this Agreement, "Registration Statements" shall mean the initial
registration statement as proposed to be amended by the amendment or
post-effective amendment to be filed shortly prior to its Effective Time,
(ii) if the Effective Time of the Initial Registration Statement is prior
to the execution and delivery of this Agreement but the Effective Time of
the Additional Registration is subsequent to such execution and delivery,
"Registration Statements" shall mean the Initial Registration Statement and
the additional registration statement as proposed to be filed or as
proposed to be amended by the post-effective amendment to be filed shortly
prior to its Effective Time, and (iii) "Prospectus" shall mean the
prospectus included in the Registration Statements.
(b) If the Effective Time of the Initial Registration Statement is
not prior to the execution and delivery of this Agreement, such Effective
Time shall have occurred not later than 10:00 P.M., New York time, on the
date of this Agreement or such later date as shall have been consented to
by CSFBC. If the Effective Time of the Additional Registration Statement
(if any) is not prior to the execution and delivery of this Agreement, such
Effective Time shall have occurred not later than 10:00 P.M., New York
time, on the date of this Agreement or, if earlier, the time the Prospectus
is printed and distributed to any Underwriter, or shall have occurred at
such later date as shall have been consented to by CSFBC. If the Effective
Time of the Initial Registration Statement is prior to the execution and
delivery of this Agreement, the Prospectus shall have been filed with the
Commission in accordance with the Rules and Regulations and Section 5(a) of
this Agreement. Prior to such Closing Date, no stop order suspending the
effectiveness
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<PAGE> 15
of a Registration Statement shall have been issued and no proceedings for
that purpose shall have been instituted or, to the knowledge of the
Company, the Selling Stockholder or the Representatives, shall be
contemplated by the Commission.
(c) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred (i) any change, or any development or event
involving a prospective change, in the condition (financial or other),
business, properties or results of operations of the Company and its
subsidiaries taken as one enterprise which, in the judgment of a majority
in interest of the Underwriters including the Representatives, is material
and adverse and makes it impractical or inadvisable to proceed with
completion of the public offering or the sale of and payment for the
Offered Securities; (ii) any downgrading in the rating of any debt
securities of the Company by any "nationally recognized statistical rating
organization" (as defined for purposes of Rule 436(g) under the Act), or
any public announcement that any such organization has under surveillance
or review its rating of any debt securities of the Company (other than an
announcement with positive implications of a possible upgrading, and no
implication of a possible downgrading, of such rating); (iii) any material
suspension or material limitation of trading in securities generally on the
New York Stock Exchange or the Nasdaq Stock Market's National Market, or
any setting of minimum prices for trading on such exchange, or any
suspension of trading of any securities of the Company on any exchange or
in the over-the-counter market; (iv) any banking moratorium declared by
U.S. Federal or, New York authorities; or (v) any outbreak or escalation of
major hostilities in which the United States is involved, any declaration
of war by Congress or any other substantial national or international
calamity or emergency if, in the judgment of a majority in interest of the
Underwriters including the Representatives, the effect of any such
outbreak, escalation, declaration, calamity or emergency makes it
impractical or inadvisable to proceed with completion of the public
offering or the sale of and payment for the Offered Securities.
(d) The Representatives shall have received an opinion, dated such
Closing Date, of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, counsel for the Company, to the effect that:
(i) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware,
with corporate power and authority to own its properties and conduct
its business as described in the Prospectus; and the Company is duly
qualified to do business as a foreign corporation in good standing in
all other jurisdictions in the United States in which its ownership or
lease of property or the conduct of its business requires such
qualification except where the failure to do so would not have a
Material Adverse Effect on the Company;
(ii) The Offered Securities delivered on such Closing Date and
all other outstanding shares of the Common Stock of the Company have
been duly authorized and validly issued, are fully paid and
nonassessable and conform to the description thereof contained in the
Prospectus; and the stockholders of the Company have no preemptive
rights pursuant to the Company's Certificate of Incorporation or
by-laws, and, to the best of such counsel's knowledge, the
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stockholders of the Company do not have any contractual or other
preemptive rights with respect to the Securities;
(iii) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings known to such counsel between
the Company and any person granting such person the right to require
the Company to file a registration statement under the Act with
respect to any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in the
securities registered pursuant to the Registration Statement or in any
securities being registered pursuant to any other registration
statement filed by the Company under the Act;
(iv) The Company is not and, after giving effect to the offering
and sale of the Offered Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as defined in the Investment Company Act of 1940.
(v) No consent, approval, authorization or order of, or filing
with, any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement or the
Custody Agreement in connection with the issuance or sale of the
Offered Securities by the Company or the Selling Stockholder (other
than as may be required by the NASD or as required by the securities
and Blue Sky laws of the various states and other jurisdictions, as to
which such counsel need not express any opinion), except such as have
been obtained and made under the Act;
(vi) The execution, delivery and performance of this Agreement or
the Custody Agreement and the issuance and sale of the Offered
Securities will not result in a breach or violation of any of the
terms and provisions of, or constitute a default under, any statute,
any rule, regulation or order of any governmental agency or body or
any court having jurisdiction over the Company or any domestic
subsidiary of the Company or any of their properties (except that such
counsel need express no opinion with regard to the securities and Blue
Sky laws of the various states and other jurisdictions to which the
issuance and sale of the Offered Securities may be subject), or any
agreement or instrument to which the Company or any such domestic
subsidiary is a party or by which the Company or any such domestic
subsidiary is bound or to which any of the properties of the Company
or any such domestic subsidiary is subject, or the charter or by-laws
of the Company or any such domestic subsidiary, and the Company has
full power and authority to authorize, issue and sell the Offered
Securities as contemplated by this Agreement;
(vii) The Initial Registration Statement was declared effective
under the Act as of the date and time specified in such opinion, the
Additional Registration Statement (if any) was filed and became
effective under the Act as of the date and time (if determinable)
specified in such opinion, the Prospectus either was filed with the
Commission pursuant to the subparagraph of Rule 424(b) specified in
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<PAGE> 17
such opinion on the date specified therein or was included in the
Initial Registration Statement or the Additional Registration
Statement (as the case may be), and, to the best of the knowledge of
such counsel, no stop order suspending the effectiveness of a
Registration Statement or any part thereof has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the Act, and each Registration Statement and the
Prospectus, and each amendment or supplement thereto (other than the
financial statements and related schedules and financial data therein,
as to which such counsel need express no opinion), as of their
respective effective or issue dates, complied as to form in all
material respects with the requirements of the Act and the Rules and
Regulations. Such counsel's opinion shall also state that although
they do not assume any responsibility for the accuracy, completeness
or fairness of the statements contained in the Registration Statement
or Prospectus, except for those referred to below, no facts have come
to their attention that have caused them to believe that any part of a
Registration Statement or any amendment thereto (other than the
financial statements and related schedules and financial date therein,
as to which such counsel need express no opinion), as of its effective
date or as of such Closing Date, contained any untrue statement of a
material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading or that the Prospectus or any amendment or supplement
thereto (other than the financial statements and related schedules and
financial date therein, as to which such counsel need express no
opinion), as of its issue date or as of such Closing Date, contained
any untrue statement of a material fact or omitted to state any
material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading; the descriptions in the Registration Statements and
Prospectus of statutes, legal and governmental proceedings and
contracts and other documents are accurate and fairly summarize in all
material respects the information required to be shown under the Act
and the Rules and Regulations; nor does such counsel know of any legal
or governmental proceedings required to be described in a Registration
Statement or the Prospectus which are not described in all material
respects therein as required nor does such counsel know of any
contracts or documents of a character required to be described in a
Registration Statement or the Prospectus or to be filed as exhibits to
a Registration Statement which are not described in all material
respects therein and filed as required; and
(viii) This Agreement has been duly authorized, executed and
delivered by the Company.
(e) The Representatives shall have received an opinion, dated such
Closing Date, of each of Cary & Kelly, L.P., Wilson Sonsini Goodrich &
Rosati, and Sierra Patent Group, each patent counsel for the Company, to
the effect that:
(i) The Company is listed in the records of the United States
Patent and Trademark Office as the holder of record of the patents
listed on a schedule to such opinion (the "Patents") and each of the
applications listed on a schedule to such opinion (the
"Applications"). To the knowledge of such counsel, there are
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<PAGE> 18
no claims of third parties to any ownership interest or lien with
respect to any of the Patents or Applications. Such counsel is not
aware of any material defect in form in the preparation or filing of
the Applications on behalf of the Company. To the knowledge of such
counsel, the Applications are being pursued by the Company. To the
knowledge of such counsel, the Company owns as its sole property the
Patents and pending Applications;
(ii) The Company is listed as the sole holder of record of the
foreign patents listed on a schedule to such opinion (the "Foreign
Patents") and each of the applications filed in a foreign jurisdiction
listed on a schedule to such opinion (the "Foreign Applications") is
listed in the appropriate records of each foreign jurisdiction. Such
counsel knows of no claims of third parties to any ownership interest
or lien with respect to the Foreign Patents or Foreign Applications.
Such counsel is not aware of any material defect of form in the
preparation or filing of the Foreign Applications on behalf of the
Company. To the knowledge of such counsel, the Foreign Applications
are being pursued by the Company. To the knowledge of such counsel,
the Company owns as its sole property the Foreign Patents and pending
Foreign Applications;
(iii) Such counsel knows of no reason why the Patents or Foreign
Patents are not valid as issued. Such counsel has no knowledge of any
reason why any patent to be issued as a result of any Application or
Foreign Application would not be valid or would not afford the Company
useful patent protection with respect thereto;
(iv) As to the statements under the captions "Risk Factors-- We
may not be able to protect our proprietary technology, which would
seriously harm our ability to use our proprietary technology to
generate revenue," which could adversely affect our ability to
manufacture and sell our products. "-- We could become subject to
litigation regarding intellectual property rights, which could be
costly and subject us to significant liability. "-- Necessary licenses
of third-party technology may not be available to us or may be very
expensive" and "Business -- Intellectual Property" nothing has come to
the attention of such counsel which caused them to believe that the
above-mentioned sections of the Registration Statement and any
amendment or supplement thereto made available and reviewed by such
counsel, Effective Time and at all times subsequent thereto up to and
on the Closing Date and on any later date on which Optional Securities
are to be purchased, contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; and
(v) Such counsel knows of no material action, suit, claim or
proceeding relating to patents, patent rights or licenses, trademarks
or trademark rights, copyrights, collaborative research, licenses or
royalty arrangements or agreements or trade secrets, know-how or
proprietary techniques, including processes and substances, owned by
or affecting the business or operations of the
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<PAGE> 19
Company which are pending or threatened against the Company or any of
its officers or directors.
(f) The Representatives shall have received an opinion, dated such
Closing Date, of Weil, Gotshal & Manges LLP, special litigation counsel to
the Company, to the effect that:
(i) As to the statements under the captions "Risk Factors - 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," and "Business - Legal Proceedings" nothing has
come to the attention of such counsel which caused them to believe
that the above-mentioned sections of the Registration Statement and
any amendment or supplement thereto made available and reviewed by
such counsel, Effective Time and at all times subsequent thereto up to
and on the Closing Date and on any later date on which Optional
Securities are to be purchased, contained any untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading.
(g) The Representatives shall have received an opinion, dated such
closing Date, of C&I Partners, Guangzhou Branch, special counsel to the
Company, to the effect that:
(i) the Company's subsidiary, New Focus Pacific Co., Ltd. in the
People's Republic of China is duly formed and validly existing as an
independent legal person in good standing under the laws of the
People's Republic of China, and possesses civil legal capacity and
capacity for civil acts.
(h) The Representatives shall have received from Brobeck, Phleger &
Harrison LLP, counsel for the Underwriters, such opinion or opinions, dated
such Closing Date, with respect to the incorporation of the Company, the
validity of the Offered Securities delivered on such Closing Date, the
Registration Statements, the Prospectus and other related matters as the
Representatives may require, and the Company and the Selling Stockholder
shall have furnished to such counsel such documents as they request for the
purpose of enabling them to pass upon such matters.
(i) The Representatives shall have received a certificate, dated such
Closing Date, of the President or any Vice President and a principal
financial or accounting officer of the Company in which such officers, to
the best of their knowledge after reasonable investigation, shall state
that: the representations and warranties of the Company in this Agreement
are true and correct; the Company has complied with all agreements and
satisfied all conditions on its part to be performed or satisfied hereunder
at or prior to such Closing Date; no stop order suspending the
effectiveness of any Registration Statement has been issued and no
proceedings for that purpose have been
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<PAGE> 20
instituted or are contemplated by the Commission; the Additional
Registration Statement (if any) satisfying the requirements of
subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to Rule 462(b),
including payment of the applicable filing fee in accordance with Rule
111(a) or (b) under the Act, prior to the time the Prospectus was printed
and distributed to any Underwriter; and, subsequent to the dates of the
most recent financial statements in the Prospectus, there has been no
material adverse change, nor any development or event involving a
prospective material adverse change, in the condition (financial or other),
business, properties or results of operations of the Company and its
subsidiaries taken as a whole except as set forth in or contemplated by the
Prospectus or as described in such certificate.
(j) The Representatives shall have received a letter, dated such
Closing Date, of Ernst & Young LLP which meets the requirements of
subsection (a) of this Section, except that the specified date referred to
in such subsection will be a date not more than three days prior to such
Closing Date for the purposes of this subsection.
(k) On or prior to the date of this Agreement, the Representatives
shall have received lockup letters from each of the executive officers and
directors of the Company.
(l) The Representative shall have received an opinion, dated such
Closing Date, of [ ], counsel for the Selling Stockholder, to the effect
that:
(i) The Selling Stockholder had valid and unencumbered title to
the Offered Securities delivered by the Selling Stockholder on such
Closing Date and had full right, power and authority to sell, assign,
transfer and deliver the Offered Securities delivered by the Selling
Stockholder on such Closing Date hereunder; and the several
Underwriters have acquired valid and unencumbered title to the Offered
Securities purchased by them from the Selling Stockholder on such
Closing Date hereunder;
(ii) No consent, approval, authorization or order of, or filing
with, any governmental agency or body or any court is required to be
obtained or made by the Selling Stockholder for the consummation of
the transactions contemplated by the Custody Agreement or this
Agreement in connection with the sale of the Offered Securities sold
by the Selling Stockholder, except such as have been obtained and made
under the Act and such as may be required under state securities laws;
(iii) The execution, delivery and performance of the Custody
Agreement and this Agreement and the consummation of the transactions
therein and herein contemplated will not result in a breach or
violation of any of the terms and provisions of, or constitute a
default under, any statute, any rule, regulation or order of any
governmental agency or body or any court having jurisdiction over the
Selling Stockholder or any of his properties or any agreement or
instrument to which the Selling Stockholder is a party or by which the
Selling Stockholder is bound or to which any of the properties of the
Selling Stockholder is subject ;
(iv) The Power of Attorney and related Custody Agreement with
respect to
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<PAGE> 21
the Selling Stockholder has been duly authorized, executed and
delivered by the Selling Stockholder and constitute valid and legally
binding obligations of the Selling Stockholder enforceable in
accordance with their terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights and
to general equity principles; and
(v) This Agreement has been duly authorized, executed and
delivered by the Selling Stockholder.
The Company and the Selling Stockholder will furnish the Representatives with
such conformed copies of such opinions, certificates, letters and documents as
the Representatives reasonably request. CSFBC may in its sole discretion waive
on behalf of the Underwriters compliance with any conditions to the obligations
of the Underwriters hereunder, whether in respect of an Optional Closing Date or
otherwise.
7. Indemnification and Contribution. (a) The Company will indemnify and
hold harmless each Underwriter, its partners, directors and officers and each
person, if any, who controls such Underwriter within the meaning of Section 15
of the Act, against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
each Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred; provided, however,
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement in or omission or alleged omission from
any of such documents in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (b) below; and provided, further,
that with respect to any untrue statement or alleged untrue statement contained
in, or omission or alleged omission from, any preliminary prospectus, the
indemnity contained in this subsection (a) shall not inure to the benefit of any
Underwriter (or to the benefit of any person controlling such Underwriter) from
whom the person asserting any such losses, claims, damages or liabilities
purchased the Offered Securities concerned, to the extent that a prospectus
relating to such Offered Securities was required to be delivered by such
Underwriter under the Act in connection with such purchase and any such loss,
claim, damage or liability results from the fact that there was not sent or
given to such person, at or prior to the written confirmation of such sale of
such Offered Securities to such person, a copy of the Prospectus if the Company
had previously furnished copies thereof to such Underwriters.
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<PAGE> 22
The Company agrees to indemnify and hold harmless the Designated
Underwriter and each person, if any, who controls the Designated Underwriter
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act (the "Designated Entities"), from and against any and all
losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) (i) caused by any untrue statement or
alleged untrue statement of a material fact contained in any material prepared
by or with the consent of the Company for distribution to Participants in
connection with the Directed Share Program or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; (ii) caused by the
failure of any Participant to pay for and accept delivery of Directed Shares
that the Participant agreed to purchase; or (iii) related to, arising out of, or
in connection with the Directed Share Program, other than losses, claims,
damages or liabilities (or expenses relating thereto) that are finally
judicially determined to have resulted from the bad faith or gross negligence of
the Designated Entities.
(b) The Selling Stockholder will indemnify and hold harmless each
Underwriter, its partners, directors and officers and each person who
controls such Underwriter within the meaning of Section 15 of the Act,
against any losses, claims, damages or liabilities, joint or several, to
which such Underwriter may become subject, under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in any Registration
Statement, the Prospectus, or any amendment or supplement thereto, or any
related preliminary prospectus, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading, and will reimburse each Underwriter for any legal or other
expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such loss, claim, damage, liability or
action as such expenses are incurred; and provided, further, that the
Selling Stockholder will not be liable in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement in or omission or alleged
omission from any of such documents in reliance upon and in conformity with
written information furnished to the Company by an Underwriter through the
Representative specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (c) below; provided further
that the liability under this subsection of the Selling Stockholder shall
be limited to an amount equal to the aggregate gross proceeds to the
Selling Stockholder from the sale of the Securities sold by the selling
Stockholder.
(c) Each Underwriter will severally and not jointly indemnify and
hold harmless the
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<PAGE> 23
Company, its directors and officers and each person, if any who controls
the Company within the meaning of Section 15 of the Act, and the Selling
Stockholder against any losses, claims, damages or liabilities to which the
Company or the Selling Stockholder may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in any
Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are
based upon the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through the
Representatives specifically for use therein, and will reimburse any legal
or other expenses reasonably incurred by the Company and the Selling
Stockholder in connection with investigating or defending any such loss,
claim, damage, liability or action as such expenses are incurred, it being
understood and agreed that the only such information furnished by any
Underwriter consists of (i) the following information in the Prospectus
furnished on behalf of each Underwriter: the concession and re-allowance
figures appearing in the fourth paragraph under the caption "Underwriting"
and the information contained in the twelfth paragraph under the caption
"Underwriting."
(d) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is to be made against the indemnifying party
under subsection (a), (b) or (c ) above, notify the indemnifying party of
the commencement thereof; but the omission so to notify the indemnifying
party will not relieve it from any liability which it may have to any
indemnified party otherwise than under subsection (a), (b) or (c) above.
In case any such action is brought against any indemnified party and it
notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the
extent that it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party),
and after notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof, the indemnifying party will
not be liable to such indemnified party under this Section for any legal or
other expenses subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of
investigation. Notwithstanding anything contained herein to the contrary,
if indemnity may be sought pursuant to the last paragraph in Section 7 (a)
hereof in respect of such action or proceeding, then in addition to such
separate firm for the indemnified parties, the indemnifying party shall be
liable for the reasonable fees and expenses of not more than one separate
firm (in addition to any local counsel) for the Designated Underwriter for
the defense of any losses, claims, damages and liabilities arising out of
the Directed Share Program, and all persons, if any, who control the
Designated Underwriter within the meaning of either Section 15 of the Act
of Section 20 of the Exchange Act. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement of
any pending or threatened action in respect
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<PAGE> 24
of which any indemnified party is or could have been a party and indemnity
could have been sought hereunder by such indemnified party unless such
settlement (i) includes an unconditional release of such indemnified party
from all liability on any claims that are the subject matter of such action
and (ii) does not include a statement as to, or an admission of, fault,
culpability or a failure to act by or on behalf of an indemnified party.
(e) If the indemnification provided for in this Section is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a
result of the losses, claims, damages or liabilities referred to in
subsection (a), (b) or (c) above (i) in such proportion as is appropriate
to reflect the relative benefits received by the Company and the Selling
Stockholder on the one hand and the Underwriters on the other from the
offering of the Securities or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company and the Selling
Stockholder on the one hand and the Underwriters on the other in connection
with the statements or omissions which resulted in such losses, claims,
damages or liabilities as well as any other relevant equitable
considerations. The relative benefits received by the Company and the
Selling Stockholder on the one hand and the Underwriters on the other shall
be deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company and the
Selling Stockholder bear to the total underwriting discounts and
commissions received by the Underwriters. The relative fault shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company, the Selling Stockholder or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission. The amount paid by an
indemnified party as a result of the losses, claims, damages or liabilities
referred to in the first sentence of this subsection (e) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any action or claim
which is the subject of this subsection (e). Notwithstanding the provisions
of this subsection (e), no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the
Offered Securities underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. The Underwriters' obligations in this
subsection (e) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(f) The obligations of the Company and the Selling Stockholder under
this Section shall be in addition to any liability which the Company and
the Selling Stockholder may otherwise have and shall extend, upon the same
terms and conditions, to each person, if any, who controls any Underwriter
within the meaning of the Act; and the obligations of
24
<PAGE> 25
the Underwriters under this Section shall be in addition to any liability
which the respective Underwriters may otherwise have and shall extend, upon
the same terms and conditions, to each director of the Company, to each
officer of the Company who has signed a Registration Statement and to each
person, if any, who controls the Company within the meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters default in
their obligations to purchase Offered Securities hereunder on either the First
Closing Date or any Optional Closing Date and the aggregate number of shares of
Offered Securities that such defaulting Underwriter or Underwriters agreed but
failed to purchase does not exceed 10% of the total number of shares of Offered
Securities that the Underwriters are obligated to purchase on such Closing Date,
CSFBC may make arrangements satisfactory to the Company and the Selling
Stockholder for the purchase of such Offered Securities by other persons,
including any of the Underwriters, but if no such arrangements are made by such
Closing Date, the non-defaulting Underwriters shall be obligated severally, in
proportion to their respective commitments hereunder, to purchase the Offered
Securities that such defaulting Underwriters agreed but failed to purchase on
such Closing Date. If any Underwriter or Underwriters so default and the
aggregate number of shares of Offered Securities with respect to which such
default or defaults occur exceeds 10% of the total number of shares of Offered
Securities that the Underwriters are obligated to purchase on such Closing Date
and arrangements satisfactory to CSFBC, the Selling Stockholder and the Company
for the purchase of such Offered Securities by other persons are not made within
36 hours after such default, this Agreement will terminate without liability on
the part of any non-defaulting Underwriter, the Company or the Selling
Stockholder, except as provided in Section 9 (provided that if such default
occurs with respect to Optional Securities after the First Closing Date, this
Agreement will not terminate as to the Firm Securities or any Optional
Securities purchased prior to such termination). As used in this Agreement, the
term Underwriter includes any person substituted for an Underwriter under this
Section. Nothing herein will relieve a defaulting Underwriter from liability for
its default.
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Selling Stockholer, the Company or its officers and of the several Underwriters
set forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation, or statement as to the results thereof,
made by or on behalf of any Underwriter, the Selling Stockholder, the Company or
any of their respective representatives, officers or directors or any
controlling person, and will survive delivery of and payment for the Offered
Securities. If this Agreement is terminated pursuant to Section 8 or if for any
reason the purchase of the Offered Securities by the Underwriters is not
consummated, the Company and the Selling Stockholder shall remain responsible
for the expenses to be paid or reimbursed by it pursuant to Section 5 and the
respective obligations of the Company, the Selling Stockholder and the
Underwriters pursuant to Section 7 shall remain in effect, and if any Offered
Securities have been purchased hereunder the representations and warranties in
Section 2 and all obligations under Section 5 shall also remain in effect. If
the purchase of the Offered Securities by the Underwriters is not consummated
for any reason other than solely because of the termination of this Agreement
pursuant to Section 8 or the occurrence of any event specified in clause (iii),
(iv) or (v) of Section 6(c), the Company and the Selling Stockholder will
reimburse the Underwriters for all out-of-pocket expenses (including fees and
disbursements of counsel) reasonably incurred by them in connection with the
offering of the Offered Securities.
10. Notices. All communications hereunder will be in writing and, if sent
to the Underwriters, will be mailed, delivered or telegraphed and confirmed to
the Representatives, c/o Credit Suisse First Boston Corporation, Eleven Madison
Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking
Department--Transactions Advisory Group, if sent to the Company , will be
mailed, delivered or telegraphed and confirmed to it at New Focus, Inc. 2630
Walsh Avenue, Santa Clara, CA 95051, Attention: Chief Financial Officer with a
copy to Wilson Sonsini Goodrich & Rosati, P.C. 650 Page Mill Road, Palo Alto,
California 94304 Attention Judith M. O'Brien, Esq., or, if sent to the Selling
Stockholder, will be mailed, delivered or telegraphed and confirmed to New
Focus, Inc. 2630 Walsh Avenue, Santa Clara, CA 95051, Attention: Timothy Day;
provided, however, that any notice to an Underwriter pursuant to Section 7 will
be mailed, delivered or telegraphed and confirmed to such Underwriter.
11. Successors. This Agreement will inure to the benefit of and be binding
upon the parties hereto and their respective successors and the officers and
directors and controlling persons referred to in Section 7, and no other person
will have any right or obligation hereunder.
12. Representation of Underwriters. The Representatives will act for the
several Underwriters in connection with this financing, and any action under
this Agreement taken by the Representatives jointly or by CSFBC will be binding
upon all the Underwriters. _____________will act for the Selling Stockholder in
connection with such transactions, and any action under or in respect of this
Agreement taken by _______________will be binding upon the Selling Stockholder.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. Applicable Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York, without regard to principles
of conflicts of laws.
The Company hereby submits to the non-exclusive jurisdiction of the Federal
and state courts in the Borough of Manhattan in The City of New York in any suit
or proceeding arising out of or relating to this Agreement or the transactions
contemplated hereby.
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company one of the
counterparts hereof, whereupon it will become a binding agreement between the
Company, the Selling Stockholder and the several Underwriters in accordance with
its terms.
Very truly yours,
NEW FOCUS, Inc.
By
---------------------------------------
Name: Kenneth E. Westrick
Title: President and Chief Executive
Officer
SELLING STOCKHOLDER
By
---------------------------------------
Name: Timothy Day
25
<PAGE> 26
The foregoing Underwriting Agreement is
hereby confirmed and accepted as of the
date first above written.
Credit Suisse First Boston Corporation
Chase Securities, Inc.
U.S. Bancorp Piper Jaffray, Inc.
CIBC World Markets Corp.
Acting on behalf of themselves and as the
Representatives of the several Underwriters
By CREDIT SUISSE FIRST BOSTON
CORPORATION
By
----------------------------------
Name:
Title:
26
<PAGE> 27
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF OPTIONAL
UNDERWRITER FIRM SECURITIES SECURITIES
----------- --------------- ------------------
<S> <C> <C>
Credit Suisse First Boston Corporation..........
Chase Securities Inc............................
U.S. Bancorp Piper Jaffray, Inc.................
CIBC World Markets Corp.........................
--------------- ------------------
Total..................................
=============== ==================
</TABLE>
<PAGE> 1
EXHIBIT 4.5
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS, AND MAY
NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF
COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH
REGISTRATION IS NOT REQUIRED, EXCEPT AS PROVIDED HEREIN.
NEW FOCUS, INC.
WARRANT TO PURCHASE COMMON STOCK
<TABLE>
<S> <C>
Warrant Holder: Lincoln-RECP Hellyer Opco, LLC, a Delaware LLC
Class of Stock: New Focus, Inc. Common Stock (the "Common Stock")
Number of Shares: 30,000 shares of Common Stock (the "Warrant Shares")
Warrant Exercise Price: The price per share of Common Stock shall be $ ____ (the
"Warrant Exercise Price"), subject to adjustments from time
to time as specified in Section 5, below
Issue Date: May ___, 2000
</TABLE>
THIS WARRANT CERTIFIES THAT, for value received, Lincoln-RECP Hellyer Opco,
LLC, a Delaware LLC, (the "Holder") is entitled to subscribe for and purchase,
subject to the provisions and upon the terms and conditions hereinafter set
forth, 30,000 fully paid and nonassessable shares of Common Stock of New Focus,
Inc., a Delaware corporation (the "Company") at the Warrant Exercise Price
(subject to adjustments from time to time, as specified in Section 5 hereof).
1. Term and Expiration. The purchase right represented by this Warrant is
exercisable, in whole or in part during the period beginning on the Issue Date,
and ending on May __, 2002 (the "Exercise Period").
2. Method of Exercise; Cash Payment; Issuance of New Warrant. Subject to
Section 1, the purchase right represented by this Warrant may be exercised by
the Holder hereof, in whole or in part and from time to time, at the election of
the Holder hereof, by the surrender of this Warrant (with the notice of exercise
substantially in the form attached hereto as Exhibit A duly completed and
executed) at the principal office of the Company and by the payment to the
Company, by cancellation of indebtedness, certified or bank check, or by wire
transfer to an account designated by the Company of an amount equal to the then
applicable Warrant Exercise Price multiplied by the number of shares then being
purchased.
The person or persons in whose name(s) any certificate(s) representing the
shares of Common Stock shall be issuable upon exercise of this Warrant shall be
deemed to have become the holder(s) of record of, and shall be treated for all
purposes as the record holder(s) of, the shares represented thereby (and such
<PAGE> 2
shares shall be deemed to have been issued) immediately prior to the close of
business on the date or dates upon which this Warrant is exercised. In the event
of any exercise of the rights represented by this Warrant, certificates for the
shares of Common Stock so purchased shall be delivered to the Holder hereof as
soon as reasonably practicable and, unless this Warrant has been fully exercised
or expired, a new Warrant representing the portion of such shares, if any, with
respect to which this Warrant shall not then have been exercised shall also be
issued to the Holder hereof as soon as reasonably practicable.
3. Right to Convert Warrant.
(a) Conversion Right. In lieu of the payment set forth in Section 2
above, the Holder shall have the right to convert this Warrant ( the "Conversion
Right"), in whole or in part, at any time during the Exercise Period, into
shares of Common Stock as provided for in this Section 3. Upon exercise of the
Conversion Right, the Company shall deliver to the Holder (without payment by
the Holder of any Warrant Exercise Price) that number of shares of Common Stock
equal to the quotient obtained by dividing (x) the value of the Warrant at the
time the Conversion Right is exercised (determined by subtracting the aggregate
Warrant Exercise Price for the Warrant Shares in effect immediately prior to the
exercise of the Conversion Right from the aggregate Fair Market Value, as
defined below, for the Warrant Shares immediately prior to the exercise of the
Conversion Right) by (y) the Fair Market Value of one share of the Warrant
Shares immediately prior to the exercise of the Conversion Right.
(b) Exercise of the Conversion Right. The Conversion Right may be
exercised by the Holder on any business day during the Exercise Period. Such
exercise shall be effected by (a) the surrender of this Warrant and (b) delivery
of the Notice of Conversion attached hereto as Exhibit B at the office of the
Company.
(c) Effect of Conversion. This Warrant shall be deemed to have been
converted immediately prior to the close of business on the date of its
surrender for conversion as provided above, and the person entitled to receive
the shares of Common Stock issuable upon such conversion shall be treated for
all purposes as the holder of record of such shares as of the close of business
on such date. As promptly as practicable on or after such date, the Company, at
its expense, shall issue and deliver to the person or persons entitled to
receive the same a certificate or certificates for the number of shares issuable
upon such conversion.
(d) Fair Market Value. Fair Market Value of a Warrant Share as of a
particular date (the "Determination Date") shall mean the Fair Market Value of a
share of the Company's Common Stock as of such Determination Date multiplied by
the number of shares of Common Stock into which a Warrant Share is then
convertible. Fair Market Value of a share of Common Stock as of a Determination
Date shall mean:
(i) If the Company's Common Stock is traded on an exchange or is
quoted on the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") National Market System, then the closing or last sale
price, respectively, reported for the business day immediately preceding the
Determination Date.
(ii) If the Company's Common Stock is not traded on an exchange
or on the NASDAQ National Market System but is traded in the over-the-counter
market, then the mean of the closing bid and asked prices reported for the
business day immediately preceding the Determination Date.
-2-
<PAGE> 3
(iii) If the Determination Date is the date on which the
Company's Common Stock is first sold to the public by the Company in a firm
commitment public offering under the Securities Act of 1933, as amended, then
the initial public offering price (before deducting commissions, discounts or
expenses) at which the Common Stock is sold in such offering.
(iv) Otherwise, as determined in good faith by the Company's
Board of Directors upon a review of relevant factors, including, without
limitation, the price per share that the Company could obtain from a willing
third party buyer for shares of Common Stock sold by the Company and
communicated in writing to the Holder upon Holder 's written request. If this
Warrant shall have deemed to be "net exercised" pursuant to the terms of Section
3 hereof and this Section 3 (d)(iv) is invoked, then the good faith
determination by the Company's Board of Directors of the fair market value of
one share of Warrant Stock shall be final and binding on the Holder.
4. Stock Fully Paid; Reservation of Shares. All shares of Common Stock
that may be issued upon the exercise of the rights represented by this Warrant
will, upon issuance pursuant to the terms and conditions herein, be fully paid
and nonassessable, and free from all preemptive rights, taxes, liens and charges
with respect to the issue thereof. During the Exercise Period, the Company will
at all times have authorized, and reserved for the purpose of the issue upon
exercise of the purchase rights evidenced by this Warrant, a sufficient number
of shares of its capital stock to provide for the exercise of the rights
represented by this Warrant.
5. Adjustment of Warrant Exercise Price and Number of Shares. The number
and kind of securities purchasable upon the exercise of this Warrant and the
Warrant Exercise Price shall be subject to adjustment from time to time upon the
occurrence of certain events, as follows:
(a) Reclassification. In case of any reclassification or change of
securities of the class issuable upon exercise of this Warrant (other than a
change in par value, or from par value to no par value, or from no par value to
par value), or as a result of a subdivision or combination or any
reorganization, merger or sale of all or substantially all of the assets of the
Company, the Company shall duly execute and deliver to the holder of this
Warrant a new Warrant (in form and substance satisfactory to the Holder of this
Warrant), so that the Holder of this Warrant shall have the right to receive, at
a total purchase price not to exceed that payable upon the exercise of the
unexercised portion of this Warrant, and in lieu of the shares of Common Stock
theretofore issuable upon exercise of this Warrant, the kind and amount of
shares of stock, other securities, money and property receivable by a holder of
the number of shares then purchasable under this Warrant upon such
reclassification, change, reorganization, merger or sale of all or substantially
all of the assets of Company. Such new Warrant shall provide for adjustments
that shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Section 5. The provisions of this subparagraph (a) shall
similarly apply to successive reclassifications or changes.
(b) Stock Splits or Combination of Shares. If the Company at any time
while this Warrant remains outstanding and unexpired shall subdivide or combine
its outstanding shares of capital stock into which this Warrant is exercisable,
the Warrant Exercise Price shall be proportionately decreased in the case of a
subdivision or increased in the case of a combination, effective at the close of
business on the date the subdivision or combination becomes effective. The
provisions of this subparagraph (b) shall similarly apply to successive stock
splits or combinations of outstanding shares.
-3-
<PAGE> 4
(c) Stock Dividends and Other Distributions. If the Company at any
time while this Warrant is outstanding and unexpired shall (i) pay a dividend
with respect to Common Stock payable in Common Stock, then the Warrant Exercise
Price shall be adjusted, from and after the date of determination of
stockholders entitled to receive such dividend or distribution, to that price
determined by multiplying the Warrant Exercise Price in effect immediately prior
to such date of determination by a fraction (A) the numerator of which shall be
the total number of shares of Common Stock outstanding immediately prior to such
dividend or distribution, and (B) the denominator of which shall be the total
number of shares of Common Stock outstanding immediately after such dividend or
distribution; or (ii) make any other distribution with respect to Common Stock
(except any distribution specifically provided for in Sections 5(a) and 5(b)
above), then, in each such case, provision shall be made by the Company such
that the holder of this Warrant shall receive upon exercise of this Warrant a
proportionate share of any such dividend or distribution as though it were the
holder of Common Stock as of the record date fixed for the determination of the
stockholders of the Company entitled to receive such dividend or distribution.
The provisions of this subparagraph (c) shall similarly apply to successive
stock dividends and other distributions by the Company.
Upon each adjustment in the Warrant Exercise Price specified in Sections
5(a), (b) or (c) above, the number of shares of Common Stock purchasable
hereunder shall be adjusted, to the nearest whole share, to the product obtained
by multiplying the number of shares of Common Stock purchasable immediately
prior to such adjustment in the Warrant Exercise Price by a fraction, the
numerator of which shall be the Warrant Exercise Price immediately prior to such
adjustment and the denominator of which shall be the Warrant Exercise Price
immediately thereafter.
6. Notice of Adjustments. Whenever the Warrant Exercise Price or the
number of shares of Common Stock purchasable hereunder shall be adjusted
pursuant to Section 5 hereof, the Company shall notify the Holder of the
adjustment, the method by which such adjustment was calculated, and the Warrant
Exercise Price and the number of shares of Common Stock purchasable hereunder
after giving effect to such adjustment.
7. Fractional Shares. No fractional shares will be issued in connection
with any exercise hereunder, but in lieu of such fractional shares the Company
shall make a cash payment therefor based on the fair value of such shares on the
date of exercise as reasonably determined at the sole discretion of and in good
faith by the Company's Board of Directors.
8. Compliance with Securities Act of 1933. The Holder of this Warrant, by
acceptance hereof, agrees that this Warrant, and the shares of Common Stock to
be issued upon exercise hereof (and the securities issuable, directly or
indirectly, upon conversion of the Common Stock), are being acquired for
investment and that such holder will not offer, sell or otherwise dispose of
this Warrant, or any such shares except under circumstances which will not
result in a violation of the Securities Act or any applicable state securities
laws. Upon exercise of this Warrant, unless the shares being acquired are
registered under the Securities Act and any applicable state securities laws or
an exemption from such registration is available, the holder hereof shall
confirm in writing that the shares so purchased are being acquired for
investment and not with a view toward distribution or resale in violation of the
Securities Act and shall confirm such other matters related thereto as may be
reasonably requested by the Company. The shares of Common Stock issued upon
exercise of this Warrant (and the securities issuable, directly or indirectly,
upon conversion of the Common Stock) shall be stamped or imprinted with a legend
in substantially the following form (unless registered under the Securities Act
and any applicable state securities laws):
-4-
<PAGE> 5
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, (THE "ACT") OR ANY STATE SECURITIES LAWS. SUCH SHARES MAY NOT
BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF SUCH REGISTRATION OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY AND ITS COUNSEL
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT. COPIES OF THE
AGREEMENTS COVERING THE PURCHASE OF THESE SHARES AND RESTRICTING THEIR
TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER
OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF NEW FOCUS SOLUTIONS, INC.
AT THE PRINCIPAL EXECUTIVE OFFICE OF THE COMPANY."
9. Transferability/Assignment. This Warrant and all rights hereunder may
be assigned by the Company in connection with a merger, reorganization,
reincorporation, sale of assets or similar event, but may only be transferred or
assigned, in whole or in part, by the Holder, subject to compliance with
applicable federal and state securities laws, (i) to any partner, member,
subsidiary or affiliate of the Holder; (ii) to any successors or assigns in
connection with any merger, sale of assets, reorganization, or similar event or
to an affiliate of such assignee or successor, without charge to the Holder and
without the requirement of an opinion of counsel, upon surrender of this Warrant
provided that (a) the transferee or assignee of such Warrant agrees in writing
for the benefit of the Company to comply with all terms and obligations of this
Warrant; and (b) that the Company is given written notice by the Holder within
five (5) business days of said transfer or assignment of this Warrant, stating
the name, address and relationship of said transferee or assignee; and (iii) to
any third party to which the Company agrees in writing, provided that the Holder
provides a legal opinion as to the compliance with applicable securities laws,
which is reasonably acceptable to the Company and its counsel.
10. Limited Rights as Stockholders; Information. No holder of this
Warrant, as such, prior to exercise thereof shall be entitled to vote or receive
dividends or be deemed the holder of shares, nor shall anything contained herein
be construed to confer upon the Holder of this Warrant, as such, any of the
rights of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting thereof,
or to receive notice of meetings, or to receive dividends or subscription rights
or otherwise until this Warrant shall have been exercised and the shares of
Common Stock purchasable upon the exercise hereof shall have become deliverable,
as provided herein.
11. Representations and Warranties of the Company.
(a) Organization of the Company. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware; has all requisite power and authority to own or lease its properties
and to carry on its business as now conducted and proposed to be conducted; and
is duly qualified or licensed to do business as a foreign corporation in good
standing in each jurisdictions in which it conducts business and where the
failure to be so qualified or licensed would have a material adverse effect on
the business, assets.
(b) Authority. The Company has all requisite power and authority to
enter into and perform all of its obligations under this Warrant, to issue this
Warrant and to carry out the transactions contemplated
-5-
<PAGE> 6
hereby. The execution and delivery by the Company of this Warrant and the
performance of all obligations of the Company hereunder, have been duly
authorized by all necessary corporate or stockholder action on the part of the
Company and this Warrant is not inconsistent with the Company's certificate of
incorporation or bylaws. The Warrant constitutes the legal, valid and binding
obligation of the Company, and is enforceable in accordance with its terms,
except as limited by applicable bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance, or other laws of general application
affecting enforcement of creditors' rights generally and as may be limited by
laws relating to the availability of specific performance, injunctive relief or
other equitable remedies.
(c) Valid Reservation and Issuance of Warrant Shares. The Warrant
Shares have been duly and validly reserved and, when issued in accordance with
the provisions of this Warrant, will be validly issued, fully paid and
non-assessable, and will be free of any taxes, liens, charges or encumbrances of
any nature whatsoever; provided, however, that the Common Stock issuable
pursuant to this Warrant may be subject to restrictions on transfer under
applicable state and/or federal securities laws. The Company covenants and
agrees that at all times it shall reserve and keep available for the exercise of
this Warrant such number of authorized shares of Common Stock as are sufficient
to permit the exercise in full of this Warrant.
(d) Good Faith. The Company will not, by amendment of its certificate
of incorporation or bylaws, or through reorganization, consolidation, merger,
dissolution, issue or sale of securities, sale of assets or any other voluntary
action, willfully avoid or seek to avoid the observance or performance of any of
the terms hereof, but will at all times in good faith assist in the carrying out
of all such terms and in the taking of all such actions as may be necessary or
appropriate in order to protect the rights of the Holder under the Warrants
against wrongful impairment. Without limiting the generality of the foregoing,
the Company: (i) will not set nor increase the par value of any Warrant Shares
above the amount payable therefor upon such exercise, and (ii) will take all
actions that are necessary or appropriate in order that the Company may validly
and legally issue fully paid and nonassessable Warrant Shares upon the exercise
of the Warrant.
(e) NASDAQ Listing. Prior to the issuance of any shares of Common
Stock upon exercise of this Warrant, the Company shall secure the listing of
such shares of Common Stock upon any securities exchange upon which the shares
of Common Stock are then listed.
12. Modification and Waiver; Effect of Amendment or Waiver. This Warrant
and any provision hereof may be changed, waived, discharged or terminated with
the written consent of the Company and the holders of a majority of shares of
the Common Stock issued or issuable upon exercise of the Warrant. Any waiver or
amendment effected in accordance with this Section 12 shall be binding upon each
holder of any Shares purchased under this Warrant at the time outstanding
(including securities into which such Shares have been converted), each future
holder of all such Shares, and the Company. The holder of this Warrant hereby
acknowledges that by operation of this Section 12, the holders of a majority of
the Shares purchased under this Warrant will have the right and power to
diminish or eliminate the rights of such holder under this Warrant.
13. Notices. Any notice, request, communication or other document required
or permitted to be given or delivered to the Holder hereof or the Company shall
be delivered, or shall be sent by certified or registered mail, postage prepaid,
to each such holder at its address as shown on the books of the Company or to
the Company at the address indicated therefor on the signature page of this
Warrant.
-6-
<PAGE> 7
14. Binding Effect on Successors. The obligations of the Company relating
to the shares of Common Stock issuable upon the exercise or conversion of this
Warrant shall survive the exercise, conversion and termination of this Warrant
and all of the covenants and agreements of the Company pursuant to this Warrant
shall inure to the benefit of the successors and assigns of the Holder hereof.
15. Lost Warrants or Stock Certificates. The Company covenants to the
Holder hereof that, upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant or any
stock certificate and, in the case of any such loss, theft or destruction, upon
receipt of an indemnity reasonably satisfactory to the Company, or in the case
of any such mutilation upon surrender and cancellation of such Warrant or stock
certificate, the Company will make and deliver a new Warrant or stock
certificate, in lieu of the lost, stolen, destroyed or mutilated Warrant or
stock certificate.
16. Descriptive Headings. The descriptive headings of the several
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant. The language in this Warrant shall be
construed as to its fair meaning without regard to which party drafted this
Warrant.
17. Governing Law. This Warrant shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws of
the State of California.
18. Severability. The invalidity or unenforceability of any provision of
this Warrant in any jurisdiction shall not affect the validity or enforceability
of such provision in any other jurisdiction, or affect any other provision of
this Warrant, which shall remain in full force and effect.
19. Counterparts. This Warrant may be executed in counterparts, each of
which shall be an original, but all of which together shall
constitute one instrument.
-7-
<PAGE> 8
20. Entire Agreement. This Warrant constitutes the entire agreement
between the parties pertaining to the subject matter contained in it and
supersedes all prior and contemporaneous agreements, representations, and
undertakings of the parties, whether oral or written, with respect to such
subject matter.
NEW FOCUS, INC.,
a Delaware corporation
By:
Kenneth E. Westrick, President
Address: 2630 Walsh Avenue
Santa Clara, California 95051
Accepted and Agreed:
LINCOLN-RECP HELLYER OPCO, LLC, A DELAWARE LLC
- ----------------------------------------------
Address: c/o Legacy Partners Commercial
400 East Third
Foster City, California 94404
Attn: Rick Wada, Asset Manager
Phone: (650) 571-2200
Fax: (650) 571-2211
-8-
<PAGE> 9
EXHIBIT A
NOTICE OF EXERCISE
To: New Focus, Inc. (the "Company")
1. The undersigned hereby elects to purchase __________ shares of Common
Stock of the Company pursuant to the terms of the attached Warrant, and tenders
herewith payment of the purchase price of such shares in full.
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name or names as are specified
below:
----------------------------------------
(Name)
----------------------------------------
(Address)
----------------------------------------
(City, State)
3. The undersigned represents that the aforesaid shares being acquired
for the account of the undersigned for investment and not with a view to, or for
resale in connection with, the distribution thereof and that the undersigned has
no present intention of distributing or reselling such shares, all except as in
compliance with applicable securities laws.
- -----------------------------
(Date)
----------------------------------------
(Signature)
<PAGE> 10
EXHIBIT B
NOTICE OF CONVERSION
TO: NEW FOCUS, INC.
(1) The undersigned hereby elects to convert the attached Warrant to the
extent of __________ shares of Common Stock of New Focus, Inc. pursuant to the
terms of the attached Warrant.
(2) In connection with the purchase of the Common Stock (the
"Securities"), I, the Purchaser, represent to the Company the following:
(a) I am aware of the Company's business affairs and financial
condition, and have acquired sufficient information about the Company to reach
an informed and knowledgeable decision to acquire the Securities. I am
purchasing these Securities for my own account for investment purposes only and
not with a view to, or for the resale in connection with, any "distribution"
thereof for purposes of the Securities Act of 1933 ("Securities Act").
(b) I understand that the Securities have not been registered under
the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of my
investment intent as expressed herein. In this connection, I understand that, in
the view of the Securities and Exchange Commission ("SEC"), the statutory basis
for such exemption may be unavailable if my representation was predicated solely
upon a present intention to hold these Securities for the minimum capital gains
period specified under tax statutes, for a deferred sale, for or until an
increase or decrease in the market price of the Securities, or for a period of
one year or any other fixed period in the future.
(c) I further understand that the Securities must be held
indefinitely unless subsequently registered under the Securities Act or unless
an exemption from registration is otherwise available. Moreover, I understand
that the Company is under no obligation to register the Securities. In addition,
I understand that the certificate evidencing the Securities will be imprinted
with a legend which prohibits the transfer of the Securities unless they are
registered or such registration is not required in the opinion of counsel for
the Company.
(d) I am aware of the provisions of Rule 144, promulgated under the
Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering subject
to the satisfaction of certain conditions.
(e) I further understand that at the time I wish to sell the
Securities there may be no public market upon which to make such a sale.
(f) I further understand that in the event all of the requirements of
Rule 144 are not satisfied, registration under the Securities Act or some other
registration exemption will be required; and that, notwithstanding the fact that
Rule 144 is not exclusive, the Staff of the SEC has expressed its opinion
<PAGE> 11
that persons proposing to sell private placement securities other than in a
registered offering and otherwise than pursuant to Rule 144 will have a
substantial burden of proof in establishing that an exemption from registration
is available for such offers or sales, and that such persons and their
respective brokers who participate in such transactions do so at their own risk.
(3) Please issue a certificate or certificates representing said shares of
Common Stock in the name of the undersigned or in such other name as is
specified below:
Print Name:
-----------------------------------
Sign Name:
-----------------------------------
Date:
-------------------
-2-
<PAGE> 1
Exhibit 4.6
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS,
AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE
REGISTRATION STATEMENT THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN
OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY AND ITS COUNSEL,
THAT SUCH REGISTRATION IS NOT REQUIRED, EXCEPT AS PROVIDED HEREIN.
NEW FOCUS, INC.
WARRANT TO PURCHASE COMMON STOCK
<TABLE>
<S> <C>
Warrant Holder: Komag, Incorporated
Class of Stock: New Focus, Inc. Common Stock (the "Common Stock")
Number of Shares: 20,000 shares of Common Stock (the "Warrant Shares")
Warrant Exercise Price: The price per share of Common Stock shall be $ ____ (the "Warrant Exercise
Price"), subject to adjustments from time to time as specified in Section 5,
below
Issue Date: May ___, 2000
</TABLE>
THIS WARRANT CERTIFIES THAT, for value received, Komag Incorporated, (the
"Holder") is entitled to subscribe for and purchase, subject to the provisions
and upon the terms and conditions hereinafter set forth, 20,000 fully paid and
nonassessable shares of Common Stock of New Focus, Inc., a Delaware corporation
(the "Company") at the Warrant Exercise Price (subject to adjustments from time
to time, as specified in Section 5 hereof) (such agreement, the "Warrant").
1. Term and Expiration. The purchase right represented by this Warrant is
exercisable, in whole or in part during the period beginning on the Issue Date,
and ending on May __, 2002 (the "Exercise Period").
2. Method of Exercise; Cash Payment; Issuance of New Warrant. Subject to
Section 1, the purchase right represented by this Warrant may be exercised by
the Holder hereof, in whole or in part and from time to time, at the election of
the Holder hereof, by the surrender of this Warrant (with the notice of exercise
substantially in the form attached hereto as Exhibit A duly completed and
executed) at the principal office of the Company and by the payment to the
Company, by cancellation of indebtedness, certified or bank check, or by wire
transfer to an account designated by the Company of an amount equal to the then
applicable Warrant Exercise Price multiplied by the number of shares then being
purchased.
The person or persons in whose name(s) any certificate(s) representing the
shares of Common Stock shall be issuable upon exercise of this Warrant shall be
deemed to have become the holder(s) of record of, and shall be treated for all
purposes as the record holder(s) of, the shares represented thereby (and such
shares shall be deemed to have been issued) immediately prior to the close of
business on the date or dates upon which this Warrant is exercised. In the event
of any exercise of the rights represented by this Warrant,
<PAGE> 2
certificates for the shares of Common Stock so purchased shall be delivered to
the Holder hereof as soon as reasonably practicable and, unless this Warrant has
been fully exercised or expired, a new Warrant representing the portion of such
shares, if any, with respect to which this Warrant shall not then have been
exercised shall also be issued to the Holder hereof as soon as reasonably
practicable.
3. Right to Convert Warrant.
(a) Conversion Right. In lieu of the payment set forth in Section 2
above, the Holder shall have the right to convert this Warrant ( the "Conversion
Right"), in whole or in part, at any time during the Exercise Period, into
shares of Common Stock as provided for in this Section 3. Upon exercise of the
Conversion Right, the Company shall deliver to the Holder (without payment by
the Holder of any Warrant Exercise Price) that number of shares of Common Stock
equal to the quotient obtained by dividing (x) the value of the Warrant at the
time the Conversion Right is exercised (determined by subtracting the aggregate
Warrant Exercise Price for the Warrant Shares in effect immediately prior to the
exercise of the Conversion Right from the aggregate Fair Market Value, as
defined below, for the Warrant Shares immediately prior to the exercise of the
Conversion Right) by (y) the Fair Market Value of one share of the Warrant
Shares immediately prior to the exercise of the Conversion Right.
(b) Exercise of the Conversion Right. The Conversion Right may be
exercised by the Holder on any business day during the Exercise Period. Such
exercise shall be effected by (a) the surrender of this Warrant and (b) delivery
of the Notice of Conversion attached hereto as Exhibit B at the office of the
Company.
(c) Effect of Conversion. This Warrant shall be deemed to have been
converted immediately prior to the close of business on the date of its
surrender for conversion as provided above, and the person entitled to receive
the shares of Common Stock issuable upon such conversion shall be treated for
all purposes as the holder of record of such shares as of the close of business
on such date. As promptly as practicable on or after such date, the Company, at
its expense, shall issue and deliver to the person or persons entitled to
receive the same a certificate or certificates for the number of shares issuable
upon such conversion.
(d) Fair Market Value. Fair Market Value of a Warrant Share as of a
particular date (the "Determination Date") shall mean the Fair Market Value of a
share of the Company's Common Stock as of such Determination Date multiplied by
the number of shares of Common Stock into which a Warrant Share is then
convertible. Fair Market Value of a share of Common Stock as of a Determination
Date shall mean:
(i) If the Company's Common Stock is traded on an exchange or is
quoted on the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") National Market System, then the closing or last sale
price, respectively, reported for the business day immediately preceding the
Determination Date.
(ii) If the Company's Common Stock is not traded on an exchange
or on the NASDAQ National Market System but is traded in the over-the-counter
market, then the mean of the closing bid and asked prices reported for the
business day immediately preceding the Determination Date.
(iii) If the Determination Date is the date on which the
Company's Common Stock is first sold to the public by the Company in a firm
commitment public offering under the Securities Act of 1933, as amended, then
the initial public offering price (before deducting commissions, discounts or
expenses) at which the Common Stock is sold in such offering.
2
<PAGE> 3
(iv) Otherwise, as determined in good faith by the Company's
Board of Directors upon a review of relevant factors, including, without
limitation, the price per share that the Company could obtain from a willing
third party buyer for shares of Common Stock sold by the Company and
communicated in writing to the Holder upon Holder's written request. If this
Warrant shall have deemed to be "net exercised" pursuant to the terms of Section
3 hereof and this Section 3 (d)(iv) is invoked, then the good faith
determination by the Company's Board of Directors of the fair market value of
one share of Warrant Stock shall be final and binding on the Holder.
4. Stock Fully Paid; Reservation of Shares. All shares of Common Stock
that may be issued upon the exercise of the rights represented by this Warrant
will, upon issuance pursuant to the terms and conditions herein, be fully paid
and nonassessable, and free from all preemptive rights, taxes, liens and charges
with respect to the issue thereof. During the Exercise Period, the Company will
at all times have authorized, and reserved for the purpose of the issue upon
exercise of the purchase rights evidenced by this Warrant, a sufficient number
of shares of its capital stock to provide for the exercise of the rights
represented by this Warrant.
5. Adjustment of Warrant Exercise Price and Number of Shares. The number
and kind of securities purchasable upon the exercise of this Warrant and the
Warrant Exercise Price shall be subject to adjustment from time to time upon the
occurrence of certain events, as follows:
(a) Reclassification. In case of any reclassification or change of
securities of the class issuable upon exercise of this Warrant (other than a
change in par value, or from par value to no par value, or from no par value to
par value), or as a result of a subdivision or combination or any
reorganization, merger or sale of all or substantially all of the assets of the
Company, the Company shall duly execute and deliver to the holder of this
Warrant a new warrant (in form and substance satisfactory to the Holder of this
Warrant), so that the Holder of this Warrant shall have the right to receive, at
a total purchase price not to exceed that payable upon the exercise of the
unexercised portion of this Warrant, and in lieu of the shares of Common Stock
theretofore issuable upon exercise of this Warrant, the kind and amount of
shares of stock, other securities, money and property receivable by a holder of
the number of shares then purchasable under this Warrant upon such
reclassification, change, reorganization, merger or sale of all or substantially
all of the assets of Company. Such new warrant shall provide for adjustments
that shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Section 5. The provisions of this subparagraph (a) shall
similarly apply to successive reclassifications or changes.
(b) Stock Splits or Combination of Shares. If the Company at any time
while this Warrant remains outstanding and unexpired shall subdivide or combine
its outstanding shares of capital stock into which this Warrant is exercisable,
the Warrant Exercise Price shall be proportionately decreased in the case of a
subdivision or increased in the case of a combination, effective at the close of
business on the date the subdivision or combination becomes effective. The
provisions of this subparagraph (b) shall similarly apply to successive stock
splits or combinations of outstanding shares.
(c) Stock Dividends and Other Distributions. If the Company at any
time while this Warrant is outstanding and unexpired shall (i) pay a dividend
with respect to Common Stock payable in Common Stock, then the Warrant Exercise
Price shall be adjusted, from and after the date of determination of
stockholders entitled to receive such dividend or distribution, to that price
determined by multiplying the Warrant Exercise Price in effect immediately prior
to such date of determination by a fraction (A) the numerator of which shall be
the total number of shares of Common Stock outstanding immediately prior to such
dividend or distribution, and (B) the denominator of which shall be the total
number of shares of
3
<PAGE> 4
Common Stock outstanding immediately after such dividend or distribution; or
(ii) make any other distribution with respect to Common Stock (except any
distribution specifically provided for in Sections 5(a) and 5(b) above), then,
in each such case, provision shall be made by the Company such that the holder
of this Warrant shall receive upon exercise of this Warrant a proportionate
share of any such dividend or distribution as though it were the holder of
Common Stock as of the record date fixed for the determination of the
stockholders of the Company entitled to receive such dividend or distribution.
The provisions of this subparagraph (c) shall similarly apply to successive
stock dividends and other distributions by the Company.
Upon each adjustment in the Warrant Exercise Price specified in Sections
5(a), (b) or (c) above, the number of shares of Common Stock purchasable
hereunder shall be adjusted, to the nearest whole share, to the product obtained
by multiplying the number of shares of Common Stock purchasable immediately
prior to such adjustment in the Warrant Exercise Price by a fraction, the
numerator of which shall be the Warrant Exercise Price immediately prior to such
adjustment and the denominator of which shall be the Warrant Exercise Price
immediately thereafter.
6. Notice of Adjustments. Whenever the Warrant Exercise Price or the
number of shares of Common Stock purchasable hereunder shall be adjusted
pursuant to Section 5 hereof, the Company shall notify the Holder of the
adjustment, the method by which such adjustment was calculated, and the Warrant
Exercise Price and the number of shares of Common Stock purchasable hereunder
after giving effect to such adjustment.
7. Fractional Shares. No fractional shares will be issued in connection
with any exercise hereunder, but in lieu of such fractional shares the Company
shall make a cash payment therefor based on the fair value of such shares on the
date of exercise as reasonably determined at the sole discretion of and in good
faith by the Company's Board of Directors.
8. Compliance with Securities Act of 1933. The Holder of this Warrant, by
acceptance hereof, agrees that this Warrant, and the shares of Common Stock to
be issued upon exercise hereof (and the securities issuable, directly or
indirectly, upon conversion of the Common Stock), are being acquired for
investment and that such holder will not offer, sell or otherwise dispose of
this Warrant, or any such shares except under circumstances which will not
result in a violation of the Securities Act or any applicable state securities
laws. Upon exercise of this Warrant, unless the shares being acquired are
registered under the Securities Act and any applicable state securities laws or
an exemption from such registration is available, the holder hereof shall
confirm in writing that the shares so purchased are being acquired for
investment and not with a view toward distribution or resale in violation of the
Securities Act and shall confirm such other matters related thereto as may be
reasonably requested by the Company. The shares of Common Stock issued upon
exercise of this Warrant (and the securities issuable, directly or indirectly,
upon conversion of the Common Stock) shall be stamped or imprinted with a legend
in substantially the following form (unless registered under the Securities Act
and any applicable state securities laws):
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, (THE "ACT") OR ANY STATE SECURITIES LAWS. SUCH SHARES MAY NOT
BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF SUCH REGISTRATION OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY AND ITS COUNSEL
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT. COPIES OF THE
AGREEMENTS COVERING THE PURCHASE OF THESE SHARES AND RESTRICTING
4
<PAGE> 5
THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE
HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF NEW FOCUS
SOLUTIONS, INC. AT THE PRINCIPAL EXECUTIVE OFFICE OF THE COMPANY."
9. Transferability/Assignment. This Warrant and all rights hereunder may
be assigned by the Company in connection with a merger, reorganization,
reincorporation, sale of assets or similar event, but may only be transferred or
assigned, in whole or in part, by the Holder, subject to compliance with
applicable federal and state securities laws, (i) to any partner, member,
subsidiary or affiliate of the Holder; (ii) to any successors or assigns in
connection with any merger, sale of assets, reorganization, or similar event or
to an affiliate of such assignee or successor, without charge to the Holder and
without the requirement of an opinion of counsel, upon surrender of this Warrant
provided that (a) the transferee or assignee of such Warrant agrees in writing
for the benefit of the Company to comply with all terms and obligations of this
Warrant; and (b) that the Company is given written notice by the Holder within
five (5) business days of said transfer or assignment of this Warrant, stating
the name, address and relationship of said transferee or assignee; and (iii) to
any third party to which the Company agrees in writing, provided that the Holder
provides a legal opinion as to the compliance with applicable securities laws,
which is reasonably acceptable to the Company and its counsel.
10. Limited Rights as Stockholders; Information. No holder of this
Warrant, as such, prior to exercise thereof shall be entitled to vote or receive
dividends or be deemed the holder of shares, nor shall anything contained herein
be construed to confer upon the Holder of this Warrant, as such, any of the
rights of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting thereof,
or to receive notice of meetings, or to receive dividends or subscription rights
or otherwise until this Warrant shall have been exercised and the shares of
Common Stock purchasable upon the exercise hereof shall have become deliverable,
as provided herein.
11. Representations and Warranties of the Company.
(a) Organization of the Company. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware; has all requisite power and authority to own or lease its properties
and to carry on its business as now conducted and proposed to be conducted; and
is duly qualified or licensed to do business as a foreign corporation in good
standing in each jurisdictions in which it conducts business and where the
failure to be so qualified or licensed would have a material adverse effect on
the business, assets, operations, results of operations or financial condition
of the Company.
(b) Authority. The Company has all requisite power and authority to
enter into and perform all of its obligations under this Warrant, to issue this
Warrant and to carry out the transactions contemplated hereby. The execution and
delivery by the Company of this Warrant and the performance of all obligations
of the Company hereunder, have been duly authorized by all necessary corporate
or stockholder action on the part of the Company and this Warrant is not
inconsistent with the Company's certificate of incorporation or bylaws. The
Warrant constitutes the legal, valid and binding obligation of the Company, and
is enforceable in accordance with its terms, except as limited by applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, or
other laws of general application affecting enforcement of creditors' rights
generally and as may be limited by laws relating to the availability of specific
performance, injunctive relief or other equitable remedies.
5
<PAGE> 6
(c) Valid Reservation and Issuance of Warrant Shares. The Warrant
Shares have been duly and validly reserved and, when issued in accordance with
the provisions of this Warrant, will be validly issued, fully paid and
non-assessable, and will be free of any taxes, liens, charges or encumbrances of
any nature whatsoever; provided, however, that the Common Stock issuable
pursuant to this Warrant may be subject to restrictions on transfer under
applicable state and/or federal securities laws. The Company covenants and
agrees that at all times it shall reserve and keep available for the exercise of
this Warrant such number of authorized shares of Common Stock as are sufficient
to permit the exercise in full of this Warrant.
(d) Good Faith. The Company will not, by amendment of its certificate
of incorporation or bylaws, or through reorganization, consolidation, merger,
dissolution, issue or sale of securities, sale of assets or any other voluntary
action, willfully avoid or seek to avoid the observance or performance of any of
the terms hereof, but will at all times in good faith assist in the carrying out
of all such terms and in the taking of all such actions as may be necessary or
appropriate in order to protect the rights of the Holder under the Warrants
against wrongful impairment. Without limiting the generality of the foregoing,
the Company: (i) will not set nor increase the par value of any Warrant Shares
above the amount payable therefor upon such exercise, and (ii) will take all
actions that are necessary or appropriate in order that the Company may validly
and legally issue fully paid and nonassessable Warrant Shares upon the exercise
of the Warrant.
(e) Listing. Prior to the issuance of any shares of Common Stock upon
exercise of this Warrant, the Company shall secure the listing of such shares of
Common Stock upon any securities exchange upon which the shares of Common Stock
are then listed.
12. Modification and Waiver; Effect of Amendment or Waiver. This Warrant
and any provision hereof may be changed, waived, discharged or terminated with
the written consent of the Company and the holders of a majority of shares of
the Common Stock issued or issuable upon exercise of the Warrant. Any waiver or
amendment effected in accordance with this Section 12 shall be binding upon each
holder of any Shares purchased under this Warrant at the time outstanding
(including securities into which such Shares have been converted), each future
holder of all such Shares, and the Company. The holder of this Warrant hereby
acknowledges that by operation of this Section 12, the holders of a majority of
the Shares purchased under this Warrant will have the right and power to
diminish or eliminate the rights of such holder under this Warrant.
13. Notices. Any notice, request, communication or other document required
or permitted to be given or delivered to the Holder hereof or the Company shall
be delivered, or shall be sent by certified or registered mail, postage prepaid,
to each such holder at its address as shown on the books of the Company or to
the Company at the address indicated therefor on the signature page of this
Warrant.
14. Binding Effect on Successors. The obligations of the Company relating
to the shares of Common Stock issuable upon the exercise or conversion of this
Warrant shall survive the exercise, conversion and termination of this Warrant
and all of the covenants and agreements of the Company pursuant to this Warrant
shall inure to the benefit of the successors and assigns of the Holder hereof.
15. Lost Warrants or Stock Certificates. The Company covenants to the
Holder hereof that, upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant or any
stock certificate and, in the case of any such loss, theft or destruction, upon
receipt of an indemnity reasonably satisfactory to the Company, or in the case
of any such mutilation upon surrender and cancellation of such Warrant or stock
certificate, the Company will make and deliver a new Warrant or stock
certificate, in lieu of the lost, stolen, destroyed or mutilated Warrant or
stock certificate.
6
<PAGE> 7
16. Descriptive Headings. The descriptive headings of the several
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant. The language in this Warrant shall be
construed as to its fair meaning without regard to which party drafted this
Warrant.
17. Governing Law. This Warrant shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws of
the State of California.
18. Severability. The invalidity or unenforceability of any provision of
this Warrant in any jurisdiction shall not affect the validity or enforceability
of such provision in any other jurisdiction, or affect any other provision of
this Warrant, which shall remain in full force and effect.
19. Counterparts. This Warrant may be executed in counterparts, each of
which shall be an original, but all of which together shall constitute one
instrument.
7
<PAGE> 8
20. Entire Agreement. This Warrant constitutes the entire agreement
between the parties pertaining to the subject matter contained in it and
supersedes all prior and contemporaneous agreements, representations, and
undertakings of the parties, whether oral or written, with respect to such
subject matter.
NEW FOCUS, INC.,
a Delaware corporation
By:
--------------------------------------
Kenneth E. Westrick, President
Address: 2630 Walsh Avenue
Santa Clara, California 95051
Accepted and Agreed:
KOMAG, INCORPORATED
- -------------------------------
By: Edward H. Siegler, Vice President and
Chief Financial Officer
Address: 1710 Automation Parkway
San Jose, California 95131
Phone: (408) 576-2000
Fax: (408) 944-9234
8
<PAGE> 9
EXHIBIT A
NOTICE OF EXERCISE
To: New Focus, Inc. (the "Company")
1. The undersigned hereby elects to purchase __________ shares of Common
Stock of the Company pursuant to the terms of the attached Warrant, and tenders
herewith payment of the purchase price of such shares in full.
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name or names as are specified
below:
----------------------------------------
(Name)
----------------------------------------
(Address)
----------------------------------------
(City, State)
3. The undersigned represents that the aforesaid shares being acquired
for the account of the undersigned for investment and not with a view to, or for
resale in connection with, the distribution thereof and that the undersigned has
no present intention of distributing or reselling such shares, all except as in
compliance with applicable securities laws.
- ------------------------
(Date)
-----------------------------------------
(Signature)
9
<PAGE> 10
EXHIBIT B
NOTICE OF CONVERSION
TO: NEW FOCUS, INC.
(1) The undersigned hereby elects to convert the attached Warrant to the
extent of __________ shares of Common Stock of New Focus, Inc. pursuant to the
terms of the attached Warrant.
(2) In connection with the purchase of the Common Stock (the
"Securities"), I, the Purchaser, represent to the Company the following:
(a) I am aware of the Company's business affairs and financial
condition, and have acquired sufficient information about the Company to reach
an informed and knowledgeable decision to acquire the Securities. I am
purchasing these Securities for my own account for investment purposes only and
not with a view to, or for the resale in connection with, any "distribution"
thereof for purposes of the Securities Act of 1933 ("Securities Act").
(b) I understand that the Securities have not been registered under
the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of my
investment intent as expressed herein. In this connection, I understand that, in
the view of the Securities and Exchange Commission ("SEC"), the statutory basis
for such exemption may be unavailable if my representation was predicated solely
upon a present intention to hold these Securities for the minimum capital gains
period specified under tax statutes, for a deferred sale, for or until an
increase or decrease in the market price of the Securities, or for a period of
one year or any other fixed period in the future.
(c) I further understand that the Securities must be held
indefinitely unless subsequently registered under the Securities Act or unless
an exemption from registration is otherwise available. Moreover, I understand
that the Company is under no obligation to register the Securities. In addition,
I understand that the certificate evidencing the Securities will be imprinted
with a legend which prohibits the transfer of the Securities unless they are
registered or such registration is not required in the opinion of counsel for
the Company.
(d) I am aware of the provisions of Rule 144, promulgated under the
Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering subject
to the satisfaction of certain conditions.
(e) I further understand that at the time I wish to sell the
Securities there may be no public market upon which to make such a sale.
(f) I further understand that in the event all of the requirements of
Rule 144 are not satisfied, registration under the Securities Act or some other
registration exemption will be required; and that, notwithstanding the fact that
Rule 144 is not exclusive, the Staff of the SEC has expressed its opinion that
persons proposing to sell private placement securities other than in a
registered offering and otherwise than pursuant to Rule 144 will have a
substantial burden of proof in establishing that an exemption from
10
<PAGE> 11
registration is available for such offers or sales, and that such persons and
their respective brokers who participate in such transactions do so at their own
risk.
(3) Please issue a certificate or certificates representing said shares of
Common Stock in the name of the undersigned or in such other name as is
specified below:
Print Name:
----------------------------
Sign Name:
----------------------------
Date:
----------------------------------
11
<PAGE> 1
EXHIBIT 10.8
CONFIDENTIAL
AGREEMENT ON TERMS AND CONDITIONS
OF PURCHASE AND SALE OF OPTICAL COMPONENTS
This Agreement ("Agreement") is made as of this 1st day of January, 2000
by and between Corning Incorporated, a New York Corporation, with an address at
Houghton Park, Corning, NY 14831 ("Corning") and New Focus, Inc. with an address
at 2630 Walsh Avenue, Santa Clara, CA 95051 ("Seller").
WHEREAS, Corning and certain of its affiliated companies plan to place
with Seller from time to time during the terms of this Agreement specific orders
for the purchase of certain Optical Components ("Materials"); and
WHEREAS, the parties wish to provide for the general terms and
conditions upon which such Materials purchase transactions shall be made; and
WHEREAS, the parties may wish to subsequently provide for certain
services for processing or additional goods and services related to the
Materials;
NOW THEREFORE, in consideration of the mutual covenants herein, Corning
and Seller hereby agree as follows:
1. Term. The Term of this Agreement shall be from January 1, 2000 through
December 31, 2000 If the parties are not in breach at the expiration of the
Term, then they may mutually agree in writing to continue this Agreement,
upon thirty (30) days' notice prior to the term expiration date, for an
additional one (1) year term.
2. Scope. During the Term of this Agreement, the terms and conditions
specified by this Agreement shall apply to all purchases of the Materials
by Corning from Seller. This Agreement is based upon an anticipated
procurement of Materials described in Appendix 1. The estimated quantity of
each item of Materials to be purchased hereunder is described in the same
Appendix. That estimated quantity for each item is based on an allocation
to Seller of a share (expressed as a percentage) of Corning's purchases
from unaffiliated companies of that item. Corning anticipates that this
share allocation to the Seller will not change during the term of this
Agreement provided the Seller can meet its delivery and other obligations
under this Agreement, and can continuously keep Corning competitive in the
market place. Corning may conduct business reviews with the Seller on a
periodic basis (monthly, quarterly, semi-annually) to review the overall
market situation and discuss changes needed to maintain a competitive
position in the communications industry.
3. Releases. When Corning wishes to purchase Materials pursuant to this
Agreement, it shall submit a written release form for a specific quantity
to Seller. Seller shall ship Materials in accordance with the Corning
release. Release forms may be delivered to Seller via fax, email, EDI, or
U.S. mail.
4. Schedule and Safety Stock. Corning's schedules depend upon timely delivery
of Materials and therefore, time is of the essence in Corning's release
forms issued to Seller hereunder. Seller agrees to make timely delivery in
accordance with agreed
<PAGE> 2
upon delivery dates. In order to assure Corning of continuity of supply,
Seller will keep as a safety stock a four-week supply of finished goods of
each Material exclusively for Corning for which Corning shall be
responsible to purchase upon termination or Material discontinuance.
Corning will authorize and update, on a quarterly basis, the safety stock
level required by product that the Seller will have available to ship. If
this level exceeds four (4) weeks of the demand, Corning shall only be
obligated to purchase the authorized four (4) weeks supply upon termination
or material discontinuance.
5. Price(s) and Quantity. During the Term, the guaranteed prices, and
estimated quantities of the Materials sold by Seller to Corning shall be as
specified in Appendix I hereto.
6. Delivery. Unless otherwise agreed, all price and delivery terms shall be on
a delivered basis, broken out specifying price, insurance, and freight
separately.
7. Performance. Corning will provide a minimum of 3 weeks lead time on new
purchase orders and 2 weeks lead time on schedule changes on forecasts.
Corning will provide at least a three (3) month or greater rolling Forecast
reflecting, by time period, shipping quantities required for each part
number to support Corning's manufacturing schedules.
Seller agrees to make timely deliveries in accordance with agreed upon
delivery dates.
8. Title. Title to and possession of all Materials shipped by Seller to
Corning shall pass to Corning upon delivery of materials at the Corning
location.
9. Warranty/Specifications. At the time of delivery, Seller warrants that
title to the Materials shall pass to Corning, free and clear of claims or
liens of third parties. Seller also warrants that the Materials supplied by
Seller to Corning hereunder shall meet the quality levels and specification
levels defined in Appendix II. Materials shall be free of objects or other
substances which, in the opinion of Corning, could render them until for
intended use. If quality levels are not defined in Appendix II for a
particular item, then Seller warrants that such Materials shall be
merchantable, of best quality and free from defects in materials,
processing or workmanship. This warranty shall survive any inspection by
Corning.
Any attempt by Seller to limit, disclaim, or restrict any such warranties
or any remedies of Corning, by acknowledgment or otherwise, in accepting or
performing this order, shall be null, void and ineffective without
Corning's written consent.
The initial warranty period of Materials shipped under the terms and
conditions of this Agreement will be [*] from the date of shipment by
Supplier. Any purchased device which is rejected for non-conformance to
Corning's specification will be returned to Seller. Seller will, at
Corning's option and without limiting any other rights of Corning, either:
(1) credit Corning the value of device, (2) replace the device at no
expense to Corning, or (3) repair the device at no cost to Corning.
10. Software & Systems Warranty. Seller warrants that the quality and delivery
of the Material will not be affected by any computer system and/or software
related
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
<PAGE> 3
malfunction including, but not limited to, changes in dates, the passing of
the calendar years 1999 or 2000, the next millennium and/or leap years.
Should Seller fail to meet the requirements of this Agreement due to such
computer system and/or software related malfunctions, Corning may (without
prejudice to any other available remedy or cause of action) terminate this
Agreement on five (5) days advance written notice to Seller. Additionally,
Corning may terminate this Agreement if Seller, when requested, fails to
give adequate assurance that it or any of its suppliers are Year 2000
compliant.
11. Inspection. Corning shall be entitled to inspect Materials upon delivery.
Any prior inspection of Materials or sampling at the Seller's facility by
Corning personnel will imply neither delivery or acceptance of such
Materials by Corning.
12. Plant Access. Seller will allow representatives of Corning and Corning's
customers access to the facilities involved in performing this order for
purposes of reviewing the status and progress of production and witnessing
any test and inspections. Such access will not relieve Seller of any of its
obligations.
13. Inspection Reports. Seller shall furnish Corning with Inspection Reports
for each shipment of Materials hereunder. Seller shall collect all relevant
data for each Material prior to shipment. Such Certificates of Analysis
shall be specific by traceable notations and Corning may reject items that
do not meet the specifications in Appendix II. Inspection reports shall
accompany all Materials shipped to Corning. Duplicate copies shall be filed
and stored by Seller for a period of seven (7) years in case future
reference is required by Corning.
14. Invoicing and Payment. Seller shall invoice Corning in duplicate for
Materials ordered by and delivered to Corning. Corning shall pay such
invoices within forty-five (45) days after their receipt. Corning shall not
be required to pay invoices for any Materials which do not meet applicable
specifications or for quantities other than those it ordered.
15. Process Changes. Seller shall notify Corning in writing and at least 30
days in advance of any change in its manufacturing, assurance of supply,
refining, feedstock, process or equipment that might affect Corning's
results, its access to, or its use of the Materials purchased from Seller
hereunder.
16. Design Changes. In the event that Corning's requirements for Materials
change, Corning and Seller shall meet in good faith to discuss possible
changes in the design of Materials and may amend the specifications to
comply with Corning's new requirements. If Seller has the technical
capability to meet Corning's new requirements, Seller shall do so. Any
price adjustments resulting from proposed design changes will be negotiated
in godd faith by Seller and Corning.
17. Patents. Seller agrees to indemnify, hold harmless and protect Corning
against any costs (including reasonable attorneys' fees), liabilities, and
judgments arising from any claim made by a third party against Corning that
the materials supplied by Seller under this Agreement infringe patent or
copyrights of such third party. Corning shall promptly notify Seller of any
such claim, agrees to provide information and reasonable assistance, and
give Seller sole authority to defend or settle such claim. Upon notice of
an alleged infringement, Seller may, at its option and expense, (i) obtain
for Coming the right to continue using the Materials, (ii) replace or
modify the product so that is
<PAGE> 4
]
becomes non-infringing or non-violating, (iii) substitute an equivalent
non-infringing version of the Materials. In the event that none of the
above options is reasonably available, either party may terminate this
Agreement and Corning may return any and all Materials paid for and in
Corning's inventory and obtain a refund from Seller of the price paid by
Corning for such inventory. Termination hereunder does not discharge the
obligations of Seller to defend Corning and pay costs or judgments.
Notwithstanding the above provisions, Seller assumes no liability for any
infringement claims based upon the use of the Materials either (i) in
connection or in combination with equipment, devices, products or software
not provided by Seller if such claims would not have resulted but for some
combination or use, or (ii) for other than normal purposes.
THE FOREGOING STATES EACH PARTY'S SOLE AND EXCLUSIVE REMEDY WITH RESPECT TO
CLAIMS OF INFRINGEMENT OR VIOLATION OF THIRD PARTY PROPRIETARY RIGHTS OF
ANY KIND.
18. Excusable Failure or Delay (Force Majeure). Neither party shall be held
responsible for the failure or delay in performance hereunder where such
failure or delay is due to any act of God or of the public enemy, war,
compliance with laws, governmental acts or regulations, fire, flood,
epidemic, accident, unusually severe weather or other causes similar to the
foregoing beyond their reasonable control. Any party whose performance is
affected by such force majeure shall promptly give notice to the other
party of the occurrence or circumstance upon which it intends to rely to
excuse its performance. If the circumstances of force majeure affecting
either party's performance hereunder delays performance for more than seven
(7) days, then the other party may terminate this Agreement upon seven (7)
days' advance written notice. In no event shall a failure or delay in
performance attributable to the "Year 2000" or other computer system and/or
software related malfunction be excusable under this paragraph or any other
paragraph of this Agreement.
19. [*] Both parties agree that during the term of this Agreement, periodic
reviews of technical programs and innovations underway at each parties
facilities will be held with the mutual goal of enhancing each parties
understanding of the other's future technical initiatives. All such reviews
would be subject to the same protection of intellectual property as
described in the "Confidential Information" clause (Article #27) of this
Agreement. In the event that Seller develops any new or "next generation"
products like the Materials sold hereunder, but with improved or enhanced
performance characteristics, then Seller will make those new products
available to Corning on terms to be negotiated, but subject to the same [*]
conditions set out above.
20. Price Protection. If Corning submits substantial evidence in writing that
another producer of goods has lawfully offered Corning goods of similar
quality, in similar quantities and under like terms and conditions, at a
delivered cost at least [*] lower than the delivered cost hereunder, then
Corning will give Seller written notice of such lower offer.
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
<PAGE> 5
If Seller does not agree, in writing and within thirty (30) days of such
notice, to reduce its price immediately to meet that lower offer, then, at
the expiration of that thirty (30) day period, Corning's only purchase
obligation hereunder will be to purchase Materials for which releases have
already been issued by Corning and accepted by Seller. Upon the purchase by
Corning of the Materials under those prior releases, Corning will be deemed
to have satisfied any and all purchase commitments and obligations
hereunder, and will not be subject to any penalty, price adjustment or
other liability for failure to purchase any additional Materials from
Seller.
21. No Assignment. This Agreement shall not be assigned and is not assignable
or delegable by either party without the written consent of the other,
which shall not be unreasonably withheld.
22. Compliance with Laws. Seller shall comply with all applicable federal,
state and local laws and regulations in the manufacture, processing, sale
and transport of the Materials to be delivered hereunder. In the event that
Seller's work does not comply with any such laws, codes, and regulations,
Seller shall correct any such noncompliance at its sole expense and
indemnify and hold Corning harmless from any claims, costs, fines,
penalties, expenses, liabilities or losses on account of any such
noncompliance.
23. Default and Termination. This Agreement and all rights granted hereunder
may be terminated by either party: (a) in the event of a continuing default
by the other party of any obligation hereunder, effective seven Corning
business (7) days after written notice of such default is given to the
defaulting party; or (b) immediately in the event that either a delivery
that is more than fifteen (15) Corning business days late, or if any three
(3) deliveries are more than seven (7) Corning business days late in any
six-month period; or (c) immediately upon written notice in the event of
bankruptcy, insolvency or any other financial condition creating reasonable
doubt as to that party's ability to perform hereunder. If any instance
under (a) or (b) occur, Corning must notify Seller in writing within (30)
days of each event. In the event that Corning does not notify Seller,
termination rights for that event lapse.
No such termination shall affect or discharge any obligations of either
party which arose prior to the effective date of termination with respect
to warranties, indemnification, moneys owed or confidential information.
24. Cancellation for Buyer's Convenience. Corning may cancel a firm Purchase
Order at any time prior to delivery. In the event of such cancellation,
Seller shall immediately cease to incur expense against the affected
Purchase Order.
If the purchase order covered standard product which is easily sellable to
Seller's other customers, the Corning will have no liability to Seller for
cancellation of the Purchase Order.
For Purchase Orders for nonstandard products, Corning's liability in the
event of cancellation shall be limited to the following for deliveries
cancelled under such Purchase Order:
<PAGE> 6
a. Actual cost incurred by Seller, up to and including the date of
cancellation for material costs and direct labor costs; and
b. Reasonable costs that Seller has reasonably committed to pay to its
suppliers; and for the materials for undelivered quantities.
Seller shall use reasonable endeavors to mitigate the amount of such
charges. Seller will provide Corning with clear documentation of all costs
and charges which Corning is liable under this provision. In no event will
Corning be liable for cancellation charges in excess of the contract value
of the Materials cancelled. Upon payment of such cancellation charges by
Corning, Seller shall deliver to Corning, in accordance with the delivery
terms of this Agreement, all work in progress and inventory for which
Corning has made payment.
25. Obsolescent. Corning reserves the right to reduce estimated quantities (but
maintaining share percentage) or substitute new products for those
referenced in Appendix I, in the event that new products offering a
superior technological or economic advantage become available during the
term of this Agreement. Seller shall be given a reasonable amount of time
to match such new products.
26. Waiver. The failure of Corning to insist in any one or more instances upon
the full performance of any of the terms, covenants or conditions of this
order or to exercise any rights it may have hereunder shall not be
construed as a waiver of any legal rights it may have with respect to such
nonperformance or be construed as Corning's condoning further
nonperformance of such terms, covenants or conditions.
27. Confidential Information. The nondisclosure agreement entered into by the
Parties on March 15, 1999 will govern the use of confidential information
by Seller. The term of the nondisclosure agreement will be the term of this
Agreement. This Agreement and its terms are subject to that nondisclosure
agreement.
28. Promotion Limitation: Seller agrees that it will not use Corning's name
whether by including reference to Corning in any list of customers
advertising that its services or products are used by Corning or otherwise,
without written authorization by Corning's authorized representative.
29. Liability. To the fullest extent permitted by law, Seller hereby
indemnifies and agrees to hold harmless Corning, its affiliates,
subsidiaries, agents, employees, directors, or representatives from and
against all claims, damages, losses and expenses, including but not limited
to attorneys' fees, arising out of or resulting from Seller's supply of
Materials or performance of these services.
30. Insurance. If Seller performs any services for Corning on Corning's
premises, Seller shall, at any time(s) upon request, furnish Corning with
an insurance certificate(s) from its insurance carrier(s) naming Corning as
an additional insured, evidencing the existence of insurance coverage of
the following kinds in at least the following amounts:
A. Workers' compensation insurance as required by law and Employer's
liability insurance with limits not less than One Million Dollars
($1,000,000).
<PAGE> 7
B. Comprehensive public liability insurance for personal injury
(including death) and property damage with limits of not less than
Five Million Dollars ($5,000,000) for personal injury and property
damage, including coverage for owned and nonowned automobiles and
Seller's contractual obligations.
C. Umbrella liability insurance with limits not less than Five Million
Dollars ($5,000,000).
31. Choice of Law and Forum. This Agreement shall be governed by, interpreted
and construed and performance hereunder shall be determined in accordance
with the law of the State of New York, without regard to its conflicts of
law principles. In the event of disputes or claims relating to this
Agreement, both parties agree to seek an amicable settlement prior to
commencing any litigation. In the event of litigation, any action shall be
venued in either the Supreme Court of the State of New York, Steuben
County, or in the United States District Court, Western District of New
York.
32. Conflict of Terms. The terms and conditions of Corning stated on this
Agreement shall govern in the event of any conflict with any terms proposed
by Seller, and are not subject to change by reason of any written or oral
statements by Seller or by any terms stated in Seller's acknowledgement of
this order, unless such conflicting or additional terms are accepted in a
writing making reference to this Agreement and signed by Corning. Shipment
of goods or materials, or performance of services pursuant to this order
shall be deemed to be an unqualified acceptance of the terms and conditions
contained herein.
33. Counterparts. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
34. Notices, Entire Agreement and Change Orders. All notices delivered or
demands given by either party under this Agreement shall be delivered in
person, or forwarded by U.S. Mail, postage prepaid, or they may be faxed
properly addressed to the authorized representatives of the party. This
Agreement constitutes the entire agreement between Corning and Seller with
respect to the Work, and supersedes all prior and contemporaneous
negotiations, agreements, representations, understandings and commitments.
No change, modification or extension of this Agreement shall be effective
unless it is made in writing, makes specific reference to this Agreement
and signed by duly authorized representatives of Corning and Seller. Such
approval shall not be unreasonably withheld. For the purposes of this
Agreement, the following persons are the authorized representatives of
Buyer and Corning:
For Corning: Kathryn M. Murphy, Division Vice President,
Materials Management
For Seller: Paul G. Smith, Vice President and General Manager
35. Ownership of Tools and Intellectual Property. Corning shall have title to
and the right of immediate possession of any tools, equipment or prototypes
furnished or paid for by Corning, and if and when any such Corning property
is in the possession of Seller,
<PAGE> 8
Seller shall not use such property for any work other than that of Corning
and shall maintain such property in good and usable condition at no further
cost to Corning.
Pursuant to the terms of the confidentiality agreement between Corning and
Seller, Seller will not use any confidential information of Coming (as
defined in that agreement) for any purpose other than the supply of
Materials to Corning. Accordingly, if Seller uses any such confidential
information of Corning to design or make any Materials, then those
Materials will be sold only to Corning and Seller will not sell or offer to
sell those Materials to any third party without the prior written consent
of Corning.
IN WITNESS WHEREOF, Seller and Corning have executed this Agreement by
their respective duly authorized representatives as of the date first above
written.
SUPPLIER NAME CORNING INCORPORATED
By: /s/ PAUL SMITH By: /s/ KATHRYN M. MURPHY
-------------------------------- --------------------------------
Kathryn M. Murphy
Title: VP/GM Telecom Division Title: Division Vice President,
Materials Management
Date: 2/18/00 Date: 2/14/00
<PAGE> 9
APPENDIX I
Quantity and Pricing
1. Quantity. Corning will purchase from New Focus a percentage (listed below
in Share) of its external requirements of the Materials during the term of
this Agreement. The forecasted volumes below are an estimate to be used for
the Seller's information purposes only, and is not intended to bind or
obligate Corning to purchase said amount.
2. Pricing.
<TABLE>
<CAPTION>
Product Share Est Volume Price (1/1-6/30)* Price (7/1-12/31)*
----------------- ----- ---------- ----------------- ------------------
<S> <C> <C> <C> <C>
[*]
</TABLE>
All pricing takes effect 1/1/00. Any current purchase orders will
cancelled 12/30/99 and new purchase orders placed at the new pricing.
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
<PAGE> 10
APPENDIX II
PURCHASE SPECIFICATION
<TABLE>
<CAPTION>
CORNING SPEC
CORNING PART NUMBER DESCRIPTION NUMBER/DATE
- ------------------- ----------- ------------
<S> <C> <C>
[*]
</TABLE>
This product shall be free from all other material or objects which, in the
opinion of Corning Incorporated, could render it unfit for its intended
use.
All measurements made to determine compliance with this specification shall
be done in accordance with analytical procedures approved by Corning
Incorporated.
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
<PAGE> 1
EXHIBIT 10.11
Agreement No. .......
DEVELOPMENT AGREEMENT
by and between
HEWLETT-PACKARD GmbH
HERRENBERGER STRASSE 130
71034 BOEBLINGEN
GERMANY
- hereinafter referred to as "HP" -
and
NEW FOCUS INC.
2630 WALSH AVE.
SANTA CLARA CA
USA
- hereinafter referred to as "New Focus" -
REGARDING THE DEVELOPMENT OF A TUNABLE LASER SOURCE MODULE
1
<PAGE> 2
1. SUBJECT-MATTER OF THE AGREEMENT
This agreement pertains to and covers the development of a Tunable Laser
Source Module (including hard- and software) which is described in
greater detail in the specifications in Schedule 1 hereto, as well as to
the manufacture of prototypes and production units by New Focus whilst
adhering to the project schedule as set forth in Schedule 3 hereof.
2. BREAK-DOWN OF COSTS / REMUNERATION
2.1 In return for the services outlined in Article 1 above, HP shall effect
payment in installments as laid out in A.) 5. of Schedule 1 according to
the development phases described in A.) 4. of Schedule 1 hereto. The
payments shall become due and payable in accordance with the terms and
conditions outlined in A.) 5. of Schedule 1.
All prices quoted are FOB Santa Clara, CA, USA. HP is responsible for
all taxes, customs, and freight.
2.2 Should the parties agree upon payment by installments which are due
prior to final and complete performance of the entire development
service, New Focus undertakes, prior to payment of the respective
installment, to provide HP with an irrevocable, unconditional and
absolute guarantee from a bank recognized as guarantor in the amount of
the respective installment. HP shall return such guarantee to the
supplier upon written confirmation of acceptance of the prototypes or
the software.
Installments by HP shall not include any acceptance of the prototypes,
developed software or the production units. With payment of the
installment all performances and expenses of New Focus in regard of the
respective development phase shall be covered.
2.3 All obligations regarding payment of costs and expenses incurred by New
Focus in connection with the performance of services to be provided
shall be deemed discharged upon payment of the agreed remuneration.
3. DEVELOPMENT
3.1 The prototypes as well as the software shall be manufactured by New
Focus in accordance with the project schedule (Schedule 3) and the
development phases contained therein as well as in Schedule 1.
3.2 Prior to the commencement of development, New Focus shall ensure that
the specifications are complete and that implementation of the contents
thereof is feasible. Should New Focus detect any defects or omissions
upon examination of the specifications, it shall inform HP hereof in
writing without any undue delay.
2
<PAGE> 3
3.3 The deadlines outlined in the agreed project schedule (Schedule 3) shall
be binding upon both parties.
3.3 In order to ensure successful and timely performance of the Development
agreement for both parties, the parties hereto agree that New Focus
shall submit to HP a written report detailing key aspects of the project
at regular monthly intervals. Both parties shall have the option of
requesting that the other party engage in discussions regarding the
current stage of development, problems arising in connection therewith,
matters pertaining to coordination etc.
New Focus shall, in particular, advise HP of the following in this
regard:
3.4.1 PROJECT STATUS
Classification of the system components on which work was performed
during the period under review. The stage of work carried out and of the
semi-finished work, as well as a comparison of the target and actual
situation if the project schedule and/or the specification requirements
have not (yet) been complied with. Any deviations or postponement of
deadlines must be justified and the supplier is further required to
indicate the measures planned for re-establishing the target situation.
3.4.2 FORECAST
New Focus shall advise HP of the work scheduled for the next period
under review, also with a view to enabling HP to arrange, in good time,
for any support which it may be required to provide.
On HP's request, New Focus shall, during the course of discussions,
provide HP with copies of HP-specific documentation regarding the
development of prototypes and software available at the time of such
discussions.
Minutes, to be duly countersigned by both parties, shall be kept of all
such discussions.
3.5 New Focus shall document the development result and the individual
development steps and make such material available to HP in
machine-readable form.
4. RESOURCES
4.1 New Focus avails of a development center which is suitably equipped to
develop the developed software defined under the subject-matter hereof.
In the event HP employees are assigned to the development project New
Focus shall provide appropriate support to these employees.
4.2 HP shall support New Focus as described in Schedule 5.
3
<PAGE> 4
5. MODIFICATIONS/AMENDMENTS TO THE SYSTEM DESCRIPTION/SPECIFICATIONS
5.1 Modifications to the specifications are subject to HP's prior written
approval. HP may request that New Focus incorporate modifications or
amendments. New Focus may also request that HP incorporate modifications
or amendments. Any such request must be submitted in writing. New Focus
shall perform the modified services if and to the extent that New Focus
can be reasonably expected to do so and New Focus has not provided HP
with written justification as to why it cannot be reasonably expected to
do so within 1 week of receipt for the modification request.
5.2 Should such modifications affect contractual agreements (relating to
costs or performance deadlines for example), the parties hereto shall
accordingly revise such agreements taking the increase/decrease in
time/expenditure required into consideration. The modifications shall be
performed within the framework of existing contractual agreements if no
such demand for review is submitted to the other party to the agreement
in writing within 2 weeks of receipt of the modification request by New
Focus. HP undertakes to advise New Focus of the significance of its
actions prior to commencement of the period in question.
5.3 In the event of a dispute regarding the scope of any increase/decrease
in time/expenditure required on the basis of modifications, both
parties hereto shall be entitled to request that an independent,
publicly-appointed and certified expert decide the issue with binding
effect for both parties.
5.4 New Focus shall inform HP immediately upon receipt of a modification
request if work already carried out by New Focus would become unusable
as a result of this modification.
6. FAILURE TO ADHERE TO THE PROJECT SCHEDULE
6.1 If, during the development phases, it already becomes apparent that the
completion date agreed upon in the project schedule (schedule 3) cannot
be adhered to, New Focus shall advise HP hereof without delay indicating
the reasons therefor. New Focus shall simultaneously advise HP of the
period of delay by which the completion date is to be postponed
vis-a-vis the deadline agreed upon in the project schedule.
6.2 If a deadline agreed upon in the project schedule is already or will
apparently be exceeded by more than 2 weeks, HP may extend the deadline
by a reasonable period of time. If this extended period expires to no
avail, HP shall be entitled to rescind the agreement. This shall not
apply if New Focus bears no responsibility for the existing or
foreseeable failure to adhere to the project schedule or for the expiry
to no avail of the period of grace.
6.3 Irrespective of the right to rescind the agreement pursuant to Article
6.2 above, the following contractual penalty shall apply:
4
<PAGE> 5
Should New Focus be unable to adhere to the delivery deadlines agreed
upon in the project schedule (Schedule 3) for the prototypes or the
software during the respective development phases, HP shall be entitled,
without providing any further evidence, to demand a contractual penalty
in the amount of [*] of the net value of each development phase
according to Schedule 1 for each working day beginning two weeks after
the delivery deadlines of Schedule 3 or part thereof up to an amount
not exceeding [*] of the total value of each development phase
according to Schedule 1 however. This shall not apply if New Focus does
not bear responsibility for the delay.
7. EXAMINATION AND DELIVERY BY NEW FOCUS
7.1 Upon completion of development and manufacture of the prototypes
together with the developed software in accordance with the
specifications (Schedule 1), New Focus shall subject the prototypes and
the software to a functional check pursuant to HP specifications in
regard of the respective development phase according to Schedule 1 with
a view to establishing conformity with the specifications. A test report
shall be submitted.
7.2 New Focus shall deliver the tested prototypes and the developed software
to HP on or before the deadline defined in the project schedule
(Schedule 3). Tested means that no deviations from the specification
requirements in regard of the respective development phase according to
Schedule 1 and no other defects were detected during testing at New
Focus.
New Focus shall provide HP with all the necessary documentation/data
sheets, source codes etc. upon delivery of the prototypes as described
in Schedule 1.
7.3 New Focus shall produce further prototypes and production units in
accordance with the terms and provisions hereof according to Schedule 1.
8. EXAMINATION AND ACCEPTANCE BY HP
8.1 HP shall examine the design of the prototypes. HP shall accept the
design provided that the prototypes to be manufactured in accordance
with this design will ensure the fulfillment of the product
specifications as described in Schedule 1.
8.2 HP shall subject any prototype as well as the developed software to a
separate functional check within eight weeks of delivery, according to
Schedule 1. HP shall provide weekly updates/reports on the progress
and results of the testing. A test report shall be submitted.
8.3 HP shall submit a written acceptance certificate of the prototypes and
the developed software to New Focus if the prototypes and the developed
software conform to all of the specification requirements of Schedule 1
and if no other defects can be detected.
5
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
<PAGE> 6
8.4 Should HP detect deviations from the specifications or defects during
the course of the functional check, HP shall inform New Focus thereof in
writing.
In this event, New Focus shall provide HP with repaired or newly
manufactured prototypes or developed software which is/are free of the
respective defect(s) within five working days. New Focus shall ensure
that the defects are remedied and rectified according to Schedule 4 by
employees who were already involved in the development of the developed
software defined under the subject-matter hereof. Subject to mutual
agreement between the parties, such rectification of defects may be
carried out by HP. In the case that New focus can not rectify such
defects within short term New Focus shall provide HP a temporary
solution.
8.5 Following delivery of the repaired / newly manufactured prototypes or
developed software, HP shall conduct another functional test. If
deviations from the specifications (Schedule 1) or defects are still
detected in the repaired / newly manufactured prototypes or developed
software and these are not remedied and rectified within 15 working
days of receipt of appropriate notice thereof from HP, HP may, at its
discretion, rescind the Agreement, rectify the defect itself or have it
rectified by a third party at New Focus's expense. Any further claims
shall remain unaffected thereby.
8.6 In the case that HP does not accept the manufactured prototypes or the
developed software within a reasonable period of time after delivery,
New Focus may set forth a deadline in order to declare the acceptance.
The manufactured prototypes or the developed software shall deemed to
be accepted if HP does neither declare the acceptance nor informs about
defects. HP shall not refuse the acceptance because of insignificant
defects. If HP accepts the manufactured prototypes or the developed
software without regard of defects, these defects shall be written down
within the minutes of the acceptance.
8.7 According to Schedule 1 HP shall release the prototypes for production
and delivery of 30 production units to HP upon acceptance of the
prototypes. In this case, the New Focus prices for these production
units as set forth in Schedule 1 shall apply.
HP shall be entitled to purchase additional production units and
building blocks thereof (for additional use in other future developed
products) after completion of the development according to this
Agreement. The scope of delivery/supply shall form the subject matter
of a separate agreement (standard purchase Agreement). The parties
hereto will enter into good faith negotiations in order to conclude
such an agreement, in which New Focus shall guarantee the same warranty
as described in clause 10 as well as a product support for a period of
five years after delivery of the last production unit.
9. CONTACT PERSONS
9.1 Both parties shall appoint contact persons in Schedule 2 to facilitate
close cooperative links in an atmosphere of mutual trust. The contact
persons shall be entitled to issue
6
<PAGE> 7
and receive legally binding statements on behalf of the respective
party, always provided that this Agreement is not modified thereby.
9.2 New Focus assures that the employees listed in Schedule 2 designated by
New Focus for support and development for the entire duration of the
project avail of the requisite knowledge and necessary experience in
this field.
9.3 During the phase of development the parties hereto shall schedule
regular meetings every 3 to 4 months in order to discuss any problems
regarding the fulfillment of this Agreement and for any other purpose as
described in this clause 9. Such meeting shall be attended by the
contact persons designated according to 9.1 and/or any other persons as
deemed appropriate in mutual agreement by the parties hereto. The
meetings shall alternately take place at the respective business sites
of the parties hereto.
10. WARRANTIES
(a) PRODUCTS AND SERVICES
New Focus warrants that for twelve (12) months following the acceptance
of the manufactured prototypes, the developed software and associated
documentation in accordance with section 8 the manufactured prototypes,
the developed software and associated documentation shall be free from
defects in workmanship and materials; the developed software shall be
free from significant programming errors; the manufactured prototypes
and the developed software shall conform to the performance
capabilities, characteristics, specifications, functions and other
descriptions and standards applicable thereto as set forth in Schedule 1
hereto; and that, in general, the services to be performed by New Focus
shall be performed in a timely and professional manner by qualified
technicians totally familiar with the manufactured prototypes and the
developed software. In the event that defects are discovered during the
warranty period, New Focus shall promptly remedy such defects at no
additional expense to HP, according to Schedule 4.
This section 10(a) shall in no way limit any of HP's rights under the
applicable law.
(b) COMPLIANCE WITH APPLICABLE LAWS
New Focus warrants that the manufactured prototypes and the developed
software and all other products, documentation and other materials
required to be delivered to HP hereunder, the development and use by HP
thereof, and the performance by New Focus of its obligations hereunder
shall be in compliance with all applicable laws, rules and regulations
as of the date of delivery thereof.
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<PAGE> 8
11. RIGHTS OF USE
11.1 HP is hereby vested with an irrevocable, exclusive, transferable production
and distribution right regarding the Tunable Laser Source Module (including
software, the respective prototypes, the production units and any and all
parts, such parts including, but not limited to, any building blocks) in
its respective state of processing, such right being unlimited with respect
to time, contents and geographical scope.
HP may grant third parties sub-licensing rights and the above mentioned
rights of use, subject to the agreement of the respective third parties to
enter into an agreement on the payment of royalty fees with respect to the
two patents on the design of external cavity diode lasers (US Patent No.:
5,319,668 and US Patent No.: 5,354,575) held by New Focus.
With respect to the manufacturing and the supply of the Tunable Laser
Source Module, HP agrees to exclusively enter into negotiations with New
Focus on the terms and conditions of a respective agreement, provided that
HP shall have total discretion as to whether or not entering into such
agreement.
11.2 New Focus shall grant HP a non-exclusive, international license to all
industrial property rights, copyrights included, at no extra cost provided
New Focus is entitled to grant such a license, if and to the extent that
this is necessary to exercise the rights of use granted to HP as set forth
under sub-clause 11.1 above.
11.3 With regard to HP's exclusive production and distribution right to the
subject-matter hereof, New Focus shall not process or otherwise use the
subject-matter either for its own purposes or for those of third parties.
12. INDUSTRIAL PROPERTY RIGHTS
12.1 New Focus hereby represents and covenants that it is the unlimited and
undisputed holder of all copyrights and other intellectual property rights
(business and trade secrets included) to the development system, thus
enabling New Focus to grant HP the rights of use pursuant to Article 11
hereof.
12.2 In the event of any violation of a third party's industrial property right,
New Focus shall establish HP's right to continued use of the development
system without payment of any additional remuneration, or, if this should
not be possible, alter or replace the subject-matter hereof in such a way
as to circumvent violation of industrial property rights whilst, however,
conforming to the specification requirements. HP shall be entitled, pending
the above, to withhold any payments due.
12.3 In the event of any such violation of an industrial property right, New
Focus shall defend HP against any claims asserted by third parties, if and
to the extent that HP does not wish to defend itself. Should third parties
file a claim against HP on account of the violation of industrial property
rights, New Focus shall indemnify HP against all claims (for damages) and
shall further bear all costs incurred by HP in connection with such a
claim (e.g. in connection with legal disputes). This shall apply
analogously in
8
<PAGE> 9
favor of those persons who, up to such time, have been [*] the
subject-matter hereof in accordance with Article 11 above.
13. AUDIT RIGHTS
At any time HP is entitled to make or cause to be made a special audit
regarding the production processes and the quality ensurance systems
established by New Focus, on reasonable request made in writing no less
than 15 days in advance. New Focus shall make all relevant matters
available for examination during regular business hours. A written summary
of the results of any such special audit shall be provided by HP to New
Focus.
14. CONFIDENTIALITY
14.1 The parties to this Agreement undertake to treat as confidential all of the
other party's information identified as such in writing and not to disclose
or divulge such information to third parties, unless such information was
released by the other party or became public knowledge without any breach
of obligations under this Agreement.
This shall apply in particular to facts and information on operational
procedures, operating results, production figures, products, business
policies, duties, claims, organizational and social services or business
management measures as well as data on purchasing/procurement functions.
The confidential information provided by HP shall solely be used by New
Focus for the purpose of this Agreement.
In doing so, the parties hereto shall apply the same level of care and
diligence as they would exercise in their own affairs.
14.2 This obligation shall expire for each party hereto four years subsequent to
receipt of the last confidential fact or item of information from the other
party.
14.3 New Focus shall take the necessary measures to ensure that the results of
development are not inadmissibly used, disclosed or copied.
15. TERMINATION
15.1 This Agreement may be terminated in writing by either party only in the
event of good cause.
Good cause shall be deemed to exist, in particular, if one of the parties
hereto fails to perform its contractual obligations, despite a reminder to
this effect. Good cause shall also be deemed to exist for HP if composition
or bankruptcy proceedings are instigated or initiated against New Focus's
assets or in the event of a lasting modi-
[*] Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to
the omitted portions.
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<PAGE> 10
fication to the ownership rights within New Focus (for example, if New
Focus will be taken over by competitors).
Furthermore, HP shall be entitled to terminate the Agreement on
extraordinary grounds if HP comes to the conclusion that continued
implementation of the general project which incorporates the developed
system is no longer feasible in view of the economic and/or technical
situation.
15.2 Should this Agreement be terminated for reasons in respect of which New
Focus bears responsibility, New Focus shall only be remunerated for
services commissioned and performed prior to termination. This is subject
to the provision that HP is in a position to use the relevant services to
further use the developed system.
15.3 In all other cases, New Focus shall be entitled to the agreed remuneration
as determined by the date of termination, subject however, to the
deduction of expenditure saved, estimated at 90% of the remuneration for
services not yet performed by New Focus. HP reserves the right to prove
that additional expenditure was saved.
15.4 In the event of termination of this Agreement, New Focus shall, without
exception, deliver and surrender to HP without delay all documents which
HP made available to New Focus within the framework of this Agreement, as
well as all and any prototypes and/or parts of them already in existence
at the time of termination and all and any documentation and other
information including but not limited to the respective source code
regarding the HP-specific development result available at the time of
termination. HP shall be vested with the rights to this development result
in accordance with Article 11 above (rights of use).
15.5 In the event of termination hereof, the obligations set forth under
Article 14 (confidential information) shall prevail and continue for a
period of four years subsequent to termination and those set forth under
Article 10 (warranty) shall also prevail and continue.
16. SCHEDULES TO THIS AGREEMENT
The Schedules listed in the following shall be deemed an integral part of
this Agreement:
Schedule 1 - Specifications, Development phases, Payment,
Schedule 2 - Contact persons
Schedule 3 - Project schedule
Schedule 4 - Bugfixing
Schedule 5 - Resources provided by HP
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17. MISCELLANEOUS PROVISIONS
17.1 No ancillary verbal agreements have been made. Any alterations and
amendments hereto must be made in writing in order to be valid and must
expressly indicate that they constitute an alteration or amendment hereto.
This shall similarly apply to any waiver of this written form requirement.
17.2 Unless otherwise expressly agreed upon herein, any transfer of the rights
arising in connection herewith to third parties by one of the parties
hereto shall be subject to the prior written approval of the other party.
17.3 Should one or more of the provisions hereof be or become void or invalid,
the parties hereto undertake to replace such a provision with a valid
provision which approximates the economic purpose or intent of the void or
invalid provision as closely as possible. The validity of the remaining
provisions shall remain unaffected thereby.
17.4 This Agreement shall be governed by and construed in accordance with the
laws of the Federal Republic of Germany. The Uniform Laws of the UN
Convention on Contracts for the International Sale of Goods shall not
apply. The courts of Stuttgart, Germany, shall have jurisdiction and
venue over any claims asserted under or in connection herewith.
For HP: For New Focus:
Boeblingen 23/12/96 Santa Clara 1/9/97
/s/ WERNER BERKEL /s/ TIMOTHY DAY
- ------------------------------------- -----------------------------------
Name Name
Business Manager Vice President, Engineering
- ------------------------------------- -----------------------------------
Area of activity/title Area of activity/title
11
<PAGE> 12
SCHEDULE 1 - SPECIFICATIONS, DEVELOPMENT PHASES, PAYMENT
A.) PRODUCT TO BE DEVELOPED:
1. A 1550 nm tunable laser source module (entire plug-in module) which will be
based on the patented (US Patent No. [*] and [*]) opto-mechanical design of
the New Focus ECDL product family for integration into the HP optical
component test platforms (or additional purposes).
2. This includes the development and production of the opto-mechanical
sub-assemblies as well as the assembly and test of the chassis and
interface electronics. Specifically, New Focus will reduce the cost and
size of the opto-mechanical head associated with the current New Focus
products, develop the low cost electronics needed to interface the
multimeter platform, and refine the packaging of the isolated fiber launch.
In addition, New Focus will develop an operations approach that allows for
the production of up to [*] plug-in modules per year. In the event that [*]
plug-in modules per year are desired an option, which requires additional
funding and a [*] period to increase capacity to [*] per year, may be
exercised by HP. The additional funding for this option will be part of a
separate development contract.
A focused team operating in a project management infrastructure and
reporting directly to the New Focus management team will be employed for
that purpose.
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
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3. New Focus will develop and deliver a final module that will meet all of the
specifications described below.
Condition: The Module is [*]
(currently under development at HP)
All Specifications apply over the Operating Temperature Range and under the
Humidity Conditions.
[*]
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
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<PAGE> 14
MODULE KEY FUNCTIONS AND FEATURES
3.1.0 TUNABLE WAVELENGTH LASER SOURCE PARAMETERS
From the customer point of view this source will have the following parameters.
All these parameters must be accessible via the user interface.
[*]
3.1.1 TUNABLE WAVELENGTH LASER SOURCE FUNCTIONALITY
[*]
3.1.2 TUNABLE WAVELENGTH LASER SOURCE EXCEPTIONS/EVENTS
[*]
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
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4. Development requirement and payment criteria:
The Development will proceed in accordance with the development phases as
described below.
A: MODULE HARDWARE
Start Contract
o Final contract signed from both parties
o Agreement on development schedule (see appendix "Development
Schedule")
o Agreement on all product specifications (see appendix "Module
Specification")
1. Design Review
a) Complete product documentation available, and documentation is
supposed to be capable to fulfill the product requirements.
[*]
2. Phase 1 Prototypes
[*]
3. Phase 2 Prototype
[*]
4. Release to Production
a) All prototypes out of phase 2 are tested at HP regarding HP
Environmental Test Manual Class B and meet the product
requirements (see appendix "Module Specification")
b) Stress and lifetime test results are available
c) Exhaustive search for design defects complete
d) Entire production process works and is documented
e) Test tooling complete
f) Incoming material inspection in place
g) Shipping container in place
5. Final Contact close
[*]
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
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<PAGE> 16
B: MODULE SOFTWARE
1. Design Review
[*]
2. Prototype (alpha)
[*]
3. Prototype (beta)
[*]
4. Release to Production
[*]
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
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<PAGE> 17
5. The delivery dates are laid down within the project schedule (Schedule 3).
The remuneration will be paid [*]. The respective installment will be due
[*] provided that HP will not detect major deviations in regard of the
requirements of the respective development phase. The installments are as
follows.
<TABLE>
<S> <C>
Start Contract $[*]
Design Review $[*]
Phase 1 Prototypes $[*]
High Power diodes in cavities $[*]
Phase 2 Prototypes $[*]
Release to Production $[*]
Final Contract close $[*]
30 Production Units $[*]
</TABLE>
The development cost approach is to use non-recurring engineering funding
from HP to develop the product and production line so that the per unit
price in 3/98 will be $[*]. The per unit price will be $[*] and the
development cost will be $[*] to get to [*] fully tested plug in modules
per year. This $[*] non-recurring engineering effort will include delivery
of [*] units but the [*] delivered at the end of the project will be $[*]
each (FOB Santa Clara, CA). This $[*] per unit price is based on a cost for
the coated diodes of $[*]. If a qualified source of AR coated diodes could
be identified that would work in our cavity then the per unit price would be
$[*] plus the cost (to NFI) of the diodes.
An option to increase the capacity in a separate development contract has
been offered, but not exercised by HP at this time, that will allow New
Focus to tool up to the [*]/year numbers associated with the high end of the
HP marketing numbers. This effort would be covered under a separate
development project and New Focus would need [*] advance notice before the
increased capacity could be realized. If this option is chosen the per unit
price for a quantity of [*] units would be $[*] (FOB Santa Clara, CA) (New
Focus are essentially only increasing capacity with this approach) and the
per unit price at [*] units would be $[*] (FOB Santa Clara, CA). In these
cases the assumed cost of the AR coated diode is $[*] and $[*],
respectively.
B.) TECHNICAL APPROACH (PROPOSED BY NEW FOCUS):
1. [*]
2. [*]
3. [*]
4. [*]
5. Extensive environmental testing of the pigtailed opto mechanical head
6. Development of compact low cost versions of our analog control electronics
(ongoing)
7. Integration of the analog and digital opto-mechanical control electronics
with the micro-processor interface and communications design provided by
HP.
8. [*]
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
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<PAGE> 18
The above Technical Approach is understood as a proposal by New Focus which may
be amended, provided that the development requirements as set out in this
Schedule 1 are fully met.
New Focus will use the HP communications and interface design, which uses a 32
bit-microprocessor, together with New Focus design for opto-mechanical control
to design and develop a complete [*]. To do this New Focus will acquire the [*]
development environment necessary to design with this processor, New Focus will
use [*] and New Focus will work to ensure that there is complete overlap between
the development effort at HP and at NFI.
C.) OPERATIONS APPROACH (PROPOSED BY NEW FOCUS):
New Focus will develop a production line solely dedicated to the assembly and
test of the HP ECDL in Santa Clara CA using some of New Focus' available
manufacturing space. The approach is summarized below:
1. Develop the operational approach (demand flow/JIT)
2. Build and capitalize laboratory manufacturing space
3. Design manufacturing tooling and automation software
4. Develop method sheets and documentation for operational model
New Focus will expand and improve its present [*] production line (model [*])
for use in the production of up to [*] HP-ECDLs per year.
D.) PROJECT MANAGEMENT BY NEW FOCUS:
This development effort will require a focused team operating within a tight
schedule. The scope of the project is well understood as are the resources
necessary to accomplish the task. New Focus will create a development team that
will report directly to the VP of Engineering. This team will be solely
dedicated to this project. The team will consist of but not be limited to:
1. Project Manager: Extensive experience with ECDL's,
project management, and e-o-engineering
2. Senior Electro-Optics Engineer: One of our senior laser designers with
extensive control and AR coating
experience
3. Senior Mechanical/Control Engineer: One of our engineers associated with the
DC servo control of precision
opto-mechanical hardware
4. Electrical Engineer: Engineer focusing on low cost
analog/digital electronics and rapid
prototyping
5. Electrical Engineer: Engineer focused on firmware and
interface to HP platform
6. Mechanical Engineer: Engineer focused on tooling
designs/documentation/incorporation of
fiber launch designs
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
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<PAGE> 19
7. Manufacturing Engineer: Engineer focused on production line
layout / manufacturing tooling / testing
New Focus will commit additional resources to this project as it moves forward.
SCHEDULE 2 - CONTACT PERSONS
For a better fulfillment of this Agreement both parties name the following
contact persons
By HP: By New Focus
Name: Edgar Leckel Name: Timothy Day
Telephone-No.: (49) 7031-142691 Telephone-No.: 408-980-8088
FAX: (49) 7031-147023 FAX: 408-980-8883
Name: Emmerich Muller Name: Michael Brownell
Telephone-No.: (49) 7031-144861 Telephone-No.: 408-980-8088
FAX: (49) 7031-147023 FAX: 408-980-8883
SCHEDULE 3 - PROJECT SCHEDULE
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[*]
[*] Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to
the omitted portions.
<PAGE> 21
[*]
[*] Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to
the omitted portions.
<PAGE> 22
SCHEDULE 4 - BUGFIXING
1. Any bugs in the developed software shall be recorded and verified by HP.
Following verification, HP shall forward the bug report to New Focus.
Bugs shall be categorized as follows:
A. Serious bugs
Bugs that result in system crashes (hangs or halts), loss of data,
destruction of data, corruption of data or cases of unreasonable
handling effort for which no "workaround" is available (i.e. there is
no method accepted by HP or by the customer for either avoiding the
bug or using the developed software).
Any medium bug as defined in B of this schedule 4 which causes a
serious bug as defined above within the final optical component
platforms shall additionally be categorized as a serious bug.
B. Medium bugs
Bugs as specified under A above, but for which a "workaround" is
available for bug avoidance.
C. Minor bugs
Any bugs not included in categories A and B above.
2. Any serious bugs in the developed software shall be immediately fixed by
New Focus. New Focus will begin to fix the bug 24 hours after the
respective report by HP the latest. New Focus shall fix the bug during 3
days or during a longer period agreed by HP. If New Focus is unable to
reproduce or to fix any bug immediately on its own computer system, it
shall fix the bug - if decided by HP - on-site in customer's place.
3. Any medium bug in the developed software shall be fixed in a reasonable
period of time. New Focus shall begin fixing the bug during 48 hours after
the respective report by HP. New Focus shall fix the bug during two weeks
or during a longer period agreed by HP.
4. Any other bugs shall be fixed as soon as possible within the scope of the
maintenance of the developed software.
5. New Focus shall update the documentation in accordance with the bug fix.
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<PAGE> 23
6. New Focus shall ensure that any serious and medium bugs shall be fixed for
both the current and the previous operating system release.
7. New Focus will maintain a telephone number with a designated knowledgeable
contact to HP to call during normal business hours to report problems and
receive assistance.
8. The Bugfixing according to this schedule 4 shall be free of charge during
the warranty period.
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<PAGE> 24
SCHEDULE 5 - RESOURCES PROVIDE BY HP
1. HARDWARE RELATED DOCUMENTS (see separate Documentation Package)
a) Drawings of all mechanical parts of the Module Chassis
o Module Bottom Cover
o Module Top Cover
o Module Sub Panel
o Plastic Front Panel
o Module Extractor
o Fiber Connector Bushing at Front Panel
o Module Fiber Interface
b) Description of Module Interface and digital Hardware
o Printed Circuit Board Outline
o Interface Connector to Module/Mainframe Positioning Dwg.
c) Schematics of digital parts including part list
d) Documentation and File of FPGA Communication Part
2. SOFTWARE RELATED DOCUMENTS (see separate Documentation Package)
a) Description of Communication between Mainframe and Module
b) HP Coding Standards
c) Documentation and Source Code Template for Operating System, Start-up
and Communication of Module
3. HARDWARE SUPPORT
a) For first Phase of Development (December 96 - March 97 Time Frame)
o HP8153 Mainframe
o Dummy and Extendermodule
--> Delivery January 1997
b) For the rest of the Development (April 97 - March 98)
o New OCT Mainframe Prototype
--> Delivery End of March
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<PAGE> 25
[GRAPH]
[*]
Page 1
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
<PAGE> 26
[GRAPH]
[*]
Page 2
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
<PAGE> 1
EXHIBIT 10.12
ADDENDUM TO THE
DEVELOPMENT AGREEMENT OF 23.12.1996
REGARDING THE DEVELOPMENT OF A TUNABLE LASER SOURCE MODULE
by and between
HEWLETT-PACKARD GmbH
HERRENBERGER STRABE 130
71034 BOEBLINGEN
GERMANY
- hereinafter referred to as "HP" -
and
NEW FOCUS INC.
2630 WALSH AVE.
SANTA CLARA CA 95051
USA
- hereinafter referred to as "New Focus" -
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<PAGE> 2
1. If not expressly stated to the contrary herein, all provisions set forth
in the Development Agreement of 23.12.1996 (the "Agreement") shall fully
apply to this Addendum and shall remain in full force and effect.
2. Delivery by New Focus of the 30 production units as described in the
Agreement shall be due on July 31, 1998. The per unit price for these
production units shall remain unchanged at $[*].--([*] U.S. Dollars).
3. The parties hereto will agree on separate terms and conditions for a
contract regarding the production and delivery of the Tunable Laser Source
Modules as defined in Clause 11.1 of the Agreement. In amendment of
Schedule 1 A.) 5. of the Agreement, the parties agree on an initial per
unit price ("HP Purchase Price") of $[*]. -- ([*] U.S. Dollars) for the
Module. This HP Purchase Price is based on the initial HP U.S. List Price
for the Module of $[*]. -- ([*] U.S. Dollars). To the extent HP decreases
or increases the HP U.S. List Price for the Module, New Focus will decrease
or increase the HP Purchase Price by half of the percentage the HP List
Price decreased or increased. If and to the extent the HP Purchase Price
falls below $[*],-- ([*] U.S. Dollars), New Focus shall have the right to
terminate the contract regarding the production and delivery of the Tunable
Laser Source Modules. If and to the extent the HP List Price falls below
$[*] -- ([*] U.S. dollars), HP shall have the right to terminate such
contract. These rights of termination shall be specified in detail in such
contract. It is understood between the parties hereto that, in this case,
HP shall be absolutely free to manufacture the Modules itself or have the
Modules manufactured and delivered by a third party provided licensing
agreements as outlined in Clause 7 of this Addendum are strictly adhered
to. In addition, HP shall not be responsible for any additional development
costs associated with supplying HP with the PMF Option of the Module due to
the fact that such additional development costs were already covered by the
NRE payments documented in the Development Contract of December 23, 1996.
4. HP agrees to pay to New Focus an amount of $500,000.--(Five Hundred
Thousand U.S. Dollars) within 30 days of the execution of this Addendum in
order to ensure timely manufacturing and delivery of the Modules by New
Focus. Payment shall be subject to New Focus providing HP a guarantee for
50% ($250,000.--Two Hundred-Fifty Thousand U.S. Dollars) of the above
amount from an internationally recognized Bank substantially in the form as
laid out in Schedule 1 hereto.
5. New Focus shall repay up to 50% ($250,000.--Two Hundred-Fifty Thousand U.S.
Dollars) of the above amount to the extent that one or more of the
following applies:
(i) New Focus being in delay with any deadline set forth in the
Agreement, this Addendum or the production and delivery contract;
provided that a delay with respect to the delivery of the production
units according to Clause 2 above shall
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
2
<PAGE> 3
only trigger repayment if such delay exceeds one month and New Focus
does not provide HP with reasonably sufficient justification for such
delay
and/or HP may not be reasonably expected to accept such delay and/or
the delay has not been primarily caused by HP.
(ii) New Focus being in default of any other material provision of the
Agreement, this Addendum or the production and delivery contract.
The following repayment schedule shall be binding:
$[*].--([*] U.S. Dollars) on [*], 1998
$[*].--([*] U.S. Dollars) on [*], 1998
$[*].--([*] U.S. Dollars) on [*], 1998
$[*].--([*] U.S. Dollars) on [*], 1998
$[*].--([*] U.S. Dollars) on [*], 1998
Clauses 5 (i) and 5(ii) of this Addendum shall not apply for any failure or
delay in the performance of New Focus due to causes including, but not
limited to, an act of God, an act of civil or military authority, fire,
epidemic, flood, earthquake, riot, war, sabotage, and governmental action
which are beyond its reasonable control; provided that New Focus: (i)
promptly gives HP written notice of such cause and, in any event, within
fifteen (15) calendar days of discovery thereof; and (ii) uses diligent
efforts to correct such failure or delay in its performance.
6. In view of HP's exclusive rights of use as described in Clause 11 of the
Agreement, the Parties agree upon the following:
(i) New Focus may solely sell Modules in their completely assembled form
(as defined by form factor, HW and SW interface) to HP.
(ii) Until HP officially informs New Focus of the obsolescence of the
Module, New Focus shall not in any way manufacture and/or sell the
Module and/or the building blocks (defined as the complete assembled
opto-mechanical sub-assembly including but not limited to, the diode
laser, external cavity, cavity optics, and drive train, in the exact
configuration) thereof either under its own brand name in a way that
direct competition to the HP Module is created or to direct HP Module
competitors (including but not limited to corporations such as Anritsu,
Photonetics, EXFO, Tektronix, Santec etc.) without the expressed
written consent of HP.
Subject to the foregoing, none of HP's rights according to Clause 11 of the
Agreement and Clause 7 of this Addendum nor any other of HP's rights under
the Agreement shall be in any way affected hereby.
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
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<PAGE> 4
7. With respect to HP's rights of use pursuant to 11.1 of the Agreement, and
to the extent HP decides to manufacture the Modules itself or decides to
have the Modules manufactured and delivered by a third party, the Parties
shall enter into negotiations regarding the amount of the license fee for
the New Focus patent in question (U.S. Patent No.: 5,319,668). This
license fee shall not exceed $[*]. -- ([*] U.S. Dollars) per manufactured
Module. New Focus warrants that it is the sole owner of U.S. patent No.
5,319,668 and the therewith related applications [*] and [*] and any other
patent or patent application claiming the priority of this patent or
patent application.
Furthermore, it is the understanding of the parties:
(i) that no further royalty or license fees shall in any way be payable by
HP to New Focus for the Module.
(ii) that HP's use of the patent in question is limited to the Module in
its completely assembled form (as defined by form factor, HW and SW
interface).
8. No ancillary verbal agreements have been made. Any alterations and
amendments hereto must be made in writing in order to be valid and must
expressly indicate that they constitute an alteration or amendment hereto.
This shall similarly apply to any waiver of this written form requirement.
Should one or more of the provisions hereof be or become void or invalid,
the parties hereto undertake to replace such a provision with a valid
provision which approximates the economic purpose or intent of the void or
invalid provision as closely as possible. The validity of the remaining
provisions shall remain unaffected thereby.
For HP: For New Focus:
Boeblingen, 10/30/97 Santa Clara, 11/6/97
/s/ WERNER BERKEL /s/ TIMOTHY DAY
- ----------------------------- -----------------------------
Werner Berkel Timothy Day
Fiber Optic Test/Business Manager Engineering/Vice President
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
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<PAGE> 5
MID-PENINSULA BANK
October 23, 1997
Hewlett-Packard GmbH
Herrenberger Str. 130
71034 Boeblingen
Germany
Dear Sirs:
Mid-Peninsula Bank (the "Bank") herewith confirms that it has knowledge that
Hewlett-Packard GmbH (hereinafter referred to as HP), Herrenberger Str. 130,
71034 Boeblingen, Germany has granted to New Focus, Inc. a payment in the amount
of $USD500,000 (Five Hundred Thousand US Dollars). The payment to New Focus,
Inc. is specified within the terms and conditions of the Addendum dated October
28, 1997 to the Development Agreement (the "Agreement") dated December 23, 1996
by and between HP and New Focus, Inc.
The Bank herewith provides assurance to HP as follows. The Bank, acting as a
principal obligor, guarantees to HP prompt payment by New Focus, Inc. of all of
its (repayment) obligations under the terms specified in that certain Addendum
to the Agreement, in an amount not to exceed $USD250,000 (Two Hundred-Fifty
Thousand US Dollars), such amount to exclude accrued interest and/or costs. In
the event that New Focus, Inc. does not make payment to HP in accordance with
Clause 5 of the Addendum to the Agreement, the Bank shall forthwith upon the
first demand of HP, make payment to HP in such amount(s) (not to exceed
$USD250,000 - Two Hundred-Fifty Thousand US Dollars) as was not paid by New
Focus, Inc. (as if the Bank instead of New Focus, Inc. were expressed to be the
principal obligor).
This guaranty shall remain in effect as long as New Focus, Inc. has a potential
payment obligation towards HP under Clause 5 of the Addendum to the Agreement.
Mid-Peninsula Bank
By: /s/ MURRAY B DEY
---------------------------------
Murray B. Dey
Executive Vice President
5
<PAGE> 6
Schedule 1
GUARANTEE
Whereas
We, the undersigned, Bank, herewith confirm that we have knowledge that
Hewlett-Packard GmbH, Herrenberger Str. 130, 71034 Boblingen, Germany has
granted to New Focus payment of an amount of $500,000 -- (Five Hundred
Thousand U.S. Dollars).
Therefore
We guarantee, as principal obligor, to HP prompt performance by New Focus
of all its (repayment) obligations under the Addendum. We undertake with HP
up to a maximum amount of $250,000 -- (Two Hundred-Fifty Thousand U.S.
Dollars), such maximum amount not including accrued interest and/or costs,
that whenever New Focus does not pay amount when due in accordance with
Clause 5 of the Addendum, we shall forthwith on first demand pay that
amount as if we instead of New Focus were expressed to be the principal
obligor.
This guarantee shall be valid until final performance of New Focus of all
its obligations under the Agreement, the Addendum or the production and
delivery contract.
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
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<PAGE> 1
EXHIBIT 10.13
ADDENDUM NO 2
to the
Development Agreement of 23.12.1996 regarding the development of a Tunable Laser
Source Module, amended by an Addendum of 30.10.1997
by and between
AGILENT TECHNOLOGIES
DEUTSCHLAND GMBH
Herrenberger Str. 130
71034 Boblingen
Germany
hereinafter referred to as "AGILENT"
and
NEW FOCUS INC.
2630 Walsh Ave.
Santa Clara CA
U.S.A.
hereinafter referred to as "New Focus"
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WHEREAS, New Focus developed a tunable laser module for AGILENT known as the
"Happy module" under the Development Agreement of 23.12.1996, amended of
30.10.1997 (hereinafter "the Development Agreement").
WHEREAS, the parties wish to develop a version of this module that provides more
power, referred to hereinafter as the "TL1502 Module" as well as an
L-band version, referred to hereinafter as the "TL1601 Module" (together
hereinafter called "Monet Module").
NOW THEREFORE, the parties agree as follows:
1. DEVELOPMENT AGREEMENT AND THIS ADDENDUM
If not expressly stated to the contrary herein, all provisions set forth
in the Development Agreement of 23.12.1996 and the Addendum of
30.10.1997 shall fully apply to this Addendum No 2 and shall remain in
full force and effect.
With respect to the penalty clause set forth in section 5.2 of the
Addendum 1 to the Development Agreement regarding the Happy Module,
AGILENT agrees not to enforce such clause with respect to any delays
having occurred before the date of this Addendum (altogether $[*];
[*] Dollars).
2. AMENDMENTS REGARDING THE DEVELOPMENT AGREEMENT
2.1 PRICES AND RAMP-UP
In amendment of Schedule 1 A.) 5. Of the Development Agreement of
23.12.1996, the parties agree on an initial per unit price ("AGILENT
Purchase Price") of $[*]-([*] U.S. Dollars) for the Happy Module. The
parties agree that this price shall not be increased in case the initial
AGILENT U.S. List Price increases or decreases.
AGILENT agrees to purchase [*] "Modules" from New Focus prior to March
2000. A "Module" is defined as a Happy Module or a Monet Module.
2.2 DELIVERY MILESTONES
2.2.i New Focus shall deliver the Happy Module according to the following
delivery milestones.
[*]
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
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It is hereby agreed that the deliveries of the Happy Module as of the
date of signing of this Addendum are in full compliance with the
delivery milestones listed above.
From December 1999 on, the parties take into account a rolling three
months window (further delivery milestones after March 2000 will be
agreed to in a separate purchase agreement). The numbers of units
delivered by New Focus will be reviewed on a monthly basis. If the total
number for one month is below the numbers agreed to this respective
month, New Focus will have a two months period to bring the total number
of units back to the number agreed to for the respective three months
period.
2.2.ii In the event that New Focus fails to deliver the number of units agreed
to for a three months period, AGILENT may terminate this Agreement upon
90 days notice.
AGILENT may also terminate this Addendum without notice if New Focus
fails to deliver the first PM beta unit by February 29, 2000 or fails to
deliver the first PM production unit by March 31st, 2000.
AGILENT must inform New Focus that AGILENT wishes to terminate the agreement in
writing within 60 days of failure by New Focus to deliver. If AGILENT fails to
do so, then AGILENT's right to terminate will lapse until the next trigger event
occurs.
2.3 QUALITY TRIGGER (HAPPY MODULE)
Regarding the Annualized Failure Rate (AFR) as defined in schedule 7,
the parties will monitor a 6 months rolling average starting in June
2000. The parties will notify each other in writing every month of the
six month rolling average of the AFR.
Regarding the rate of Defect on Arrival (DOA) as defined in schedule 7,
the parties will measure a rolling three months average starting in
December 1999. The parties will notify each other in writing every month
of the three month rolling average of the DOA.
In the event that the following trigger events apply, AGILENT may
terminate this Addendum to the Development Agreement upon 90 days prior
notice:
- the six month rolling average of the AFR is above [*]%
- the three month rolling average of the DOA exceeds [*]%
AGILENT must inform New Focus in writing within 60 days of the occurrence of the
above trigger events that AGILENT wishes to terminate the agreement. If AGILENT
fails to do so, then AGILENT's right to terminate will lapse until the next
trigger event occurs.
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
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2.4 TRANSITION
In the event that this Addendum will be terminated according to Article
2.2, 2.3,5,6,7 or according to any provision regarding the Monet Module
herein, New Focus agrees to provide the following documents and
transition services to AGILENT:
i. complete transfer of all R&D documentation regarding the Products
of the Development Agreement and this Amendment.
ii. transfer of SW source code
iii. transfer of all Manufacturing documentation
iv. transfer of supply chain access and documentation
v. [*] months engineering support (Mr. [Tim Day] or an equivalent
engineer)
vi. [*] months phone support after transfer is complete
vii. New Focus agrees to bridge the production up to [six] months
during transfer of documents and processes.
viii. New Focus agrees to transfer all unique production tools and
fixtures plus any testcode.
ix. It is agreed that the guaranteed purchase price for the capped
diode will a) include a [*]% gross margin to New Focus and b)
the cost of coating used in this calculation will not exceed
$[*]. The price to AGILENT for the coated and capped diode will
therefore be according to the following formula: (Actual laser
diode cost + coating cost max.$[*]) / ([*]) The supply of
the capped diode is guaranteed for a period of one year after
termination.
3. DEVELOPMENT OF THE MONET MODULE
New Focus agrees to develop a Tunable Laser Source Module (including
hard- and software), hereinafter "Monet Module", which is described in
greater detail in the specifications in Schedule 1 hereto, as well as to
manufacture prototypes and produce units whilst adhering to the project
schedule as set forth in Schedule 2 hereof.
4. BREAK-DOWN OF COSTS / REMUNERATION FOR THE MONET MODULE
4.1 In return for the services outlined in Article 3 above, AGILENT shall
effect payment in installments as laid out in Section3. "Payment
Criteria" of Schedule 1 according to the development phases for hardware
and software described in 2 Sections 2. A-B of Schedule 1 hereto. The
payments shall become due and payable in accordance with the terms and
conditions outlined in Section3. "Payment Criteria" of Schedule 1.
4.2 A) AGILENT agrees to an initial payment to New Focus of [*] U.S. Dollars
($[*]) within 30 days of the execution of this Addendum in order to
ensure timely manufacturing and delivery of the Monet Module by New
Focus. This sum represents [*]% of the total developmental amount of [*]
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filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
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U.S. dollars ($[*]) which Agilent is hereby obligated to pay according
to the terms and of this Addendum and the schedules attached hereto for
the development of the Monet Module. This sum is in addition to any
contract amounts which Agilent has previously agreed to pay New Focus
(See for Example: Section 4 of the Addendum No. 1 of 30.10.1997 to the
Development Agreement.)
B) The initial and subsequent payments for the Monet Module set forth
above in Section 4.2A and which are detailed in the attached schedules
1-2 shall be subject to New Focus providing AGILENT a performance
guarantee of [*] U.S. Dollars ($[*]) from an internationally recognized
Bank. This subsection shall, for the Monet Module, supercede and replace
the guarantees set forth in Section 5 of Addendum No 1 of 30.10.1997 to
the Development Agreement.
C) The parties agree on an initial per unit price for the Monet Module
(either for the TL1502 or the TL1601 single mode fiber version) of $[*]
for the first [*] units and for any further unit $[*], as well as for
the PM-Version of these Modules $[*]. The parties agree that this price
shall not be increased within the first year after delivery of the first
production unit. The parties to this Addendum will renegotiate the per
unit price one year after acceptance by AGILENT of the first units of
Monet Modules produced under this Addendum. New Focus shall work
continuously on reducing the cost of the products. Any share of cost
advantages will be part of a future procurement agreement.
4.3 The production and delivery of the Monet Modules shall be subject to a
separate Framework Purchase Agreement. The parties shall negotiate such
terms and conditions and have an agreement in place 2 months before the
first product shipment. This agreement shall contain the ramp up
quantities for the first six months of production. The target capacity,
without any commitment herein, is intended to be in total (for SMF/PC,
SMF/APC, PMF/PC; PMF/APC) [*] units up to [*] per year.
5. DEVELOPMENT
5.1 The prototypes as well as the software of the Monet Modules shall be
manufactured and developed by New Focus in accordance with the project
schedule (Schedule 2 to this Addendum No 2) and the development phases
contained therein as well as in Schedule 1.
5.2 AGILENT may terminate this Addendum upon 90 days notice if New Focus
fails to deliver the TL1502 prototype and production unit as well as the
TL1601 prototype and production unit as defined in section 2 of schedule
1 of this Addendum, until 3 months after the milestones as defined in
Schedule 2 of this Addendum. Article 2.4 ("Transition") shall apply
accordingly.
Agilent must inform New Focus in writing of Agilent's intention to terminate the
agreement within 60 days of the occurrence of the failure by New Focus to
deliver the TL1502 and TL1601 prototype and production units. If AGILENT fails
to do so, then AGILENT's right to terminate
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
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will lapse until the next trigger event occurs.
6. QUALITY TRIGGER (MONET MODULE)
Regarding the Annualized Failure Rate (AFR) as defined in schedule 7,
the parties will monitor a 6 months rolling average starting 6 months
after the first production unit is delivered. The parties will notify
each other in writing every month of the six month rolling average of
the AFR.
Regarding the rate of Defect on Arrival (DOA) as defined in schedule 7
the parties will measure a rolling three months average starting three
months after the first production unit is delivered. The parties will
notify each other in writing every month of the six month rolling
average of the AFR.
In the event that the following trigger events apply, AGILENT may
terminate this Addendum upon 90 days notice:
- the six month rolling average of the AFR is above [*]%
- the three month rolling average of the DOA exceeds [*]%
- the absolute number of DOA is higher than 3 during the first
three months after the delivery of the first production unit.
AGILENT must inform New Focus in writing within 60 days of the occurrence of a
trigger event that AGILENT wishes to terminate the agreement. If AGILENT fails
to do so, then AGILENT's right to terminate will lapse until the next trigger
event occurs.
7. RIGHTS OF USE
7.1 All rights of use set forth in Section 11 of the Development Agreement
of 23.12.1996 granted to AGILENT regarding the Happy Modules under the
Development Agreement shall remain in full force and effect and shall
not be amended in any way by this Addendum. Only with respect to the
Monet Modules being subject of this Addendum, section 11.1 shall be
amended as follows.
7.2 AGILENT is hereby vested with an irrevocable, exclusive, transferable
distribution right regarding the Monet Modules (including software, the
respective prototypes, the production units and any and all parts
including, but not limited to any building blocks) in their respective
state of process, such right being unlimited with respect to time,
contents and geographical scope.
7.3 It is the intent of the parties that the manufacturing and supply of the
Monet Module be performed for AGILENT exclusively by New Focus provided
that the quality, timeliness
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filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
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of delivery of the Monet Modules as supplied by New Focus meet the
commitments made herein. The parties will establish an escrow account to
protect AGILENT in the event that New Focus is unable to meet its
commitments under this Addendum, or in the event that the agreement is
terminated under section 2, 5 or 6. The terms of the escrow account are
set forth below in subsections 7.3 i to v.
7.3.i As soon as available, New Focus shall deposit any
prototypes and/or parts of them as well as any
documentation with the latest version of the source code
regarding the AGILENT-specific development result and
update such deposits in escrow with a mutually agreeable
escrow trustee. AGILENT shall bear the costs of the
escrow trust.
The provisions applicable to the deposit of source code by New
Focus shall be as follows:
In the event that one or more of the following trigger
events apply AGILENT is automatically vested with an
irrevocable, transferable, non-exclusive production
right regarding the Products under this Addendum.: New
Focus
a. is no longer able to meet its maintenance and support
contract obligations to AGILENT, provided that the
cessation of maintenance services is not solely
attributable to the failure of the licensee to make
timely payment of any charges under such maintenance
contract;
b. has ceased to do business;
c. has ceased to produce the Products specified in
Schedule 1 hereto;
d. has significantly changed its quality management in
such a way that it becomes unacceptable to AGILENT
(e.g. audit reasons, administrative or governmental
regulations) or if the Modules will not reach an
acceptable level and if after AGILENT informs New
Focus in writing New Focus fails to remedy such
quality deficiency within 90 days;
e. has increased prices of the Products specified in
Schedule 1 hereto by more than [*]%;
f. has become insolvent, suffers or permits the
appointment of a receiver for its business or assets
or becomes subject to, any bankruptcy proceedings or
any statute relating to insolvency or the protection
of rights of creditors.
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
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7.3.ii The escrow trustee shall follow the procedures set forth
herein below:
- Escrow trustee shall promptly notify New Focus of the
occurrence of the Release Condition and shall provide
to New Focus a copy of AGILENT's notice to escrow
trustee. "Release Condition" for the purposes of this
Agreement shall mean all of the trigger events
described above.
- If the escrow trustee does not receive Contrary
Instructions, as defined below, from New Focus within
thirty (30) days following escrow trustee's delivery
of a copy of such notice to New Focus, Escrow trustee
shall deliver a copy of the source code to AGILENT.
"Contrary Instructions" for the purposes of this
subclause shall mean the filing of written notice with
escrow trustee by New Focus, with a copy to AGILENT
demanding delivery, stating that the Release Condition
has not occurred or has been cured.
- If Escrow trustee receives Contrary Instructions from
New Focus within thirty (30) days of the giving of
such notice to New Focus, Escrow trustee shall not
deliver a copy of the Source Material to AGILENT, but
shall continue to store the source code until:
a) otherwise directed by New Focus and AGILENT
jointly;
b) Escrow trustee has received a copy of an order of a
court of competent jurisdiction directing Escrow
trustee as to the disposition of the Source
Material; or
c) Escrow trustee has deposited the source code with a
court of competent jurisdiction or a Trustee or
receiver.
7.3.iii Upon receipt of Contrary Instructions from New Focus,
escrow trustee shall have the absolute right, at escrow
trustee's election to file an action in interpleader
requiring the New Focus and AGILENT to answer and
litigate their several claims and rights amongst
themselves.
7.3.iv Upon execution of this Addendum, AGILENT shall be
granted, at no charge, a non-exclusive,
non-transferable, irrevocable and perpetual right of
utilization to the deposited source codes. AGILENT may
only exercise
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its rights under this license and use the source code in
the event that the requirements of subclause 7.3.ii are
met.
7.3.v Prior to depositing the source codes, AGILENT may
inspect the source material to assure itself of the
quality thereof and of the fact that they are complete.
7.4 New Focus grants to AGILENT a non-exclusive, worldwide, transferable and
irrevocable license to all international property rights in the Monet
Module which are owned by New Focus, copyrights included, Said grant
will be provided royalty free for the Monet Modules sold to AGILENT by
New Focus. Said grant will be provided under the royalty provisions set
forth in subsection 7.7 hereof for Monet Modules not sold by New Focus
to AGILENT..
7.5 AGILENT grants to New Focus a non-exclusive, transferable, irrevocable
production and distribution right regarding the optoblock as defined in
Schedule 3. New Focus will pay to AGILENT a royalty of $[*] for the
first [*] and $[*] for any further sold optoblock. In the event of an
acquisition of New Focus, New Focus will be allowed to produce the
optoblock under the same agreement. AGILENT grants to New Focus a
non-exclusive, non-transferable, irrevocable production and distribution
right regarding the Digital/analog part as defined in Schedule 3. The
rights granted shall be revocable if New Focus will be taken over by
competitors as defined in Article 8.2 of this Addendum.
7.6 AGILENT grants to New Focus a non-exclusive, non-transferable,
irrevocable production and distribution right regarding the
Computing/interface part as defined in Schedule 3. New Focus will pay to
AGILENT a royalty of $[*] for each sold Computing/interface part. The
rights granted shall be revocable if New Focus will be taken over by
competitors as defined in Article 8.2 of this Addendum.
7.7 In the event of termination of this Addendum by AGILENT, AGILENT will
pay to New Focus a royalty for the Monet Module based on AGILENT's net
revenues for Monet or other modules which are based on the optoblock as
defined in schedule 3 of this Addendum or other modules which are based
on the optoblock as defined in schedule 3 of this Addendum per calendar
year as follows:
- 2000: [*]%
- 2001: [*]%
- 2002: [*]%
- 2003 and onward: [*]%
The above royalty payments will not be due in case that one or more of
the trigger events mentioned in Article 7.3i a-f apply.
In case that this Addendum will be terminated by AGILENT because of
Article 7.3.i.a-f, AGILENT agrees to pay a royalty of $[*] for each unit
of the Monet Modules built after
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filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
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termination.
AGILENT agrees to keep records showing the sales or other disposition of
Monet Modules or other modules based on the optoblock defined in
schedule 3 of this Addendum in sufficient detail to enable the royalties
payable hereunder by AGILENT to be determined, and further agrees to
permit its books and records to be examined to the extent necessary to
verify the Royalties payable. Such examination to be made at the expense
of New Focus by an independent auditor acceptable to AGILENT. Costs
shall be born by AGILENT if discrepancies occur.
8. MISCELLANEOUS
8.1 With respect to section 8.5 of the Development Agreement of 23.12.1996,
the liability for New Focus under this section, regarding AGILENT's
right to rectify the defect itself or have it rectified by a third party
at New Focus's expense, shall be limited to [*] U.S. dollars ($[*].)
8.2 Article 15.1 second paragraph of the Development Agreement of 23.12.1996
shall be modified as follows:
Good cause shall be deemed to exist, in particular, if one of the
parties hereto fails to perform its contractual obligations, despite a
reminder to this effect. Good cause shall also be deemed to exist for
AGILENT if bankruptcy proceedings are instigated or initiated against
New Focus's assets or in the event of a lasting modification to the
ownership rights within New Focus (for example, if New Focus will be
taken over by competitors within the market of telecommunication, test
and measurement).
8.3 Article 15.1 third paragraph of the Development Agreement of 23.12.1996
shall not apply to this Addendum.
8.4 No ancillary verbal agreements have been made. Any alterations and
amendments hereto must be made in writing in order to be valid and must
expressly indicate that they constitute an alteration or amendment
hereto. This shall similarly apply to any waiver of this written form
requirement.
8.5 Should one or more of the provisions hereof be or become void or
invalid, the parties hereto undertake to replace such a provision with a
valid provision which approximates the economic purpose or intent of the
void or invalid provision as closely as possible. The validity of the
remaining provisions shall remain unaffected thereby.
8.6 In the case that AGILENT transfers all or part of its assets to a new
legal entity and therefore has to assign and/or transfer the rights and
obligations under the agreement and this Addendum No 2 to such new legal
entity, New Focus declares its agreement to such assignment or transfer
and AGILENT accepts such agreement.
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
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9. SCHEDULES TO THIS ADDENDUM
The Schedules listed in the following shall form an integral part of
this Addendum:
Schedule 1 Specifications, Development Phases, Payment
Schedule 2 Project schedule
Schedule 3 Definition of the "Tunable Laser Module" and Parts thereof
Schedule 4 Contact persons
Schedule 5 Bugfixing
Schedule 6 Resources provided by AGILENT
Schedule 7 Definition of Annualized Failure Rate (AFR) and Defect on
Arrval(DOA)
For AGILENT: For New Focus:
Boeblingen, 12/16/1999 Boeblingen, Dec 10, 1999
/s/ JORGE SCHULTZ /s/ PAUL SMITH
- ----------------------------------- ------------------------------------
Name Name
CONTROLLER, OCMD VP/GM Telecom Division
- ---------------------------- ---------------------------------
Area of activity/title Area of activity/title
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Final Version - 10.12.1999
SCHEDULE 1 SPECIFICATIONS, DEVELOPMENT PHASES, PAYMENT
Complete specification should be according to specification control
drawings!
1. MODULE KEY FUNCTIONS AND FEATURES
1.0 TUNABLE WAVELENGTH LASER SOURCE PARAMETERS
From the customer point of view this source will have the following
parameters. All these parameters must be accessible via the user
interface.
<TABLE>
<CAPTION>
Parameter Limits Preset Remarks
- --------- ------ ------ -------
<S> <C> <C> <C>
[*]
</TABLE>
1.1 TUNABLE WAVELENGTH LASER SOURCE FUNCTIONALITY
[*]
1.2 TUNABLE WAVELENGTH LASER SOURCE EXCEPTIONS / EVENTS
[*]
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filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
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[*]
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
2
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2. Development requirement:
The Development will proceed in accordance with the development phases
as described below.
("of each" herein means of [*] and of [*] modules)
A: MODULE HARDWARE
Start Contract
- Final Contract signed from both parties
- Agreement on Project schedule (see schedule 2)
- Agreement on all product specifications (see specification control
drawing [*] and specification control drawing [*])
1. Design Review
a) Complete product documentation available, and
documentation is supposed to be capable to fulfill
the product requirements.
- Drawings of mechanical parts
- Assembly drawings of mechanical parts
- Technical specifications of all electro-mechanical components
- Technical specifications of all optical components
- Technical specifications of all opto-electronic components
- Printed circuit board layout and schematics of electronic
circuits
- Electrical power dissipation summary
- Series of operation description
2. Phase 1 Prototypes
a) First [*] of each (alpha units) prototypes are
delivered and test data of each prototype is
supplied
b) Prototypes meet specification according to
specification control drawing
3. Phase 2 Prototypes
a) [*] of each (beta units) prototypes are delivered
and test data of each prototype is supplied
b) Prototypes meet specification according to
specification control drawing
4. Release to Production
a) All prototypes out of phase 2 are tested at AGILENT
regarding AGILENT Environmental Test Manual Class B
and meet the product requirements specification
control drawing
b) Stress and lifetime test results are available
c) Exhaustive search for design defects complete
d) Entire production process works and is documented
e) Test tooling complete
f) Incoming material inspection in place
g) Shipping container in place
5. Final Contact close
a) 30 Production units of each are delivered and
product performance is documented
b) [*] units of each are at AGILENT incoming inspected
and meet the product specification
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filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
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Final Version - 10.12.1999
B: MODULE SOFTWARE
1. Design Review
[*]
2. Phase 1 Prototypes (alpha units)
[*]
3. Phase 2 Prototypes (beta units)
[*]
4. Release to Production
[*]
3. Payment criteria:
[*]% ($[*]) will be due at contract start (payment criteria; contract
signing by AGILENT and NFI).
[*]% ($[*]) will be due after shipment of [*] with waiver spec and [*]
(payment criteria is an [*] module successfully tested by AGILENT in
Germany meeting specifications according to specification control
drawing [*]). Estimated completion date [*].
[*]% due [*] modules with coherence control and with the original
environmental spec. (payment criteria both Alpha Modules pass
environmental testing by AGILENT in Germany according to specification
control drawing [*] and specification control drawing [*]. Estimated
completion date [*].
[*]% ($[*]) due after the first shipment of the [*] with coherence
control (payment criteria: units meet the same specification control
drawing limits as the [*] according to [*]). Estimated Completion date
[*].
[*]% ($[*]) due at final contract close (payment criteria: final
contract close which shall occur after 30 production units of both the
[*] modules have been accepted by AGILENT in Germany). Estimated
completion date [*].
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
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Final Version - 10.12.1999
SCHEDULE 2 - PROJECT SCHEDULE
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Agilent Technologies
[*]
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
<PAGE> 19
Agilent Technologies
[*]
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
<PAGE> 20
Agilent Technologies
[*]
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
<PAGE> 21
Agilent Technologies
[*]
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
<PAGE> 22
Final Version - 10.12.1999
SCHEDULE 3: DEFINITION OF THE "TUNABLE LASER MODULE" AND PARTS THEREOF
Digital/analog part
Comprising the [*] and the Analog board as well as the related Low Level
Software drivers.
Computing/interface part
Comprising the Computing Platform and the Bus interface as well as the
adaptation to the Wind River OS and the High Level Software Functions.
The optoblock
as the complete assembled opto-mechanical sub-assembly, including but not
limited to the diode laser, external cavity, cavity optics and drive train, in
the exact configuration, as subject of the Addendum to the Development
Agreement, last signed on Oct. 30, 1997.
[*]
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
6
<PAGE> 23
Final Version - 10.12.1999
SCHEDULE 4 - CONTACT PERSONS
For a better fulfillment of this Agreement both parties name the following
contact persons
By AGILENT: By New Focus
Name: Edgar Leckel Name: Bruce Pittman
Telephone-No.: (49) 7031-142691 Telephone-No.: (01) 408 919-2741
FAX: (49) 7031-143387
Name: Emmerich Muller Name: Dave Arnone
Telephone-No.: (49) 7031-144861 Telephone-No.: (01) 408-919-1528
FAX: (49) 7031-143387
7
<PAGE> 24
Final Version - 10.12.1999
SCHEDULE 5 - BUGFIXING
1. Any bugs in the developed software shall be recorded and verified by
AGILENT. Following verification, AGILENT shall forward the bug report to
New Focus.
Bugs shall be categorized as follows:
A. Serious bugs
Bugs that result in system crashes (hangs or halts), loss of
data, destruction of data, corruption of data or cases of
unreasonable handling effort for which no "workaround" is
available (i.e. there is no method accepted by AGILENT or by the
customer for either avoiding the bug or using the developed
software).
Any medium bug as defined in B. of this schedule 4 which causes
a serious bug as defined above within the final optical
component platforms shall additionally be categorized as a
serious bug.
B. Medium bugs
Bugs as specified under A above, but for which a "workaround" is
available for bug avoidance.
C. Minor bugs
Any bugs not included in categories A and B above.
2. Any serious bugs in the developed software shall be immediately fixed by
New Focus. New Focus will begin to fix the bug 24 hours after the
respective report by AGILENT the latest. New Focus shall fix the bug
during 3 days or during a longer period agreed by AGILENT. If New Focus
is unable to reproduce or to fix any bug immediately on its own computer
system, it shall fix the bug - if decided by AGILENT - on-site in
customer's place.
3. Any medium bug in the developed software shall be fixed in a reasonable
period of time. New Focus shall begin fixing the bug during 48 hours
after the respective report by AGILENT. New Focus shall fix the bug
during two weeks or during a longer period agreed by AGILENT.
4. Any other bugs shall be fixed as soon as possible within the scope of
the maintenance of the developed software.
5. New Focus shall update the documentation in accordance with the bug fix.
8
<PAGE> 25
Final Version - 10.12.1999
6. New Focus shall ensure that any serious and medium bugs shall be fixed
for both the current and the previous operating system release.
7. New Focus will maintain a telephone number with a designated
knowledgeable contact to AGILENT to call during normal business hours to
report problems and receive assistance.
8. The Bugfixing according to this schedule 5 shall be free of charge
during the warranty period.
9
<PAGE> 26
Final Version - 10.12.1999
SCHEDULE 6 - RESOURCES PROVIDED BY AGILENT
1. HARDWARE RELATED DOCUMENTS (see separate Documentation Package)
a) Drawings of all mechanical parts of the Module Chassis
- Module Bottom Cover
- Module Top Cover
- Module Sub Panel
- Plastic Front Panel
- Module Extractor
- Fiber Connector Bushing at Front Panel
- Module Fiber Interface
b) Description of Module Interface and digital Hardware
- Printed Circuit Board Outline
- Interface Connector to Module/Mainframe Positioning Dwg.
c) Schematics of digital parts including part list
d) Documentation and File of FPGA Communication Part
2. SOFTWARE RELATED DOCUMENTS (see separate Documentation Package)
a) Description of Communication between Mainframe and Module
b) AGILENT Coding Standards
c) Documentation and Source Code Template for Operating System, Start-up
and Communication of Module
10
<PAGE> 27
Final Version - 10.12.1999
SCHEDULE 7 - DEFINITION OF ANNUALIZED FAILURE RATE(AFR) AND DEFECT ON
ARRIVAL(DOA)
AFR(% YR), PER MONTH:
=(SUM OF 'ONE YEAR' WARRANTY FAILS IN THIS MONTH)/(SUM OF UNITS IN
WARRANTY THIS MONTH) *12 * 100
DOA = MODULE IS EITHER INCOMPLETE, DEFECT, OR DOES NOT MEET SPECIFICATIONS.
11
<PAGE> 1
EXHIBIT 10.14
[ALCATEL LOGO]
MEMORANDUM OF AGREEMENT
This Agreement is dated and effective as of January 7, 2000, by and between
Alcatel USA Sourcing, L.P. ("Buyer"), having a place of business at 1000 Coit
Road, Plano, Texas 75075 and New Focus, Inc. ("Seller"), having its principle
place of business at 2630 Walsh Avenue, Santa Clara, California 95051-0905.
Whereas, Seller commits to support and manufacture the optoelectronic component
("Product") as noted below for purchase by Customer.
Whereas, Buyer commits to purchase at least [*] of Buyer's total demand,
equating to approximately [*] units, based on acceptable levels of service and
quality from Seller, of the Product noted below from Seller for deliveries
during calendar year 2000 based on Buyer's current usage projections.
Product and Commercial Issues
-----------------------------
- New Focus Part Number; [*]
- Alcatel Part Number: [*]
- Desc: [*]
- Pricing: [*] USD for deliveries received January 1 through June 30
[*] USD for deliveries received July 1 through December 31
- Maximum lead time of eight (8) weeks ARO
- Establishment of safety stock for lead time reduction program as
mutually agreed upon by both Buyer and Seller.
This Memorandum of Agreement supersedes all previous understandings or
representations made prior to or simultaneous with the execution of this
document, by any party, with respect to the subject matter contained herein.
It is understood that issuance of a purchase order(s) is subject to receipt of
final approval by internal management of Alcatel USA Sourcing, L.P. and mutually
agreed to terms and conditions. It is further understood that should
the-required management approval be withheld, Alcatel USA will not place a
purchase order(s) and will not be subject to penalties, costs or other liability
of any nature.
/s/ DAVE STARK /s/ BOB MACDONALD
- ----------------------------------- ------------------------------------
Dave Stark Bob MacDonald
Purchasing Team Leader Product Marketing Manager
Alcatel USA Sourcing, L.P. New Focus, Inc.
/s/ GREG BROCKMANN /s/ PAUL SMITH
- ----------------------------------- ------------------------------------
Greg Brockmann Paul Smith
Manager - Advanced Purchasing Vice President, GM of
Alcatel USA Sourcing, L.P. Telecommunications
New Focus, Inc.
[*] Certain information on this page has been omitted and
filed separately with the Commission. Confidential treatment
has been requested with respect to the omitted portions.
<PAGE> 1
EXHIBIT 10.18
NEW FOCUS PACIFIC CO., LTD.
AND
FUZHOU CONET COMMUNICATION, INC.
-----------------------------------------------
SUPPLY CONTRACT
-----------------------------------------------
* Certain information on this page has been omitted and
filed separately with the Commission. Confidential
treatment has been requested with respect to the omitted
portions.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE PAGE
----
<S> <C>
PRELIMINARY STATEMENT................................................................... 1
ARTICLE 1 - DEFINITIONS AND INTERPRETATION........................................ 1
ARTICLE 2 - TERM.................................................................. 2
ARTICLE 3 - SUPPLY OF PRODUCTS.................................................... 3
ARTICLE 4 - PRICING AND PAYMENTS.................................................. 4
ARTICLE 5 - DELIVERY AND TITLE.................................................... 6
ARTICLE 6 - SUPERVISION AND QUALITY CONTROL....................................... 7
ARTICLE 7 - REPRESENTATIONS, WARRANTIES AND BREACH................................ 7
ARTICLE 8 - INVESTIGATION RIGHT AND RIGHT OF SET-OFF.............................. 8
ARTICLE 9 - NF COMMITMENTS........................................................ 9
ARTICLE 10 - TERMINATION........................................................... 9
ARTICLE 11 - FORCE MAJEURE......................................................... 10
ARTICLE 12 - SETTLEMENT OF DISPUTES................................................ 10
ARTICLE 13 - BREACH OF CONTRACT.................................................... 11
ARTICLE 14 - GENERAL PROVISIONS.................................................... 12
SIGNATURES ......................................................................
</TABLE>
ANNEX
1 PRODUCTS TO BE SUPPLIED
<PAGE> 3
SUPPLY CONTRACT
THIS CONTRACT is made in Fuzhou Municipality, People's Republic of China, on
this 11th day of May, 2000 by and between:
(1) NEW FOCUS PACIFIC CO., LTD., a wholly foreign-owned enterprise
registered in the People's Republic of China ("PRC") with its registered
address at Building R3-B, Unit A, 1st Floor, Shenzhen High-Tech
Industrial Park, Nanshan District, Shenzhen, PRC (hereinafter referred
to as the "NF"); and
(2) FUZHOU CONET COMMUNICATION, INC., a Chinese-foreign joint venture
company duly organized and existing under the laws of the People's
Republic of China, with its legal address at No. 39 Fuxing Avenue,
Gushan Fuxing Investment Zone, Jingan District, Fuzhou Municipality,
People's Republic of China (hereinafter referred to as the "SUPPLIER").
Supplier and NF are hereinafter also individually referred to as a "PARTY" and
collectively as the "PARTIES".
PRELIMINARY STATEMENT
WHEREAS, Supplier, New Focus, Inc. ("NFUS"), among others, entered into a Letter
of Intent dated 14 January 2000 ("LOI"), under which US$1 million ("SUCH
PAYMENT") has been paid by NF to Supplier.
WHEREAS, Supplier and NF wish to enter into a supply contract for Supplier to
supply certain products to NF and NF Affiliates (as defined later).
NOW, THEREFORE, the Parties agree as follows:
ARTICLE 1 - DEFINITIONS AND INTERPRETATION
1.1 Definitions
Unless the terms or context of this Contract otherwise provide, the
terms used herein shall have the meanings set forth below:
"ACCEPTED THIRD PARTY PURCHASES" means the Third Party purchases as
accepted by Supplier in accordance with Article 3.4 hereof.
"ADVANCED PAYMENT" means RMB29 million to be paid by NF to Supplier
pursuant to Article 4.3 hereof.
"CHINA" or "PRC" means the People's Republic of China.
"COMMENCEMENT DATE" means 1 June 2000.
1
<PAGE> 4
"EFFECTIVE DATE" means the date of execution of this Contract by the
Parties.
"MINIMUM PURCHASE AMOUNTS" means the amounts / quantities of Products
that NF commits to purchase from Supplier pursuant to Article 9 hereof.
"NF AFFILIATE" means any company which, directly or indirectly, is
controlled by, under common control with, or in control of, NF, the term
"control" meaning ownership of more than fifty percent of the voting
stock or registered capital, or the power to appoint or elect a majority
of the directors, or the power to direct the management, of a company.
"NF DELAWARE" means New Focus Inc., a company duly incorporated and
existing under the laws of the State of Delaware, U.S.A. with its
registered address at 1209 Orange Street, City of Wilmington, Delaware
19801, County of New Castle, U.S.A.
"SAFE" means the State Administration of Foreign Exchange, Fuzhou
branch.
"TERM" means the period for the supply of the Products under this
Contract which shall begin on the Commencement Date and shall have a
duration of three (3) years therefrom.
"THIRD PARTY" means any other party or entity other than the Parties, NF
Affiliates and NF Delaware.
"USA" means the United States of America.
1.2 Interpretation
Articles and headings in this Contract are inserted for the purposes of
convenience and reference only and shall not affect the interpretation
or construction of this Contract.
ARTICLE 2 - TERM
2.1 Term
This Contract shall become effective upon the Effective Date. The period
of the supply of the Products shall commence on the Commencement Date
and shall continue in force for three (3) years from the Commencement
Date (i.e. the Term), unless otherwise agreed to in writing by the
Parties. The Term may be extended upon agreement in writing by the
Parties.
2
<PAGE> 5
ARTICLE 3 - SUPPLY OF PRODUCTS
3.1 Supply
During the Term, Supplier shall supply to NF and NF Affiliates the
products which are listed in Annex 1 hereto (the "PRODUCTS") in
accordance with the terms of this Contract.
3.2 Annual Budget
Prior to 1 November preceding each calendar year during the Term, NF
shall provide Supplier with an annual budget ("ANNUAL BUDGET") of its
requirements of Products for that calendar year in the form to be agreed
by the Parties. This Annual Budget shall represent a reasonable estimate
on NF's part as to NF's and NF Affiliates' requirements for the Products
for that calendar year. NF shall make certain commitments to Supplier
with respect to the Annual Budget in accordance with Article 9 hereof.
Notwithstanding this Article 3.2, the Parties acknowledge that NF shall
provide Supplier a half year budget for the last half of Year 2000 and
the Quarterly Budget for the third quarter of Year 2000 one month prior
to the commencement of the Term.
3.3 Quarterly Budget
NF shall provide Supplier four weeks before each quarter of a calendar
year a budget for NF and NF Affiliates' requirements for the Products
for such quarter ("QUARTERLY BUDGET") and a projected forecast for NF's
(and NF Affiliates') requirements for the Products for the quarter
immediately following such quarter (for the avoidance of doubt, such
projected forecast when given shall not alter or amend each Party's
obligations under this Contract with respect to the Annual Budget and
the Quarterly Budgets). NF undertakes to Supplier that it and NF
Affiliates shall place orders with Supplier for the full amount of
Products as stated in such Quarterly Budgets. Supplier undertakes with
NF that it shall supply NF (or NF Affiliates, as the case may be) the
Products based on orders placed by NF or (NF Affiliates) at least for
the amount of products that Supplier can reasonably be expected to
produce with:
[ *** ] DJL-400 or equivalent furnaces on or before 31 December 2000;
[ *** ] DJL-400 or equivalent furnaces on or before 31 March 2001;
[ *** ] DJL-400 or equivalent furnaces on or before 30 June 2001;
[ *** ] DJL-400 or equivalent furnaces after 30 June 2001.
Provided that:
(i) the amount of Products stated in the Quarterly Budget for the
first (1st) quarter of each calendar year during the Term shall
not be in excess of 120% of that amount stated in the Quarterly
Budget for the fourth (4th) quarter of the preceding Calendar
year, unless otherwise agreed by the Parties; and
* Certain information on this page has been omitted and filed separately
with the Commission. Confidential treatment has been requested with
respect to the omitted portions.
3
<PAGE> 6
(ii) the total amounts of the Products stated in the Quarterly Budget
shall not exceed that stated in the relevant quarter of the
applicable Annual Budget, unless otherwise agreed by the
Parties.
3.4 Third Party Purchases
Supplier further undertakes to NF that Supplier shall not sell any
products to a Third Party or otherwise enter into any contract /
agreement that would commit any of Supplier's production capacity unless
the following conditions are met in full:
(a) Supplier's sale of the relevant products shall be concluded
within six (6) months from the date the purchase order of such
products is placed with Supplier;
(b) The provision to, the acceptance of purchase orders from, or the
manufacture on behalf of a Third Party by Supplier of any
products, or the entering into of any contract or agreement by
Supplier committing any of Supplier's production capacity would
not cause any problem or delay in respect of Supplier's
undertaking with NF to supply NF (or NF Affiliates, as the case
may be) the amount of Products as specified in Article 3.3
hereof.
Sales made by Supplier to a Third Party in accordance with Article 3.4
shall be referred to in this Contract as an "ACCEPTED THIRD PARTY
PURCHASE".
3.5 Purchase Order
Purchase of the Products by NF and NF Affiliates shall be based on
binding purchase orders made by NF and NF Affiliates to Supplier. The
terms of the purchase orders shall incorporate the terms of sale as
stated in this Contract (where appropriate) and shall not be
inconsistent therewith.
3.6 No Resale
Products purchased by NF and NF Affiliates from Conet cannot be resold
to Third Parties in its original form.
ARTICLE 4 - PRICING AND PAYMENTS
4.1 Prices
The prices of the Products that are sold by Supplier to NF shall be
quoted on an FOB basis and shall be negotiated by the Parties for each
Quarterly Budget based on the then prevailing market price and on a
most-preferred customer basis, provided however that the prices for the
Products shall be lower than those quoted / offered by NF's current
supplier(s) for the same Products under similar terms. Supplier
undertakes with NF that the prices of the Products supplied to NF (and
NF Affiliates) shall be the most favorable among all its sales
(including sales to Third Parties) of the Products for the relevant
period of supply.
4
<PAGE> 7
4.2 Payments
(a) NF (or NF Affiliates, as the case may be) shall pay Supplier the
purchase sum for the Products in relation to a particular
purchase order within thirty (30) days after the invoice date
for the relevant Products, provided that the invoice date shall
not be earlier than the date of shipping of the Products by
Supplier.
(b) All payments to Supplier for export of the Products by Supplier
or sales to a bonded zone company in accordance with this
Contract shall be made in United States Dollars or in another
foreign currency (e.g. Hong Kong dollars). All payments to
Supplier for domestic sales in PRC shall be in Renminbi.
4.3 Advanced Payment
(a) NF shall make an advance payment in the amount of RMB29 million
(i.e. the Advanced Payment) to Supplier and Supplier shall repay
Such Payment to NFUS in accordance with the following:
(i) NF shall remit RMB12.4 million within twenty-one (21)
days after the signing of this Contract to Supplier's
following account:
Account Name:
Account Number:
Name and address of Bank:
(ii) Supplier undertakes with NF to repay the full amount of
Such Payment in US Dollars to NFUS within thirty (30)
days after Supplier's receipt of the money referred to
in Article 4.3(a)(i) hereof.
(iii) NF shall remit RMB8.3 million to Supplier's bank account
as set out in Article 4.3(a)(i) within seven (7) days
after NFUS receives the full payment of Such Payment by
Supplier.
(iv) NF shall remit RMB8.3 million within ninety (90) days
after NFUS receives the full payment of Such Payment by
Supplier to Supplier's bank account as set out in
Article 4.3(a)(i) hereof.
Supplier shall repay NF the Advanced Payment in instalments in
accordance with the following schedules:
<TABLE>
<CAPTION>
Monthly
Repayment Total
Date (in Renminbi) Duration (in Renminbi)
---- ------------- -------- -------------
<S> <C> <C> <C>
30 November 2000 to 31 May 2001 500,000 6 months 3,000,000
1 June 2001 to 30 November 2001 700,000 6 months 4,200,000
</TABLE>
5
<PAGE> 8
<TABLE>
<S> <C> <C> <C> <C>
1 December 2001 to 31 May 2002 900,000 6 months 5,400,000
1 June 2002 to 30 November 2002 1,200,000 6 months 7,200,000
1 December 2002 to 30 April 2003 1,500,000 5 months 7,500,000
1 May 2003 to 31 May 2003 1,700,000 1 month 1,700,000
Total: 29,000,000
==========
</TABLE>
(b) If Supplier fails to repay NF any or all of the Advanced Payment
in accordance with the Schedule set out in 4.3(a) above, NF
shall have the right to credit any part or all of such due and
outstanding portion of the Advanced Payment against NF or NF
Affiliates' payments due in relation to purchase orders placed
by NF or NF Affiliates during the Term in accordance with the
provisions of this Contract. If Supplier is not able to meet its
supply obligations under this Contract (particularly Articles 3,
4 and 5 hereof), such failure by Supplier shall constitute a
breach of this Contract and NF shall have the right to the
repayment by Supplier of the Advanced Payment on 1 December
2001, in addition to other remedies which NF may have under law
in relation to such breach.
If Supplier fails to meet any of its repayment obligations hereunder,
interest on the default amount due from Supplier to NF shall accrue from
the date of default at the rate of 2% above the Renminbi lending rate
for working capital loan to companies as announced by Bank of China
Fuzhou Branch from time to time until such time the default amount and
the accrued interest are repaid in full.
ARTICLE 5 - DELIVERY AND TITLE
5.1 Delivery
Delivery of the Products shall be made by Supplier to NF's (or NF
Affiliate's, as the case may be) premises or such other location as may
be specified by NF (or NF Affiliates, as the case may be) from time to
time. NF shall bear the reasonable costs associated with such delivery
after the Products leave Supplier's factory premises.
5.2 Title
Title and the risk of loss or damage to the Products shall pass from
Supplier to NF (or NF Affiliates, as the case may be) when the Products
leave Supplier's factory.
6
<PAGE> 9
ARTICLE 6 - SUPERVISION AND QUALITY CONTROL
6.1 Standards and Specifications
Supplier shall manufacture the Products in accordance with NF's (or NF
Affiliate's) specifications quality standards as maybe provided to
Supplier from time to time. NF (or NF Affiliates) shall have the right
to review and approve the quality level of such Products which are
produced by Supplier. Supplier shall not distribute, market or sell any
Products to NF and NF Affiliates to having quality, appearance or weight
that do not meet the technical specifications required by NF (or NF
Affiliates).
6.2 Inspection
NF (or NF Affiliates) shall have the right to inspect Supplier's
manufacturing facility and warehouse in relation to the Products, at any
reasonable time during working hours upon prior written notice to
Supplier.
6.3 Sampling
During the term of this Contract, at NF's (or NF Affiliate's) request,
Supplier agrees to obtain and submit, free of any charge to NF (or NF
Affiliates), an agreed upon number of randomly selected, then current
production samples of the Products, so that NF (or NF Affiliates) may
assure itself of the quality thereof. If, at any time, any such sample
is disapproved by NF (or NF Affiliates) for good cause, NF (or NF
Affiliates) shall so advise Supplier and, upon receipt of such written
advice, Supplier shall have a reasonable opportunity (no longer than
ninety (90) days) to correct the problem and restore the quality of the
Products to the satisfaction of NF (or NF Affiliates). If Supplier fails
to correct the quality of the said Products, NF (or NF Affiliates) shall
have the right to terminate this Contract upon the second written notice
to Supplier.
6.4 Product Responsibility
Notwithstanding NF's right to enforce compliance with NF's quality
standards with respect to the Products, Supplier shall be solely
responsible for the manufacturing quality of all Products. Specifically,
Supplier shall comply with all relevant laws and regulations of the
People's Republic of China in connection with, and shall obtain all
necessary approvals, licenses and permits for the manufacture, supply,
sale and export (where applicable) of the Products.
ARTICLE 7 - REPRESENTATIONS, WARRANTIES AND BREACH
7.1 Representations
Supplier represents, warrants and undertakes with NF that, at the time
of delivery of the Products to NF (or NF Affiliates, as the case may
be), all Products shall comply with the specifications provided by NF
(or NF Affiliates, as the case may be) to Supplier (and accepted by
Supplier) from time to time, fit for the purpose as may be specified by
NF (or NF Affiliates, as the case may be) in its purchase orders.
7
<PAGE> 10
7.2 Breach of Article 7.1
In the event of any Supplier's breach of its representations, warranties
and undertakings made under Article 7.1 of this Contract, Supplier shall
be liable to, at NF's (or NF Affiliate's, as the case may be) option:
(a) promptly replace the Products in question; or
(b) promptly repay the price of the Products.
in addition to other remedies which NF (or NF Affiliates) may have
hereunder or under law.
ARTICLE 8 - INVESTIGATION RIGHT AND RIGHT OF SET-OFF
8.1 Right to Audit
Within three (3) months after the end of each calendar year during the
Term at, at NF's (or NF Affiliates') request and agreed by Supplier, the
Parties shall jointly appoint an internationally based, reputable and
sizable accounting firm ("ACCOUNTANT") (which also shall have a presence
in the PRC, for example, Ernst and Young) at NF's expense to investigate
the books and accounts of Supplier for the sole purpose of determining
whether the Products supplied to NF and NF Affiliates are supplied with
the most favorable prices when compared to other sales of the Products
made by Supplier (including those made to Third Parties). Supplier
undertakes with NF that Supplier shall cooperate with and provide the
Accountant reasonable access to Supplier's financial and sales records,
provided that the following scope and instructions have been provided to
the Accountant:
(a) the Accountant shall keep confidential all documents and
information of Supplier examined while conducting its
investigation, other than those permitted to be disclosed
hereunder;
(b) the Accountant only shall review Accepted Third Party Purchases
that involve Products that have the similar specifications in
one or more of the purchase orders placed by NF or an NF
Affiliates;
(c) when the Accountant makes comparison of prices, it also shall
take into account other terms of these Accepted Third Party
Purchases. The Accountant shall report its findings in writing
(the "REPORT") to the Parties within one (1) month after
concluding the above investigation.
8.2 Right of Refund or Set-off
Following the issuance of the Report by the Accountant in accordance
with Article 8.1 hereof, if the price(s) of the Products supplied to NF
(or NF Affiliates, as the case may be) in any given period are not the
most favorable as stipulated in Article 4.1, NF
8
<PAGE> 11
(or NF Affiliates, as the case may be) shall be entitled to a refund by
Supplier of the overpaid amount(s) . Alternatively, NF may elect to
set-off this overpaid amount against the invoiced amount in respect of a
subsequent purchase of Products by NF (or NF Affiliates) made pursuant
to this Contract.
ARTICLE 9 - NF COMMITMENTS
9.1 Subject to Article 9.3 hereof, NF represents, warrants and undertakes
with Supplier that, with respect to each calendar year during the Term
(or part of the calendar year for the first and last years during the
Term), NF and NF Affiliates together shall purchase from Supplier 70% of
the United States Dollar amount of the Products stated the applicable
Annual Budget for that year ("MINIMUM PURCHASE AMOUNTS"). The failure by
NF and NF Affiliates to meet the Minimum Purchase Amounts in accordance
with this Article 9.1 shall constitute a breach under this Contract. In
the event that NF and NF Affiliates fail to meet the Minimum Purchase
Amounts, Supplier shall use its best efforts to find other purchaser(s)
for the shortfall, notwithstanding Supplier's other rights under this
Contract.
9.2 Subject to Article 9.3 hereof, with respect to the purchase of Products,
NF shall first purchase the Products from Supplier during the Term.
9.3 NF's obligations under Article 9.1 and Article 9.2 hereof shall be
subject to (i) Supplier having capacity and being able to manufacture
and supply the Products to NF that meet NF's specifications and
standards; and (ii) the sale of Products to NF being made in accordance
with the terms of this Contract (including Articles 3, 4, 5, 6 and 7
hereof).
ARTICLE 10 - TERMINATION
10.1 Termination
(a) One Party shall have the right to terminate this Contract by
providing the other Party thirty (30) days prior notice in
writing under any of the following circumstances:
(i) if the other Party materially breaches this Contract and
such a breach is not remedied within thirty (30) days of
notification of such breach;
(ii) if the other Party has become bankrupt or is the subject
of proceedings for liquidation or dissolution or ceases
to carry on business or becomes unable to pay its debts
as they become due; or
(iii) if both Parties agree in writing to terminate this
Contract.
10.2 Expiration or termination of this Contract shall not affect any supply
obligations of Supplier to NF (and NF Affiliates) based on purchase
orders already placed with Supplier prior to such expiration or
termination.
9
<PAGE> 12
ARTICLE 11 - FORCE MAJEURE
11.1 Definition of Force Majeure
"FORCE MAJEURE" shall mean all events which are beyond the control of
the Parties to this Contract, and which are unforeseen, unavoidable or
insurmountable, and which prevent total or partial performance by either
Party. Such events shall include earthquakes, typhoons, flood, fire,
war, failures of international or domestic transportation, acts of
government or public agencies, epidemics, civil disturbances, strikes
and any other event which cannot be foreseen, prevented or controlled,
including events which are recognized as Force Majeure in general
international commercial practice.
11.2 Consequences of Force Majeure
(a) If an event of Force Majeure occurs, a Party's contractual
obligations affected by such an event shall be suspended during
the period of delay caused by the Force Majeure and the period
for performing such obligations shall be extended, without
penalty, for a period equal to such suspension.
(b) The Party claiming Force Majeure shall promptly inform the other
Party in writing and shall furnish within fifteen (15) days
thereafter sufficient proof of the occurrence and expected
duration of such Force Majeure. The Party claiming Force Majeure
shall also use all reasonable endeavours to terminate the Force
Majeure.
(c) In the event of Force Majeure, the Parties shall immediately
consult with each other in order to find an equitable solution
and shall use all reasonable endeavours to minimize the
consequences of such Force Majeure.
ARTICLE 12 - SETTLEMENT OF DISPUTES
12.1 Consultations
In the event any dispute arises in connection with the interpretation or
implementation of this Contract, the Parties shall attempt in the first
instance to resolve such dispute through friendly consultations. If the
dispute is not resolved in this manner within sixty (60) days after the
date on which one Party has served written notice on the other Parties
for the commencement of consultations, then any of the Parties may refer
the dispute to arbitration in accordance with the provisions of Article
12.2 hereof.
12.2 Arbitration
With respect to any disputes which have not been resolved through
consultations, they shall be submitted for arbitration to China
International Economic And Trade Arbitration Commission in Beijing
("ARBITRATION INSTITUTE") in accordance with the
10
<PAGE> 13
applicable arbitration rules ("ARBITRATION RULES"), for final decision
pursuant to the provisions of its Arbitration Rules.
The arbitration shall also be conducted in accordance with the following
provisions:
(a) the arbitrators shall refer to the Chinese and English texts of
this Contract;
(b) all proceedings in any arbitration shall be conducted in
Chinese; and
(c) there shall be three (3) arbitrators all of whom shall be fluent
in English. NF shall select one (1) arbitrator and Supplier
shall select one (1) arbitrator. The third arbitrator shall be
appointed by the Arbitration Institute and shall serve as
chairman of the arbitration tribunal.
12.3 Effect of Arbitration Award
The arbitration award shall be final and binding on the Parties, and the
Parties agree to be bound thereby and to act accordingly.
12.4 Costs
The costs of arbitration shall be borne by the Party as designated in
the arbitration award.
12.5 Continuing Rights and Obligations
When any dispute occurs and when any dispute is under arbitration,
except for the matters under dispute, the Parties shall continue to
exercise their remaining respective rights, and fulfil their remaining
respective obligations under this Contract.
ARTICLE 13 - BREACH OF CONTRACT
13.1 General Breach and Indemnity
If one Party breaches any of its representations, warranties or
undertakings made under this Contract, such Party shall be liable to the
other Party (including NF Affiliates in the case of NF) for the direct
and indirect losses suffered by the other Party (including NF Affiliates
in the case of NF) as a result of such breach.
Each Party (the "INDEMNIFYING PARTY") further indemnifies and holds
harmless the other Party (including NF Affiliates in the case of NF) for
any claim, loss or damage sustained or incurred by the other Party
(including NF Affiliates in the case of NF) or arising as a result of a
breach by the Indemnifying Party of its representations, warranties,
undertakings and obligations hereunder, in addition to other remedies
which the other Party (including NF Affiliates in the case of NF) may
have under law.
11
<PAGE> 14
13.2 Liability for Breach of Contract
In the event that a breach of contract committed by a Party to this
Contract results in the non-performance of or inability to fully perform
this Contract, the liabilities arising from the breach of contract,
including reasonable attorneys fees, shall be borne by the Party in
breach as provided in this Contract. In the event that a breach of
contract is committed by both Parties, each Party shall bear its
individual share of the liabilities arising from the breach of contract.
ARTICLE 14 - GENERAL PROVISIONS
14.1 Governing Law
The validity, interpretation, implementation and resolution of disputes
of this Contract shall be governed by the laws of the People's Republic
of China.
14.2 Assignability
Neither Party may at any time assign this Contract or any of its rights
and obligations hereunder without the prior written consent of the other
Party, except that NF shall have the right to assign its rights,
obligations and interests under this Contract to NF Delaware or an NF
Affiliate and Supplier shall be deemed hereby to have given its consent
to such assignment.
14.3 Entire Agreement
This Contract, including the attachments appended hereto, constitutes
the entire agreement between the Parties hereto relating to the subject
matter hereof. This Contract may be amended only by a written document
signed by both Parties.
14.4 Severability of Terms
If any one or more of the provisions contained in this Contract shall be
invalid, illegal or unenforceable in any respect under any applicable
law, the validity, legality and enforceability of the remaining
provisions contained herein shall not in any way be affected or
impaired.
14.5 No Waiver
The failure of one party to enforce any of the provisions of this
Contract or to exercise any right herein provided shall not be deemed a
waiver of such or any other provision or in any way affect the validity
of this Contract.
14.6 Language
This Contract and the attachments appended hereto are executed in both
English and Chinese. Both language versions shall be equally authentic.
If a provision of this Contract in the two versions are inconsistent,
the Chinese version shall prevail.
12
<PAGE> 15
14.7 Notices
Any notice or written communication provided for in this Contract by
either Party to the other, including but not limited to any and all
offers, writings, or notices to be given hereunder, shall be made in
English and Chinese by facsimile or by courier service delivered letter,
promptly transmitted or addressed to the appropriate Party. The date of
receipt of a notice or communication hereunder shall be deemed to be
seven (7) days after the letter is given to a reputable courier service
in the case of a courier service delivered letter and two (2) working
days after dispatch of a facsimile if evidenced by a transmission
confirmation report. All notices and communications shall be sent to the
appropriate address set forth below, until the same is changed by notice
given in writing to the other Party.
NF:
NEW FOCUS PACIFIC CO., LTD.
Building R3-B, Unit A, 1st Floor,
Shenzhen High-Tech Industrial Park,
Nanshan District, Shenzhen, PRC
Telephone No: 755-6525100
Facsimile No: 755-6525150
Attention: General Manager
Supplier:
FUZHOU CONET COMMUNICATION, INC.
No. 39 Fuxing Avenue
Gushan Fuxing Investment Zone
Jingan District, Fuzhou
People's Republic of China
Telephone No: 0591-3620100
Facsimile No: 0591-3627300
Attention: General Manager
13
<PAGE> 16
IN WITNESS WHEREOF, the Parties hereto have caused this Contract to be executed
by their duly authorized representatives on the date first written above.
NEW FOCUS PACIFIC CO., LTD. FUZHOU CONET COMMUNICATION, INC.
By: /s/ BAO-TONG MA By: /s/ ZHI-XIN CAO
---------------------------- ------------------------------
Name: Bao-Tong Ma Name: Zhi-Xin Cao
---------------------------- ------------------------------
Title: General Manager Title: Chairman of the Board
---------------------------- ------------------------------
14
<PAGE> 17
ANNEX 1
PRODUCTS TO BE SUPPLIED
Optical Crystals and Optical Fibre Components as specified by NF in its purchase
orders, Quarterly Budgets and Annual Budget from time to time.
15
<PAGE> 1
EXHIBIT 10.19
SUBLEASE
THIS SUBLEASE (this "Sublease") is dated for reference purposes as of
May 16, 2000, and is made by and between Komag Incorporated, a Delaware
corporation ("Sublessor"), and New Focus, Inc. a Delaware corporation
("Sublessee"). Sublessor and Sublessee agree as follows:
RECITALS:
Western Digital Corporation, a Delaware Corporation, as lessee, and Enzo
Drive, LLC, a California limited liability company ("Master Lessor"), as lessor,
entered into that certain lease ("Lease") dated September 15, 1997 with respect
to approximately 10.658 acres of land with that certain approximately 58,785
square foot building located thereon known as 300 Enzo Drive, San Jose, CA
("Project"), which Lease was amended by that certain First Amendment to Lease
Agreement dated as of January 1998 ("First Amendment") and Second Amendment to
Lease Agreement dated July 30, 1999 ("Second Amendment"). Under the terms of
that certain Assignment and Assumption of Lease dated as of April 5, 1999
("Assignment"), Western Digital Corporation assigned the Lease and First
Amendment to Sublessor. Sublessee also acknowledges that Sublessor intends to
execute that certain Subordination Agreement ("Subordination Agreement") under
the terms of which Sublessor agrees that the Lease, First Amendment and Second
Amendment (and therefore this Sublease) shall be subject and subordinate to the
terms of that certain Declaration of Reciprocal Easements and Covenants,
Conditions and Restrictions ("CC&Rs"). A copy of the Lease, First Amendment,
Second Amendment, Assignment and Master Lessor's consent thereto and
Subordination Agreement (collectively "Master Lease") and the CC&Rs are attached
hereto as Exhibit A. Sublessor desires to lease to Sublessee and Sublessee
desires to lease from Sublessor that portion of the Project depicted on Exhibit
B to this Sublease ("Subleased Premises").
AGREEMENT:
1. Subleased Premises: Subject to the terms and conditions set forth
herein, Sublessor subleases to Sublessee, and Sublessee subleases from
Sublessor, the Subleased Premises consisting of that certain Building containing
approximately 58,785 square feet and adjacent parking areas shown on Exhibit B.
The parties hereto acknowledge that the Subleased Premises as identified on
Exhibit B is subject to change pursuant to the Second Amendment, and that in the
event of such a change, Sublessor shall provide Sublessee with a new Exhibit B
and the Subleased Premises shall be redefined as set forth on such new Exhibit
B. Sublessee shall also have the right to use at least 215 parking spaces on or
about the Subleased Premises (21 of which Sublessee may reserve and designate
for the use of its visitors, employees and vendors).
2. Master Lessor's Development of Adjacent Property: Sublessee
acknowledges that Master Lessor intends to develop a certain portion of the land
adjacent to the Subleased Premises which will include construction of additional
building(s) ("Master Lessor Development"). Sublessee acknowledges that Master
Lessor has covenanted not to unreasonably interfere with Sublessee's operations
on, or occupancy of the Subleased Premises ("Master
<PAGE> 2
Lessor Interference"). Sublessor shall not be held liable or responsible to
Sublessee for any Master Lessor Interference.
3. Use: The Subleased Premises shall be used for general office,
software development, sales, research, development, light manufacturing,
shipping, receiving, storage and any other related and legally permitted uses
and for no other purpose without Master Lessor's and Sublessor's prior written
consent.
4. Term: The term ("Term") of this Sublease shall commence on July 1,
2000 ("Commencement Date"), and, subject to Sublessee's right to an Extension
Term (as defined in Paragraph 5 hereof), shall terminate on the earliest to
occur of: (a) the eighth anniversary of the Commencement Date of the Sublease,
(b) the date this Sublease is sooner terminated pursuant to its terms, or (c)
the date the Master Lease is sooner terminated pursuant to its terms.
Notwithstanding the foregoing, Sublessee shall be permitted access to the
Subleased Premises thirty (30) days prior to the Commencement Date to install
furniture, fixtures and equipment. Such access shall be on all of the terms and
conditions of this Sublease with the exception of the Base Rent obligations set
forth in Paragraph 7.A. hereof.
5. Extension of Term: No later than One Hundred and Twenty (120) days
prior to the end of the Term, Sublessee shall deliver written notice to
Sublessor as to whether Sublessee desires to extend the Term of this Sublease
for an additional period commencing on the expiration of the initial Term and
terminating on May 31, 2013 ("Extension Term"). The "Term" of this Sublease
shall include the Extension Term, once exercised. The monthly rent payable for
the Extension Term shall be the greater of the Base Rent during the final full
month of the initial Term or the then current market rate which shall be
determined in accordance with the terms attached hereto as Exhibit D. Sublessee
shall give Sublessor access to the Subleased Premises during the last ninety
(90) days before the end of the Extension Term so that Sublessor can plan for
and cooperate with Sublessee to perform any required surrender obligations.
During such access, Sublessor shall not unreasonably interefere with any ongoing
operations of Sublessee.
6. Delivery and Acceptance/Condition of Premises: Sublessor, at
Sublessor's sole cost and expense, shall deliver the Subleased Premises to
Sublessee on the Commencement Date with all building systems and subsystems,
including, but not limited to, HVAC, roof membrane, electrical, plumbing and
parking lot in good working order and condition. Sublessor represents that on
June 1, 2000, the clean rooms at the Subleased Premises shall meet federal clean
room classification standard 209e "as built." Sublessor also represents and
warrants that the Premises currently comply with: (i) all municipal, state and
federal statutes, rules, regulations, ordinances, requirements, or orders
("Laws"), including those requiring installation of fire sprinkler systems,
seismic reinforcement and asbestos removal; and (ii) the Americans With
Disabilities Act, and Sublessor shall promptly pay for and perform any action
required to address any non-compliance with respect to the foregoing subsections
(i) and (ii); provided; however, that Sublessor makes no representation or
warranty regarding compliance with Laws that might be triggered as a result of
Sublessee's construction of alterations or improvements in the Subleased
Premises and Sublessee shall pay for, and perform any actions required to remedy
any non-compliance with Laws triggered by Sublessee's performance of such
alterations or improvements. Except as
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<PAGE> 3
specifically set forth in this Paragraph 6, Sublessor makes no representations
or warranties of any kind or nature, express or implied, with respect to the
Subleased Premises and Sublessee accepts the Subleased Premises "as is."
7. Rent:
(a) Base Rent. During the Term, Sublessee shall pay to Sublessor
as base monthly rent ("Base Rent") the following:
<TABLE>
<CAPTION>
Months Rent Per Square Foot Total Base Rent
- ------ -------------------- ---------------
<S> <C> <C>
Commencement Date to 6/30/01 $1.55 $ 91,116.75
7/1/01 to 6/30/02 $1.612 $ 94,761.42
7/1/02 to 6/30/03 $1.67648 $ 98,551.88
7/1/03 to 6/30/04 $1.7435392 $102,493.95
7/1/04 to 6/30/05 $1.8132808 $106,593.71
7/1/05 to 6/30/06 $1.885812 $110,857.46
7/1/06 to 6/30/07 $1.9612445 $115,291.76
7/1/07 to 6/30/08 $2.0396943 $119,903.43
</TABLE>
The parties (including Master Lessor by its initials set forth below)
acknowledge that included as part of the Base Rent amounts set forth above is
$.20 per square foot per month paid as reimbursement to Sublessor for amounts
spent to construct the existing improvements in the Subleased Premises. Thus,
for the purpose of determining the amount of Base Rent allocable as bonus rent
payable to Master Lessor pursuant to Paragraph 24.B.(2) of the Master Lease, the
"Rent Per Square Foot" amounts set forth above shall be reduced by $.20 per
square foot before determining the amount of Base Rent used for the calculation
of the bonus rent amount.
- -------
Master Lessor's Initials
(b) Base Rent and Additional Rent (as defined in subparagraph
7(c) hereof), except as otherwise set forth in subparagraph 7(c) hereof, shall
be paid to Sublessor on or before the first (1st) day of each month during the
Term. Base Rent and Additional Rent (as defined in subsection (c) below)
(collectively, "Rent") for any period during the Term hereof which is for less
than one month of the Term shall be a pro rata portion of the monthly
installment based on the actual number of days in such month. Rent shall be
payable without notice or demand and without any deduction, offset, or abatement
except as expressly set forth herein, in lawful money of the United States of
America. Rent shall be paid directly to Sublessor at 1710 Automation Parkway,
San Jose, CA 95131, Attention: Accounts Receivable, or such other address as may
be designated in writing by Sublessor at least five (5) days in advance.
Notwithstanding the foregoing, upon execution of this Sublease by Sublessee,
Sublessee shall pay to Sublessor the sum of Ninety-One Thousand One Hundred and
Sixteen Dollars and Seventy-Five Cents ($91,116.75) as prepayment of rent for
credit against the first installment of Base Rent due hereunder with any
resulting excess being applied to the second installment of Base Rent due
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<PAGE> 4
hereunder, and shall deposit with Sublessor Ninety One Thousand Dollars
($91,000.00) as a security deposit.
(c) Additional Rent. All monies other than Base Rent required to
be paid by Sublessee under this Sublease with respect to the Subleased Premises
(including, without limitation, Additional Rent as defined in the Master Lease
and all other payments to be made by Sublessor to Master Lessor which are the
obligation of Sublessee by virtue of the incorporation provision of Paragraph 13
of this Sublease) shall be deemed additional rent ("Additional Rent"). Sublessee
shall pay such amounts of Additional Rent to Sublessor on the following basis:
(i) For any estimated payments owed by Sublessor to Master Lessor in connection
with the Subleased Premises which Sublessor is required to pay at the same time
as the Monthly Installment (as defined in the Master Lease) ("Estimated
Payments") and for any monthly payment made by Sublessor pursuant to any ongoing
maintenance or landscaping contracts ("Contract Payments") - within ten (10)
days following the date upon which Sublessor delivers an invoice to Sublessee
for such Estimated Payments or Contract Payments, but in any event no earlier
than the date such Estimated Payments or Contract Payments are due to be paid by
Sublessor; and (ii) For any payments required to be paid by Sublessor in
connection with the Subleased Premises which are not Estimated Payments pursuant
to the Master Lease - pursuant to the terms of the Master Lease, provided that
Sublessee shall not be obligated to pay any late fees or penalties due to Master
Lessor as a result of Sublessor's failure to deliver any Additional Rent to
Master Lessor, except to the extent such failure is caused by Sublessee.
8. Enforcement of Master Lessor's Obligations: In enforcing performance
of all such obligations of Master Lessor, Sublessor shall (a) upon Sublessee's
written request, promptly notify Master Lessor of its nonperformance under the
Master Lease and request that Master Lessor perform its obligations under the
Master Lease, and (b) permit Sublessee to commence a lawsuit or other action in
Sublessee's name (and assign to Sublessee any rights of Sublessor required in
connection therewith), or commence a lawsuit or other action in Sublessor's
name, to obtain the performance required from Master Lessor under the Master
Lease, provided that (i) Sublessee pays any and all costs, expenses, liabilities
or damages of any kind or nature incurred in connection with or arising out of
any such lawsuit or other action; and (ii) uses counsel reasonably acceptable to
Sublessor in the pursuit of such lawsuit. Sublessee shall promptly provide
Sublessor a copy of any and all pleadings to be filed in any such lawsuit.
9. Release and Waiver of Subrogation: The waivers of rights of recovery
and subrogation set forth in Paragraph 9.E. of the Master Lease incorporated
herein pursuant to Paragraph 13 hereof shall be deemed a three-party agreement
binding among and inuring to the benefit of Sublessor, Sublessee and Master
Lessor (by reason of its consent hereto).
10. Surrender: Sublessee shall not be permitted to make any alterations,
improvements or additions, ("Alterations") to the Subleased Premises without the
advance written consent of Master Lessor (pursuant to the terms of the Master
Lease) and Sublessor. Sublessor's consent to an Alteration shall not be
unreasonably withheld or delayed and Sublessor may: (i) require that Sublessee
remove the Alterations from the Subleased Premises at the end of the Term.; and
(ii) place such conditions on its consent as it determines, in the reasonable
exercise of its discretion, including, without limitation, such financial
assurance as Sublessor
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<PAGE> 5
determines will protect Sublessor with respect to the completion of such
Alterations and the satisfaction of Sublessee's surrender requirements
hereunder. Sublessor must reply to any request of Sublessee for consent to
Alterations within ten (10) days following receipt by Sublessor of Sublessee's
request for consent and if Sublessor's response is not so provided, Sublessor's
consent shall be deemed granted. If Master Lessor or Sublessor does not consent
to the surrender of such Alterations at the expiration or earlier termination of
the Term, then prior to expiration or earlier termination of this Sublease,
Sublessee shall remove from the Subleased Premises, at Sublessee's sole cost and
expense, such Alterations, along with all of its trade fixtures and personal
property (provided, that in no event shall Sublessee be required to remove any
Alterations made to the Subleased Premises by Sublessor), and shall surrender
the Subleased Premises to Sublessor in good condition and repair, free of
Hazardous Materials (defined below) brought on to the Subleased Premises by
Sublessee, its agents, employees, subtenants or invitees or otherwise resulting
from Tenant Contamination (defined below), reasonable wear and tear, casualties
and condemnation, and damage caused by Master Lessor or Sublessor excepted. If
the Subleased Premises are not so surrendered, then Sublessee shall be liable to
Sublessor for all costs incurred by Sublessor (including any charges by Master
Lessor under the Master Lease) in returning the Subleased Premises to such
required condition, plus interest thereon at the lesser of twelve (12) percent
per annum or the maximum rate allowable by law. Sublessor shall provide, at no
charge to Sublessee, as-built architectural and engineering drawings including
the master background, and any other plans of areas outside of the Subleased
Premises for the planning and construction of the Sublessee's improvements in
the Subleased Premises.
11. Subordination: Sublessor agrees to use commercially reasonable
efforts to obtain through Master Lessor and for the benefit of Sublessee, in
form reasonably acceptable to Sublessee, a Subordination and Non-Disturbance
Agreement from any existing lenders with a security interest in the ownership of
the Subleased Premises.
12. Holdover: If Sublessee remains in possession of the Subleased
Premises after the expiration or earlier termination of this Sublease,
Sublessee's continued possession shall be as a sublessee from month to month of
Sublessor and Sublessee shall continue to comply with and perform all the terms
and obligations of the Sublessee under this Sublease and pay Sublessor holdover
Base Rent equal to one hundred and twenty-five percent (125%) of the Base Rent
payable immediately preceding the termination of this Sublease plus actual
Additional Rent. Sublessee shall indemnify, protect, defend and hold harmless
Sublessor, its officers, directors, employees, agents and assigns, from and
against all loss and liability resulting from Sublessee's delay in surrendering
the Subleased Premises.
13. Other Sublease Terms:
(a) Incorporation By Reference. Except as otherwise provided in
or modified by this Sublease, the terms, provisions and conditions contained in
the Master Lease are incorporated herein by reference, and are made a part
hereof as if set forth herein at length; provided, however, that: (i) each
reference in such incorporated sections to "Lease" shall be deemed a reference
to "Sublease"; (ii) each reference to the "Premises," "Project" and "Total
Project" shall be deemed a reference to the "Subleased Premises" as defined
herein; (iii) each reference to "Landlord" and "Tenant" shall be deemed a
reference to "Sublessor" and
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<PAGE> 6
"Sublessee", respectively; (iv) with respect to work, services, repairs,
restoration, insurance, capital improvements, or the performance of any other
obligation of Master Lessor under the Master Lease, the sole obligations of
Sublessor shall be as set forth in Paragraph 8 hereof; (v) with respect to any
obligation of Sublessee the non-performance of which would constitute a default
under Paragraph 14.A.2 of the Master Lease as incorporated into this Sublease,
Sublessee shall have twenty-eight (28) days to perform the obligation; provided
that it would reasonably take longer than twenty-eight (28) days to perform the
obligation, Sublessee shall commence such obligation within such twenty-eight
day period and diligently prosecute such obligation to completion; (vi)
Sublessor shall have no liability to Sublessee with respect to (a)
representations and warranties made by Master Lessor under the Master Lease, (b)
any indemnification obligations of Master Lessor under the Master Lease or other
obligations or liabilities of Master Lessor with respect to compliance with laws
or condition of the Premises, and (c) Master Lessor's repair, maintenance,
restoration, upkeep, insurance and similar obligations under the Master Lease,
regardless of whether the incorporation of one or more provisions of the Master
Lease into the Sublease might otherwise operate to make Sublessor liable
therefor other than to use reasonable efforts to obtain Master Lessor's
compliance with the same as set forth in subparagraph 13(a)(iv) hereof; and
provided further that nothing in the foregoing shall abrogate, modify, detract
from or diminish any obligation of Master Lessor under the Master Lease or any
obligation of Sublessor to Master Lessor; (vii) with respect to any approval or
consent required to be obtained from the "Landlord" under the Master Lease,
Sublessee shall be required to obtain such approval or consent from Master
Lessor and Sublessor, and the approval or consent of Sublessor may be withheld
if Master Lessor's approval or consent is not obtained, provided, however,
Sublessor's consent may not be unreasonably withheld if Master Lessor provides
its consent; (viii) all references to "Expansion Project", "Expansion Building"
"Improvement Agreement" and "Leasehold Improvements" shall be deleted and all
provisions to the extent applicable to those terms (including, without
limitation, language regarding amortization and recovery of amortized amounts)
shall not apply to Sublessee and shall not be incorporated herein; (ix) all
references to "Tenant Improvements" shall refer only to Sublessee Improvements
and any and all alterations or other improvements installed by, or at the
direction of Sublessee; and (x) the following provisions of the Master Lease are
expressly not incorporated herein by reference: Paragraphs 1, 2, 3, 4, 5.A.,
5.B., 5.E., 5.F., 5.G., 6, the last paragraph of Paragraph 13, 20A, 22, 33, 36,
37, 38.C, Exhibit A, Exhibit B, Exhibit C, Exhibit D and Exhibit F, and
Paragraphs 3, 5(d), 6(l), 8 and 9 of the Second Amendment. Notwithstanding
anything to the contrary in this Sublease, for the purposes of the Second
Amendment as incorporated herein, all references to Landlord shall mean Master
Lessor and not Sublessor.
(b) Structural Repairs: In the event Sublessee is required to pay
for and perform any repairs to or maintenance or replacement of the "structural
elements of the Building" as defined in Section 11.A of the Master Lease, and
such repair, maintenance or replacement would constitute a capital expense under
generally accepted accounting principles as reasonably determined by Sublessor,
Sublessee shall perform such repair or maintenance (with the plan for such
repair or maintenance work reviewed and approved by Sublessor in the reasonable
exercise of its discretion) and Sublessor shall pay for and be reimbursed by
Sublessee for such capital expense on the following basis: (i) The cost of such
capital expense shall be amortized over the remainder of the term of the Master
Lease with interest on the unamortized balance at the then prevailing market
rate Sublessor would pay if it borrowed funds to construct
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<PAGE> 7
such capital expenses from an institutional lender, and Sublessor shall inform
Sublessee of the monthly amortization payment required to so amortize such
costs, and shall also provide Sublessee with the information upon which such
determination is made; and (ii) Sublessee shall pay such amortization payment
for each month after such capital expense is completed until the first to occur
of (i) the expiration of the Term (including the Extension Term if exercised by
Sublessee) or (ii) the end of the term over which such costs were amortized,
which amount shall be due at the same time the Base Rent is due hereunder.
(c) Assumption of Obligations. This Sublease is and at all times
shall be subject and subordinate to the Master Lease and the rights of Master
Lessor thereunder. Sublessor shall not commit or permit an of its employees or
agents to commit on the Subleased Premises any act or omission which shall
violate any term or condition of the Master Lease. Sublessee hereby expressly
assumes and agrees during the Term of this Sublease: (i) to comply with all
provisions of the Master Lease which are required to be performed by Sublessee
hereunder; and (ii) to perform all the obligations on the part of the "Tenant"
to be performed under the terms of the Master Lease during the term of this
Sublease which are required to be performed by Sublessee hereunder. Sublessee
shall not commit (or permit to be committed by any subtenant, invitee, agent,
representative or contractor of Sublessee) on the Subleased Premises any act or
omission which shall violate any term or condition of the Master Lease. In the
event of termination of Sublessor's interest as "Tenant" under the Master Lease
for any reason, this Sublease shall terminate simultaneously (subject to any
other agreement which may exist between Sublessee and Master Lessor) with such
termination of Sublessor's interest. Sublessor shall not be permitted to
terminate the Master Lease in accordance with paragraphs 15 and 16 of the Master
Lease (or otherwise arising out of Master Lessor's uncured default under the
Master Lease) without the advance written consent of Sublessee; provided,
however, that no such consent shall be required if Sublessor determines, in the
reasonable exercise of its discretion, that Sublessee would not be able to
continue to satisfy the financial obligations of Sublessee under the Sublease.
If Sublessee denies such consent: (i) Sublessee shall be required to exercise
its option for the Extension Term; and (ii) Sublessee shall pay all costs and
expenses directly incurred in connection with Sublessor's actions to maintain
the Master Lease in full force and effect (after Sublessee's denial of consent
to terminate) including, without limitation, reasonable attorney's fees or other
related costs ("Master Lease Maintenance Costs"); provided, however, that such
Master Lease Maintenance Costs shall not include any costs and expenses that
Sublessor would otherwise incur under the Master Lease absent the termination
(i.e. ongoing rent, operating expense, tax and related financial obligations).
Sublessor shall provide notice to Sublessee before incurring any Master Lease
Maintenance Costs, and shall permit Sublessee the opportunity to perform such
actions and incur such costs in place of Sublessor. In the event of a conflict
between the provisions of this Sublease and the Master Lease, as between
Sublessor and Sublessee, the provisions of this Sublease shall control.
Sublessor shall have no liability to Sublessee for Sublessor's termination of
the Master Lease unless Sublessor violates the provisions of this Paragraph
13(c). Nothing contained in this Sublease shall limit Sublessor's liability to
Sublessee in the event this Sublease terminates as a result of the default of
Sublessor under the Master Lease (except that Sublessor shall not be liable to
Sublessee to the extent such default is caused by Sublessee).
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<PAGE> 8
(d) Sublessor's Obligations under Master Lease. Sublessor shall
pay as and when due the Monthly Installment, Additional Rent (as such terms are
defined in the Master Lease) and all other sums due under the Master Lease
(except for costs, late charges or interest under the Master Lease resulting
from Sublessor's failure to perform its obligations thereunder, except to the
extent such failure is caused by Sublessee), and if Sublessor shall fail to do
so, then, no earlier than two (2) days after delivery of written notice from
Sublessee to Sublessor that such sum is due, if such sum is still not paid by
Sublessor to Master Lessor, Sublessee shall be entitled to make all payments of
Rent due under this Sublease directly to Master Lessor and set off such amounts
against Rent due or coming due under this Sublease. Sublessor shall perform all
other agreements, covenants and obligations of "Tenant" under the Master Lease
not required to be performed by Sublease hereunder, and shall not amend, modify
or alter the terms of the Master Lease without the prior written consent of
Sublessee.
14. Quiet Enjoyment. The Sublessor covenants that, upon the Sublessee
paying Rent in a timely manner and observing in a timely fashion all of the
Sublessee's other obligations hereunder, the Sublessee may peaceably and quietly
have, hold and enjoy the Subleased Premises throughout the term, free from any
interference from Sublessor, subject to the terms and conditions provided
elsewhere in this Sublease.
15. Notices: The address of each party shall be that address set forth
below their signatures at the end of this Sublease. Any party hereto may change
its address for the purposes of this Paragraph 15 by delivery of at least five
(5) days prior written notice of such change to the other party in the manner
set forth in this Paragraph. All notices, demands or communications in
connection with this Sublease shall be (i) in writing, (ii) properly addressed,
and (iii) either (a) sent by prepaid, certified mail, return receipt requested,
or (b) sent by recognized overnight courier service. In the event a party
refuses to accept delivery of a notice mailed in accordance herewith, such
notice shall be deemed received on the date such party refuses to accept
delivery. If a notice is received or deemed received on a Saturday, Sunday or
legal holiday, it shall be deemed received on the next business day. All notices
given to Master Lessor under the Master Lease shall be considered received only
when delivered in accordance with the Master Lease.
16. Hazardous Materials: Sublessee shall use no Hazardous Materials in,
on, under or about the Subleased Premises or the building, except in accordance
with the terms and conditions of the Master Lease, and except for the types and
quantities of Hazardous Materials set forth on Exhibit C attached hereto, and
Sublessee shall indemnify, defend with counsel reasonably acceptable to
Sublessor, protect, and hold harmless Sublessor, its employees, agents,
contractors, stockholders, officers, directors, successors, personal
representatives, and assigns from and against all claims, actions, suits,
proceedings, judgments, losses, costs, personal injuries, damages, liabilities,
deficiencies, fines, penalties, damages, reasonable attorneys' fees, reasonable
consultants' fees, investigations, detoxifications, remediations, removals, and
expenses of every type and nature, to the extent caused by the use, release,
disposal, discharge or emission of Hazardous Materials on or about the Subleased
Premises during the Term of this Sublease by Sublessee or Sublessee's employees,
subtenants, agents or invitees other than Sublessor, Master Lessor or their
agents or employees ("Sublessee Contamination"). Sublessor shall indemnify,
defend and hold harmless Sublessee from and against all claims, suits,
judgments, losses, costs, personal injuries, damages, and expenses of every type
and nature directly or indirectly arising
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<PAGE> 9
out of or in connection with any Hazardous Material present at any time on or
about the Premises, or the violation of any environmental law relating to any
such Hazardous Material expect to the extent that any of the forgoing
constitutes Sublessee Contamination. "Hazardous Material" shall mean any
material or substance that is now or hereafter prohibited or regulated by any
statute, law, rule, regulation or ordinance or that is now or hereafter
designated by any governmental authority to be radioactive, toxic, hazardous or
otherwise a danger to health, reproduction or the environment (excluding,
however, Hazardous Material contained in office or janitorial products properly
and safely maintained by Sublessee).
17. Conditions Precedent: It shall be an express condition precedent to
Sublessor's and Sublessee's obligations hereunder that, and this Sublease shall
not be effective unless and until Master Lessor has consented in writing to this
Sublease. If Master Lessor does not consent in writing to this Sublease within
ten (10) days after the full execution and delivery of this Sublease, then
either party may, at any time thereafter until such consent and non-disturbance
are obtained, terminate this Sublease upon written notice to the other,
whereupon any monies previously paid by Sublessee to Sublessor shall be
reimbursed to Sublessee.
18. Assignment and Subletting: Subject to the approval of the Master
Lessor in accordance with the terms of the Master Lease, Sublessee shall have
the right to assign this Sublease or sub-sublet all or any part of the Subleased
Premises to any subsidiary or affiliate in which Sublessee has an ownership
interest, to any parent of Sublessee, to any subsidiary or affiliate in which
Sublessee's parent owns by means of an ownership interest, or to any entity into
which Sublessee may be merged or consolidated or which acquires all or
substantially all of Sublessee's assets or stock . Any other assignment or
sublease shall be made with the prior written consent of Sublessor, whose
consent shall not be unreasonably withheld, conditioned or delayed, and Master
Lessor, under the terms of the Master Lease. Any excess rent obtained through a
sub-sublease or assignment shall be shared equally between Sublessor and
Sublessee after first deducting Sublessee's costs for real estate commissions,
legal fees, and tenant improvements made specifically for such subtenant.
19. Indemnity: Sublessee shall indemnify, defend, protect, and hold
Sublessor and its officers, agents, employees, successors and assigns
(collectively, "Sublessor's Agents") and Master Lessor harmless from and against
all claims, demands, actions, causes of action, losses and expenses
(collectively "Claims") which may be brought against Sublessor, Sublessor's
Agents or Master Lessor or which Sublessor, Sublessor's Agents or Master Lessor
may pay or incur by reason of any breach or default of this Sublease by
Sublessee, an intentional misrepresentation by Sublessee of the matters set
forth herein, or the negligence or willful misconduct of Sublessee or
Sublessee's employees, agents, contractors, or invitees in or about the
Subleased Premises during the Term to the extent that the Claims are not caused
by the negligence or willful misconduct of Sublessor or Sublessor's Agents.
Without limiting the generality of the foregoing, Sublessee shall indemnify,
defend, protect and hold Sublessor, Sublessor's Agents and Master Lessor
harmless from and against any Claims which may be brought against Sublessor,
Sublessor's Agents or Master Lessor or which Sublessor, Sublessor's Agents or
Master Lessor may pay or incur by reason of any violation of any laws by
Sublessee or its employees, agents or contractors.
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<PAGE> 10
Sublessor shall indemnify, defend, protect, and hold Sublessee and its
officers, agents, employees, successors and assigns (collectively, "Sublessee's
Agents") harmless from and against all Claims which may be brought against
Sublessee or Sublessee's Agents or which Sublessee or Sublessee's Agents or may
pay or incur by reason of any breach or default of this Sublease by Sublessor,
an intentional misrepresentation by Sublessor of the matters set forth herein,
or the negligence or willful misconduct of Sublessor or Sublessor's employees,
agents, contractors, or invitees in or about the Subleased Premises during the
Term to the extent that the Claims are caused by the negligence or willful
misconduct of Sublessee or Sublessee's Agents. Without limiting the generality
of the foregoing, Sublessor shall indemnify, defend, protect and hold Sublessee
and Sublessee's Agents harmless from and against any Claims which may be brought
against Sublessee or Sublessee's Agents or which Sublessee or Sublessee's Agents
may pay or incur by reason of any violation of any laws by Sublessor or its
employees, agents or contractors.
20. Signage: Sublessee shall be entitled to install an illuminated sign
on the exterior of the Premises and to use the monument signage in front of the
Building and on the Building, subject to Sublessor's consent which shall not be
unreasonably withheld (and shall be deemed granted if Master Lessor's consent is
obtained), subject to Master Lessor's consent under the terms of the Master
Lease and subject to applicable restrictions of Bayside Business Park and the
City of San Jose.
21. Successors: This Sublease shall be binding on and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns.
22. Broker: Sublessor and Sublessee represent, warrant and agree that
they have not dealt with any brokers with a right to a commission arising out of
this Sublease except for CB Richard Ellis representing both Sublessee and
Sublessor. Each party agrees to hold the other party harmless from and against
all claims for brokerage commissions, finder's fees or other compensation made
by any other agent, broker, salesman or finder as a consequence of said party's
actions or dealings with such agent, broker, salesman, or finder. Sublessor
acknowledges and agrees that it will pay a Brokerage fee in accordance with its
listing agreement with Broker.
23. Counterparts: This Sublease may be executed in one or more
counterparts each of which shall be deemed an original but all of which together
shall constitute one and the same instrument. Signature copies may be detached
from the counterparts and attached to a single copy of this Sublease physically
to form one document. A facsimile counterpart signature delivered to each party
shall be deemed an original for the purpose of the execution of this Sublease.
24. Entire Agreement: This Sublease and the provisions of the Master
Lease incorporated herein by the express terms of this Sublease constitute the
complete and exclusive agreement among the parties with respect to the matters
contained herein and supersede all prior written or oral agreements or
statements by and among the parties hereto regarding the same, provided that
this Sublease shall be at all times subject to all of the terms and conditions
of the Master Lease.
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<PAGE> 11
IN WITNESS WHEREOF, the parties have executed this Sublease as of the day and
year first above written.
SUBLESSEE: SUBLESSOR:
NEW FOCUS, INC. KOMAG INCORPORATED
By: /s/ Nicola Pignati By: /s/ Edward H. Siegler
------------------------------ -----------------------------
Printed Printed
Name: Nicola Pignati Name: Edward H. Siegler
------------------------------ -----------------------------
Its: Chief Operating Officer Its: Chief Financial Officer
------------------------------ -----------------------------
Date: 5/16/00 Date: 5/17/00
------------------------------ -----------------------------
Address: Address: 1710 Automation Parkway
San Jose, CA 95131
Attention: Attention:
FAX: FAX:
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<PAGE> 12
EXHIBIT A
Master Lease
(To be inserted)
<PAGE> 13
EXHIBIT B
Subleased Premises
(To be inserted)
<PAGE> 14
EXHIBIT C
Hazardous Materials
(To be inserted)
<PAGE> 15
EXHIBIT D
Determination Of Market Rent
If the option for the Extension Term is properly exercised by Sublessee,
the basic rent for the Subleased Premises shall become the then current fair
market monthly rent ("Fair Market Rent") for the Subleased Premises as of the
commencement date of the Extension Term, as determined by the agreement of the
parties or, if the parties cannot agree within sixty (60) days prior to the
commencement of such Extension Term, then by an appraisal. All other terms and
conditions contained in the Sublease, as the same may be amended from time to
time by the parties in accordance with the provisions of the Sublease, shall
remain in full force and effect and shall apply during the Extension Term.
APPRAISAL. If it becomes necessary to determine the fair market rental
value for the Subleased Premises by appraisal, real estate appraiser(s), all of
whom shall be members of the American Institute of Real Estate Appraisers and
who have at least five (5) years experience appraising office space located in
the vicinity of the Subleased Premises shall be appointed and shall act in
accordance with the following procedures:
(i) If the parties are unable to agree on the Fair Market Rent within
the allowed time, either party may demand an appraisal by giving written notice
to the other party, which demand to be effective must state the name, address
and qualifications of an appraiser selected by the party demanding an appraisal
(the "Notifying Party"). Within ten (10) days following the Notifying Party's
appraisal demand, the other party (the "Non-Notifying Party") shall either
approve the appraiser selected by the notifying party or select a second
properly qualified appraiser by giving written notice of the name, address and
qualification of said appraiser to the Notifying Party. If the Non-Notifying
Party fails to select an appraiser within the ten-(10) day period, the appraiser
selected by the Notifying Party shall be deemed selected by both parties and no
other appraiser shall be selected. If two appraisers are selected, they shall
select a third appropriately qualified appraiser. If the two appraisers fail to
select a third qualified appraiser, the third appraiser shall be appointed by
the then presiding judge of the county where the Premises are located upon
application by either party.
(ii) If only one appraiser is selected, that appraiser shall notify the
parties in simple letter form of its determination of the Fair Market Rent for
the Subleased Premises within fifteen (15) days following his selection, which
appraisal shall be conclusively determinative and binding on the parties as the
appraised Fair Market Rent.
(iii) If multiple appraisers are selected, the appraisers shall meet not
later than ten (10) days following the selection of the last appraiser. At such
meeting the appraisers shall attempt to determine the Fair Market Rent for the
Subleased Premises as of the commencement date of the extended term by the
agreement of at least two (2) of the appraisers.
(iv) If two (2) or more of the appraisers agree on the Fair Market Rent
for the Subleased Premises at the initial meeting, such agreement shall be
determinative and binding upon the parties hereto and the agreeing appraisers
shall, in simple letter form executed by the agreeing
<PAGE> 16
appraisers, forthwith notify both Landlord and Tenant of the amount set by such
agreement. If multiple appraisers are selected and two (2) appraisers are unable
to agree on the Fair Market Rent for the Subleased Premises, all appraisers
shall submit to Landlord and Tenant an independent appraisal of the Fair Market
Rent for the Subleased Premises in simple letter form within twenty (20) days
following appointment of the final appraiser. The parties shall then determine
the Fair Market Rent for the Subleased Premises by averaging the appraisals;
provided that any high or low appraisal, differing from the middle appraisal by
more than ten percent (10%) of the middle appraisal, shall be disregarded in
calculating the average.
(v) The appraisers' determination of Fair Market Rent shall be based on
rental of space of the same age, construction, size and location as the
Subleased Premises with the improvements installed therein and shall take into
account Tenant's obligations to pay additional rent under this Lease.
(vi) If only one appraiser is selected, then each party shall pay
one-half of the fees and expenses of that appraiser. If three appraisers are
selected, each party shall bear the fees and expenses of the appraiser it
selects and one-half of the fees and expenses of the third appraiser.
<PAGE> 17
EXHIBIT E
MASTER LESSOR'S CONSENT
(The capitalized terms used herein shall have the same meaning as those
given in the Sublease between Komag Incorporated. and New Focus, Inc.
dated May 16, 2000 for leased space in the building located at 300 Enzo
Drive, San Jose, California)
The undersigned, as Master Lessor under the Sublease, hereby consents to
the Sublease on the terms set forth therein. This consent does not constitute
consent to any further sublease of the Subleased Premises; Master Lessor
reserves the right to approve or disapprove any such further sublease.
Dated: "Master Lessor"
ENZO Drive LLC, a California limited
liability company
By:
--------------------------------
Title:
--------------------------------
<PAGE> 18
SECOND AMENDMENT TO LEASE AGREEMENT
This Second Amendment to Lease Agreement ("Second Amendment") is entered
into as of this 30th day of July, 1999 (the "Effective Date"), by and between
ENZO DRIVE, LLC, a California limited liability company ("Landlord") and KOMAG
INCORPORATED, a Delaware corporation ("Tenant"), successor-in-interest to
WESTERN DIGITAL CORPORATION, a Delaware corporation ("WDC").
RECITALS
A. Landlord and WDC entered into that certain Lease Agreement dated
September 15, 1997 (the "Original Lease"), pursuant to which Landlord leased to
WDC and WDC leased from Landlord that certain real property, consisting of
approximately 10.658 acres, more or less, located in the City of San Jose as
more particularly described in the Original Lease, together with that certain
R&D building containing approximately fifty-eight thousand seven hundred
eighty-five (58,785) square feet to be constructed on the Land by Landlord in
accordance with the terms of an Improvement Agreement attached to the Original
Lease.
B. The Original Lease was amended by that certain First Amendment to
Lease Agreement dated January, 1998 (the "First Amendment"), to reflect the
transfer of the "Site" (as defined in the First Amendment) by Landlord to Great
Oaks Water Company. The Original Lease as amended by the First Amendment is
referred to herein as the "Lease". Unless otherwise defined herein, capitalized
terms used herein shall have the meanings given to them in the Lease.
C. Pursuant to that certain Assignment and Assumption of Lease dated
April 5, 1999, WDC, as assignor, assigned all of its right, title and interest
in and to the Lease to Tenant, as assignee, however WDC was not released or
relieved of any of its obligations or duties under the Lease.
D. Pursuant to the terms of the Lease, Tenant has the right to
construct, or cause to be constructed, the Expansion Project on the Land,
subject to the terms and conditions of the Lease. Tenant does not desire to
construct the Expansion Project, and Landlord desires to pursue the development
and construction of an expansion project or a second building on that portion of
the Land not occupied by the Building. Tenant is willing to waive and relinquish
its rights to construct the Expansion Project in consideration for a reduction
in the Monthly Installment of rent, and Landlord is willing to accept such
waiver and relinquishment and to agree to a reduction in the Monthly Installment
of rent, in the event Landlord requests and obtains (and subject to Landlord's
ability to obtain) site development approval from the City of San Jose for the
construction of a second building on the Land, on terms and conditions
acceptable to Landlord.
E. Landlord and Tenant now desire to amend the Lease as more
particularly stated below
<PAGE> 19
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth below, and for other valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the parties hereto agree as
follows;
1. Waiver and Relinquishment of Right to Construct the Expansion
Project. Subject to the terms and conditions of Paragraph 8 hereof, Tenant
hereby waives and relinquishes the right provided to Tenant in Paragraph 2 of
the Lease to construct, or cause to be constructed, the Expansion Project on the
Land. From and after the Effective Date, but subject to the reinstatement of the
Lease terms pursuant to Section 8 below, Tenant shall have no right to construct
the Expansion Project or any portion thereof, and Tenant's rights in and to the
Land shall be as hereinafter set forth, and all references in the Lease to the
"Expansion Building(s)" and the "Expansion Project" shall be of no further
force or effect.
2. Landlord's Right to Pursue Site Development and Related Approvals.
Landlord intends to pursue (and shall have the right to pursue) site development
approval from the City of San Jose for the development and construction on the
Land of an additional building consisting of approximately 100,186 square feet,
and related sitework, in the approximate location shown on the Conceptual Site
Plan attached as Exhibit A (the "Site Plan"). In conjunction with seeking such
site development approval, Landlord shall have the right, but not the
obligation, to seek approval of the City of San Jose of the parcelization of the
Land into two (2) parcels, having the approximate configuration shown on the
Site Plan. Tenant acknowledges that the Site Plan is preliminary only, and that
Landlord may pursue development of a building larger or smaller than that shown
on the Site Plan, and may seek to parcelize the Land in a manner other than as
shown on the Site Plan; provided, however, that Tenant's rights with respect to
the use of the Building and 200 parking spaces on the Premises shall not be
diminished thereby, and any and all of Tenant's obligations under the Lease
shall not be increased thereby.
For purposes of this Second Amendment, the following terms shall have
the following meanings:
(a) "Approval Date" shall mean the date on which Landlord obtains
the final approval of the City of San Jose of the Site Development Permit, and
all appeal periods applicable to such final approval having lapsed or expired
without any appeal or challenge then pending.
(b) "Commencement of Construction" shall mean the date on which
Landlord commences construction of the foundation of the Second Building.
(c) "Parcel 1" shall mean that portion of the Land on which the
Building is located.
(d) "Parcel 2" shall mean that portion of the Land on which
Landlord proposes to construct the Second Building.
(e) "Parcel Map" shall mean a parcel map parcelizing the Land into
Parcel 1 and Parcel 2, on terms and conditions acceptable to Landlord in its
sole and absolute discretion, with the parcel line between Parcel 1 and Parcel 2
being in the approximate location shown on the Site Plan, but subject to
adjustment in the sole and absolute discretion of Landlord; provided,
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<PAGE> 20
however, that Tenant's rights with respect to the use of the Building and 200
parking spaces on the Premises shall not be diminished thereby, and any and all
of Tenant's obligations under the Lease shall note be increased thereby.
(f) "Second Building" shall mean the additional building Landlord
proposes to construct on the Land.
(g) "Site Development Permit" shall mean a site development permit
approved by the City of San Jose for the construction of the Second Building, on
terms and conditions acceptable to Landlord in its sole and absolute discretion.
In connection with Landlord's obtaining of the Parcel Map, Tenant
acknowledges that it may be necessary for Landlord to impose conditions,
covenants and restrictions and/or reciprocal easement agreements ("CC&Rs") on
the Land to provide for the operation and management of improvements to be used
in common and/or on a non-exclusive basis by the owners, tenants and occupants
of Parcel 1 and Parcel 2 (e.g., common driveways, parking spaces, storm drains
and utilities). Tenant hereby agrees to subordinate the Lease to such CC&Rs,
provided that the CC&Rs do not materially interfere with the rights of Tenant to
use and operate the Premises under the Lease or materially increase any or all
obligations of Tenant under the Lease.
Among other things, the CC&Rs shall provide that (i) each owner will be
responsible for the repair and maintenance of its parcel, including any shared
or jointly used facilities, and (ii) the owner of Parcel 2 shall be obligated to
pay the owner of Parcel 1 a portion of the total costs of the maintenance,
repair and resurfacing of the parking areas on Parcel 1, in the same proportion
that the number of parking spaces located on Parcel 1 which the owner of Parcel
2 is entitled to use under the CC&Rs bears to the total number of parking spaces
located on Parcel 1.
Landlord shall notify Tenant in writing of the Approval Date if Landlord
obtains the final approval of the City of San Jose of the Site Development
Permit Tenant acknowledges that Landlord makes no representation or warranty of
Landlord's ability to obtain the Site Development Permit or the Parcel Map, or
the time period within which Landlord may obtain the Site Development Permit or
the Parcel Map, and further acknowledges that Landlord may at any time elect not
to proceed with seeking any of such approvals. If Landlord elects to discontinue
its efforts obtain to the Site Development Permit, Landlord shall so notify
Tenant in writing, and the provisions of Section 8 below shall apply.
3. Adjustment in Monthly. If Landlord obtains the approval of the City
of San Jose of the Site Development Permit; then effective on the Approval Date,
the Monthly Installment in effect as of the Approval Date shall be reduced to
Seventy-six Thousand Four Hundred Twenty Dollars and Fifty Cents ($76,420.50).
The Monthly Installment shall continue to be adjusted thereafter pursuant to
Paragraph 5.B.(2) of the Lease.
4. Adjustment in Additional Rent. If Landlord obtains the approval of
the City of San Jose of the Site Development Permit, then effective on
Commencement of Construction, Tenant's obligation to pay those elements of
Additional Rent which relate to the Land (e.g., Real Property Taxes, maintenance
costs) shall be adjusted in a manner which depends on whether or
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<PAGE> 21
not the Parcel Map is obtained, and as more particularly set forth in Section 5
or Section 6 below, as applicable.
5. Additional Amendment of Lease Terms - Parcelization of the Land. In
the event Landlord elects to, and is able to obtain the Parcel Map in connection
with (or at any time following) the approval of the Site Development Permit
and/or the construction of the Second Building, then effective on Commencement
of Construction, the Lease shall be further amended as follows:
(a) Land. The definition of the term "Land" as set forth Paragraph
2(a) of the Lease shall be amended to refer to Parcel 1, and Exhibit A attached
to the Lease shall be deleted and replaced with the legal description of Parcel
1.
(b) Total Project. The term "Total Project" shall mean and refer to
the Project.
(c) Parking. In the event the number of parking spaces located on
the Land (i.e., Parcel 1) and the number of parking spaces located on Parcel 2,
respectively, satisfy the code requirements of the City of San Jose, Tenant
shall be entitled to use only those parking spaces located on the Land (with
such use being Tenant's exclusive use), and the owner of Parcel 2 shall not be
entitled to use parking spaces located on Parcel 1. Notwithstanding the
foregoing sentence, in no event shall Tenant be provided less than 200 parking
spaces on Parcel 1 (and if applicable, Parcel 2) for Tenant's use.
In the event either the number of parking spaces located on the
Land (i.e., Parcel 1) or the number of parking spaces located on Parcel 2 does
not satisfy the code requirements of the City of San Jose, then the CC&Rs shall
provide the owner and tenant of Parcel 1 or Parcel 2 (as the case may be) the
right to use, on a non-exclusive basis, a sufficient number of parking spaces
located on the other parcel to satisfy the code requirements of the City of San
Jose. Tenant shall have the parking rights granted to the owner of Parcel 1
under the CC&Rs, and Tenant's use of Parcel 1 shall be subject to the rights to
the owner of Parcel 2 under the CC&Rs.
(d) Maximum Secured Borrowings. Paragraph 20.A. of the Lease shall
be deleted.
6. Additional Amendment of Lease Terms - No Parcelization of the Land.
In the event Landlord does not elect to, or is not able to obtain the
parcelization of the Land on terms and conditions acceptable to Landlord in
connection with approval of the Site Development Permit and/or construction of
the Second Building, then the terms and conditions of Section 5. shall not apply
and, effective as of the Commencement of Construction, the Lease shall instead
be further amended as follows:
(a) Premises. The term "Premises" shall mean the Building, together
with certain rights in the Land appurtenant thereto, as more particularly set
forth below.
(b) Land. In addition to the real property described in Paragraph
2(a) of the Lease, the term "Land" shall mean and include the site improvements
constructed or to be constructed by Landlord outside the exterior of the
Building and the Second Building, consisting
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<PAGE> 22
of parking areas, sidewalks, access driveways, landscaping and other site
improvements shown on the Site Plan or as constructed in accordance with the
Site Development Permit.
Tenant shall have the following rights with respect to the Land:
(i) the nonexclusive right to use not more than two hundred (200) parking spaces
on the Land not allocated for the exclusive use of another tenant of Landlord;
and (ii) such other rights as are necessary and convenient to Tenant's
possession of the Premises or performance of Tenant's obligations under this
Lease. In addition, Landlord grants to Tenant a non-exclusive easement for
vehicular ingress and egress in and over the paved roadways on the Land and
pedestrian ingress and egress in and over the Land.
Landlord reserves the right to grant to tenants of the other
building which now exists or may hereafter be constructed upon the Land, and to
the agents, employees, servants, invitees, contractors, guests, employees,
savants, invitees, contractors, guests, customers and representatives of such
tenants or to any other user authorized by Landlord, the non-exclusive right to
use the Land for pedestrian and vehicular ingress and egress and vehicular
parking and the exclusive right to use parking spaces on the Land.
(c) Total Project. The term "Total Project" shall mean and refer to
the Project.
(d) Rent During Extended Term. Paragraph 5.G. of the Lease shall be
amended as follows:
(i) In the fourth line, the word "Project" shall be deleted
and replaced with the word "Premises".
(ii) In the eleventh through the thirteenth lines, the words
"and without taking into consideration the value of the Expansion Project
constructed or installed by Tenant at Tenant's sole cost" shall be deleted.
(iii) The last sentence of Paragraph 5.G. shall be deleted.
(e) Prorata Share. The term "Prorate Share" shall mean the
percentage determined by dividing the square footage of gross leasable area in
the Building by the total of square footage of gross leasable area of the
Building and the Second Building. In the event the Second Building is comprised
of 100,186 gross square feet, then Tenant's Prorata Share shall be thirty-seven
percent (37%).
(f) Property Taxes. The first sentence of Paragraph 8.B. of the
Lease shall be deleted and replaced with the following sentence:
"Tenant shall pay, as additional rent, (i) Tenant's Prorata, Share
of all Property Taxes levied or assessed with respect to the Land and (ii) all
Property Taxes levied or assessed with respect to the Building and Tenant
Improvements referred to in Paragraph 2 above which become due or accrue during
the Term of this Lease."
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<PAGE> 23
In addition, the portion of the last sentence of the first
paragraph of paragraph 8.B. reading "however, the amount of Property Taxes
allocable to the entire Land shall not be prorated based on the fact that the
Expansion Building(s), if applicable, may be completed after the Building" shall
be deleted.
(g) Insurance . The first sentence of Paragraph 9.B. of the Lease
shall be deleted and replaced with the following sentence:
"Tenant shall, at Tenant's expense, obtain and keep in force during
the term of this Lease a policy of commercial general liability insurance
insuring Landlord and Tenant against (i) claims and liabilities arising out of
the operation, use, or occupancy of the Building, and (ii) claims and
liabilities arising out of the operation, use, or occupancy of the Land and all
areas appurtenant thereto, including parking areas, by Tenant sad Tenant's
agents, employees, contractors and invitees."
(h) Utilities. The first paragraph of Paragraph 10 of the Lease
shall be deleted and replaced with the following:
Tenant shall pay for (i) all water, gas, light, heat, power,
electricity, telephone, trash pick-up, sewer charges and all other services
supplied to or consumed in the Building, and all taxes and surcharges thereon,
and (ii) Tenant's Prorata Share of all water, gas, light, power, electricity,
trash pick-up, sewer charges and all other services supplied to or consumed on
the Land or in connection with the site improvements (comprising part of the
Land as defined in Section 6(b) above), and all taxes and surcharges thereon.
Tenant shall reimburse Landlord for its Prorata Share of utilities
provided to the Land and Site Improvements in the same manner as set forth in.
Section 6(i)(i) below.
(i) Repairs and Maintenance. -
(i) Landlord's Repairs. Paragraph 11.A shall be amended by
adding the following paragraphs:
Landlord shall keep and maintain the Land in good order and
repair. The manner in which the Land shall be maintained and the expenditures
for such maintenance shall be at the reasonable discretion of Landlord. The term
"repair" shall include replacements, restorations and/or renewals when
necessary. Tenant shall reimburse Landlord for Tenant's Prorata Share of the
cost of maintenance and repairs of the Land, unless such maintenance or repair
is required because of the negligence or willful misconduct of Tenant or its
employees, agents or invitees, in which event Tenant shall reimburse Landlord
for the entire cost thereof. To the extent any costs incurred by Landlord to
maintain or repair (as defined above in this paragraph) the Land shall
constitute a capital expenditure(s), such capital expenditure(s) shall be
amortized at ten percent (l0%) per annum over the reasonably estimated useful
life of the repair or maintenance item, and Tenant shall reimburse Landlord
monthly for Tenant's Prorata Share of such amortized cost commencing on the date
such maintenance or repair item is completed through the earlier of (i) Lease
termination, or (ii) the expiration of the amortization period. Landlord shall
notify Tenant of the amount of such reimbursement promptly following the date
such capitalized maintenance or repair item is completed.
-6-
<PAGE> 24
Landlord shall have no obligation to make repairs to the
Land under this Subparagraph until a reasonable time after receipt of written
notice from Tenant of the need for such repairs. However, in the event of
circumstances posing imminent risk of personal injury or property damage,
Tenant, upon notice to Landlord, shall have the right, but not the obligation,
to make such repairs and Landlord shall reimburse Tenant the reasonable cost
thereof within thirty (30) days after presentation of Tenant's invoice.
Tenant shall pay Tenant's Prorata Share of the cost of
maintenance and repairs of the Land to Landlord as Additional Rent and without
deduction or offset. Payment of Tenant's Prorata Share of the cost of
maintenance and repairs of the Land by Tenant shall be made by whichever of the
following methods is from time to time designated by Landlord, and Landlord may
change the method of payment at any time. Tenant's Prorata Share of the cost of
maintenance and repairs of the Land actually incurred or paid by Landlord but
not theretofore billed to Tenant, as invoiced by Landlord, shall be payable by
Tenant within ten (10) days after receipt of Landlord's invoice, but not more
often than once each calendar month. Alternatively, Tenant's payment of Tenant's
Prorata Share of the cost of maintenance and repairs of the Land shall be based
upon Landlord's estimate thereof and shall be payable in equal monthly
installments in advance on the first day of each calendar month commencing with
the month following receipt of Landlord's estimate (and subject to Landlord's
right to change the method of payment). Within one hundred twenty (120) days
after the end of each calendar year (or at Lease termination), Landlord shall
furnish Tenant a statement showing the actual costs of maintenance and repair of
the Land for the period to which Landlord's estimate pertains and shall
concurrently either bill Tenant for the balance due (payable upon demand by
Landlord) or credit Tenant's account for the excess previously paid.
(ii) Tenant's Repairs. Paragraph 11.B. shall be amended by
deleting the words "parking areas, exterior landscaping". Landlord, and not
Tenant, shall maintain and repair the Land (including, without limitation, the
site improvements comprising part of the Land).
(j) Alterations. Paragraph 12 of the Lease shall be amended to
provide that Tenant shall make no alterations to the Land (including, without
limitation, the site improvements comprising part of the Land).
(k) Condemnation. Paragraph 16.A of the Lease shall be amended to
provide that the reference to "parking areas" shall mean and refer to the number
of parking spaces allocated for Tenant's use in Section 6(b) above.
(1) Maximum Secured Borrowings. Paragraph 20.A of the Lease shall
be deleted. Any Security Instrument may encumber the Land, the Building and the
Second Building.
(m) Landlord Loan or Sale. Paragraph 27 of the Lease shall be
amended to provide that any deed of trust or mortgage may cover the Land, the
Building and the Second Building.
7. Additional Amendment of Lease Terms - Subsequent Parcelization. If
the Land is parcelized at any time after the initial approval of the Site
Development Permit and/or
-7-
<PAGE> 25
construction of the Second Building, then effective as of the date of such
parcelization, the Lease shall be amended as provided in Section 5 above.
8. Reinstatement of Lease Terms. In the event Landlord determines, at
any time prior to Landlord's receipt of the Site Development Permit, to abandon
its efforts to obtain the Site Development Permit, Landlord shall so notify
Tenant in writing (the "Reinstatement Notice"). Effective on the date of the
Reinstatement Notice, this Second Amendment shall be of no further force or
effect, and the terms and conditions of the Lease (including, without
limitation, Tenant's right to construct, or cause to be constructed, the
Expansion Project) shall be reinstated in full. Notwithstanding the foregoing,
or anything to the contrary in this Second Amendment, in the event that the
Approval Date (as defined in Section 2(a) above) has not occurred on or before
July 31, 2000, this Second Amendment shall be of no further force or effect, and
the terms and conditions of the Lease (including, without limitation, Tenant's
right to construct, or cause to be constructed the Expansion Project) shall be
reinstated in full.
9. Consents. The effectiveness of this Second Amendment is expressly
subject to and conditioned upon (i) Landlord's obtaining the approval of its
lender, Comerica-Bank California ("Lender"), to the terms and conditions hereof,
and (ii) Tenant obtaining the approval of WDC to the terms and conditions
hereof. Landlord and Tenant, respectively, agree to use reasonable efforts to
obtain the consent of Lender and WDC, respectively, to this Second Amendment as
soon as reasonably possible, and prior to the execution hereof if so required.
10. No Increase in Tenant Obligations/Decrease in Rights: Except as
otherwise expressly provided in this Second Amendment, in no event shall:
(i) Tenant's obligations under the Lease (financial or otherwise)
be increased in any material manner by virtue of Landlord's development of
Parcel 2 (and in no event shall any Additional Rent obligations of Tenant under
the Lease be increased by virtue of Landlord's development of Parcel 2); and
(ii) Tenant pay, or be responsible for in any respect, any costs,
charges, losses or expenses, of any kind or nature, associated with Landlord's
development of Parcel 2 (except to the extent such costs, charges, losses or
expenses are caused by, result from or are related to the acts, omissions,
negligence or willful misconduct of Tenant or any of its agents, employees,
contractors, guests, invitees, licensees or other representatives); and
(iii) Tenant's rights under the Lease (other than Tenant's right to
use Parcel 2 for other than parking purposes as set forth herein, and Tenant's
rights to the Expansion Project as set forth herein) be in any material manner
diminished by Landlord's development of Parcel 2.
11. Landlord's Indemnity: Landlord shall defend, indemnify and hold
harmless Tenant and its officers, directors, employees, agents, assignees and
sublessees under the Lease, invitees and representatives, from and against any
and all claims, damages, losses, costs and expenses, including attorneys' fees,
and any other losses of any kind or nature, whether direct or indirect, relating
in any way to or arising out of the negligence or willful misconduct of
Landlord, its officers, directors, employees, agents, representatives,
contractors or subcontractors
-8-
<PAGE> 26
relating in any way to the development of Parcel 2 by Landlord; provided,
however, in no event shall Landlord be liable under this Section 11 for any
claims of lost profits, loss of business or loss of income.
12. Landlord's Insurance: From Commencement of Construction to the
completion of the development of Parcel 2, Landlord (or if the development is to
be performed by a general contractor, the general contractor) shall be required
to maintain the following insurance at its own cost and expense and shall
provide Tenant certificates demonstrating proof of such insurance:
(i) Worker's Compensation and Employer's Liability Insurance in an
amount not less than the amount prescribed by law;
(ii) Comprehensive Automobile Liability Insurance (owned,
non-owned, and hired) with limits of not less than One Million Dollars
($1,000,000) per occurrence and Two Million Dollars ($2,000,000) in the
aggregate; and
(iii) Commercial General Liability Insurance with limits of not
less than One Million Dollars ($1,000,000) per occurrence and Two Million
Dollars ($2,000,000) in the aggregate which policy shall have broad-form
contractual liability coverage and umbrella and excess coverage also having
broad-form contractual liability coverage with a limit of not less than Five
Million Dollars ($5,000,000) each occurrence and in the aggregate.
Tenant, any future assignee of the Lease or sublessee under the Lease (of whom
Landlord has received written notice) and WDC shall be named additional insureds
on the policies set forth in Paragraph 12(ii) and (iii) above. All
subcontractors shall maintain the same insurance as provided in 12(i) through
(iii) above except to the extent the subcontractor would already be covered
under the insurance to be maintained under Paragraph 12(i) through (iii) by
Landlord or its general contractor, as applicable. The insurance to be
maintained by Landlord (if applicable) hereunder is subject to the waiver of
subrogation provisions of Paragraph 9E of the Lease (but only to the extent of
property damage covered by such insurance). The insurance policies provided in
Paragraph 12(i) through (iii) shall provide that Tenant shall be notified thirty
(30) days in advance of the cancellation date of such policies. In the event
that the parties required to maintain insurance hereunder fail to maintain such
insurance, Tenant shall have the right to acquire such insurance and bring an
action against Landlord for reimbursement of such insurance premium reasonably
paid by Tenant in curing Landlord's default.
13. Non-Interference With Tenant's Operations. In no event shall
Landlord's development of Parcel 2 unreasonably interfere with Tenant's (or its
assignee's or sublessee's) operations on, occupancy or use of the Premises.
After Commencement of Construction and during the course of construction until
completion of the development of Parcel 2, Landlord shall provide Tenant, on a
monthly basis, a schedule of planned development activities.
14. Subordination. Notwithstanding anything to the contrary in the
Lease, the Lease and this Second Amendment shall not be subject to or
subordinate to any future ground or underlying lease or to any future lien,
mortgage, deed of trust, or security interest hereafter
-9-
<PAGE> 27
affecting the Premises (a "Future Security Interest"), nor shall Tenant be
required to execute any documents subordinating the Lease and this Second
Amendment to any such Future Security Interest, unless the ground lessor, lender
or other holder of the interest to which the Lease and this Second Amendment
shall be subordinated contemporaneously executes a recognition and
non-disturbance agreement which (i) provides, inter alia, that the Lease and
this Second Amendment shall not be terminated so long as Tenant is not in
default under the Lease, as amended by this Second Amendment, and (ii)
recognizes all of Tenant's rights under the Lease, as amended by this Second
Amendment.
15. Effect of Amendment. Except as otherwise modified by this Second
Amendment, the terms of the Lease shall remain unmodified and in full force and
effect. In the event of any conflict or inconsistency between the terms of this
Second Amendment and the Lease, the terms of this Second Amendment shall
control.
16. Counterparts. This Second Amendment may be executed in counterparts,
each of which shall be deemed an original, and which together shall constitute
one instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Second
Amendment as of the date and year first written above.
LANDLORD:
ENZO DRIVE, LLC,
a California limited liability company
By: /s/ SCOTT R. TROBBE
------------------------------------
Name: Scott R. Trobbe
----------------------------------
Its: Member
-----------------------------------
TENANT:
KOMAG INCORPORATED,
a Delaware corporation
By: /s/ WILLIAM L. POTTS JR.
------------------------------------
Name: William L. Potts, Jr.
----------------------------------
Its: SVP., CFO.
-----------------------------------
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<PAGE> 28
The terms and conditions of the foregoing Second Amendment to Lease Agreement
are accepted and agreed to:
WDC:
WESTERN DIGITAL CORPORATION,
a Delaware corporation
By: /s/ CINDY M. CAMPOS
------------------------------------
Name: Cindy M. Campos
----------------------------------
Its: Real Estate Specialist
-----------------------------------
-11-
<PAGE> 29
EXHIBIT A
Site Plan
[to be attached}
-1-
<PAGE> 30
FIRST AMENDMENT TO LEASE AGREEMENT
This First Amendment to Lease Agreement is entered into as of this day
of January, 1998, by and between ENZO DRIVE, LLC, a California limited liability
company ("Landlord") and WESTERN DIGITAL CORPORATION, a Delaware corporation
("Tenant").
RECITALS
A. Landlord and Tenant have entered into that certain Lease Agreement
dated September 15, 1997 (the "Lease") pursuant to which Landlord leased to
Tenant and Tenant leased from Landlord that certain real property, consisting of
approximately 10.658 acres, more or less, located in the City of San Jose as
more particularly described in the aforementioned Lease (the "Land") together
with that certain R&D building containing approximately fifty-eight thousand
seven hundred eighty-five (58,785) square feet to be constructed on the Land by
Landlord in accordance with the terms of an Improvement Agreement attached to
the Lease (collectively, the "Premises").
B. Landlord and Tenant now desire to modify or amend the Lease as more
particularly stated below.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth below, and for other valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Tenant hereby acknowledges that Landlord intends to enter into that
certain Agreement for Purchase and Sale of Property attached hereto as Exhibit
"A" and made a part hereof (the "Water Company Agreement"), and that Tenant has
no objection to Landlord executing the same. Tenant acknowledges and agrees that
in the event escrow closes under the Water Company Agreement, the Site described
therein shall no longer comprise part of the Land described in the Lease and
that Tenant shall no longer have any rights or interest in, or obligations with
respect to, the Site (including, without limitation, any right to possess the
Site). Following the close of escrow under the Water Company Agreement, the
Premises described in the Lease shall no longer include the Site.
2. Following the close of escrow under the Water Company Agreement,
Tenant acknowledges and agrees that its rights and interests under the Lease
shall be subject and subordinate to the Permanent Easement described in the
Water Company Agreement. Tenant has no objection to Landlord selling the Site to
the Great Oaks Water Company, nor does it have any objection to Landlord
granting the Great Oaks Water Company the Permanent Easement described in the
Water Company Agreement.
3. Nothing stated herein should be construed or interpreted as a
representation or warranty by Landlord that Great Oaks Water Company will
provide, sell or deliver water to the Premises described in the Lease.
4. Except as otherwise modified by this First Amendment, the terms of
the original Lease shall remain unmodified and in full force and effect. In the
event of any conflict or inconsistency between the terms of this First Amendment
and the original Lease, the terms of this First Amendment shall control.
5. This First Amendment may be executed in counterparts, each of which
shall be deemed an original, and which together shall constitute one instrument.
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment as of the date and year first written above.
ENZO DRIVE, LLC, a California limited
liability company
By:
Its:
WESTERN DIGITAL CORPORATION, a Delaware
corporation
By:
Its:
<PAGE> 31
AGREEMENT FOR PURCHASE AND SALE OF PROPERTY
This Purchase and Sale Agreement ("Agreement") is entered into as of the
Agreement Date by and between ENZO DRIVE, LLC, a California limited liability
company ("Seller") having an address of 511 Division Street, Campbell, CA 95008,
and GREAT OAKS WATER COMPANY, a California corporation ("Buyer") having an
office at 23 Great Oaks Boulevard, Suite L, San Jose, California, 95119.
RECITALS
A. These Recitals refer to and utilize certain capitalized terms which
are defined in Article I of this Agreement. The parties intend to refer to those
definitions in conjunction with the use of capitalized terms in these Recitals.
B. Seller owns the Property, a portion of which will be purchased by the
Buyer.
C. The Property is located within Buyer's water service area so Buyer is
required to provide necessary water services in the surrounding area which will
require Buyer to install and operate the Well.
D. Buyer will access the Well by the Permanent Easement.
E. During the installation of the Well, Buyer will store any resulting
debris on Property adjacent to the Site by means of a temporary right of entry
granted to Buyer by Seller.
F. Seller desires to sell the Site and grant the Permanent Easement to
Buyer and Buyer desires to buy the Site and to accept the Permanent Easement.
G. Seller currently leases the Property to Western Digital Corporation,
a Delaware corporation, ("Lessee").
H. It is the intent of the parties to convey the Site by separate grant
deed.
NOW THEREFORE, in consideration of the covenants and conditions set out
hereinabove and hereinafter the parties agree to the following:
AGREEMENT
ARTICLE 1
DEFINITIONS AND EXHIBITS
Section 1.1. Definitions. The following defined terms used in this
Agreement shall have the following meaning and definition:
(a) "Agreement" means this Agreement.
(b) "City" means the City of San Jose, California.
<PAGE> 32
(c) "Close of Escrow" or "COE" shall be the date the Site is conveyed
from Seller to Buyer presently anticipated to be not later than December 31,
1998, unless extended by written agreement of the parties, provided, however,
that either Buyer or Seller shall have the right, on written notice to and
approval of the other, to extend COE in order to provide sufficient time for
completion and establishment of the Site and related easements.
(d) "Date of Execution" is the latest date that this Agreement is
executed by the Seller or the Buyer.
(e) "Escrow Holder" and "Title Company" shall mean Santa Clara Land and
Title Company.
(f) "Permanent Easement" shall mean and refer to a Permanent Easement to
be granted by Seller across a portion of the Property, the Permanent Easement
being more particularly described in Exhibit C, attached and incorporated herein
by this reference. The easement will be used for the various purposes of
vehicular ingress and egress, installment and maintenance of Well and other
activities incident or appurtenant to the Site and other purposes as necessary
for Buyer's full and complete utilization of the Site for installation of the
Well and the sale and delivery of water and other purposes reasonably related
thereto.
(g) "Property" means property owned by Seller located at the comer of
Enzo Drive and Ru Ferrari Drive in the City of San Jose, more particularly shown
by Assessor Map APN 678-06-021 and 678-06-008 attached hereto as Exhibit A.
(h) "Purchase Price" means as set in Section 2.1.
(i) "Site" means the property to be conveyed from Seller to Buyer for
the installation and operation of the Well referenced in Section 2.6 more
particularly described in Exhibit B, attached and incorporated herein by this
reference.
(j) "Well" means the water well to be built on the Site by Buyer.
Section 1.2. Exhibits. The following exhibits are attached to and
incorporated by reference in this Agreement:
Exhibit A Legal Description of the Property
Exhibit B Legal Description of the Site
Exhibit C Legal Description of the Permanent Easement
<PAGE> 33
ARTICLE II
PURCHASE AND SALE
Section 2.1. Purchase and Sale. For one dollar ($1.00) and other good
and valuable consideration the receipt of which is hereby acknowledged, Seller
agrees to sell and Buyer agrees to buy the Site in fee simple, by a duly
executed and recorded grant deed and Seller agrees to sell and Buyer agrees to
buy the Permanent Easement.
Section 2.2. Purpose. The purpose of this purchase and sale is to enable
Buyer to purchase and own the Site and to install and operate the Well to
collect water for sale and general usage and to provide for Buyer and its
successors, assigns, designees or licensees sufficient and permanent access for
utilization of the Site (by way of the Permanent Easement). The Site shall be
maintained, at all times, by Buyer, at its sole cost and expense, in good
condition and repair. This Agreement shall also enable Buyer to store any debris
collected resulting from the installation of the Well on the Property,
recognizing that upon completion of the Well, Buyer will remove, at its sole
cost and expense, any debris stored on the Property resulting from the
construction. The obligations of Buyer under this Section 2.2 shall survive the
Close of Escrow hereunder.
Section 2.3. Payment of Purchase Price. The Purchase Price shall be paid
to Seller in cash at Close of Escrow.
Section 2.4. Permanent Easement. Seller acknowledges that the purpose of
the Permanent Easement is to provide Buyer access for vehicular ingress and
egress, installment and maintenance of Well and other activities incident or
appurtenant to the Site and other purposes as necessary for Buyer's full and
complete utilization of the Site for installation of the Well and the sale and
delivery of water and other purposes reasonably related thereto. Buyer hereby
agrees to repair any damage to the Permanent Easement caused directly by Buyer,
its agents, consultants or contractors at its sole cost and expense both before
and after COE. Upon discovery of any damage to the Permanent Easement, Seller
shall notify Buyer in writing of the damage. The obligations of Buyer under this
Section 2.4 shall survive the Close of Escrow hereunder.
Section 2.5. Placement of a Fence Surrounding the Site. Buyer shall, at
its sole cost and expense, build and maintain a permanent fence around the Well
in the manner determined acceptable to the City and Seller (and Lessee if it is
a tenant of Seller possessing or occupying any portion of the Property adjacent
to the Site). Under no circumstances shall the fence be a chain link fence.
Buyer shall, at its sole cost and expense, provide or furnish landscaping around
the perimeter of the fence so as to screen the well site from the balance of the
Property. If City requires other permitted improvements to the Site and directly
related to the Site only, Buyer shall be responsible, at its sole cost, for the
costs of such improvements. The obligations of Buyer under this Section 2.5
shall survive the Close of Escrow hereunder.
Section 2.6. Conveyances. At COE, Seller shall convey to Buyer, by grant
deed (the "Grant Deed"), fee simple title to the Site. The Grant Deed shall
describe the Site by its metes and bounds description. In addition, Seller shall
convey, by metes and bounds, to Buyer the Permanent Easement. The conveyance of
the Site is subject to: (i) current general and special taxes and the
assessments not yet delinquent; (ii) all matters shown on a preliminary report
for the Site issued by the Title Company (the "Preliminary Report") which are
acceptable to Buyer in writing; (III) all matters which would be revealed by an
inspection of the Site; and (iv) matters affecting the condition of title to the
Site created by or with the written consent of Buyer. Evidence of title to the
Site shall be in the form of a C.L.T.A.
<PAGE> 34
Standard Coverage Owner's Policy of title insurance (the "Title Policy") naming
Buyer as the insured, or at Buyer's option, a binder for such Title Policy. The
Title Policy, to be paid for by Buyer, shall be in an amount of Twenty Five
Thousand Dollars ($25,000).
Section 2.7. Indemnification. Buyer shall indemnify, defend, and hold
Seller and Lessee, their agents, employees, members, lenders, and their
respective successors and assigns, harmless from and against any and all
liabilities, causes of action, judgments, costs (including, but not limited to,
attorneys' fees), loss, expense, claim, damage, and injury to person or property
arising in connection with the performance of Buyer's rights and obligations
under this Agreement. Buyer shall maintain the Site free of liens or
encumbrances arising from Buyer's investigation or inspection of the Site and
shall hold Seller and Lessee harmless from any claim or lien arising from the
work. Buyer shall return the Site to its original condition upon completion of
its inspection and investigation. Buyer shall, at Buyer's expense, at all times,
obtain and keep in force a policy of comprehensive public liability insurance
with policy limits of Two Million Dollars ($2,000,000) per occurrence. The limit
- -of -said insurance shall not limit the liability of the Buyer hereunder. Buyer
may carry such insurance under a blanket policy provided such insurance adds
Seller and Lessee as additional insureds. Prior to entry on the Site, Buyer
shall deliver to Seller certificates evidencing the existence and amounts of
such insurance and naming Seller, its members and lender as additional insured.
No policy shall be cancelable or subject to reduction of coverage except after
thirty (30) days prior written notice to Seller. The obligations of Buyer under
this Section 2.7 shall survive the Close of Escrow hereunder or the earlier
termination of this Agreement.
Section 2.8. Documents. At the reasonable request of Buyer, Seller shall
make available for inspection by Buyer during reasonable business hours, without
representation or warranty, all reports, studies, surveys, maps, correspondence,
and other documents in the possession or control of the Seller relating to the
Site ("Property Documents"); provided, however, that the Property Documents
shall not include, and Seller shall not be obligated to make available for
inspection by Buyer, reports, correspondence, documents, or other information of
any nature whatsoever which relate to any financial and economic matters of the
Property, all matters which would normally be considered to be business or trade
secrets of an owner, developer, lessor and operator of real property, or all
matters which are protected by the attorney-client privilege or any other
legally recognized privilege.
Section 2.9. Interim Construction/Access For Use.
Section 2.9.1 Right of Entry. After the Date of Execution and until
Close of Escrow or termination of this Agreement, Buyer and its agents or
consultants shall have access to the Site to conduct inspection and
investigation including, without limitation, such soil and environmental
inspections as Buyer may deem appropriate. Buyer shall pay all costs associated
with such investigations and inspections.
Prior to COE Seller hereby grants to Buyer, at Buyer's sole option,
an irrevocable right to enter upon the Property and utilize the Site and to use
the Permanent Easement as provided in this Agreement for the purposes of
allowing Buyer to begin and complete construction of the Well and to operate the
Well in such manner and fashion deemed, at Buyer's sole option, necessary to
pump water and utilize the Well for Buyer's purposes. Any entry upon the Site or
the Property by Buyer or its agents, employees, contractors or subcontractors
shall be undertaken without interference with Lessee.
All rights of Buyer under this section shall terminate upon default
of Buyer. If this Agreement is terminated for any reason prior to COE, Buyer
shall, at its sole cost and expense, restore the Site to its condition prior to
entry. All entry on the Property prior to COE is subject to the terms and
conditions of this Agreement, including, without limitation, the terms and
conditions of maintenance,
<PAGE> 35
insurance, and indemnification of Seller and Lessee. The obligations of Buyer
upon this paragraph shall survive termination of this Agreement.
Section 2.9.2. Buyer's Cost. All construction on the Site shall be
done at Buyer's sole cost and expense. Buyer shall obtain all necessary permits
and shall construct the improvements in compliance with all applicable laws.
Buyer shall indemnify, defend and hold Seller and Lessee, their agents,
employees, members, lenders, and their respective successors and assigns
harmless from any and all loss, expense, claim, damage or injury to persons or
property arising in connection with Buyer, its agents, consultants, and
contractors, activity on the Site or the Permanent Easement, including, without
limitation, mechanic's liens. The obligations of Buyer under this paragraph
shall survive the termination of this Agreement or the Close of Escrow
hereunder.
Section 2.10. Seller's Representations and Warranties. For the purpose
of consummating the sale and purchase of the Site and the Permanent Easement in
accordance herewith, Seller makes the following representations and warranties
to Buyer as of the Date of Execution and as of the COE unless otherwise
specified below, which representations and warranties shall survive COE by one
year:
Section 2.10.1. Authority . Subject to Seller obtaining Lessee's
consent to this Agreement, Seller has the full right, power and
authority to enter into this Agreement and to perform the transactions
contemplated hereunder.
Section 2.10.2. Valid and Binding Agreements . This Agreement and
all other documents delivered by Seller to Buyer now or at COE have been
or will be duly authorized and executed and delivered by Seller and
subject to Seller obtaining Lessee's consent to this Agreement are lgal,
valid and binding obligations of Seller sufficient to convey to Buyer
the Site and the Permanent Easement described therein, and are
enforceable in accordance with their respective terms and, to the actual
knowledge of Seller, do not violate any provisions of any agreement to
which Seller is a party or by which Seller may be bound.
Section 2.10.3 Good Title. Seller has, and at COE shall have, good,
marketable and indefeasible fee simple title to the Site and the Permanent
Easement and the interests therein to be conveyed to Buyer hereunder.
Section 2.10.4 Condition of the Site. Except or otherwise disclosed
to Buyer, to the best of Seller's knowledge without inquiry or investigation:
(I) the Site is not in violation of, nor has been under investigation for, a
violation of federal, state or local law or regulation relating to environmental
conditions or hazardous materials or waste; (ii) neither Seller nor any thir
dparty hve used, generated or manufactured, stored or disposed in, on, or under
the Site any hazardous materials or waste; and (iii) that there has been no
discharge, migration or release or any hazardous waste or material from, onto,
under or about the Site.
Section 2.10.5 Development of the Site. Subject to Seller obtaining
Lessee's consent to this Agreement, Seller knows of no facts nor has Seller
misrepresented any fact which would prevent Buyer from using the Site or the
Permanent Easement during the installation of the Well.
Section 2.10.6 Legal Disputes. To the best of Seller's knowledge as
of th eDate of Execution, there is no ongoing or threatened litigation or other
legal disputes concerning any aspect of the sale to Buyer.
Section 2.11. Buyer's Representations and Warranties. For the purpose of
consummating the sale and purchase of the Site in accordance herewith, Buyer
makes the following representations and warranties to Seller as of the date this
Agreement is fully executed and as of the Date of Execution which
representations and warranties shall survive COE by one year.
<PAGE> 36
Section 2.11.1 Authority. Buyer has the full right, power and
authority to enter into this Agreement and to perform the transactions
contemplated hereunder.
Section 2.11.2. Valid and Binding Agreements. This Agreement and
all other documents delivered by Buyer to Seller now or at COE have been, or
will be, duly authorized, executed and delivered by Buyer and are legal, valid
and binding obligations of Buyer sufficient to allow conveyance to Buyer of the
Site and the Permanent Easement described therein, and are enforceable in
accordance with their respective terms and do not violate any provisions of any
agreement to which Buyer is a party or by which Buyer may be bound.
ARTICLE III
ESCROW AND CLOSE OF ESCROW
Section 3.1. Escrow and Possession. Seller shall open an escrow with the
Title Company within two (2) business days after the Date of Execution. All
escrow instructions shall be consistent with the terms and conditions of this
Agreement. COE means the moment when the last of the Grant Deed and Easement
Deed is recorded. Title shall be conveyed as provided in section 2.6 above and
possession given to Buyer at COE. COE shall occur on or before December 31,
1998. Each party shall timely deposit such documents, monies, and any additional
written escrow instructions with the Escrow Holder as may be necessary for the
conveyance of the Site and the Permanent Easement in accordance with the terms
of this Agreement. A fully executed copy of this Agreement shall be deposited
with Title Company to serve as escrow instructions to Title Company; provided
that the parties may execute such additional supplementary or customary escrow
instructions as Title Company may reasonably require. This Agreement may be
amended or supplemented by explicit additional escrow instructions signed by
both parties, but the printed portion of such escrow instructions shall not
supersede any inconsistent provisions contained in this Agreement. Title Company
is hereby appointed and instructed to deliver, pursuant to the terms of this
Agreement, the documents and monies to be deposited into the escrow as herein
provided.
Section 3.2. Buyer's Conditions to Close. Buyer's obligation to perform
under this Agreement is conditioned upon:
Section 3.2.1. Buyer's Approval of the Preliminary Report. Buyer
shall have not less than ten (10) days from receipt of the Preliminary Title
Report to complete its review and approval.
Section 3.2.2. Easement Buyer and Seller have agreed to, and Seller
has executed the Permanent Easement and delivered such documents into escrow,
all to be recorded at COE.
Section 3.2.3. Grant Deed. Delivery by Seller into escrow of the
Grant Deed conveying fee interest in the Site to Buyer.
Section 3.2.4. Title Policy. Buyer's receipt at COE of a CLTA
Standard Coverage Owner's Policy, or, at Buyer's option, a binder for such Title
Policy, issued by Escrow Holder in an amount equal to Twenty-Five Thousand
Dollars ($25,000), subject only to those exceptions to title approved by Buyer
in writing following a ten (10) working day opportunity to review the exceptions
in the title report.
Section 3.2.5. Viable Property. Confirmation by Buyer, its
contractors, agents or consultants that the Site will provide Buyer with a
viable water source with which to serve its customers.
<PAGE> 37
Section 3.3. Seller's Conditions to Close. Seller's obligation to
perform under this Agreement is conditioned upon Buyer's deposit of the Purchase
Price into escrow and Buyer's naming Seller and its members and lender and
lessee as additional insureds on Buyer's liability insurance.
Section 3.4. Closing Costs and Prorations. Buyer shall pay all transfer
taxes, all escrow fees, the premium for the Title Policy, all notary, document
preparation, and recording fees. General and special real property taxes shall
be prorated as of the date of the Close of Escrow. Each party shall pay the
legal fees incurred by its own legal counsel.
ARTICLE IV
DEFAULT AND REMEDIES
Section 4.1. Default by Seller. In the event of Seller's default, Buyer
may obtain specific performance of this Agreement and may seek any other remedy
available to Buyer at law or equity.
Section 4.2. Default by Buyer. Because the purchase and placement of the
Well is for the benefit of Seller, in the event of Buyer's default in the
acquisition of the Site and Permanent Easement, Seller agrees and affirms that
Seller shall have no further remedy at law or equity to enforce this Agreement
except to retain the amount of money placed in escrow by Buyer. Notwithstanding
the preceding, if Buyer breaches any of its obligations under Sections 2.2, 2.4,
2.5, 2.7, 2.9.1, and 2.9.2, then Seller may pursue any rights and remedies
available to it at law or in equity.
ARTICLE V
CONTINUING OBLIGATIONS
Section 5.1. Non-hinderance. Buyer agrees it will not hinder Seller and
Lessee in their use of the remainder of the Property. The obligation of Buyer
under the immediately preceding sentence shall survive the Close of Escrow
hereunder.
Section 5.2. Notices. All notices and demands shall be given in writing
by personal service, certified mail (return receipt requested), or by any
commercial delivery service which guarantees next business day delivery
("Overnight Service"). Notices and payments required hereunder, shall be
considered given when served, when deposited in the United States mail, or when
deposited with an Overnight Service. Notices shall be addressed to the parties
at their addresses set forth above, provided that if any party gives notice of a
change in name or address, notices to the giver of that notice shall thereafter
be given as demanded in that notice. Notice shall be accomplished by delivery
to: To Seller:
ENZO DRIVE, LLC
511 Division Street
Campbell, CA 95008
Attn: Dan Rosenbaum
Courtesy Copy:
Berliner & Cohen
10 Almaden Blvd., llth Floor
San Jose, CA 95113-2233
Attn: Sam Farb
<PAGE> 38
To Buyer:
GREAT OAKS WATER
23 Great Oaks Boulevard, Suite L
San Jose, CA 95119
Courtesy Copy:
Law offices Of Robert J. Logan
255 West Julian Street, Suite 302
San Jose, CA 95110-2406
The parties may subsequently change addresses by providing written
notice of the change in address to the other party in accordance with this
section.
Section 5.3. Broker's Commissions. Buyer and Seller each covenant to the
other that they have not entered into any agreement or incurred any obligation
which might result in any obligation to pay a sales or brokerage commission or
finder's fee on this transaction to any party or company. Buyer and Seller each
shall indemnify and hold harmless the other from any losses, damages, costs, or
expenses, including reasonable attorney's fees, incurred by the other due to a
breach by the indemnifying party of the foregoing warranty. The obligations of
Buyer and Seller under this Section 5.3 shall survive the Close of Escrow or the
earlier termination of this Agreement.
ARTICLE VI
MISCELLANEOUS PROVISIONS
Section 6.1. Integrated Document. This Agreement supersedes any prior
agreements, statements or promises by the parties and contains the entire
agreement of the parties on the matters covered.
Section 6.2. Amendments. Any amendments to this Agreement shall be in
writing and signed by all parties hereto.
Section 6.3. Interpretation. This Agreement shall be interpreted under
the laws of the State of California. The provisions of this Agreement were
negotiated by all the parties hereto and this Agreement shall be deemed to have
been drafted by all the parties hereto. Time is of the essence of this Agreement
Section 6.4. Binding on Successors and Assigns. This Agreement shall
inure to the benefit of and be binding upon the successors and permitted assigns
of the parties hereto.
Section 6.5. Partial Invalidity. If any provision of this Agreement
shall be held invalid or unenforceable to any extent, the remainder of this
Agreement shall not be affected and shall be enforced to the greatest extent
permitted by law.
Section 6.6. Costs and Attorney's Fees. If either party institutes an
action to enforce or interpret the terms of this Agreement, the losing party
shall pay to the prevailing party the reasonable attorneys' fees and costs of
the prevailing party.
<PAGE> 39
Section 6.7. Captions and Headings. Captions and headings in the
Agreement are for convenience of reference only, and are not to be considered in
construing the Agreement.
Section 6.8. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but which together
shall constitute one instrument.
IN WITNESS WHEREOF, the undersigned have entered into this Agreement as
of the Date of Execution.
BUYER SELLER:
GREAT OAKS WATER COMPANY, ENZO DRIVE, LLC, a California
a California corporation limited liability company
By: By:
Name: Name:
Its: Its:
Date: Dated:
By:
ACKNOWLEDGEMENT REQUIRED] Name:
Its:
Dated:
[ACKNOWLEDGEMENT REQUIRED]
EXHIBIT A
Legal Description
ALL OF THAT CERTAIN REAL PROPERTY SITUATE IN THE CITY OF SAN JOSE, COUNTY OF
SANTA CLARA, STATE OF CALIFORNIA, DESCRIBED AS FOLLOWS:
PARCEL ONE:
BEGINNING AT A POINT ON THE NORTHEASTERLY LINE OF MONTEREY ROAD. AS THE SAME WAS
ESTABLISHED IN THE DEED FROM DOMINGOS T. BORGE, ET UX, TO THE STATE OF
CALIFORNIA, DATED JANUARY 7, 1937 RECORDED MARCH 2, 1937 IN BOOK 815 OF OFFICIAL
RECORDS, PAGE 80, SAID POINT BEING THE MOST EASTERLY CORNER OF THAT CERTAIN
0.031 ACRE PARCEL DESCRIBED IN THE ABOVE MENTIONED DEED AND ALSO BEING ON THE
SOUTHEASTERLY LINE OF THAT CERTAIN 29.58 ACRE PARCEL OF LAND DESCRIBED IN THE
DEED FROM JACK TURTURICI ET UX. TO LUISA MARIA FERRARI DATED MARCH 12,1946,
RECORDED APRIL 12,1946 IN BOOK 1335 OF OFFICIAL RECORDS, PAGE 182, DISTANT
THEREON NORTH 37 12' 55" EAST 67.52 FROM THE MOST SOUTHERLY CORNER OF SAID 28.58
ACRE PARCEL; THENCE FROM SAID POINT OF BEGINNING ALONG THE SOUTHEASTERLY LINE OF
SAID 28.58 ACRE PARCEL NORTH 37 12' 55" EAST 2,522.68 FEET TO THE MOST SOUTHERLY
CORNER OF THAT CERTAIN 10 ACRE PARCEL OF LAND DESCRIBED IN THE DEED FROM LUISA
MARIA FERRARI, TO GIOVANNI L. ROMANO, DATED APRIL 11 1957, RECORDED APRIL
15,1957 IN BOOK 3775 OF OFFICIAL RECORDS, PAGE 532, THENCE ALONG A SOUTHWESTERLY
LINE OF SAID 10 ACRE PARCEL NORTH 52 47'45" WEST 20.00 FEET, TO A POINT ON A
NORTHWESTERLY LINE OF SAID 28.58 ACRE PARCEL; THENCE ALONG SAID LAST MENTIONED
LINE SOUTH 37 12'55" WEST 2,522.66 FEET TO THE MOST NORTHERLY CORNER OF SAID
0.031 ACRE PARCEL; THENCE ALONG THE NORTHEASTERLY LINE OF SAID 0.031 ACRE PARCEL
SOUTH 52 43' 45" EAST 20.14 FEET TO THE POINT OF BEGINNING.
<PAGE> 40
EXCEPTING THEREFROM THAT PORTION THEREOF LYING SOUTHWESTERLY OF THE
NORTHEASTERLY LINE OF THE PARCEL OF LAND CONDEMNED TO THE STATE OF CALIFORNIA BY
FINAL ORDER OF CONDEMNATION, A CERTIFIED COPY OF WHICH WAS RECORDED APRIL 4,
1972 IN BOOK 9772, PAGE 609 OF OFFICIAL RECORDS.
PARCEL TWO:
BEGINNING AT A STAKE MARKED "B" STANDING AT THE INTERSECTION OF THE CENTER LINE
OF THE MONTEREY ROAD WITH THE SOUTHWESTERLY PROLONGATION OF THE FENCE LINE
BETWEEN LANDS OF MRS. MURPHY COLOMBET AND WARREN COTTLE, BEING ALSO THE COMMON
CORNER FOR LOTS "M" AND "N" IN THE CENTER OF SAID ROAD, AS SHOWN ON THE MAP
ACCOMPANYING THE REPORT OF THE REFEREES IN THE SUIT FOR PARTITION ENTITLED
"YGNACIO BERNAL ET AL VS. RUFINA BERNAL DE GUINAC ET AL. CASE NO. 5643 IN THE
TWENTIETH DISTRICT COURT OF THE STATE OF CALIFORNIA, IN AND FOR THE COUNTY OF
SANTA CLARA, AND RUNNING THENCE ALONG THE CENTER OF THE MONTEREY ROAD, S.52 55'
E. 16.36 CHAINS TO A POINT DISTANT NORTHWESTERLY 20 FEET FROM THE COMMON CORNER
FOR LANDS OF MRS. MURPHY COLOMBET AND E. VAN EVERY IN THE CENTER OF SAID ROAD,
THENCE PARALLEL TO THE FENCE LINE BETWEEN THE LANDS OF SAID VAN EVERY AND MRS
MURPHY COLOMBET AND DISTANT THEREFROM TWENTY FEET NORTHWESTERLY, N. 37
E.39.24-1/2 CHAINS TO A 4" X 4" STAKE MARKED 2-3; THENCE AT RIGHT ANGLES N 53 W.
9.85-1/2 CHAINS TO A STAKE MARKED C.M.1 STANDING IN THE CENTER OF THE COYOTE
RIVER AND LINE BETWEEN LANDS OF MRS. MURPHY COLOMBET AND EDWARD M. PIERCY AND
FROM WHICH STAKE A SYCAMORE 36 INCHES IN DIAMETER MARKED B.T.C.M. 1 BEARS N.84"
30' W. 2.26 CHAINS; THENCE ALONG THE CENTER OF SAID RIVER AND LINE BETWEEN LANDS
OF SAID PIERCYAND MRS. MURPHYCOLOMBET WITH THE FOLLOWING COURSES AND DISTANCES:
S. 31 45' W. 4.71-1/2 CHAINS N 86 38'W.5.00 CHAINS AND N. 64 30'W. 2.82 CHAINS
TO THE COMMON CORNER FOR LANDS OF MRS. MURPHY COLOMBET AND WARREN COTTLE IN THE
CENTER OF SAID RIVER; THENCE LEAVING SAID RIVER AND RUNNING ALONG THE FENCE LINE
BETWEEN THE LANDS OF SAID COTTLE AND MURPHY COLOMBET, S. 37 W. 31.17 CHAINS TO
THE PLACE OF BEGINNING. BEING A PART OF LOT "N" AS SET OFF TO JOSE A. AND DANIEL
BERNAL IN THE SUIT FOR PARTITION ENTITLED "YGNACIO BERNAL ET AL VS. RUFINA
BERNAL DE GUINAC ET Al CASE NO. 5643 IN THE TWENTIETH DISTRICT COURT OF THE
STATE OF CALIFORNIA, IN AND FOR THE COUNTY OF SANTA CLARA AND A PART OF LOT 33
OF THE PARTITION OF THE SANTA TERESA RANCHO.
EXCEPTING THEREFROM THAT PORTION THEREOF, LYING NORTHERLY OF THE SOUTHERLY LINE
OF THE LAND DESCRIBED IN THE DEED TO THE COUNTY OF SANTA CLARA, RECORDED
SEPTEMBER 11,1969 IN BOOK 8665, PAGE 413 OF OFFICIAL RECORDS MORE PARTICULARLY
DESCRIBED AS FOLLOWS:
BEGINNING AT THE MOST EASTERLY CORNER OF THAT CERTAIN PARCEL OF LAND CONVEYED TO
THE SANTA CLARA VALLEY WATER CONSERVATION DISTRICT BY DEED RECORDED JULY 9, 1963
IN BOOK 6094 OFFICIAL RECORDS, PAGE 493. THENCE ALONG THE SOUTHERLY BOUNDARY OF
SAID PARCEL SOUTH 39 30' 10" WEST 25.03 FEET, SOUTH 0 02' 10" EAST 31.40 FEET
SOUTH 34 56' 30" WEST 25.02 FEET, SOUTH 41 58' 50" WEST 11.95 FEET, SOUTH 26 07'
05" WEST 17.20, SOUTH 71 25' 40" WEST 25.18 FEET, NORTH 79 55' 30" WEST 26.9
FEET, SOUTH 83 40' 30" WEST 125.55 FEET, SOUTH 72 04' 40" WEST 85.72 FEET, SOUTH
64 08' 30" WEST 25.36 FEET, SOUTH 72 32'10", WEST 107.02 FEET. SOUTH 86 03' 10"
WEST 150.01 FEET, NORTH 87 40' 40" WEST 75.48 FEET, NORTH 82 28' 50" WEST 47.38
FEET, NORTH 75 22' 30" WEST 175.01 FEET, AND NORTH 66 13' WEST 56.94 FEET TO THE
MOST WESTERLY CORNER THEREOF AND LYING IN THE NORTHWESTERLY LINE OF THAT CERTAIN
PARCEL OF LAND DESCRIBED IN THE DEED FROM ANTHONY LABARBERA, ET AL. TO PETER
FILICE AND SONS. A CO-PARTNERSHIP. DATED APRIL 17, 1956 AND RECORDED APRIL 23,
1956 IN BOOK 3474 OFFICIAL RECORDS, AT PAGE 212, SANTA CLARA COUNTY RECOR.DS;
THENCE LEAVING SAID SOUTHERLY BOUNDARY AND PROCEEDING ALONG SAID NORTHWESTERLY
LINE SOUTH 37 00' WEST 34.71 FEET; THENCE LEAVING SAID NORTHWESTERLY LINE SOUTH
62 17' 10" EAST 5.61 FEET; THENCE SOUTH 74 44' 55" EAST 312.93 FEET. THENCE
NORTH 79 19' 42" EAST 764.03 FEET MORE OR LESS TO A POINT ON THE NORTHEASTERLY
LINE OF THAT PARCEL OF LAND DESCRIBED IN THE AFOREMENTIONED DEED FROM ANTHONY
LABARBERA, ET AL; THENCE ALONG SAID NORTHEASTERLY LINE NORTH 53 00' 00" WEST
145.09 FEET MORE OR LESS TO THE POINT OF BEGINNING.
ALSO EXCEPTING THEREFROM, THAT PORTION THEREOF LYING SOUTHWESTERLY AND
SOUTHEASTERLY OF THE NORTHEASTERLY AND NORTHWESTERLY LINE OF LAND DESCRIBED IN
THE DEED TO THE STATE OF CALIFORNIA RECORDED APRIL 13,1972 IN BOOK 9785, PAGE
674
<PAGE> 41
OF OFFICIAL RECORDS, MORE PARTICULARLY DESCRIBED AS FOLLOWS:
BEGINNING FOR REFERENCE AT THE MOST WESTERLY CORNER OF THAT PARCEL OF LAND
DESCRIBED IN THE DEED TO THE COUNTY OF SANTA CLARA RECORDED SEPTEMBER 22, 1969,
IN BOOK 8677 AT PAGE 216, OFFICIAL RECORDS OF SANTA CLARA COUNTY; THENCE ALONG
THE PROPERTY LINE COMMON TO THE LANDS, NOW OR FORMERLY, OF THE ESTATE OF
ANGELINA FILICE BEEHM AND DANNA AND DANNA, INC., A CORPORATION, S. 37 35'06"
WEST, 80.04 FEET TO THE TRUE POINT OF COMMENCEMENT, THENCE S. 55 00'29" E.,
786.52 FEET; THENCE S. 56 09' 14" E.281.42 FEET; THENCE N. 37 31'06", E. 106.62
FEET; THENCES.52 28'54" E., 15.00 FEET TO THE PROPERTY, LINE COMMON TO THE
LANDS, NOW OR FORMERLY, OF THE ESTATE OF ANGELOMA FILICE. BEHM AND OF EUGENE
FERRARI ET AL; THENCE ALONG LAST SAID COMMON PROPERTY LINE S. 37 31' 06", W.
411.89 FEET; THENCE N. 55 00' 29" W., 1083.00 FEET TO THE FIRST SAID COMMON
PROPERTY LINE; THENCE ALONG SAID COMMON PROPERTY LINE N. 37 35' 06" E., 300.31
FEET TO THE TRUE POINT OF COMMENCEMENT.
ARB-NO: 678-6-8 & 678-5-21
APN NO: 678-05-021 678-06-008
<PAGE> 42
November 14, 1997
Job No. 97-246
LEGAL DESCRIPTION
OF A WELL SITE
All that certain real property situate in the City of San Jose, County of Santa
Clara, State of California, being as described as follows:
BEGINNING at the Easterly most corner of that certain parcel of land granted to
Santa Clara Land Title Company, a California Corporation from Arcadia
Development corporation, by that certain Corporation Grant Deed recorded on June
22, 1988 in Book K577, Page 2203 of the Official Records of Santa Clara County,
thence from said point of beginning along the northeasterly line of said parcel,
N. 53 23' 51" W, 86.92 feet; thence South 36 36' 09" W., 134.83 feet to the TRUE
POINT OF BEGINNING of this description; thence N. 53 23' 51" W, 53.93 feet;
thence south 11 05'40" E, 79.67 feet; thence N 36 36' 09" E, 53.62 feet to the
said true point of beginning of this description, and containing 1,580 square
feet of land, more or less.
<PAGE> 43
Job No. 97-291
LEGAL DESCRIPTION
OF A WATER PIPELINE EASEMENT
An easement (10.00 feet in width) for the purposes of the installation,
maintenance and repair of a water pipeline, together with any and all
appurtenances thereto, over, under and upon that certain strip of land situate
in the City of San Jose, County of Santa Clara, State of California, being
described as follows:
BEGINNING at the Easterly most corner of that certain parcel of land granted to
Santa Clara Land Title Company, a California Corporation from Arcadia
Development corporation, by that certain Corporation Grant Deed recorded on June
22, 1988 in Book K577, Page 2203 of the Official Records of Santa Clara County;
thence from said point of beginning along the southeasterly line of said parcel,
S 36 36' 17" West, 91.86 feet to the true point of beginning of this
description; thence leaving said southeasterly line, N 54 13' 55" West 54.96
feet to point a; thence N. 54 13' 55" West, 37.00 feet to point b; thence North
54 13' 55" West, 152.14 feet; thence south 78 22' 26" West, 773.48 feet thence
South 34 23' 08" West, 56.94 feet to point c; thence South 56 00' 41" East,
742.41 feet to the said southeasterly line, hereinabove described, said point
being the terminus of this description.
TOGETHER WITH:
Parcel A
BEGINNING at point A, being hereinabove described; South 37 41' 40" West, 133.02
feet, thence North 53 23' 51" West, 20.34 feet to the terminus of this
description.
ALSO TOGETHER WITH:
Parcel B
BEGINNING at point B, being herinabove described; thence South 36 41' 36" West,
41.63 feet to the terminus of this description.
ALSO TOGETHER WITH:
Parcel C
BEGINNING at point C, being hereinabove described; thence North 81 36' 46" West,
31.49 feet to a line parallel with and 5.00 feet northeasterly of, measured at
right angles to, the southwesterly line of said parcel of land being hereinabove
described; thence along said parallel line, North 55 54' 00" West, 297.80 feet
to the northwesterly line of said parcel of land, said point being the terminus
of this description.
<PAGE> 44
LEASE AGREEMENT
1. Parties. This Lease Agreement ("Lease"), dated for reference purposes
only, September 15, 1997, is made by and between ENZO DRIVE, LLC, a California
limited liability company ("Landlord"), and WESTERN DIGITAL CORPORATION, a
Delaware corporation ("Tenant").
2. Premises. Landlord hereby leases to Tenant and Tenant hereby leases
from Landlord, upon the terms and conditions hereinafter set forth, the
following property (the "Premises"):
(a) that certain real property, consisting of approximately 10.658
acres, more or less, as more particularly described in Exhibit "A" attached
hereto (the "Land") located in the City of San Jose, County of Santa Clara,
State of California; and
(b) that certain R&D building containing approximately fifty-eight
thousand seven hundred eighty-five (58,785) square feet to be constructed on the
Land by Landlord in accordance with the terms of the Improvement Agreement
described below (the "Building"). The Building shall be situated on the Land in
the approximate location shown on the site plan attached hereto as Exhibit "B".
The Building, together with the sitework outside the perimeter walls of
the Building, are to be constructed by Landlord in accordance with the
Improvement Agreement attached hereto as Exhibit "C" (the "Improvement
Agreement"). The parties hereto acknowledge and understand that Tenant intends
to construct, or cause to be constructed, certain leasehold improvements (both
general utility and specialized improvements) in the Building pursuant to the
terms of a separate construction contract or improvement agreement. Such
separate construction contract or improvement agreement is contemplated to be
entered into between Tenant and its general contractor, which general contractor
shall be a joint venture consisting of South Bay Construction Company and
Southland Industries. The aforementioned leasehold improvements (both general
utility and specialized) to be constructed, or caused to be constructed, by
Tenant in the Building are referred to herein as the "Tenant Improvements". The
term "Building", as used herein shall not include the Tenant Improvements.
For purposes of this Lease, the term "Project" shall mean the Land,
Building, and Tenant Improvements described herein.
Landlord acknowledges that during the Lease Term (as defined below),
Tenant may desire to construct, or cause to be constructed, at Tenant's sole
cost and expense, an extension of the Building and/or one or more additional
buildings on the Land (such extension of the Building and/or additional
buildings, if any, to be constructed by Tenant are collectively referred to
herein as the "Expansion Building(s)") and leasehold improvements therein (such
Expansion Building(s) and the leasehold improvements, if any, to be constructed
therein are collectively referred to herein as the "Expansion Project"). Tenant
may not construct, or cause to be constructed, such Expansion Project (or any
portion thereon on the Land without Landlord's approval, which approval shall
not be unreasonably withheld. Landlord may impose as a condition to Landlord's
<PAGE> 45
consent, such requirements as Landlord may deem necessary in its reasonable
discretion, including, without limitation, a right of reasonable approval of (i)
the plans and specifications for the Expansion Project, and all portions
thereof, and any and all changes to such approved plans and specifications (it
being understood and agreed that Landlord's approval of such plans and
specifications, and any changes thereto, shall not constitute a representation
or warranty by Landlord that such Expansion Project improvements are properly
engineered or designed), (ii) the general contractor by whom the work is to be
performed (it being understood and agreed that the Landlord's approval of any
such contractor shall not constitute a warranty that such contractor is in fact
qualified), (iii) the construction contract(s) covering the works of improvement
comprising the Expansion Project and all parts thereof, (iv) the manner in which
the work is to be performed, (v) the location in which the Expansion Building(s)
may be constructed on the Land, and (vi) the times during which the work is to
be accomplished. With respect to the Expansion Project, and all portions
thereof, the following additional requirements shall apply: (a) Tenant shall
give Landlord at least five (5) days written notice prior to commencing any work
of improvement in, on or about the Expansion Building(s), the Expansion Project
or the Land for which a building permit is required and/or which is to be
performed by a third party contractor or subcontractor and which is estimated to
cost or will cost in excess of $25,000, (b) prior to the commencement of
construction of the Expansion Project, or applicable portion thereof, Tenant
shall furnish Landlord with written evidence reasonably satisfactory to Landlord
that Tenant has the financial resources necessary to complete the Expansion
Project desired to be undertaken by Tenant, (c) if requested by Landlord, Tenant
shall post a completion bond in an amount and form satisfactory to Landlord, (d)
at the expiration or earlier termination of the Lease Term, Tenant shall
surrender to Landlord the Expansion Building(s) and all leasehold improvements
constructed or installed by Tenant therein (and all alterations, additions and
improvements to such leasehold improvements) in safe condition and free of
debris, with all trade fixtures, personal property and equipment of Tenant
removed from the Total Project, however, Tenant shall not be required by
Landlord to remove any leasehold improvements constructed in the Expansion
Building(s) or any alterations, additions or improvements constructed or
installed by Tenant in such leasehold improvements, (e) Tenant shall construct
the Expansion Project and all applicable portions thereof in compliance with all
applicable laws, ordinances, rules, orders and regulations of all federal,
state, county and municipal governments or agencies now in force or that may be
enacted hereafter and with all directive rules and regulations of the fire
marshal, health officer, building inspector or other proper officers of any
governmental agency now having or hereafter acquiring jurisdiction, (f) Tenant
be responsible for obtaining all necessary permits and approvals required for
the construction of the Expansion Project, or applicable portion thereof and (g)
Tenant shall reimburse Landlord for Landlord's actual costs incurred in
reviewing any proposed improvements, buildings or alterations or additions
whether or not Landlord's consent is granted. Landlord shall have no obligation
to pay for any of the costs of constructing, or causing to be constructed, the
Expansion Project, or any portion thereof, and Landlord shall not be responsible
for obtaining any approvals, licenses, or permits that are necessary to
construct, or cause to be constructed, the Expansion Project, or any portion
thereof Notwithstanding the immediately preceding sentence, Landlord agrees to
reasonably cooperate with Tenant, at Tenant's request but with no liability or
cost to Landlord, in Tenant's efforts to obtain any approvals, licenses or
permits that are necessary or appropriate to construct, or cause to be
constructed, the Expansion Project, or any portion thereof Tenant acknowledges
and agrees that the right to construct, or cause to be constructed, the
Expansion Project on terms and conditions set forth above shall be personal to
the original Tenant hereunder, Western Digital Corporation, and to any affiliate
of Western Digital Corporation to whom this Lease may be assigned or to an
entity that acquires all or substantially all of the assets of Western Digital
Corporation (in the event of an assignment of this Lease to such entity) and
Landlord reserves the right to withhold its approval, in its sole and absolute
discretion, to any other assignee, sublessee or transferee of Western Digital
Corporation constructing, or causing to be constructed any Expansion Project, or
any portion thereof, on the Land. During the Lease Term, the improvements
comprising the Expansion Project shall be owned by Tenant and Tenant shall be
entitled to claim the depreciation deductions, if any, applicable to the
Expansion Project.
<PAGE> 46
For purposes of this Lease, the term "Total Project" shall mean the
Project and the Expansion Project described above.
3. Conditions Precedent. The effectiveness of this Lease is hereby
conditioned upon the satisfaction (or written waiver by Landlord) of the
following conditions precedent:
(a) Landlord's acquisition of the Land; and
(b) Landlord obtaining a binding, written commitment or agreement
for the financing or joint venture development of the Premises that is
acceptable in form and substance to Landlord in its sole discretion.
If any of the foregoing conditions precedent are not satisfied by
October 31, 1997, then unless Landlord expressly waives the applicable condition
precedent in writing within five (5) business days thereafter, Landlord may
terminate this Lease by written notice to Tenant within such five (5) business
day period following October 31, 1997. Upon any such termination of this Lease,
neither party shall have any obligations to the other in connection with or
under this Lease except for obligations accruing prior to the termination and
obligations which, by their terms, survive the termination of this Lease and
except that Landlord shall then promptly return to Tenant any advance rent paid
by Tenant pursuant to Paragraph 5.F.
4. Term.
A. Commencement Date. The term of this Lease ("Lease Term") shall be for
fifteen (15) years, commencing on the earlier of (i) the date Tenant takes
possession of the Building and commences business operations therein, or (ii)
June 1, 1998 (such earlier date being referred to herein as the "Commencement
Date") and ending fifteen (15) years later, unless sooner terminated pursuant to
any provision hereof or unless extended pursuant to the terms of Paragraph 4.C
below.
B. Delays in Delivery of Possession of Buildings. Landlord makes no
representation or warranty as to the date by which the Building will be
substantially completed. Landlord shall not be liable for any damage or loss
incurred by Tenant for Landlord's failure for whatever cause to deliver
possession of the Building, or either of them, by a particular date, nor shall
this Lease be void or voidable on account of such failure to deliver possession
of the Building. Landlord agrees to exercise diligent, good faith efforts to
complete construction of the Building following approval of plans and
specifications for such Building and issuance of applicable building permits.
C. Options to Extend Lease Term. Landlord hereby grants to Tenant two
(2) options to extend the Lease Term for a period of five (5) years each (each
such period being referred to herein as an "Extended Term" and together referred
to herein as the "Extended Terms"), on the following terms and conditions:
(1) Tenant shall give Landlord written notice of its
exercise of the applicable option to extend the Lease Term no earlier than nine
(9) months nor later than six (6) months before expiration of the initial Lease
Term, or the first Extended Term, as the case may be. Time is of the essence
Tenant shall have no right to exercise the option applicable to the second
Extended Term if it fails to timely and properly exercise the option applicable
to the first Extended Term.
(2) Tenant may not extend the Lease Term pursuant to this
Paragraph 4.C if Tenant is in material default of any of its obligations under
this Lease as of the date of Tenant's notice of exercise of this option, or if
Tenant shall have assigned, sublet or otherwise transferred its interest in this
Lease and/or the
<PAGE> 47
Premises, or any portion thereof, whether or not Landlord's consent to such
assignment or transfer has been given. The preceding sentence to the contrary
notwithstanding, Tenant shall not be precluded from extending the Lease Term as
provided herein solely because Tenant may have assigned this Lease to an
affiliate of Tenant or to an entity that acquires all or substantially all of
the assets of Tenant, by merger or otherwise. If Tenant is in default under this
Lease on the date that the Extended Term is to commence, then Landlord may elect
to terminate this Lease, notwithstanding any notice given by Tenant of an
exercise of its option to extend and such exercise of Tenant's option to extend
the Lease Term shall be void and of no force or effect.
(3) All terms and conditions of this Lease shall apply
during the applicable Extended Term, except that the Rent for the Extended Term
shall be determined in accordance with Paragraph 5.G below, Tenant shall have no
further options to extend the Lease Term beyond the Extended Terms described in
this Paragraph 4.C and Landlord shall have no obligation to construct or install
any building shell improvements (as described in Exhibit C attached hereto) or
leasehold improvements within such building shell improvements.
(4) Once Tenant delivers notice of its exercise of the
applicable option to extend the Lease Term, Tenant may not withdraw such
exercise and, subject to the provisions of this Paragraph 4.C, such notice shall
operate to extend the Lease Term. Upon the extension of the Lease Term pursuant
to this Paragraph 4.C, the term "Lease Term" as used in this Lease shall
thereafter include the applicable Extended Term for which the option is
exercised and the Lease Termination date shall be the expiration date of the
applicable Extended Term unless sooner terminated pursuant to the terms hereof.
D. Fixturization. Commencing on the date Landlord delivers possession of
a water tight shell with respect to the Building (as defined in Exhibit F
attached hereto), Tenant shall have the right to enter into the Building to
fixturize such space or to commence construction or installation of certain
leasehold improvements therein (as permitted under this Lease), provided,
however, Tenant shall schedule such fixturization or construction or
installation of leasehold improvements in such a manner as to not interfere with
or delay Landlord's completion of construction of the Building. If Landlord
delivers possession of a water tight shell with respect the Building prior to
June 1, 1998, then Tenant's use and possession of the Building during the period
prior to the earlier of (i) June 1, 1998, or (ii) the date Tenant commences
operation of its business within such Building (such period being hereinafter
referred to as the "Building Early Occupancy Period") shall be subject to all of
the terms and conditions of this Lease except that Tenant shall have no
obligation to pay any Monthly Installment of rent or taxes or insurance incurred
by Landlord during the Building Early Occupancy Period.
S. Rent.
A. Time of Payment. Tenant shall pay to Landlord as rent for the
Premises the sum specified in Paragraph 5.B (with respect to the initial Lease
Term) and Paragraph 5.G below (with respect to the any Extended Term) (the
"Monthly Installment") each month in advance on the first day of each calendar
month, without deduction or offset, prior notice or demand, commencing on the
Commencement Date and continuing through the Term of this Lease, together with
such additional rents as are payable by Tenant to Landlord under the terms of
this Lease. The Monthly Installment for any period during the Lease Term which
period is less than one (1) full month shall be a prorata portion of the Monthly
Installment based on the actual number of days in such month.
B. Monthly Installment.
<PAGE> 48
(1) Initial Monthly Installment. The initial Monthly Installment of
rent payable each month during the first two (2) years of the Lease Term shall
be equal to Ninety-four Thousand Six Hundred Seventy-one Dollars ($94,671) per
month.
(2) Rental Adjustments. During the Lease Term (including, without
limitation, any applicable Extended Term), the Monthly Installment of rent shall
be adjusted as follows:
Upon commencement of the twenty-fifth (25th); forty-ninth (49th); seventy-third
(73rd); ninety-seventh (97th); one hundred twenty-first (121st); one hundred
forty-fifth (145th) and one hundred sixty-ninth (169th) months of the initial
Lease Term and upon the commencement of the twenty-fifth and forty-ninth months
of each Extended Term ("Rental Adjustment Dates"), the Monthly Installment of
rent shall be adjusted by multiplying the Monthly Installment of rent payable
during the month immediately prior to the applicable Rental Adjustment Date
(without regard to any abatement of rent due to damage or destruction) by one
hundred eight and sixteen hundredths percent (108.16%)
C. Late Charge. Tenant acknowledges that late payment by Tenant to
Landlord of rent and other sums due hereunder will cause Landlord to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed on Landlord by the
terms of any mortgage or deed of trust covering the Premises. Accordingly, if
any installment of rent or any other sum due from Tenant shall not be received
by Landlord within ten (10) days after such amount shall be due, Tenant shall
pay to Landlord, as additional rent, a late charge equal to four percent (4%) of
such overdue amount. The parties hereby agree that such late charge represents a
fair and reasonable estimate of the costs Landlord will incur by reason of late
payment by Tenant. Acceptance of such late charge by Landlord shall in no event
constitute a waiver of Tenant's default with respect to such overdue amount, nor
prevent Landlord from exercising any of its other rights and remedies granted
hereunder.
D. Additional Rent. All taxes, insurance premiums, late charges, costs
and expenses which Tenant is required to pay hereunder, together with all
interest and penalties that may accrue thereon in the event of Tenant's failure
to pay such amounts, shall be deemed to be additional rent ("Additional Rent")
and shall be paid in addition to the Monthly Installment of rent.
E. Place of Payment. Rent shall be payable in lawful money of the United
States of America to Landlord at 511 Division Street, Campbell CA, or to such
other person(s) or at such other place(s) as Landlord may designate in
writing.
F. Advance Payment. Within five (5) days following the date Tenant
receives written notice from Landlord of the satisfaction or waiver of the
conditions set forth in Paragraph 3 above (but in no event earlier than October
1, 1997), Tenant shall pay to Landlord the sum of Ninety-four Thousand Six
Hundred Seventy-one Dollars ($94,671) to be applied to the Monthly Installment
of rent first accruing under this Lease.
G. Rent During Extended Term. If Tenant elects to extend the Lease Term
pursuant to Paragraph 4.C above, the Monthly Installment of rent payable by
Tenant for the first two (2) years of the applicable Extended Term shall be in
an amount equal to ninety-five percent (95%) of the fair market rental value of
the Project in relation to market conditions at the time of the commencement of
the applicable Extended Term (including, but not limited to, rental rates for
comparable space with comparable tenant improvements and taking into
consideration any adjustments to rent based upon direct costs (operating
expenses) and taxes, load factors, financing charges, and/or cost of living or
other rental adjustments; the relative strength of the TENANTS; THE SIZE of the
space; and any other factors which affect market rental values at the time of
the commencement of
<PAGE> 49
the applicable Extended Term, but without taking into consideration the value of
any leasehold improvements installed in the Premises by Tenant at Tenant's sole
cost and without taking into consideration the value of the Expansion Project
constructed or installed by Tenant at Tenant's sole cost); however, the Monthly
Installment of rent for the first two (2) years of the Extended Term shall in no
event be lower than the Monthly Installment of rent payable during the last
lease year immediately prior to the commencement of the applicable Extended Term
and the Monthly Installment of rent payable during the applicable Extended Term
shall be adjusted every two (2) years following the commencement of the
applicable Extended Term in accordance with Paragraph 5.B.(2) above. Anything
herein to the contrary notwithstanding, the value of the entire Land shall be
taken into consideration in calculating the fair rental value of the Project.
(1) Mutual Agreement. After timely receipt by Landlord of Tenant's
notice of exercise of the applicable option to extend the Lease Term, Landlord
and Tenant shall have a period of fifteen (15) days in which to agree on the
Monthly Installment of rent for the first two (2) years of the applicable
Extended Term. If Landlord and Tenant agree on said Monthly Installment of rent
during such fifteen (15)-day period, they shall immediately execute an amendment
to this Lease stating the Monthly Installment of rent for the first two (2)
years of the applicable Extended Term. If Landlord and Tenant are unable to
agree on the Monthly Installment of rent for the first two (2) years of the
applicable Extended Term as aforesaid, then the provisions of Paragraph 5.G.(2)
below shall apply.
(2) Appraisal. Within ten (10) days after the fifteen (15) day
period described in Paragraph 5.G(l) above, each party at its cost and by giving
notice to the other party, shall appoint an M.A.I. real estate appraiser, with
at least (5) years full-time commercial appraisal experience in Santa Clara
County, to appraise and set the fair market rental value of the Project. If a
party does not appoint an appraiser within ten (10) days after the other party
has given notice of the name of its appraiser, the single appraiser appointed
shall be the sole appraiser and shall set the fair market rental value. The cost
of such sole appraiser shall be borne equally by the parties. If two (2)
appraisers are appointed by the parties as provided in this Paragraph 5.G(2),
the two appraisers shall meet promptly in an attempt to set the fair market
rental value. If they are unable to agree within twenty (20) days after the last
appraiser has been appointed, then the two (2) appraisers shall attempt to
select a third (3rd) appraiser meeting the qualifications stated in this
Paragraph 5.G(2) within ten (10) days after the last day the two (2) appraisers
are given to set the fair market rental value. If they are unable to agree on
the third (3rd) appraiser, either of the parties to this Lease, by giving ten
(10) days notice to the other party, may apply to the presiding judge of the
Superior Court of Santa Clara County for the selection of a third (3rd)
appraiser who meets the qualifications stated above. Each of the parties shall
bear one-half (1/2) of the cost of appointing the third (3rd) appraiser and of
paying the third (3rd) appraiser's fee. The third appraiser, however selected,
shall be a person who has not previously acted in any capacity for either party.
Within twenty (20) days after the selection of the third appraiser, the majority
of the appraisers shall set the fair market rental value. If the majority of the
appraisers are unable to set the fair market rental value within said twenty
(20) day period, the three (3) appraisals shall be added together and the total
divided by three (3); the resulting quotient shall be the fair market rental
value and shall be deemed incorporated herein; provided, however, that if any
appraisal differs from the median appraisal by an amount equal to more than ten
percent (10%) of such median appraisal, that appraisal shall be disregarded, and
the average of the remaining appraisals (or the remaining appraisal) shall be
the fair market rental value. In establishing the fair market rental value, the
appraiser or appraisers shall consider the factors referred to in Section 5.G
above, without regard to the existence of this Lease and without regard to the
value of any leasehold improvements installed in the Premises by Tenant at
Tenant's sole cost (and Without talking into consideration the value of the
Expansion Project constructed or installed by Tenant at Tenant's sole cost) but
taking into consideration the triple net nature of this Lease.
6. Security Deposit. (INTENTIONALLY DELETED.]
<PAGE> 50
7. Use of Premises. Tenant shall use the Building (and the Expansion
Building(s), if applicable) only for the purpose of general office, marketing,
sales, warehousing, distribution, light industrial manufacturing and assembly,
research and development of electronics products, and any other related and
legally permitted uses, and for no other purpose. The preceding notwithstanding,
Tenant's use of the Total Project (and all portions thereof) shall in all events
be in conformance with applicable governmental laws, regulations, rules and
ordinances. Tenant shall indemnify, protect, defend, and hold Landlord harmless
against any loss, expense, damage, attorneys' fees or liability arising solely
out of the failure of Tenant to use the Total Project, or any portion thereof,
in compliance with any applicable law. Tenant shall not commit or suffer to be
committed, any waste upon the Total Project, or any nuisance, or allow any sale
by auction upon the Total Project (except at the expiration or earlier
termination of the Lease, Tenant may auction equipment in place from the
Building or the Expansion Building(s)), or allow the Total Project, or any
portion thereof, to be used for any unlawful purpose, or place any loads upon
the floor, walls or ceiling which endanger the structure, or place any harmful
liquids in the drainage system of the Building or the Expansion Building(s). No
waste materials or refuse shall be dumped upon or permitted to remain upon any
part of the Total Project outside of the Building or the Expansion Building(s),
if applicable, except in trash containers placed inside exterior enclosures
designated for that purpose by Landlord. No materials, supplies, equipment,
finished products or semifinished products, raw materials or articles of any
nature shall be stored upon or permitted to remain on any portion of the Total
Project outside of the Building or the Expansion Building(s) except in areas
approved in writing by Landlord for such purposes. Tenant's use of the Total
Project shall be subject to with the terms of Paragraph 38 below.
8. Taxes and Assessments.
A. Tenant's Property. Tenant shall pay before delinquency any and all
taxes and assessments, license fees and public charges levied, assessed or
imposed upon or against Tenant's fixtures, equipment, leasehold improvements,
furnishings, furniture, appliances and personal property installed or located on
or within the Total Project. Tenant shall cause said fixtures, equipment,
furnishings, furniture, appliances and personal property to be assessed and
billed separately from the real property of Landlord. If any of Tenant's said
personal property shall be assessed with Landlord's real property, Tenant shall
pay Landlord the taxes attributable to Tenant within thirty (30) days after
receipt of a written statement from Landlord setting forth the taxes applicable
to Tenant's property, together with a copy of Landlord's tax bill therefor.
B. Property Taxes. Tenant shall pay, as additional rent, all Property
Taxes levied or assessed with respect to the real property comprising the Land
and with respect to all buildings and improvements located on the Land
(including, without limitation, the Building and Tenant Improvements referred to
in Paragraph 2 above and the Expansion Building(s) and all leasehold or tenant
improvements that may be constructed in such Expansion Building(s)) which become
due or accrue during the Term of this Lease. Provided that Landlord bills Tenant
at least thirty (30) days prior to the delinquency date of such Property Taxes,
Tenant shall pay such Property Taxes to Landlord at least ten (10) days prior to
the delinquency date, and if Tenant fails to do so, Tenant shall reimburse
Landlord, on demand, for all interest, late fees and penalties that the taxing
authority charges Landlord. If Landlord bills Tenant less than thirty (30) days
prior to the delinquency date of such Property Taxes, Tenant shall pay such
Property Taxes to Landlord within thirty (30) days of the date of delivery of
such bill to Tenant. Landlord's bill to Tenant shall include a copy of
Landlord's tax bill from the taxing authority. In the event Landlord's mortgagee
requires an impound for Property Taxes, then on the first day of each month
during the Lease Term (commencing not less than thirty (30) days after written
notice to Tenant that such impound account is so required), Tenant shall pay
Landlord one twelfth (1/12) of its annual share of such Property Taxes. If the
amount of any such impound installment payments paid by Tenant exceeds Tenant's
actual share of such Property Taxes after payment to the applicable taxing
authority (exclusive of any interest or penalties arising from late payment)
such excess shall be refunded to Tenant within thirty (30) days after the
payment is made to the taxing authority. Anything herein to the contrary
notwithstanding, Tenant's liability
<PAGE> 51
hereunder shall be prorated to reflect the Commencement Date and termination
date of this Lease; however, the amount of Property Taxes allocable to the
entire Land shall not be prorated based on the fact that the Expansion
Building(s), if applicable, may be completed after the Building.
For the purpose of this Lease, "Property Taxes" means and includes all
taxes, assessments (including, but not limited to, assessments for public
improvements or benefits), taxes based on vehicles, utilizing parking areas,
taxes based or measured by the rent paid, payable or received under this Lease,
taxes based upon, allocable to, or measured by the area of the Total Project,
the Premises, the Building and the Expansion Building(s) or the Land; taxes upon
or with respect to the possession, leasing, operation, management, maintenance,
alteration or repair of the Total Project or any portion thereof, gross receipts
tax, sales and/or use tax, water tax, sewer tax, employee tax, occupational
license tax imposed upon Landlord or Tenant with respect to the Total Project,
or applicable portion thereof, any tax upon this transaction or any document to
which Tenant is a party creating or transferring an interest or an estate in the
Total Project or the Premises, taxes on the value, use, or occupancy of the
Total Project, or any portion thereof, Environmental Surcharges, and all other
governmental impositions and charges of every kind and nature whatsoever,
whether or not customary or within the contemplation of the parties hereto and
regardless of whether the same shall be extraordinary or ordinary, general or
special, unforeseen or foreseen, or similar or dissimilar to any of the
foregoing which, at any time during the Lease Term, shall be applicable to the
Total Project, or any portion thereof or assessed, levied or imposed upon the
Total Project, or any portion thereof, or become due and payable and a lien or
charge upon the Total Project, or any part thereof, under or by virtue of any
present or future laws, statutes, ordinances, regulations or other requirements
of any governmental authority whatsoever. The term "Environmental Surcharges"
shall mean and include any and all expenses, taxes, charges or penalties imposed
by the Federal Department of Energy, the Federal Environmental protection
Agency, the Federal Clean Air Act, or any regulations promulgated thereunder or
any other local, state or federal governmental agency or entity now or hereafter
vested with the power to impose taxes, assessments, or other types of surcharges
as a means of controlling or abating environmental pollution or the use
of-energy. The term "Property Taxes" shall not include (a) any federal, state or
local income, franchise, estate, gift or inheritance tax, (b) any transfer
taxes, recording fees, or monument preservation fees. (c) any license or similar
fees imposed to permit the conduct of Landlord's business, (d) that portion of
any tax, fee or encumbrance that would otherwise come within the definition of
"Property Taxes" but which is assessed or imposed with respect to the
operations, activities of any tenant or occupant other than Tenant, (e) fuel
taxes on Landlord's vehicles, sales taxes on Landlord's purchases, withholding
and other employment taxes for Landlord's employees and Landlord's business
license, (f) any tax imposed on Landlord as a result of it financing or
refinancing the Land, or any portion thereof, or as a result of Landlord's
secured lender foreclosing on the Land (except Property Taxes shall include any
increased taxes resulting from a change of ownership following any foreclosure
of the Land), (g) any interest or penalties imposed as a result of Landlord's
failure to comply with applicable law, including, without limitation, Landlord's
failure to pay its taxes timely, unless such failure arises from Tenant's acts,
negligence, willful misconduct or breach of this Lease, or (h) any taxes
included as a Project Cost under the Improvement Agreement attached hereto. The
term "Environmental Surcharge" shall not include any expense, tax, penalty or
other charges imposed as a result of (a) any environmental contamination not
caused by Tenant or its Agents, (b) the operations or activities of any tenant
or occupant other than Tenant, or (c) Landlord's failure to comply with
applicable law, unless such failure arises from Tenant's acts, negligence,
willful misconduct or breach of this Lease.
9. Insurance.
A. Indemnity. Tenant agrees to indemnify, protect and defend Landlord against
and hold Landlord harmless from any and all claims, causes of action, judgments,
obligations or liabilities, and all reasonable expenses incurred in
investigating or resisting the same (including reasonable attorneys' fees), on
account of, or
<PAGE> 52
arising out of, the operation, maintenance, use or occupancy of the Total
Project and/or any portion thereof and all areas appurtenant thereto by Tenant
or Tenant's agents, employees, contractors, guests, invitees or licensees. This
Lease is made on the express understanding that Landlord shall not be liable
for, or suffer loss by reason of, injury to person or property, from whatever
cause (except for negligence or willful misconduct of Landlord or its Agents),
which in any way may be connected with the operation, use or occupancy of the
Total Project and/or any portion thereof by Tenant or Tenant's agents,
employees, contractors, guests, invitees or licensees, specifically including,
without limitation, any liability for injury to the person or property of
Tenant, its agents, officers, employees, licensees and invitees. The obligations
of Tenant under this Paragraph 9.A shall survive the expiration or earlier
termination of this Lease.
B. Liability Insurance. Tenant shall, at Tenant's expense, obtain and
keep in force during the term of this Lease a policy of commercial general
liability insurance insuring Landlord and Tenant against claims and liabilities
arising out of the operation, use, or occupancy of the Total Project and all
areas appurtenant thereto, including parking areas. Such insurance shall be in
an amount of not less than Five Million Dollars ($5,000,000.00) for bodily
injury or death as a result of any one occurrence and One Million Dollars
($1,000,000.00) for damage to property as a result of any one occurrence. The
insurance shall be with companies rated A X or better by A. M. Best insurance
rating. Tenant shall deliver to Landlord, prior to possession, and at least
thirty (30) days prior to the expiration thereof, a certificate of insurance
evidencing the existence of the policy required hereunder and such certificate
shall certify that the policy (1) names Landlord as an additional insured, (2)
shall not be canceled or the coverage or amount of coverage reduced without
thirty (30) days prior written notice to Landlord, (3) insures performance of
the indemnity set forth in Paragraph 9.A above, (4) the coverage is primary and
any coverage by Landlord is in excess thereto and (5) contains a cross-liability
endorsement or its equivalent (i.e. a separation of insured provision in the
basic comprehensive liability insurance policy). Landlord may maintain a policy
or policies of comprehensive general liability insurance (or 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
Total Project, with such limits of coverage as Landlord may from time to time
determine are reasonably necessary for its protection. Within thirty (30) days
following receipt of a written statement or invoice from Landlord and a copy of
the insurance carrier's invoice, Tenant shall pay to Landlord, as additional
rent, the cost of any such liability insurance maintained by Landlord.
C. Property Insurance. Landlord shall obtain and keep in force during
the term of this Lease a policy or policies of insurance covering loss or damage
to the Building only, in the amount of not less than Sixty Dollars ($60.00) per
square foot of completed Building, providing protection against those perils
included within the classification of "all risk" insurance, plus a policy of
rental income insurance in the amount of one hundred percent (100%) of twelve
(12) months rent (including, without limitation, sums payable as Additional
Rent), plus, at Landlord's option, flood insurance and earthquake insurance, and
any other coverages which may be required from time to time by Landlord's
mortgagee. The preceding to the contrary notwithstanding, within ten (10) days
following written request of Tenant to increase the minimum limits of property
insurance covering the Building, or at Landlord's election in its sole
discretion, Landlord shall increase the minimum limits of property insurance
covering the Building to the amount requested by Tenant or the amount desired by
Landlord, as the case may be, but in no event shall such property insurance be
in an amount more than the full replacement cost of the Building. Landlord shall
furnish to Tenant, within twenty (20) days after written request by Tenant, a
certificate from Landlord's insurance carrier evidencing that the insurance
coverage required to be carried by Landlord is in effect. Landlord's insurance
shall be primary up to the amount of its policy limits. Tenant shall have no
interest in nor any right to the proceeds of any insurance procured by Landlord
on the Premises except as specifically provided in this Lease.
<PAGE> 53
Provided that Landlord bills Tenant at least thirty (30) days prior
to the due date of the premium for such insurance procured and maintained by
Landlord, Tenant shall pay such premium to Landlord at least ten (10) days prior
to the due date, and if Tenant fails to do so, Tenant shall reimburse Landlord,
on demand, for all interest, late fees and penalties that the insurance carrier
charges Landlord. If Landlord bills Tenant less than thirty (30) days prior to
the due date of such insurance premium, Tenant shall pay such premium to
Landlord within thirty (30) days of the date of delivery of such bill to Tenant.
Landlord's bill to Tenant shall include a copy of the insurance carrier's
invoice to Landlord. In the event Landlord's mortgagee requires an impound for
insurance premiums, then on the first day of each month during the Lease Term
(commencing not less than thirty (30) days after written notice to Tenant that
such impound account is so required), Tenant shall pay Landlord one twelfth
(1/12) of the annual insurance premiums. If the amount of any such impound
installment payments paid by Tenant exceeds Tenant's actual share of such
insurance premiums after payment to Landlord's insurer (exclusive of any
penalties for late payment) such excess shall be refunded to Tenant within
thirty (30) days after the payment is made to Landlord's insurer.
Tenant acknowledges that such insurance procured by Landlord shall
contain a commercially reasonable deductible which reduces Tenant's cost for
such insurance and, in the event of loss or damage, Tenant shall be required to
pay to Landlord the amount of such deductible (which, exclusive of the
deductible applicable to the earthquake insurance coverage, shall not exceed
Twenty Thousand Dollars ($20,000) without Tenant's prior written approval).
Tenant further acknowledges that, except to the extent covered by the limits of
insurance required to be carried by Landlord as described above, the insurance
carried by Landlord does not cover, and Landlord has no obligation to insure,
any specialized roof or core improvements to the Building (including, without
limitation, reinforced roof improvements) or Tenant Improvements installed by
Tenant in or on the Building (or any alterations, additions or improvements
thereto installed by Tenant). In addition, Tenant further acknowledges and
agrees that Landlord shall not be required hereunder to carry or maintain any
insurance covering the Expansion Project or any portion thereof (including,
without limitation, any Expansion Building(s) or leasehold improvements that may
be constructed in the Expansion Building(s), if any).
D. Tenant's Insurance; Release of Landlord. Tenant acknowledges that the
insurance to be maintained by Landlord on the Building pursuant to Subparagraph
C above will not insure any of Tenant's property or Tenant Improvements
constructed by Tenant (or any alterations, additions or improvements thereto
installed by Tenant) or any portion of the Expansion Project. Accordingly,
Tenant, at Tenant's own expense, shall maintain in full force and effect on all
of its fixtures, equipment, Tenant Improvements and personal property in the
Premises and all of the Expansion Building(s) and leasehold and tenant
improvements constructed in such Expansion Building(s), if applicable,, a policy
of "All Risk" coverage insurance to the extent of at least ninety percent (90%)
of their insurable value. The foregoing notwithstanding, Landlord agrees that
the original Tenant hereunder, Western Digital Corporation, may elect to
self-insure Tenant's fixtures, equipment, personal property and Tenant
Improvements (and leasehold or tenant improvements, if any, constructed or
installed in the Expansion Building(s), if applicable), and such self-insurance
shall be primary. The right to so self-insure shall apply only to the original
Tenant hereunder and shall not apply to any assignee of the original Tenant. In
the event the premiums for Landlord's liability insurance are increased by
reason of Tenant's self-insurance (whether because of the parties' agreement
that the original Tenant hereunder may self-insure or because of claims made or
defense undertaken or proceeds paid under Landlord's liability policy would not
have otherwise occurred if Tenant had maintained a policy of liability insurance
in accordance with the provisions of this paragraph, Tenant agrees to pay
promptly following demand and receipt of a statement of such increase, but in no
event later than ten (10) days after such demand and as Additional Rent, the
amount of such increase. Tenant hereby releases Landlord, and its partners,
officers, agents employees and servants from any and all claims, demands,
losses, expenses or injuries to the Total Project, or any portion thereof, or to
the furnishings, fixtures, equipment, inventory or other personal property of
Tenant in, about, or upon the Total Project, which are caused by perils, events
or happenings where the same are covered by the insurance required by this Lease
or
<PAGE> 54
which are the subject of insurance carried by Tenant and in force at the time of
such loss (and then only to the extent of such insurance proceeds payable
thereunder). Tenant shall procure an appropriate clause in, or an endorsement
to, all policies required by this Lease or any other insurance policy maintained
by Tenant with respect to the Building, Tenant Improvements, the Expansion
Building(s) and/or leasehold improvements constructed in such Expansion
Building(s) or Tenant's occupancy thereof, pursuant to which the insurance
company or companies waive subrogation or consent to a waiver of a right of
recovery against Landlord.
E. Waiver of Subrogation. Notwithstanding any provision of this Lease to
the contrary, Landlord and Tenant each hereby waive, for themselves and their
respective insurers, any and all rights of recovery against the other for any
loss or damage occasioned to such waiving party or its property or the property
of others under its control (and whether or not such loss or damage is due to
the neglect or fault of a party) to the extent such loss or damage is insured,
or is required hereunder to be insured, against under any casualty insurance
policy existing for the benefit of the respective parties at the time of such
loss or damage. Each party shall obtain any special endorsements, if required by
their insurer, to evidence compliance with the aforementioned waiver.
10. Utilities. Tenant shall pay for all water, gas, light, heat, power,
electricity, telephone, trash pick-up, sewer charges and all other services
supplied to or consumed on the Project, and all taxes and surcharges thereon.
Tenant shall store its waste either inside the Building (inside the
Expansion Building(s), if applicable) or in trash enclosures or dumpsters
located outside of the Building (and Expansion Building(s), if applicable).
Tenant shall not at any time store, place or maintain any garbage, trash,
rubbish, other refuse or Tenant's personal property in any area of the parking
areas or exterior of the Building or Expansion Building(s) (except in areas
approved in writing by Landlord for such purposes).
11. Repairs and Maintenance.
A. Landlord's Repairs. Subject to provisions of Paragraph 15, during the
first two (2) years following the Commencement Date of this Lease, Landlord
shall keep and maintain the structural elements of the Building in good order
and repair. Tenant shall not be required to reimburse Landlord for the cost of
maintenance and repairs of such structural elements of the Building which accrue
or become necessary during such two (2) year period unless such maintenance or
repair is required because of the negligence or willful misconduct of Tenant or
its employees, agents or invitees. As used herein, the term "structural elements
of the Building" shall mean and be limited to the foundation, footings, floor
slab (but not flooring), structural walls, and roof structure and specialized
roof reinforcement improvements (but not roofing or roof membrane). During the
two (2)-year period set forth above, Landlord shall have no obligation to make
repairs to the structural elements of the Building under this Subparagraph until
a reasonable time after receipt of written notice from Tenant of the need for
such repairs. However, in the event of circumstances posing imminent risk of
personal injury or property damage during the two (2)-year period set forth
above, Tenant, upon notice to Landlord, shall have the right, but not the
obligation, to make such repairs and Landlord shall reimburse Tenant the
reasonable cost thereof within thirty (30) days after presentation of Tenant's
invoice.
Following the two (2)-year period set forth above, subject to Paragraphs
15 and 16 below, Tenant shall, at its sole cost, keep and maintain the
structural elements of the Building in good condition and repair. Following the
two (2)-year period, should Tenant fail to maintain such structural elements of
the Building or fail to commence making repairs required of Tenant hereunder
forthwith upon thirty (30) days notice from Landlord or should Tenant fail
thereafter to diligently complete the repairs, Landlord, in addition to all
other remedies available hereunder or by law and without waiving any alternative
remedies, may make the same, and in that event, Tenant shall reimburse Landlord
as additional rent for the cost of such maintenance or repairs within thirty
(30) days of written demand by Landlord.
<PAGE> 55
B. Tenant's Repairs. Except as expressly provided in Subparagraph A
above and subject to Paragraphs 15 and 16 below, Tenant shall, at its sole cost,
keep and maintain the entire Premises and every part thereof in the same
condition as delivered to Tenant by Landlord, ordinary wear and tear excepted,
including without limitation the exterior walls, roof, specialized or
supplemental shell and core improvements, specialized roof reinforcement
improvements, roof membrane, the windows, window frames, plate glass, glazing,
skylights, truck doors, doors and all door hardware, the walls and partitions,
parking areas, exterior landscaping, and the electrical, plumbing, lighting,
heating, ventilating and air conditioning systems and equipment. The term
"repair" shall include replacements, restorations and/or renewals when necessary
as well as painting. Tenant's obligation shall extend to all Tenant Improvements
installed by Tenant and alterations, additions and improvements to the Premises
and Tenant Improvements, and all fixtures and appurtenances therein and thereto.
Landlord hereby assigns to Tenant for the Term of this Lease all of its rights
and interests under all manufacturer and installation warranties covering the
heating, ventilation and air conditioning ("HVAC") equipment or other fixtures
or personal property within the Premises and agrees to reasonably cooperate, at
no cost to Landlord, with Tenant in enforcing such warranties.
Should Tenant fail to commence making repairs required of Tenant
hereunder forthwith upon thirty (30) days notice from Landlord or should Tenant
fail thereafter to diligently complete the repairs, Landlord, in addition to all
other remedies available hereunder or by law and without waiving any alternative
remedies, may make the same, and in that event, Tenant shall reimburse Landlord
as additional rent for the cost of such maintenance or repairs within thirty
(30) days of written demand by Landlord. In the event that Tenant is required to
effect repairs or replacements to any portion of the Premises or Tenant
Improvements (or to any alterations, additions or improvements to any of portion
of the Premises or Tenant improvements) or to any portion of the Expansion
Project, then, to the extent Tenant is permitted or required under this Lease to
make such repairs or replacements, the same shall be made at Tenant's sole cost
and expense.
Landlord shall have no maintenance or repair obligations whatsoever
with respect to the Premises except as expressly provided in Paragraphs 11.A.
Anything herein to the contrary notwithstanding, the parties hereto acknowledge
and agree that Landlord shall not be responsible or liable for the maintenance
or repair of any portion of the Expansion Project; it being understood and
agreed that Tenant, at its sole cost and expense, shall maintain the Expansion
Project and all portions thereof in safe condition during the Lease Term. Should
Tenant fail to maintain the Expansion Project or any portion thereof or fail to
commence making repairs required of Tenant hereunder forthwith upon thirty (30)
days notice from Landlord or should Tenant fail thereafter to diligently
complete the repairs, Landlord, in addition to all other remedies available
hereunder or by law and without waiving any alternative remedies, may make the
same, and in that event, Tenant shall reimburse Landlord as additional rent for
the cost of such maintenance or repairs within thirty (30) days of written
demand by Landlord.
Tenant hereby expressly waives the provisions of Subsection I of
Section 1932 and Sections 1941 and 1942 of the Civil Code of California and all
rights to make repairs at the expense of Landlord as provided in Section 1942 of
said Civil Code. There shall be no allowance to Tenant for diminution of rental
value, and no liability on the part of Landlord by reason of inconvenience,
annoyance or injury to business arising from the making of any repairs,
alterations, decorations, additions or improvements in or to any portion of the
Total Project, the Premises, the Buildings, the Tenant Improvements or the Land
(or any of the areas used in connection with the operation thereof, or in or to
any fixtures, appurtenances or equipment), or by reason of the negligence of
Tenant or any other tenant or occupant of the Land. Landlord shall use
reasonable efforts to minimize the disruption to Tenant's business resulting
from such activities by Landlord or its Agents. In no event shall Landlord be
responsible for any consequential damages arising or alleged to have arisen from
any of the foregoing matters. Tenant hereby agrees that Landlord shall not be
liable for injury to Tenant's business or any loss of income therefrom or for
damage to the goods, wares, merchandise or other property of Tenant,
<PAGE> 56
Tenant's employees, invitees, customers, or any other person in or about the
Total Project or any portion thereof, nor shall Landlord be liable for injury to
the person of Tenant, Tenant's employees, agents or contractors whether such
damage or injury is caused by or results from fire, steam, electricity, gas,
water or rain, or from the breakage, leakage, obstruction or other defects of
pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting
fixtures, or from any other cause, whether the said damage or injury results
from any other cause, whether the said damage or injury results from conditions
arising upon the Total Project or upon any portion thereof, or from other
sources or places and regardless of whether the cause of such damage or injury
or the means of repairing the same is inaccessible to Tenant. Landlord shall not
be liable for any damages arising from any act or neglect of any other tenant,
if any, of the Total Project, or any portion thereof However, the provisions of
this paragraph shall not apply in the event of the negligence or willful
misconduct of Landlord or its Agents, but in no event shall Landlord be liable
for consequential damages, including without limitation, lost profits or loss of
business.
12. Alterations. Tenant shall not make, or suffer to be made, any
structural alterations, improvements or additions in, on, about or to the
Project or the Premises or any part thereof, or make any alterations,
improvements or additions which would adversely affect the basic building
systems of the Building, without the prior written consent of Landlord, which
consent will not be unreasonably withheld. At the time Tenant requests
Landlord's consent to any structural alterations, additions or improvements or
any alterations, additions or improvements which would adversely affect the
basic building systems in the Building (which request shall be made in writing
and shall include plans and specifications detailing the work desired to be
performed by Tenant), Tenant shall also request Landlord's response to such
consent within ten (10) business days following Landlord's receipt of such
request. If Landlord fails or refuses to respond to Tenant's request for consent
within such ten (10) business day period, then Landlord shall be deemed to have
consented to such alterations, additions or improvements requested to be
performed by Tenant in the Building (and in accordance with the plans and
specifications included in Tenant's request). Under no circumstances shall
Tenant be permitted to make any alterations, additions or improvements which
would adversely affect or impair the structural integrity of the Building or the
Expansion Building(s). Landlord's consent shall not be required for
non-structural alterations, improvements or additions in the Building or in the
Expansion Building(s) (which do not adversely affect the basic building systems
of the Building or the Expansion Building(s) or involve roof or wall
penetrations). The preceding sentence notwithstanding, whether or not Landlord's
consent is required, in order to allow Landlord sufficient time to post a notice
or notices of nonresponsibility, Tenant agrees to give Landlord at least five
(5) days written notice prior to commencing any work of improvement in, on or
about the Project or Premises or the Expansion Project (a) for which a building
permit is required, and/or (b) which is to be performed by a third party
contractor or subcontractor and which is estimated to cost or will cost in
excess of $25,000.
Within ten (10) days after Tenant's written request, Landlord shall
advise Tenant as to whether Landlord will require any proposed alterations,
improvements or additions to the Building (including, without limitation, the
Tenant Improvements to be installed by Tenant in the Building) to be removed or
surrendered at the expiration (or earlier termination) of the Lease Term. In the
absence of any such request by Tenant, Landlord shall give Tenant written
notice, not less than ninety (90) days prior to the expiration of the Term, of
any alterations, additions or improvements to the Building (including, without
limitation, the Tenant Improvements to be installed by Tenant in the Building)
Landlord requires to be removed. Failure of Landlord to respond timely to
Tenant's request or, otherwise to give timely notice of the alterations,
additions or improvements (including, without limitation, the Tenant
Improvements to be installed by Tenant in the Building) Landlord requires to be
removed from the Building at the expiration of the Lease Term, shall constitute
Landlord's consent to the surrender of such alterations,
<PAGE> 57
improvements or additions, excluding any non-structural alterations,
improvements or additions which Tenant elects to remove, provided that Tenant
repairs all damage to the Total Project caused by such removal. Unless Landlord
requires that Tenant remove any such alterations, improvements or additions, any
alteration', addition or improvement to the Premises, except movable furniture
and trade fixtures, shall become the property of Landlord upon termination of
the Lease and shall remain upon and be surrendered with the Premises at the
termination of this Lease. Without limiting the generality of the foregoing, all
heating, lighting, electrical (including all wiring, conduit, outlets, drops,
buss ducts, main and subpanels, partitioning [except for modular demountables,
which may be removed], drapery, and carpet installations made by Tenant
regardless of how affixed to the Premises, together with all other additions,
alterations and improvements that have become an integral part of the Building,
shall be and become the property of the Landlord upon termination of the Lease,
and shall not be deemed trade fixtures, and shall remain upon and be surrendered
with the Premises at the termination of this Lease.
The foregoing notwithstanding, on or before the expiration or earlier
termination of the Lease Term, Tenant shall not be required by Landlord to
remove any leasehold improvements constructed in the Expansion Building(s) by or
for Tenant (or to remove any additions, alterations or improvements to such
leasehold improvements in the Expansion Building(s)) and, if not voluntarily
removed by Tenant, the same shall become the property of the Landlord upon
termination or expiration of the Lease.
All alterations, improvements and additions to the Premises or the
Tenant Improvements and/or the Expansion Building(s) or Expansion Project
installed by Tenant shall be undertaken in compliance with all applicable laws,
rules, regulations and ordinances, and with a valid building permit or permits
if required.
If during the term hereof, any alteration, addition or change of any
sort to all or any portion of the Project, Premises or Expansion Project is
required by law, regulation, ordinance or order of any public agency as a result
of (i) Tenant's negligence or willful misconduct, (ii) Tenant's particular use
of the Premises, Tenant Improvements or Expansion Project (including, without
limitation, any change of use of the Premises, Tenant Improvements or Expansion
Project by Tenant), (iii) any alterations, additions or improvements to the
Premises, Tenant Improvements or Expansion Project by or for Tenant, or (iv)
Tenant's applications for governmental approvals or permits, rather than due to
the use and occupancy of the Premises in general or for any other reason, Tenant
shall promptly make the same at its sole cost and expense. If during the term
hereof, any alteration, addition, or change to the Premises (except as provided
in the previous sentence) is required by law, regulation, ordinance or order of
any public agency, Landlord shall make the same and no portion of the cost of
such alteration, addition or change shall be borne by the Tenant. It is
expressly understood and agreed that Tenant shall not be required to make any
alterations, improvements or additions to the Premises which are required by any
law, regulation, ordinance or order except and only to the extent that such
requirement applies because of the specific activities conducted by Tenant at
the Project, Premises or Expansion Project, including without limitation, the
negligence or willful misconduct of Tenant, the particular use or any change in
use of the Premises, Tenant Improvements or Expansion Project by Tenant, any
alterations, additions or improvements to the Premises, Tenant Improvements or
Expansion Project by or for Tenant, or any application by Tenant for
governmental approvals or permits.
If during the term hereof, any alteration, addition, or change to
the Expansion Project or any portion thereof is required by law, regulation,
ordinance or order of any public agency, Tenant shall diligently make the same
at Tenant's sole cost and expense.
13. Acceptance of the Premises. By entry and taking possession of the
Premises, or applicable portion thereof, pursuant to this Lease, Tenant accepts
the same as being in good and sanitary order, condition and repair (subject to
punch list items and reservation by Tenant of claims of latent defects and
violations of applicable law, and without limiting Landlord's obligations under
this Lease) and Tenant accepts the Premises, or applicable portion thereof,
including without limitation, the Building constructed by Landlord, in their
condition existing as of the date of such entry or possession. Landlord
acknowledges that Tenant's acceptance
<PAGE> 58
of possession of the shell of the Building in a "water tight" condition does not
release or excuse Landlord from its obligation under the Improvement Agreement
attached hereto as Exhibit "C" to complete construction of such Building. Tenant
acknowledges that neither the Landlord nor Landlord's agents has made any
representation or warranty as to the suitability of the Premises or the
Expansion Project to the conduct of Tenant's business. Any agreements,
warranties or representations not expressly contained herein shall in no way
bind either Landlord or Tenant, and Landlord and Tenant expressly waive all
claims for damages by reason of any statement, representation, warranty, promise
or agreement, if any, not contained in this Lease. This Lease constitutes the
entire understanding between the parties hereto and no addition to, or
modification of, any term or provision of this Lease shall be effective until
set forth in a writing signed by both Landlord and Tenant.
14. Default.
A. Events of Default. A breach of this Lease shall exist if any of the
following events (hereinafter referred to as "Event of Default") shall occur:
1. Default in the payment when due of any installment of rent or
other payment required to be made by Tenant hereunder, where such default shall
not have been cured within five (5) days after written notice of such default is
given to Tenant;
2. Tenant's failure to perform any other term, covenant or
condition contained in this Lease where such failure shall have continued for
thirty (30) days after written notice of such failure is given to Tenant;
provided that if performance reasonably requires more than thirty (30) days,
then Tenant shall not be in default unless Tenant shall have failed to commence
performance within such thirty (30) day period and thereafter diligently pursued
such performance to completion.
3. Tenant's general assignment of its assets for the benefit of its
creditors:
4. The sequestration of, attachment of, or execution on, any
substantial part of the property of Tenant or on any property essential to the
conduct of Tenant's business shall have occurred and Tenant shall have failed to
obtain a return or release of such property within sixty (60) days thereafter,
or prior to sale pursuant to such sequestration, attachment or levy, whichever
is earlier,
5. Tenant shall commence any case, proceeding or other action
seeking reorganization, arrangement, adjustment, liquidation, dissolution or
composition of it or its debts under any law relating to bankruptcy, insolvency,
reorganization or relief of debtors, or seek appointment of a receiver, trustee,
custodian, or other similar official for it or for all or any substantial part
of its property; or
6. Any case, proceeding or other action against Tenant shall be
commenced seeking to have an order for relief entered against it as debtor, or
seeking reorganization, arrangement, adjustment, liquidation, dissolution or
composition of it or its debts under any law relating to bankruptcy, insolvency,
reorganization or relief of debtors, or seeking appointment of a receiver,
trustee, custodian or other similar official for it or for all or any
substantial part of its property, and such case, proceeding or other action (i)
results in the entry of an order for relief against it which is not fully stayed
within thirty (30) business days after the entry thereof or (ii) remains
undismissed for a period of sixty (60) days.
B. Remedies. Upon any Event of Default, Landlord shall have the
following remedies, in addition to all other rights and remedies provided by
law, to which Landlord may resort cumulatively, or in the alternative:
<PAGE> 59
1. Recovery of Rent. Landlord shall be entitled to keep this Lease
in full force and effect (whether or not Tenant shall have abandoned the
Premises or the Expansion Project) and to enforce all of its rights and remedies
under this Lease, including the right to recover rent and other sums as they
become due, plus interest at the Permitted Rate (as defined in Paragraph 32
below) from the due date of each installment of rent or other sum until paid.
2. Termination. Landlord may terminate this Lease by giving Tenant
written notice of termination. On the giving of the notice, all of Tenant's
rights in the Total Project, including, without limitation, Premises, Buildings,
Tenant Improvements, Land, Expansion Building(s) and the leasehold improvements
in or to the Expansion Building(s) shall terminate. Upon the giving of the
notice of termination, Tenant shall surrender and vacate the Total Project in
the condition required by Paragraph 3'3, and Landlord may re-enter and take
possession of the Total Project and all the remaining improvements or property
and eject Tenant or any of Tenant's subtenants, assignees or other person or
persons claiming any fight under or through Tenant or eject some and not others
or eject none. This Lease may also be terminated by a judgment specifically
providing for termination. Any termination under this paragraph shall not
release Tenant from the payment of any sum then due Landlord or from any claim
for damages or rent previously accrued or then accruing against Tenant. In no
event shall any one or more of the following actions by Landlord constitute a
termination of this Lease:
a. maintenance and preservation of the Premises, Tenant
Improvements and/or the Expansion Project;
b. efforts to relet the Premises and Tenant Improvements
and/or the Expansion Project;
c. appointment of a receiver in order to protect Landlord's
interest Hereunder;
d. consent to any subletting of the Premises (and Tenant
Improvements) and/or the Expansion Project or assignment of this Lease by
Tenant, whether pursuant to provisions hereof concerning subletting and
assignment or otherwise; or
e. any other action reasonably taken by Landlord or
Landlord's agents intended to mitigate the adverse effects from any breach of
this Lease by Tenant.
3. Damages. In the event this Lease is terminated pursuant to
Subparagraph 14.B.2 above, or otherwise, Landlord shall be entitled to damages
in the following sums:
a. the worth at the time of award of the unpaid rent which
has been earned at the time of termination; plus
b. the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that Tenant proves could have been
reasonably avoided; plus
c. the worth at the time of award of the amount by which the
unpaid rent for the balance of the term after the time of award exceeds the
amount of such rental loss that Tenant proves could be reasonably avoided; and
<PAGE> 60
d. 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, without limitation, the following: (i) expenses for
cleaning, repairing or restoring the Total Project, or applicable portion
thereof, (ii) costs of carrying the Total Project such as taxes and insurance
premiums thereon, utilities and security precautions; (iii) expenses in retaking
possession of the Total Project, or applicable portion thereof, (iv) reasonable
attorneys' fees and court costs; and (v) any unamortized real estate brokerage
commission paid in connection with this Lease.
e. The "worth at the time of award" of the amounts referred
to in Subparagraphs (a) and (b) of this Paragraph, is computed by allowing
interest at the Permitted Rate. The "worth at the time of award" of the amounts
referred to in Subparagraph (c) of this Paragraph is computed by discounting
such amount at the discount rate of the Federal Reserve Board of San Francisco
at the time of award plus one percent (1%). The term "rent" as used in this
Paragraph shall include all sums required to be paid by Tenant to Landlord
pursuant to the terms of this Lease.
15. Destruction. In the event that any portion of the Building is
destroyed or damaged by an uninsured peril, Landlord or Tenant may, upon written
notice to the other, given within thirty (30) days after the occurrence of such
damage or destruction, elect to terminate this Lease; provided, however, that
either party may, within thirty (30) days after receipt of such notice, elect to
make any required repairs and/or restoration at such party's sole cost and
expense, in which event this Lease shall remain in full force and effect, and
the party having made such election to restore or repair shall thereafter
diligently proceed with such repairs and/or restoration.
In the event that the Building is damaged or destroyed from any insured
peril and there are insufficient insurance proceeds available to repair or
restore the Building, Landlord may, upon written notice to Tenant, given within
thirty (30) days after the occurrence of such damage or destruction, elect to
terminate this Lease; provided, however, Tenant may, within thirty (30) days
after receipt of such termination notice and in its sole discretion, elect to
pay for any shortfall in funding the required repairs and/or restoration, in
which event Tenant shall furnish Landlord such shortfall funds prior to the
commencement of such repairs and/or restoration, this Lease shall remain in full
force and effect, and Landlord shall thereafter diligently proceed with such
repairs and/or restoration. If Landlord does not give such notice in writing
within such period, Landlord shall be deemed to have elected to rebuild or
restore the Building and the sitework outside the perimeter walls of the
Building, if damaged, to the extent of insurance proceeds available to Landlord.
Any shortfall in insurance proceeds available to Landlord to rebuild or restore
the Building shall be borne by Tenant and be made available by Tenant to
Landlord prior to commencement of such rebuilding or restoration. Upon
Landlord's receipt of such insurance proceeds and shortfall funds, if
applicable, Landlord shall promptly rebuild or restore the applicable Building
and such sitework to their condition prior to the damage or destruction. Tenant
also shall pay to Landlord upon commencement of reconstruction the amount of any
deductible from the insurance policy.
In the event the Building is damaged or destroyed from an insured peril,
and if there are adequate insurance proceeds available to Landlord to rebuild or
restore the Building, then Landlord shall promptly rebuild or restore the
applicable Building and also repair the sitework outside of the perimeter walls
of the Building, if damaged, to their condition prior to such damage or
destruction. In such event, Tenant shall pay to Landlord upon commencement of
reconstruction, the amount of any deductible from the insurance policy.
In the event that, pursuant to the foregoing provisions, Landlord is to
rebuild or restore the Building, Landlord shall, within thirty (30) days after
the occurrence of such damage or destruction, provide Tenant with written notice
of the estimated time required for such repair or restoration. If such period is
longer than one hundred eighty (180) days from the date of the event causing
such damage or destruction of the Building,
<PAGE> 61
Tenant may, within thirty (30) days after receipt of Landlord's notice, elect to
terminate the Lease by giving written notice to Landlord of such election,
whereupon the Lease shall immediately terminate. The period of time for Landlord
to complete the repair or restoration shall be extended for delays caused by the
fault or neglect of Tenant or because of acts of God, labor disputes, strikes,
fires, freight embargoes, rainy or stormy weather, inability to obtain
materials, supplies or fuels, acts of contractors or subcontractors, or delay of
contractors or subcontractors due to such causes, or other contingencies beyond
the control of Landlord. Landlord's obligation to repair or restore a Building
shall not include Tenant's trade fixtures, equipment, personal property or
merchandise.
Unless this Lease is terminated pursuant to the foregoing provisions,
this Lease shall remain in full force and effect; provided, however, that during
any period of repairs or restoration to the Building, rent and all other amounts
to be paid by Tenant on account of the Premises and this Lease shall be abated
in proportion to the area of the Premises rendered not reasonably suitable for
the conduct of Tenant's business thereon. Tenant hereby expressly waives the
provisions of Section 1932, Subdivision 2 and Section 1933, Subdivision 4 of the
California Civil Code.
In the event the Expansion Project, or any portion thereof, is damaged
or destroyed, Landlord shall have no obligation to repair, restore or rebuild
the same and Tenant shall have no right to terminate this Lease as a result
thereof If any portion of the Expansion Project is damaged or destroyed, Tenant
shall have the right, during the Lease Term, to rebuild or restore the same
provided Tenant complies with the terms of the penultimate paragraph of Section
2 of this Lease above as the same relates to the construction or installation of
the Expansion Project. If Tenant does not elect to rebuild or restore the
damaged or destroyed Expansion Project, or applicable portion thereof, Tenant
shall, at its sole cost, remove all debris and rubble from the Total Project
caused by the damage or destruction of the Expansion Project, or applicable
portion thereof, and maintain the balance of the Expansion Project in safe
condition and repair.
16. Condemnation.
A. Definition of Terms. For the purposes of this Lease, the term (1)
"Taking" means a taking of the Total Project, or applicable portion thereof or
damage to the Total Project, or applicable portion thereof, related to the
exercise of the power of eminent domain and includes a voluntary conveyance, in
lieu of court proceedings, to any agency, authority, public utility, person or
corporate entity empowered to condemn property and who has commenced proceedings
to condemn the Total Project, or applicable portion thereof, (2) "Total Taking"
means the taking of the entire Total Project or so much thereof as to prevent or
substantially impair the use thereof by Tenant for the uses herein specified;
provided, however, in no event shall a Taking of less than ten percent (10%) of
the Building and Expansion Building(s) or twenty-five percent (25%) of the
parking areas be deemed a Total Taking; (3) "Partial Taking" means the taking of
only a portion of the Building and/or Expansion Building(s) or the parking areas
which does not constitute a Total Taking; (4) "Date of Taking" means the date
upon which the title to the Total Project, or a portion thereof, passes to and
vests in the condemnor or the effective date of any order for possession if
issued prior to the date title vests in the condemnor; and (5) "Award" means the
amount of any award made, consideration paid, or damages ordered as a result of
a Taking.
B. Rights. The parties agree that in the event of a Taking all rights
between them or in and to an Award shall be as set forth herein and Tenant shall
have no right to any Award except as set forth herein.
C. Total Taking In the event of a Total Taking during the Term hereof
(1) the rights of Tenant under the Lease and the leasehold estate of Tenant in
and to the Total Project shall CEASE AND TERMINATE AS OF THE DATE of
<PAGE> 62
Taking; (2) Landlord shall refund to Tenant any prepaid rent; (3) Tenant shall
pay Landlord any rent or charges due Landlord under the Lease, each prorated as
of the Date of Taking; (4) Tenant shall receive those portions of the Award
attributable to (a) the unamortized cost of Tenant Improvements constructed or
installed in the Building by Tenant, at Tenant's cost, in excess of the
unamortized cost of Landlord's deemed contribution to such Leasehold
Improvements (which deemed contribution shall be equal to Twenty Dollars
($20.00) per square foot of the Building), which amortization shall be
calculated on a straight-line basis over a fifteen-year period, (b) the
Expansion Building(s) and the leasehold improvements therein paid for by Tenant,
(c) movable personal property or trade fixtures of Tenant, (d) moving expenses
of Tenant, (e) loss of goodwill; and (5) the remainder of the Award shall be
paid to and be the property of Landlord.
D. Partial Taking In the event of a Partial Taking during the term
hereof (1) the rights of Tenant under the Lease and leasehold estate of Tenant
in and to the portion of the Total Project taken shall cease and terminate as of
the Date of Taking; (2) from and after the Date of Taking the Monthly
Installment of rent shall be an amount equal to the product obtained by
multiplying the Monthly Installment of rent immediately prior to the Taking by a
fraction, the numerator of which is the number of square feet contained in the
Building after the Taking and the denominator of which is the number of square
feet contained in the Building prior to the Taking; (3) Tenant shall receive
from the Award the portions of the Award attributable to (a) the unamortized
cost of Tenant Improvements constructed or installed in the Building by Tenant,
at Tenant's cost (allocated on a per square foot basis to the portion of such
Tenant Improvements taken), in excess of the unamortized cost of Landlord's
deemed contribution to such Tenant Improvements (allocated on a per square foot
basis to the portion of such Tenant Improvements taken and which deemed
contribution shall be equal to Twenty Dollars ($20.00) per square foot of the
Building), which amortization shall be calculated on a straight-line basis over
a fifteen-year period, (b) the Expansion Building(s) and the leasehold
improvements therein paid for by Tenant, (c) movable personal property or trade
fixtures of Tenant, and (d) removal costs; and (4) the remainder of the Award
shall be paid to and be the property of Landlord. In the event of a Partial
Taking, Landlord shall restore, to the extent solely of severance damages paid
to Landlord from the condemnation Award, the Building to a completed
architectural unit, and any amount not so funded by Landlord shall be borne by
Tenant. In the event of a Partial Taking of the Expansion Project, or applicable
portion thereof, Tenant shall have no right to terminate this Lease and there
shall be no reduction or abatement of the Monthly Installment of rent.
17. Mechanics' Lien. Tenant shall (A) pay for all labor and services performed
for, materials used by or furnished to, Tenant or any contractor employed by
Tenant with respect to the Total Project, or applicable portion thereof, (B)
indemnify, defend, protect and hold Landlord and the Total Project harmless and
free from any liens, claims, liabilities, demands, encumbrances, or judgments
created or suffered by reason of any labor or services performed for, materials
used by or furnished to, Tenant or any contractor employed by Tenant with
respect to the Total Project or applicable portion thereof, and (C) permit
Landlord to post a notice of nonresponsibility in accordance with the statutory
requirements of California Civil Code Section 3094 or any amendment thereof. In
the event Tenant is required to post an improvement bond with a public agency in
connection with the above, Tenant agrees to include Landlord as an additional
obligee.
18. Inspection of the Premises. Tenant shall permit Landlord and its agents to
enter the Total Project, or applicable portion thereof, at any reasonable time
for the purpose of inspecting the same, performing Landlord's maintenance and
repair responsibilities (if applicable), posting a notice of non-responsibility
for alterations, additions or repairs, placing upon the Total Project ordinary
"For Sale" signs and at any time within ninety (90) days prior to expiration of
this Lease, to place upon the Total Project, ordinary "For Lease" signs. Except
in the event of an emergency, Landlord shall give Tenant at least 48 hours prior
notice and enter only during Tenant's normal business hours. Entry shall be
subject to Tenant's reasonable security requirements. Landlord shall exercise
good faith efforts to perform its activities on the Total Project in a manner so
as to minimize any
<PAGE> 63
disruption, disturbance or interference with the conduct of Tenant's business to
the extent practicable under the circumstances.
19. Compliance with Laws. Tenant shall, at its own cost, comply with all of the
requirements of all municipal, county, state and federal authorities now in
force, or which may hereafter be in force, pertaining to the use and occupancy
of the Total Project, Expansion Building(s) (and leasehold improvements
constructed therein), Premises and Tenant Improvements by Tenant, and shall
faithfully observe all municipal, county, state and federal law, statutes or
ordinances now in force or which may hereafter be in force applicable to
Tenant's use or occupancy of the Total Project, Expansion Building(s) (and
leasehold improvements constructed therein), Premises and Tenant Improvements.
The judgment of any court of competent jurisdiction or the admission of Tenant
in any action or proceeding against Tenant, whether Landlord be a party thereto
or not, that Tenant has violated any such ordinance or statute in the use and
occupancy of the Total Project, Expansion Building(s) (and leasehold
improvements constructed therein), Premises or Tenant Improvements shall be
conclusive of the fact that such violation by Tenant has occurred.
20. Subordination. The following provisions shall govern the relationship of
this Lease to any underlying lease, mortgage or deed of trust which now or
hereafter affects the Total Project, Expansion Project, Premises, the Building
and/or the Land, or Landlord's interest or estate therein and any renewal,
modification, consolidation, replacement, or extension thereof (a "Security
Instrument").
A. Maximum Secured Borrowings. Landlord agrees that at no time during
the term of this Lease shall Landlord obtain a loan or loans secured by the
Total Project, or any portion thereof, in an aggregate principal amount greater
than the fair market value of the Premises at the time such loan(s) is made and
assuming the completion of construction of the Building in accordance with
approved plans and specifications. Such fair market value shall be determined by
the secured party's appraisal.
B. Subsequent Security Instruments. At Landlord's election, this Lease
shall become subject and subordinate to any Security Instrument created after
the Commencement Date. Notwithstanding such subordination, Tenant's rights under
this Lease, including without Initiation, its right to quiet possession of the
Total Project 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. Documents. Tenant shall execute any document or instrument required
by Landlord or 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 (1) the return of the
Security Deposit unless the Lender receives it from Landlord, and (2) any
defaults on the part of Landlord occurring prior to the time that the Lender
takes possession of the Total Project or applicable portion thereof in
connection with the enforcement of its Security Instrument; provided, however,
that such other matters shall not conflict with the terms of this Lease.
Tenant's failure to execute any such document or instrument within fifteen (15)
days after written demand therefor shall constitute a default by Tenant.
<PAGE> 64
D. Tenant's Attornment. Tenant shall attorn (1) to any purchaser of the
Total Project or applicable portion thereof at any foreclosure sale or private
sale conducted pursuant to any Security Instrument encumbering the Total Project
or applicable portion thereof, (2) to grantee or transferee designated in any
deed given in lieu of foreclosure; or (3) to the lessor under any underlying
ground lease should such ground lease be terminated, provided such party, in
writing, assumes and agrees to observe and perform the obligations of Landlord
under this Lease accruing after the date of the applicable transfer.
E. Lender. The term "Lender" shall mean (1) any beneficiary, mortgagee,
secured party, or other holder of any deed of trust, mortgage, or other written
security device or agreement affecting the Total Project or applicable portion
thereof, and (2) any lessor under any underlying lease under which Landlord
holds its interest in the Total Project or applicable portion thereof.
21. Holding Over. This Lease shall terminate without further notice at the
expiration of the Lease Term. Any holding over by Tenant after expiration shall
not constitute a renewal or extension or give Tenant any rights in or to the
Total Project except as expressly provided in this Lease. Any holding over after
the expiration without the consent of Landlord shall be construed to be a
tenancy from month to month, at one hundred twenty-five percent (125%) of the
monthly rent for the last month of the Lease Term, and shall otherwise be on the
terms and conditions herein specified insofar as applicable.
22. Notices. Any notice required or desired to be given under this Lease shall
be in writing with copies directed as indicated below and shall be personally
served or given by mail. Any notice given by mail shall be deemed to have been
given on the third (3rd) day following the date on which such notice was
deposited in the United States mails, certified and postage prepaid, addressed
to the party to be served with a copy as indicated herein at the last address
given by that party to the other party under the provisions of this Paragraph.
At this date of execution of this Lease, the address of Landlord is:
511 Division Street
Campbell CA 95008
and the address of Tenant is:
8105 Irvine Center Drive
Irvine, CA 92718
Attention: Manager, Corporate Real Estate
23. Attorneys' Fees. In the event either party shall bring any action or legal
proceeding for damages for any alleged breach of any provision of this Lease, to
recover rent or possession of the Total Project or applicable portion thereof,
to terminate this Lease, or to enforce, protect or establish any term or
covenant of this Lease or right or remedy of either party, the prevailing party
shall be entitled to recover as a part of such action or proceeding, reasonable
attorneys' fees and court costs, including attorneys' fees and costs for appeal,
as may be fixed by the court or jury. The term "prevailing party" shall mean the
party who received substantially the relief requested, whether by settlement,
dismissal, summary judgment, judgment, or otherwise.
24. Nonassigment.
A. Landlord's Consent Required. Except as expressly provided in this
Paragraph 24, Tenant's interest in this Lease is not assignable, by operation of
law or otherwise, nor shall Tenant have the right to sublet the Total Project,
or any portion thereof, transfer any interest of Tenant therein or permit any
use of the Total Project, or any portion thereof by another party, without the
prior written consent of Landlord to such assignment,
<PAGE> 65
subletting, transfer or use, which consent Landlord agrees not to withhold or
delay unreasonably subject to the provisions of Subparagraph B below. A consent
to one assignment, subletting, occupancy or use by another party shall not be
deemed to be a consent to any subsequent assignment, subletting, occupancy or
use by another party. Any assignment or subletting without such consent shall be
void and shall, at the option of Landlord, terminate this Lease.
Landlord's waiver or consent to any assignment or subletting
hereunder shall not relieve Tenant from any obligation under this Lease unless
the consent shall so provide.
B. Transferee Information Required. If Tenant desires to assign its
interest in this Lease or sublet the Total Project or any portion thereof, or
transfer any interest of Tenant therein, or permit the use of the Total Project
or any portion thereof by another party (hereinafter collectively referred to as
a "Transfer"), Tenant shall give Landlord at least ten (10) days prior written
notice of the proposed Transfer and of the terms of such proposed Transfer,
including, but not limited to, the name and legal composition of the proposed
transferee, a financial statement of the proposed transferee, the nature of the
proposed transferee's business to be carried on in the Premises or Expansion
Building(s), the payment to be made or other consideration to be given to Tenant
on account of the Transfer, and such other pertinent information as may be
requested by Landlord, all in sufficient detail to enable Landlord to evaluate
the proposed Transfer and the prospective transferee. Landlord shall keep and
maintain such information in strict confidence and shall not disclose the same
to any person or entity (other than to Landlord's lender, general partners,
attorneys and employees who have a need to know such information and who agree
in writing to comply with this confidentiality obligation) without Tenant's
express written consent. In the event Tenant seeks to Transfer its interest in
this Lease or the Total Project, or applicable portion thereof, Landlord shall
have the following options, which may be exercised at its sole choice without
limiting Landlord in the exercise of any other right or remedy which Landlord
may have by reason of such proposed Transfer:
(1) If Tenant proposes to assign this Lease or sublet more than
seventy-five percent (75%) of the total rentable square footage of the Premises
for a term exceeding two years (or, if less, for the balance of the Term), then
Landlord may elect to terminate this Lease effective as of the proposed
effective date of the proposed Transfer and release Tenant from any farther
liability hereunder accruing after such termination date by giving Tenant
written notice of such termination within ten (10) days after receipt by
Landlord of Tenant's notice of intent to transfer as provided above. If Landlord
makes such election to terminate this Lease, Tenant shall surrender the Total
Project, in accordance with Paragraph 33, on or before the effective termination
date, however, this Lease shall not terminate if, within five (5) days after
receiving Landlord's notice electing to terminate this Lease, Tenant notifies
Landlord in writing; that Tenant has withdrawn its assignment or sublet
proposal; or
(2) Landlord may consent to the proposed Transfer on the
condition that Tenant agrees to pay to Landlord, as additional rent, fifty
percent (50%) of all rents or other consideration (including key money) received
by Tenant from the transferee by reason of such Transfer of the Premises only,
or applicable portion thereof, in excess of the rent payable by Tenant to
Landlord under this Lease (prorated in the event of a subletting of less than
the entire Premises) (less any brokerage commissions, advertising expenses, or
tenant improvement costs or other concessions paid or incurred by Tenant in
connection with the Transfer of the Premises only, or applicable portion
thereof). Tenant expressly agrees that the foregoing is a reasonable condition
for obtaining Landlord's consent to any Transfer; or
(3) Landlord may reasonably withhold its consent to the proposed
Transfer.
<PAGE> 66
Notwithstanding anything to the contrary contained herein, the
provisions of this Paragraph 24 shall not apply to any transfer (a) to any
affiliate of Tenant, (b) any entity who acquires all or substantially all of the
assets of Tenant, by merger or otherwise, or (c) to independent contractors
under contract to provide services to or for the benefit of Tenant, including,
without limitation, vending machine companies, food service providers, and
consultants.
25. Successors. The covenants and agreements contained in this Lease shall be
binding on the parties hereto and on their respective heirs, successors and
assigns (to the extent the Lease is assignable).
26. Mortgagee Protection. In the event of any default on the part of Landlord,
Tenant will give notice by registered or certified mail to any beneficiary of a
deed of trust or mortgagee of a mortgage encumbering the Total Project, or
applicable portion thereof, whose address shall have been furnished to Tenant,
and shall offer such beneficiary or mortgagee a reasonable opportunity to cure
the default, including reasonable time to obtain possession of the Total Project
or applicable portion thereof by power of sale or judicial foreclosure, if such
should prove necessary to effect a cure.
27. Landlord Loan or Sale. Tenant agrees promptly following request by Landlord
(A) to execute and deliver to Landlord estoppel certificates presented to Tenant
by Landlord, (i) certifying that this Lease is unmodified and in full force and
effect or specifying any modifications and the date to which the rent and other
charges are paid in advance, if any, and (ii) acknowledging that there are not,
to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder or
specifying the nature of any such defaults, and (iii) evidencing the status of
the Lease as may be required either by a lender making a loan to Landlord to be
secured by a deed of trust or mortgage covering the Total Project or applicable
portion thereof or a purchaser of the Total Project or applicable portion
thereof from Landlord; (B) to deliver to Landlord the publicly available (if
Tenant is publicly traded) financial statement of Tenant with an opinion of a
certified public accountant, if available, including a balance sheet and profit
and loss statement, for the-last completed fiscal year all prepared in
accordance with generally accepted accounting principles consistently applied;
and (C) to deliver to Landlord a financial statement of Tenant (if Tenant is not
a publicly traded entity) with an opinion of a certified public accountant, if
available, including a balance sheet and profit and loss statement, for the last
completed fiscal year all prepared in accordance with generally accepted
accounting principles consistently applied. Tenant's failure to deliver an
estoppel certificate promptly following such request shall be an Event of
Default under this Lease.
28. Surrender of Lease Not Merger. The voluntary or other surrender of this
Lease by Tenant, or a mutual cancellation thereof, shall not work a merger and
shall, at the option of Landlord, terminate all or any existing subleases or
subtenants, or operate as an assignment to Landlord of any or all such subleases
or subtenants.
29. Waiver. The waiver by Landlord or Tenant of any breach of any term, covenant
or condition herein contained shall not be deemed to be a waiver of any
preceding or succeeding breach of the same or any other covenant or condition
herein contained.
30. General.
A. Captions, The captions and paragraph headings used in this Lease are
for the purposes of convenience only. They shall not be construed to limit or
extend the meaning of any part of this Lease, or be used to interpret specific
sections. The word(s) enclosed in quotation marks shall be construed as defined
terms for purposes of this Lease. As used in this Lease, the masculine, feminine
and neuter and the singular or plural number shall each be deemed to include the
other whenever the context so requires.
<PAGE> 67
B. Definition of Landlord. The term "Landlord" as used in this Lease, so
far as the covenants or obligations on the part of Landlord are concerned, shall
be limited to mean and include only the owner at the time in question of the fee
title of the Premises, and in the event of any transfer or transfers of the
title of such fee, the Landlord herein named (and in case of any subsequent
transfers or conveyances, the then grantor) shall after the date of such
transfer or conveyance be automatically freed and relieved of all liability with
respect to performance of any covenants or obligations on the part of Landlord
contained in this Lease, thereafter to be performed; provided that any funds in
the hands of Landlord or the then grantor at the time of such transfer, in which
Tenant has an interest, shall be turned over to the grantee. It is intended that
the covenants and obligations contained in this Lease on the part of Landlord
shall, subject as aforesaid, be binding upon each Landlord, its heirs, personal
representatives, successors and assigns only during its respective period of
ownership.
C. Time of Essence. Time is of the essence for the performance of each
tem covenant and condition of this Lease in which the time for performance is
specified.
D. Severability. In case any one or more of the provisions contained
herein, except for the payment of rent, shall for any reason be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Lease, but this
Lease shall be construed as if such invalid, illegal or unenforceable provision
had not been contained herein. This Lease shall be construed and enforced in
accordance with the laws of the State of California.
E. Joint and Several Liability. If Tenant is more than one person or
entity, each such person or entity shall be jointly and severally liable for the
obligations of Tenant hereunder.
F. Law. The term "law" shall mean any judicial decision, statute,
constitution, ordinance, resolution, regulation, rule, administrative order, or
other published and available requirement of any government agency or authority
having jurisdiction over the parties to this Lease and/or the Total Project (or
applicable portion thereof), in effect at the Commencement Date of this Lease or
any time during the Lease Term, including, without limitation, any regulation,
order, or policy of any quasi-official entity or body (e.g., board of fire
examiners, public utility or special district).
G. Agent. As used herein the term "Agent" shall mean, with respect to
either Landlord or Tenant, its respective agents, employees, contractors (and
their subcontractors), and invitees (and in the case of Tenant, its subtenants).
H. WAIVER OF JURY TRIAL. LANDLORD AND TENANT HEREBY WAIVE THEIR
RESPECTIVE RIGHT TO TRIAL BY JURY OF ANY CAUSE OF ACTION, CLAIM COUNTERCLAIM OR
CROSS-COMPLAINT IN ANY ACTION, PROCEEDING, AND/OR HEARING BROUGHT BY EITHER
LANDLORD AGAINST TENANT OR TENANT AGAINST LANDLORD ON ANY MATTER WHATSOEVER
ARISING OUT OF, OR IN ANY WAY CONNECTED WITH, THIS LEASE, THE RELATIONSHIP OF
LANDLORD AND TENANT, TENANT'S USE OR OCCUPANCY OF THE TOTAL PROJECT, OR ANY
PORTION THEREOF, OR ANY CLAIM OF INJURY OR DAMAGE, OR THE ENFORCEMENT OF ANY
REMEDY UNDER ANY LAW, STATUTE, OR REGULATION, EMERGENCY OR OTHERWISE, NOW OR
HEREAFTER IN EFFECT.
INITIALS: LANDLORD /S/
TENANT /S/
<PAGE> 68
31. Sign. Subject to all necessary governmental approvals, Tenant shall have the
right to place identifying signs on the exterior of the Building and the
Expansion Building(s) and on a sign monument at the entrance to the Project. The
location and size of such signs shall be subject to Landlord's approval, which
shall not be unreasonably withheld or delayed. Tenant may place additional signs
or decorations on the exterior of the Building and Expansion Building(s) or on
the Land with the prior written consent of Landlord, which consent will not be
unreasonably withheld or delayed.
32. Interest on Past Due Obligations. Any Monthly Installment of rent or any
other sum due from Tenant under this Lease which is received by Landlord after
the date the same is due shall bear interest from said due date until paid, at
an annual rate equal to the greater of (the "Permitted Rate"): (1) ten percent
(10%); or (2) five percent (5%) plus the rate established by the Federal Reserve
Bank of San Francisco, as of the twenty-fifth (25th) day of the month
immediately preceding the due date, on advances to member banks under Section 13
and 13 (a) of the Federal Reserve Act, as now in effect or hereafter from time
to time amended. Payment of such interest shall not excuse or cure any default
by Tenant. In addition, Tenant shall pay all reasonable costs and attorneys fees
incurred by Landlord in collection of such amounts.
33. Surrender of the Premises. On the last day of the term hereof, or on the
sooner termination of this Lease, (i) Tenant shall surrender to Landlord the
Expansion Building(s), and the leasehold improvements constructed or installed
therein (and all alterations, additions and improvements to such leasehold
improvements) in safe condition and free of debris, with all trade fixtures,
personal property and equipment of Tenant removed from the Total Project,
however, Tenant shall not be required by Landlord to remove any leasehold
improvements constructed in the Expansion Building(s) or any alterations,
additions or improvements to such leasehold improvements, (ii) Tenant shall
surrender the Premises to Landlord, subject to the provisions of paragraph 10 of
the Improvement Agreement attached hereto as Exhibit "C", in their condition
existing as of the date such Premises, or applicable portion thereof, are
delivered to Tenant, and (iii) Tenant shall also surrender to Landlord any
Tenant Improvements and alterations, additions and improvements to such Tenant
Improvements made by Tenant that are not required by Landlord, pursuant to the
terms of this Lease, to be removed by Tenant at Tenant's cost, each in their
condition existing as of the date the same were constructed or installed,
ordinary wear and tear and damage from casualty or condemnation excepted (unless
caused by the negligence or willful misconduct of Tenant or Tenant's agents,
employees or contractors), with all interior walls cleaned, and repaired or
replaced, all carpets shampooed and cleaned, the air conditioning and heating
equipment serviced and repaired by a reputable and licensed service firm, all
floors cleaned and waxed, all to the reasonable satisfaction of Landlord. Tenant
shall remove all of Tenant's personal property and trade fixtures from the Total
Project, and all property not so removed shall be deemed abandoned by Tenant.
Tenant, at its sole cost, shall repair any damage to the Total Project, and any
portion thereof, caused by the removal of Tenant's personal property, machinery
and equipment, which repair-shall include, without limitation, the patching and
filling of holes and repair of structural damage. If the Total Project or any
portion thereof are not so surrendered at the termination of this Lease, as
required by the terms of this Lease, Tenant shall indemnify and hold Landlord
harmless from and against loss or liability resulting from delay by Tenant in so
surrendering the Expansion Project, the Expansion Building(s) (or any leasehold
improvements constructed or installed therein), the Premises and/or Tenant
Improvements (or alterations, additions or improvements to such Tenant
Improvements) including without limitation, any claims made by any succeeding
tenant or losses to Landlord due to lost opportunities to lease to succeeding
tenants.
34. Authority. The undersigned parties hereby warrant that they have proper
authority and are empowered to execute this Lease on behalf of Landlord and
Tenant, respectively.
35. Public Record. This Lease is made subject to all matters of public record
affecting title to the property of which the Premises are a part. Tenant shall
abide by and comply with all matters of public record now or
<PAGE> 69
hereafter affecting the Total Project and any amendment thereof. The preceding
notwithstanding, Tenant shall not be responsible for correcting any violations
existing as of the date possession of the Building is delivered to Tenant of the
provisions of any document which is of public record and affecting the Premises
or the Land.
36. Brokers. Tenant represents and warrants to Landlord that it has dealt solely
with CB Commercial with respect to this transaction and hereby agrees to
indemnify and hold Landlord harmless from and against any brokerage commission
or fee, obligation, claim or damage (including attorneys' fees) paid or incurred
respecting any other broker claiming through Tenant or with which/whom Tenant
has dealt. It is acknowledged that one or more of Landlord's members may be real
estate brokers. Landlord shall pay and be solely responsible for all commissions
due CB Commercial pursuant to a separate written agreement between Landlord and
CB Commercial and any other persons or entities representing or claiming under
or through Landlord in connection with this transaction. Landlord hereby
indemnifies and agrees to defend and hold harmless Tenant from and against all
claims, demands, liabilities, damages and expenses (including, without
limitation, attorneys' fees and costs) from all such persons or entities.
37. Limitation on Landlord's Liability. Tenant, for itself and its successors
and assigns (to the extent this Lease is assignable), hereby agrees that in the
event of any actual, or alleged, breach or default by Landlord under this Lease
that:
A) Tenant's sole and exclusive remedy against Landlord shall be as
against the assets owned by Landlord (including, without limitation, Landlord's
interest in the Total Project, and any insurance proceeds available to
Landlord), but not against the individual assets of Landlord's partners or
members;
B) No partner, member or officer of any partner or member of Landlord
shall be sued or named as a party in a suit or action (except as may be
necessary to secure jurisdiction of the partnership or limited liability
company);
C) No service of process shall be made against any partner or member of
Landlord (except as may be necessary to secure jurisdiction of the partnership
or limited liability company);
D) No partner or member of Landlord shall be required to answer or
otherwise plead to any service of process;
E) No judgment will be taken against any partner or member of Landlord;
F) Any judgment taken against any partner or member of Landlord maybe
vacated and set aside at any time nunc pro tunc;
G) No writ of execution will ever be levied against the assets of any
partner or member of Landlord;
H) The covenants and agreements of Tenant set forth in this Section 37
shall be enforceable by Landlord and any partner or member of Landlord.
3.8 Hazardous Material.
A. Definitions. As used herein, the term "Hazardous Material", shall
mean any substance: (i) the presence of which requires investigation or
remediation under any federal, state or local statutes, regulation, ordinance,
order, action, policy or common law; (ii) which is or becomes defined "hazardous
waste," "hazardous substance," pollutant or contaminant under any federal, state
or local statute, regulation, rule or
<PAGE> 70
ordinance or amendments thereto including, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601
et seq.) and/or the Resource Conservation and Recovery Act (42 U.S.C. Section
6901 et seq.); (iii) which is toxic, explosive, corrosive, flammable,
infectious, radioactive, carcinogenic, mutagenic, or otherwise hazardous and is
or becomes regulated by any governmental authority, agency, department,
commission, board, agency, or instrumentality of the United States, the State of
California or any political subdivision thereof, (iv) the presence of which on
the Project or the Expansion Project, if applicable, or any portion thereof,
poses or threatens to pose a hazard to the health or safety of persons on or
about the Project or the Expansion Project; (v) without limitation which
contains gasoline, diesel fuel, or other petroleum hydrocarbons; (vi) without
limitation which contains polychlorinated biphenyls (PCBs), asbestos or urea
formaldehyde foam insulation; or (vii) without limitation radon gas.
B. Landlord's Indemnity. Landlord shall indemnify, defend, protect and
hold Tenant harmless from and against all liabilities, claims, penalties, fines,
response costs and other expenses (including, but limited to, reasonable
attorneys' fees and consultants' fees and costs) arising out of, resulting from,
or caused by any Hazardous Material used, generated, discharged, transported to
or from, stored or disposed of by Landlord or its Agents in, on, under, over,
through or about the Total Project (or any portion thereof and/or the
surrounding real property. Landlord further agrees not to hold Tenant
responsible for the cleanup or remediation of any Hazardous Materials that
exist, if any, in, on or under the Land or the Premises as of the date
possession of the Premises is delivered to Tenant (unless the same was generated
or caused to be present by Tenant or its agents, employees or contractors).
Nothing stated herein (including, without limitation, the terms of the
immediately preceding sentence) shall be interpreted or construed as creating an
obligation on Landlord to indemnify or defend Tenant against liabilities,
claims, penalties, fines, response costs and other expenses (including, without
limitation, attorneys' fees and consultants' fees and costs) arising out of or
resulting from, or caused by any Hazardous Materials used, generated,
discharged, transported to or from, stored or disposed of by a person or entity
other than Landlord or its Agents.
C. Permitted Use. Subject to the compliance by Tenant with the
provisions of Subparagraphs D, E, F, G, I, J and K below, Tenant shall be
permitted to use and store on the Total Project those Hazardous Materials listed
in Exhibit "D" attached hereto in the quantities attached set forth in Exhibit
"D" and such additional Hazardous Materials as are reasonably required or
necessary in connection with Tenant's business. Unless such new Hazardous
Materials are described in a HMMP (as described below) furnished to Landlord,
promptly following Tenant's use of any Hazardous Materials that are not
described on Exhibit "D" attached hereto, Tenant shall notify Landlord in
writing of the name of the new Hazardous Materials being used by Tenant and the
estimated quantities of such Hazardous Materials being used.
D. Hazardous Materials Management Plan. Prior to Tenant using, handling,
transporting or storing any Hazardous Material at or about the Project and/or
the Expansion Project (including, without limitation, those listed in Exhibit
"D" , Tenant shall submit to Landlord a Hazardous Materials Management Plan
("HMMP") for Landlord's review and approval which approval shall not be
unreasonably withheld. The HMMP shall describe: (i) the approximate quantities
of each MATERIAL to be used, (ii) the purpose for which each material is to be
used (subject to Tenant's requirements for maintaining the confidentiality of
its trade secrets), (iii) the method of storage of each material, (iv) the
method of transporting each material to and from the Project (and the Expansion
Project, if applicable), or applicable portion thereof, (v) the methods Tenant
will employ to monitor the use of the material and to detect any leaks or
potential hazards, and (vi) any other information any department of any
governmental entity (city, state or federal) requires prior to the issuance of
any required permit for the Project (or the Expansion Project) or during
Tenant's occupancy of the Premises (or the Expansion Project). Landlord may, but
shall have no obligation to review and approve the foregoing information and
HMMP, and such review and approval or failure to review and approve shall not
act as an estoppel or otherwise waive Landlord's rights under this Lease or
relieve Tenant of its obligations under this
<PAGE> 71
Lease. If Landlord determines in good faith by inspection of the Project (or the
Expansion Project), or any portion thereof, or review of the HMMP that the
methods in use or described by Tenant are not adequate in Landlord's good faith
judgment to prevent or eliminate the existence of environmental hazards, then
Tenant shall not use, handle, transport, or store such Hazardous Materials at or
about the Project (or at or about the Expansion Project), or portion thereof,
unless and until such methods are approved by an environmental consultant
reasonably approved by Landlord and Tenant and added to an approved HMMP. Tenant
shall strictly comply with the HMMP and shall not change its use, operations or
procedures with respect to Hazardous Materials without submitting an amended
HMMP for Landlord's review and approval as provided above.
E. Use Restriction. Except as specifically allowed in Subparagraph C
above, Tenant shall not cause or permit any Hazardous Material to be used,
stored, generated, discharged, transported to or from, or disposed of in or
about the Project (or the Expansion Project, if applicable), or any other land
or improvements in the vicinity of the Project (or the Expansion Project).
Without limiting the generality of the foregoing, Tenant, at its sole cost,
shall comply with all Laws relating to the storage, use, generation, transport,
discharge and disposal by Tenant or its Agents of any Hazardous Material. If the
presence of any Hazardous Material on the Total Project or any portion thereof
caused or permitted by Tenant or its Agents results in contamination of the
Total Project, or any portion thereof, or any soil, air, ground or surface
waters under, through, over, on, in or about the Total Project, or any portion
thereof Tenant, at its expense, shall promptly take all actions necessary to
return the Total Project and/or the surrounding real property to the condition
required by applicable governmental authorities or agencies. The obligation of
Tenant to return the Total Project and/or surrounding property to the condition
required by applicable governmental authorities or agencies shall not limit,
reduce or alter in any manner Tenant's indemnity obligation under Subparagraph F
below; it being understood and agreed by Tenant that, although hypothetically
the applicable governmental agencies may allow Tenant to keep on the Project or
Expansion Project, if applicable, or encapsulate thereunder, certain traces of a
Hazardous Material(s) caused to be present by Tenant or any of its agents and
not remove all of it from the Project or the Expansion Project, if Landlord
suffers any damages, liabilities or losses as a result of such Hazardous
Materials remaining on the Project or the Expansion Project or migrating onto
another property (including, without limitation, diminution in the fair market
value of the Project or the Expansion Project, or any portion thereof, and
diminution in the fair rental value of the Project or the Expansion Project,
inability to finance or refinance the Project or the Expansion Project or
inability to lease or sell the Project or the Expansion Project), Tenant shall
be liable for such damages, liabilities or losses under the terms of
Subparagraph F below.
F. Tenant Indemnity . Tenant shall defend, protect, hold harmless and
indemnify Landlord and its Agents and Lenders with respect to all actions,
claims, losses (including, diminution in value of the Project), fines,
penalties, fees, (including, but not limited to, reasonable attorneys' and
consultants' fees and costs) costs, damages, liabilities, remediation costs,
investigation costs, response costs and other expenses arising out of, resulting
from, or caused by any Hazardous Material used, generated discharged,
transported to or from, stored, or disposed of by Tenant or its Agents in, on,
under, over, through or about the Project and/or the Expansion Project (or any
portion of either) and/or the surrounding real property. Tenant shall not suffer
any lien to be recorded against the Total Project, or any portion thereof, as a
consequence for the disposal of any Hazardous Material by Tenant or its Agents,
including any so called state, federal or local "super fund" lien related to the
"clean up" of any Hazardous Material in, over, on, under through, or about the
Total Project, or applicable portion thereof
G. Compliance. Tenant shall immediately notify Landlord of any
governmentally required test, investigation, or enforcement proceeding against
Tenant or the Total Project, or any portion thereof, concerning any Hazardous
Material in, on, under or about the Total Project, or applicable portion thereof
or allegedly used in, on, under or about the Total Project or applicable portion
thereof. Any remediation plan prepared by or on behalf of Tenant must be
submitted to Landlord prior to conducting any work pursuant to such plan and
prior to
<PAGE> 72
submittal to any applicable government authority and shall be subject to
Landlord's consent. Tenant acknowledges that Landlord, as the owner of the Land
and Building (and the Expansion Building(s) at the expiration of the Lease Term)
located thereon, at its election, shall have the sole right to negotiate,
defend, approve and appeal any action taken or order issued with regard to any
Hazardous Material by any applicable governmental authority. The preceding
sentence notwithstanding, Landlord agrees that if governmental enforcement
action is taken against Landlord with respect to any Hazardous Materials
discharged or released or caused to be present on, in or under the Total
Project, or applicable portion thereof, then Landlord shall promptly notify
Tenant of such enforcement action and Tenant shall be entitled to participate in
any negotiations with the applicable governmental agency concerning the clean
up, remediation or monitoring of such Hazardous Materials. Nothing stated herein
shall preclude Landlord from settling or compromising any claims or actions
initiated against it or from entering into any monitoring or remediation plan
for which Tenant has an obligation of indemnity hereunder.
H. Assignment and Subletting. It shall not be unreasonable for Landlord
to withhold its consent to any proposed assignment or subletting if the proposed
assignee or subtenant has been required by any prior landlord, lender, or
governmental authority to "clean up" or remediate any Hazardous Material and has
failed to promptly do so; provided that the foregoing will not apply in the case
of a Fortune 1,000 Company. Landlord shall not unreasonably withhold its consent
to any proposed assignment or subletting if (i) the proposed assignee's or
subtenant's anticipated use of the Total Project, or applicable portion so
subleased, involves the storage, generation, discharge, transport, use or
disposal of any Hazardous Material not permitted under Subparagraph C above; or
(ii) if the proposed assignee or subtenant is subject to investigation or
enforcement order or proceeding by any governmental authority in connection with
the use, generation, discharge, transport, disposal or storage of any material
amount of Hazardous Material.
I. Surrender. Upon the expiration or earlier termination of the Lease,
Tenant, at its sole cost, shall remove all Hazardous Materials from the Total
Project that Tenant or its Agents introduced to the Total Project, or applicable
portion thereof. If Tenant fails to so surrender the Total Project, Tenant shall
indemnify, protect, defend and hold Landlord harmless from and against all
damages resulting from Tenant's failure to surrender the Total Project as
required by this Paragraph, including, without limitation, any actions, claims,
losses, liabilities, fees (including, but not limited to, reasonable attorneys'
fees and consultants' fees and costs), fines, costs, penalties, or damages in
connection with the presence of such Hazardous Materials at the Total Project,
or applicable portion thereof, including, without limitation, damages occasioned
by the inability to relet the Total Project, or applicable portion thereof, or a
reduction in the fair market and/or rental value of the Total Project by reason
of the existence of any Hazardous Materials in, on, over, under, through or
around the Total Project, or applicable portion thereof, by Tenant.
J. Right to Appoint Consultant. Landlord shall have the right to appoint
a consultant, reasonably acceptable to Tenant, to conduct an investigation to
determine whether any Hazardous Material is being used, generated, discharged,
transported to or from, stored or disposed of in, on, over, through, or about
the Total Project, or any portion thereof, in an appropriate and lawful manner.
If Tenant has violated any Law or covenant in this Lease regarding the use,
storage or disposal of Hazardous Materials on or about the Total Project, or any
portion thereof, Tenant shall reimburse Landlord for the reasonable cost of such
investigations applicable to the discovery of Tenant's violation and future
investigations of the environmental condition of the Total Project reasonably
undertaken by or on behalf of Landlord to confirm the violation has been cured.
Tenant, at its expense, shall comply with all reasonable recommendations of the
consultant required to conform Tenant's use, storage or disposal of Hazardous
Materials to the requirements of applicable Law or to fulfill the obligations of
Tenant hereunder.
<PAGE> 73
K. Holding Over. If any action of any kind is required to be taken by
any governmental authority to clean-up, remove, remediate or monitor Hazardous
Material (the presence of which is the result of the acts or omissions of Tenant
or its Agents) and such action is not completed prior to the expiration or
earlier termination of the Lease, Tenant shall be deemed to have impermissibly
held over until such time as such required action is completed, and Landlord
shall be entitled, subject to Landlord's obligation to attempt to reasonably
mitigate its damages, to all damages directly or indirectly incurred in
connection with such holding over, including without limitation, damages
occasioned by the inability to re-let the Total Project, or applicable portion
thereof, or a reduction of the fair market and/or rental value of the Total
Project, or applicable portion thereof; provided, however, that the presence of
any Hazardous Material that is confined to a single Building shall be deemed to
be a holdover only as to the affected Building, and Tenant's liability for the
rent due with respect to such holdover status shall be equitably apportioned.
L Existing Environmental Reports;. Tenant hereby acknowledges that it
has received, read and reviewed the reports and test results described in
Exhibit "E" attached hereto and made a part hereof (the "Existing Environmental
Reports").
M. Provisions Survive Termination. The provisions of this Paragraph 38
shall survive the expiration or termination of this Lease.
N. Controlling Provisions. The provisions of this Paragraph 38 are
intended to govern the rights and liabilities of the Landlord and Tenant
hereunder respecting Hazardous Materials to the exclusion of any other
provisions in this Lease that might otherwise be deemed applicable. The
provisions of this Paragraph 38 shall be controlling with respect to any
provisions in this Lease that are inconsistent with this Paragraph 38.
IN WITNESS WHEREOF, the parties have executed this Agreement on the dates set
forth below.
LANDLORD: TENANT:
ENZO DRIVE, LLC, WESTERN DIGITAL CORPORATION,
a California limited liability company a Delaware corporation
By: /s/ J.D. Mair By: /s/ Richard Salva
Its: Member Its: Vice President
<PAGE> 74
EXHIBIT "A"
LEGAL DESCRIPTION
All that certain real property situate in the City of San Jose. County of Santa
Clara. State of California. described as follows:
PARCEL ONE:
BEGINNING at a point on the Northeasterly line of Monterey Road, as the same was
established in the Deed from Domingos T. Borge, et ux, to the State of
California, dated January 7, 1937, recorded March 2, 1937, in Book 815 of
Official Records, page 80, said point being the most Easterly corner of that
certain 0.031 acre parcel described in the above mentioned Deed and also being
on the Southeasterly line of that certain 28.58 acre parcel of land described in
the Deed from Jack Turturici, et ux, to Luisa Maria Ferrari, dated March 12,
1946, recorded April 12, 1946 in Book 1335 of Official Records, page 182,
distant thereon North 37 12' 55" East 67.52 from the most Southerly corner of
said 28.58 acre parcel: thence from said point of beginning along the
Southeasterly line of said 28.58 acre parcel North 37 12' 55" East 2,522.68 feet
to the most Southerly comer of that certain 10 acre parcel of land described in
the Deed from Luisa Maria Ferrari, to Giovanni L. Romano, dated April 11, 1957,
recorded April 15, 1957 in Book 3775 of Official Records, page 532; thence along
a Southwesterly line of said 10 acre parcel North 52 47' 45 " West 20.00 feet,
to a point on a Northwesterly line of said 28.5 8 acre parcel; thence along said
last mentioned line South 37 12' 55" West. 2,522.66 feet to the most Northerly
comer of said 0.031 acre parcel, thence along the Northeasterly line of said
0.031 acre parcel South 52 43' 45" East 20.14 feet to the point of beginning,.
EXCEPTING THEREFROM that portion thereof lying Southwesterly of the
Northeasterly line of the parcel of land condemned to the State of California by
Final Order of Condemnation. a Certified Copy of which was recorded April 4,
1972 in Book 9772. Page 609 of Official Records.
PARCEL TWO:
BEGINNING at a stake marked "B" standing at the intersection of the center line
of the Monterey Road with the Southwesterly prolongation of the Fence line
between lands of Mrs. Murphy Colombet and Warren Cottle, being also the common
comer for Lots "M" and "N" in the center of said road, as shown on the Map
accompanying the report of the referees in the suit for partition entitled,
"Ygnacio Bernal et al vs. Rufina Bemal de Guinac et al", Case No. 5643 in the
Twentieth District Court of the State of California, in and for the County of
Santa Clara, and running thence along the center of the Monterey Road, S. 52 55'
E. 16.36 chains to a point distant Northwesterly 20 feet from the common corner
for lands of Mrs. Murphy Colombet and E. Van Every in the center of said road,
thence parallel to the fence line between the lands of said Van Every and Mrs.
Murphy Colombet and distant therefrom twenty feet Northwesterly, N. 37 E.
39.24-1/2 chains to a 4" x 4" stake marked 2-3: thence at right angles N. 53' W.
9.85-1/2 chains to a stake marked C.M. 1 standing in the center of the Coyote
River and line between lands of Mrs. Murphy Colombet and Edward M. Piercy and
from which stake a Sycamore 36 inches in diameter marked B.T.C.M. 1 bears N. 84
30' W. 2.26 chains: thence along the center of said river and line between lands
of said Piercy and Mrs. Murphy Colombet with the following courses and
distances: S. 31 45' W. 4.71-1/2 chains, N. 86 38' W. 5.00 chains and N. 64 30'
W. 2.82 chains to tiie common corner for lands of Mrs. Murphv Colombet and
Warren Cottle in the center of said river; thence leaving said river and running
along the fence line between the ------ lands of said Cottle and Murphy
Colombet, S. 37 W. 31.17 chains to the place of beginning. Being a part of Lot
"N" as setoff to Jose A. and Daniel Bernal in the suit for partition entitled,
"Ygnacio Bemal et al vs. Rufina Bemal de Guinac et al, Case No. 5643 in the
Twentieth District Court of the State of California, in and for the County of
Santa Clara and a part of Lot 33 of the partition of the Santa Teresa Rancho.
<PAGE> 75
EXCEPTING THEREFROM that portion thereof, lying Northerly of the Southerly line
of the land described in the deed to the County of Santa Clara, recorded
September 11, 1969 in Book 8665, page 413 of Official Records, more particularly
described as follows:
BEGINNING at the most Easterly corner of that certain parcel of land conveyed to
the Santa Clara Valley Water Conservation District by Deed Recorded July 9, 1963
in Book 6094 Official Records, page 493; thence along the Southerly boundary of
said parcel South 41 58' 50" West 25.03 feet. South 0 02' 10" East 31.40 feet.
South 34 56' 30" West 25.02 feet, South 41 58' 50" West 11.95 feet, South 26 07'
05" West 17.20 feet. South 71 25' 40" West 25.18 feet. North 79 55' 30" West
26.93 feet. South 83 40' 30" West 125.55 feet. South 72 04' 40" West 85.72 feet,
South 64 08' 30" West 25.36 feet, South 72 32' 10" West 107.02 feet, South 86
03' 10" West 150.01 feet, North 87 40' 40" West 75.48 feet. North 82 28' 50"
West 47.38 feet. North 75 22' 30" West 175.01 feet, and North 66 13' West 56.94
feet to the most Westerly corner thereof and lying in the Northwesterly line of
that certain parcel of land described in the Deed from Anthony LaBarbera et al.
to Peter Filice and Sons, a co-partnership. dated April 17, 1956 and recorded
April 23, 1956 in Book 3474 Official Records, at Page 212. Santa Clara County
Records; thence leaving said Southerly boundary and proceeding along, said
Northwesterly line South 37 00' West 34.71 feet; thence leaving said
Northwesterly line South 62 17' 10" East 5.61 feet; thence South 74 44' 55" East
312.93 feet; thence North 79 19' 42" East 764.03 feet more or less to a point on
the Northeasterly line of that parcel of land described in the aforementioned
Deed from Anthony LaBarbera. et al; thence along said Northeasterly line North
53 00' 00" West 145.09 feet more or less to the point of beginning.
ALSO EXCEPTING THEREFROM that portion thereof lying Southwesterly and
Southeasterly of the Northeasterly and Northwesterly line of the land described
in the deed to the State of California recorded April 13. 1972 in Book 9785,
Page 674 of Official Records, more particularly describe as follows:
Beginning for reference at the most Westerly corner of that parcel of land
described in the deed to the County of Santa Clara recorded September 22, 1969,
in Book 8677 at page 216, Official Records of Santa Clara County; thence along
the property line common to the lands, now or formerly, of the Estate of
Angelina Filice Behm and Danna and Danna. Inc., a corporation, S. 37 35' 06"
West, 80.04 feet to the true point of commencement; thence South 55 00'29" East,
786.52 feet; thence South 56 09' 14" East, 281.42 feet. thence N. 37 31' 06",
Eat 106.62 feet; thence South 52 28' 54" East, 15.00 feet to the property line
common to the lands, now or formerly, of the Estate of Angelina Filice Behm, and
of Eugene Ferrari, et al; thence
<PAGE> 76
EXHIBIT "C"
Improvement Agreement
This Improvement Agreement is made part of that Lease Agreement dated
September 15, 1997 (the "Lease"), by and between ENZO DRIVE, LLC, a California
limited liability company ("Landlord") and WESTERN DIGITAL CORPORATION, a
Delaware corporation ("Tenant").
Except as otherwise provided herein, all defined or capitalized terms
used herein shall have the same meaning as ascribed to such terms in the Lease.
I. Landlord's Obligation to Construct the Building and Improve the Land.
The parties hereto acknowledge that the Land is presently unimproved. Subject to
satisfaction or waiver by Landlord of the conditions set forth in Paragraph 3 of
the Lease, Landlord shall improve the Land with a building shell (the "Building
Shell") and sitework related thereto. Such Building Shell and related sitework
shall be constructed by Landlord substantially in accordance with the Final
Building Plans (as described below) approved or to be approved by Landlord and
Tenant as described herein, subject to the approval of and any changes required
by any appropriate governmental authority or Landlord's Lender. As stated in the
Lease, the Building shall contain approximately 58,785 square feet.
Prior to the execution of this Lease, Tenant contemplated entering into
a build-to-suit lease with Landlord pursuant to which Landlord would develop and
build two (2) buildings on the Land and lease the same to Tenant for Tenant's
use. One of those buildings was to have been approximately 101,060 square feet
and the other building was to have been approximately 55,202 square feet. In
cooperation with Tenant, Landlord had caused to be prepared certain preliminary
plans and specifications for the development of such two buildings and had
submitted such plans to the City of San Jose for plan check and approval.
Although Landlord may elect, in its sole and absolute discretion, to continue to
pursue site development approval from the City of San Jose based on the
development of the site with two buildings, consisting of approximately 101,060
and 55,202 square feet, respectively, the parties hereto acknowledge and agree
that the plans and specifications for development of the Land will need to be
redesigned to address the development of only an approximately 58,785 square
foot building on the Land. The Building Shell for the approximately 58,785
square foot Building and related sitework shall be designed and constructed in
accordance with the terms set forth below.
2. Design of Building Shell. As soon as practicable following the
execution of the Lease, Landlord, with the reasonable cooperation of Tenant,
shall develop preliminary plans and specifications (the "Preliminary Building
Plans") and then final plans, specifications and working drawings for the
Building Shell (the "Final Building Plans"). Within five (5) days following
delivery to Tenant of the Preliminary Plans or Final Building Plans for the
Building Shell, Tenant shall review them and either (i) approve them, which
approval shall not be unreasonably withheld, or (ii) specify in writing its
objections to such Preliminary Building Plans or Final Building Plans for the
Building Shell, and all changes that must be made to such Preliminary Building
Plans or Final Building Plans to satisfy such objections; provided, however,
that Tenant may only object to the Preliminary Building Plans or Final Building
Plans for the Building Shell on the basis that they do not substantially conform
to the schematic plan for the Building Shell attached hereto as Attachment 1. If
Tenant does not deliver any written objections to such Preliminary Building
Plans for the Building Shell within the specified period, then Tenant shall be
deemed to have approved the same and Landlord shall then diligently cause to be
prepared Final Building Plans that are consistent with and a logical evolution
of the approved Preliminary Building Plans. If Tenant does not deliver any
written objections to the Final Building Plans for the Building Shell within the
specified period, then Tenant shall be deemed to have approved the Final
Building
<PAGE> 77
Plans for the Building Shell. If Tenant does deliver such written objections
within such time period, then the parties shall confer and use their best
efforts to resolve such objections by Tenant within five (5) days after Landlord
has received notice thereof. If the parties are unable to resolve such
objections by Tenant within said time period, then such objections shall be
resolved by arbitration conducted according to the procedures described in
paragraph 11 hereof. Upon Tenant's approval of the Final Building Plans,
Landlord shall submit such Final Building Plans to all appropriate governmental
agencies for approval. Immediately after all such governmental approvals have
been obtained, and after such Final Building Plans for the Building Shell, have
been approved by Landlord's Lender providing financing for the construction of
such Building, then such approved Final Building Plans (which, together with any
and all change orders approved by Landlord, Tenant and, if applicable,
Landlord's Lender, are hereinafter collectively referred to as the "Approved
Final Plans" for the Building) shall be initialed and dated by Landlord and
Tenant.
The parties hereto acknowledge and understand that Tenant intends to
construct, or cause to be constructed certain leasehold improvements (both
general utility and specialized improvements) in the Building pursuant to the
terms of a separate construction contract or improvement agreement. Such
separate construction contract or improvement agreement is contemplated to be
entered into between Tenant and its general contractor, which general contractor
shall be a joint venture consisting of South Bay Construction Company and
Southland Industries. This Improvement Agreement shall not govern or address the
terms and conditions upon which such leasehold improvements shall be designed
and constructed, however, Landlord shall have a right to reasonably approve the
scope of such initial leasehold improvements contemplated to constructed by
Tenant within the Building Shell.
3. Construction Contract. Landlord shall retain South Bay Construction
Company (the "General Contractor") as general contractor to construct the
Building Shell (and related sitework) on behalf of Landlord. The contract
entered into by Landlord with the General Contractor for construction of the
Building Shell shall be on a "cost plus six percent (6%)" basis so that, with
respect to the Building Shell and related sitework, the General Contractor is
paid all Project Costs (as hereinafter defined) applicable to the design and
construction of such applicable Building Shell and related sitework and receives
a fee for profit and overhead equal to six percent (6%) of the Project Costs.
Landlord agrees that all major subcontractor work shall be bid in accordance
with standard procedures in Santa Clara County. "Project Costs" shall mean:
(i) All "hard" construction costs for the construction of the
Building Shell and related sitework, according to the Approved Final Plans and
all approved changes thereto, including, but not limited to, the following:
(A) All labor, supervision and benefit costs therefore,
including, without limitation, costs of a project manager and project
superintendents (with such costs to be equitably apportioned by Landlord to the
extent any employee of Landlord or the General Contractor is not engaged on this
project on a full-time basis);
(B) Costs of all materials;
(C) Value of all tools and equipment consumed on the job
and rental of all equipment used in the construction;
(D) Contract price for all construction work undertaken by
general contractors and sub-contractors, including grading and site preparation;
<PAGE> 78
(E) The cost of obtaining all governmental approvals and
permits (including, without limitation, building permits) for the construction
of the Building Shell and related sitework, including all building or
construction taxes imposed by any governmental authority;
(F) The cost of all equipment and fixtures, including the
cost of installation;
(G) Engineering and architectural fees for the preparation
of all plans, specifications and working drawings;
(H) The cost of all other on-site improvements made to the
Land, including grading and filling portions of the Land, and the installation
of paved parking and driveways, sidewalks, curbs, landscaping, irrigation and
underground drainage systems;
(1) The cost of premiums for surety bonds, if any,
including but not limited to payment and performance bonds and mechanics' lien
bonds;
(J) The cost of bringing utilities from the street to the
Building, including, without limitation, service connection fees;
(K) Fees for any reports necessary in the construction of
the improvements, including environmental impact reports, soils reports and
other reports;
(L) Costs of machinery and equipment rented for the
construction of the Building Shell and related sitework, or which are owned by
General Contractor but are purchased for the construction and would not
ordinarily be owned by General Contractor (however, if such machinery or
equipment is purchased by General Contractor and may be used on other
construction projects, then the costs of such equipment and machinery shall be
equitably included as a Project Cost (and charged to Tenant) or, alternatively,
Landlord shall quitclaim and convey such equipment and machinery to Tenant if
the same has no residual value to the Landlord once used;
(M) Costs of reasonable transportation and travel expenses
incurred in connection with the construction of the Building Shell and related
sitework;
(N) Costs of minor repairs and replacements (including,
without limitation, dismantling and removal thereof);
(O) Costs of removal of debris;
(P) Costs of telephone calls, postage and delivery charges
and reasonably petty cash expenses at the construction site office;
(Q) Costs of insurance required to be maintained by
General Contractor under the construction contract;
(R) Sales, use or similar taxes related to the
construction and for which General Contractor is liable;
(S) Costs of preventing damage or loss in the event of an
emergency (provided the emergency is not caused by the negligence of General
Contractor);
<PAGE> 79
(T) Costs of repairing work damaged or improperly
executed, provided the damage or improper execution did not result from the
negligence of General Contractor (except that such costs shall be included in
Project Costs notwithstanding the cause of such costs to the extent such costs
are not covered by insurance);
(U) Fees and assessments for the building permits,
licenses and inspections for which Landlord or the General Contractor is
required to pay; and
(V) Such other costs as reasonably may be incurred by the
Landlord or General Contractor in connection with the construction of the
Building Shell and related sitework on the Land (including, without limitation,
any and all "soft costs" and the costs incurred by Landlord in connection with
the design and development of the prior two buildings contemplated to be built
on the Land as stated above and the costs of revising such plans and
specifications based on the development of only a single Building on the Land
consisting of approximately 58,785 square feet).
4. Changes to Approved Final Plans. Once the Approved Final Plans have
been finally approved by Landlord and Tenant and the general construction
contract has been signed with the General Contractor with respect to the
construction of the approximately 58,785 square foot Building Shell and related
sitework, Landlord or Tenant shall have the right to order extra work or change
orders with respect to the construction of the Building Shell or related
sitework provided Landlord and Tenant consent in writing to such requested
change orders. The consent of Landlord or Tenant, as the case may be, to any
change orders requested by Landlord or Tenant shall not be unreasonably withheld
or delayed. All extra work or change orders requested by either Landlord or
Tenant shall be made in writing, shall specify the amount of delay or the time
saved resulting therefrom, shall estimate any added or reduced cost resulting
therefrom, and shall become effective and a part of the Approved Final Plans for
the Building Shell once approved in writing by both parties. Anything herein to
the contrary notwithstanding, the Commencement Date of the Lease shall not be
extended for any reason and all delays caused by any changes made to the
Approved Final Plans shall be charged to Tenant.
5. Commencement and Completion of the Building Shell. Landlord and
Tenant acknowledge that the Building Shell for the approximately 58,785 square
foot Building and related sitework shall be constructed, or caused to be
constructed, by Landlord on a "fast track" basis and that construction of such
Building Shell may commence prior to the date the Final Building Plans
applicable to such Building Shell is approved. With respect to the Building
Shell, as soon as (i) all necessary governmental approvals for the construction
of the Building Shell have been obtained, (ii) Landlord has entered into a
general construction contract with General Contractor for the construction of
the Building Shell, and (iii) all major subcontractor work has been put out to
bid and bids received by Landlord applicable to the Building Shell, then
Landlord shall commence construction of the Building Shell, and shall diligently
prosecute such construction to completion. Tenant acknowledges that the
Commencement Date of the Lease, and the date Tenant is required to start paying
rent and additional rent under the Lease, may occur prior to the date that
construction of the Building Shell and/or Building is complete.
6. Payment of Cost of Building Shell. With respect to the Building Shell
(and related sitework) Landlord agrees to make available for the payment of the
costs of the Building Shell and related sitework ("Building Shell Costs"), an
amount equal to Three Million Five Hundred Twenty-seven Thousand One Hundred
Dollars ($3,527,100) (the "Maximum Shell Allowance"). Such Maximum Shell
Allowance for the Building can be used by Tenant to pay for shell improvements
to the Building and/or related sitework, and if such Maximum Shell Allowance
applicable to the Building is not fully expended on the Building Shell and
related sitework for the approximately 58,785 square foot Building, such
unexpended funds shall be applied to the cost any leasehold
<PAGE> 80
improvements to be constructed by Tenant within such Building Shell. The
preceding to the contrary notwithstanding, if the Maximum Shell Allowance has
not been fully expended on the Building Shell or related sitework for the
Building (or such aforementioned leasehold improvements) on or before the
Commencement Date of the Lease, then, provided Tenant is not in default under
this Improvement Agreement or the Lease, such unexpended portion of the Maximum
Shell Allowance allocable to the Building Shell shall be paid to Tenant promptly
following the Commencement Date of the Lease.
With respect to the completion of construction of the Building Shell for
the approximately 58,785 square foot Building, Tenant shall pay all of the
Building Shell Costs incurred or to be incurred by Landlord in excess of the
Maximum Shell Allowance for the Building Shell and related sitework (with such
Building Shell Costs to be paid by Tenant being referred to herein as "Tenant's
Shell Contribution"). During the course of construction of the Building Shell,
each progress payment due to Landlord's contractor or to any subcontractor or
material supplier shall be paid by Landlord and Tenant as follows: (i) Landlord
shall pay a fraction of each progress or other payment, which fraction shall
have as its numerator the Maximum Shell Allowance for the Building and shall
have as its denominator Landlord's estimate of the total Building Shell Costs
applicable to the Building and related sitework, to complete construction of the
Building Shell and related sitework (it being understood and agreed, however,
that in no event shall Landlord be required to contribute more than the Maximum
Shell Allowance toward the costs of designing and constructing the Building
Shell and related sitework); and (ii) Tenant shall pay the balance of each
progress or other payment. Prior to the commencement of construction of the
Building Shell, Tenant shall, if requested to do so by Landlord, provide
assurances to Landlord's Lender that the funds necessary to pay Tenant's Shell
Contribution will be immediately available to Landlord as and when needed to pay
such Building Shell Costs, which assurances shall be reasonably satisfactory to
Landlord and Landlord's Lender. As soon as practicable following completion of
the Building Shell, Landlord shall notify Tenant of the actual cost of
construction of such Building Shell. Tenant shall have the right to audit the
books, records, and supporting documents of the Landlord to the extent necessary
to determine the accuracy of such notice of actual costs during normal business
hours after giving Landlord at least three (3) business days prior written
notice. Tenant shall bear the cost of such audit. Any such audit must be
conducted, if at all, within sixty (60) days after Landlord delivers its notice
of actual costs to Tenant. In the event Tenant's payment of Landlord's estimate
of Tenant's Shell Contribution shall have resulted in either an overpayment or
underpayment of the amount actually due, then an adjustment shall be made such
that any overpayment shall be credited against the next Monthly Installment of
rent or any underpayment shall be paid as Additional Rent together with the next
Monthly Installment of rent.
In addition to Tenant's Shell Contribution, to the extent the following
costs are not paid for from Landlord's Maximum Shell Allowance, Tenant shall
also be obligated to pay or reimburse Landlord, within ten (10) days following
written demand therefor, for all predevelopment costs or expenses incurred by
Landlord in connection with its investigation or evaluation of the Land for the
design and construction of the Building Shell (including, without limitation,
governmental fees, the costs of all soils and geologic studies, and
architectural and engineering costs). The preceding to the contrary
notwithstanding, Tenant shall not be obligated to pay or reimburse Landlord for
the following costs: (i) costs of off-site improvements to be constructed by
Landlord (i.e. streets, curbs, and gutters) and the value of any land dedication
for such purposes, (ii) brokerage commissions incurred by Landlord, (iii)
finance costs incurred by Landlord, (iv) costs of preparation of the burrowing
owl studies, (v) costs related to the investigation of the riparian corridor
adjacent to, or comprising part of, the Land upon which the Building Shell is to
be built, (vi) costs of the initial Phase I environmental assessment prepared by
or for Landlord, (vi) Landlord's attorneys' fees; or (vii) impact fees charged
by the City of San Jose in connection with the development of the Property (e.g.
school fees, park fees, and environmental mitigation fees).
7. [Intentionally Omitted]
<PAGE> 81
8. Delivery of Possession and Punchlist. When the Building Shell for the
approximately 58,785 square foot Building is "water-tight" as described in
Exhibit F to the Lease, and again following substantial completion of the
Building Shell, Landlord and Tenant shall together walk through and inspect the
Building Shell, using their best efforts to discover all uncompleted or
defective construction. After the first such inspection has been completed, each
party shall sign a list of "punch list" items which Tenant has determined must
be corrected by Landlord, and which Landlord has determined Landlord is
obligated to correct, in order to make such applicable Building Shell
"water-tight". After the second such inspection has been completed, each party
shall sign a list of "punch list" items which Tenant has determined must be
corrected by Landlord, and which Landlord has determined Landlord is obligated
to correct, in order to complete construction of the Building Shell. Landlord
agrees to use reasonable efforts to complete those "punch list" items within
thirty (30) days after executing each such list. Notwithstanding anything
contained herein, Tenant's obligations to pay the Monthly Installment of rent
and Additional Rent shall commence as provided in the Lease, regardless of
whether Tenant completes such inspection or executes such list or whether or not
Landlord has completed construction of the Building Shell or placed such
Building Shell in "water-tight" condition.
9. Construction Warranty for the Building Shell. Effective upon
substantial completion of the Building Shell for the approximately 58,785 square
foot Building, Landlord does hereby warrant that the construction of the
Building Shell and related sitework were performed substantially in accordance
with the Approved Final Plans therefor, as the case may be, in a good and
workmanlike manner, and that all materials and equipment furnished conform to
said plans and are new and otherwise of good quality; provided, however, that
said representation and warranty shall not extend to, and Landlord shall not be
liable for, any defect in construction or in the operation of equipment which is
discovered twelve (12) months or more after substantial completion of
construction of the Building Shell for the approximately 58,785 square foot
Building, subject to "punch list" items as referred to above.(which applicable
twelve (12)-month period of time is referred to herein as the "Warranty
Period"). Tenant shall promptly notify Landlord in writing of any defect in
construction or the operation of equipment comprising the Building Shell
discovered within the applicable Warranty Period, and promptly thereafter
Landlord shall commence the cure of such defect and complete such cure with
diligence at Landlord's cost and expense. With respect to defects discovered
after the expiration of the applicable Warranty Period, the parties hereto
acknowledge that it is their intention that Tenant have the benefit of any
construction or equipment warranties existing in favor of Landlord that would
assist Tenant in correcting such construction defects and in discharging its
obligations regarding the repair and maintenance of the Premises. Upon request
by Tenant following the expiration of the Warranty Period, Landlord shall inform
Tenant of all written construction and equipment warranties existing in favor of
Landlord which affect the Building Shell. Landlord shall cooperate with Tenant
in enforcing such warranties and in bringing any suit that may be necessary to
enforce liability with regard to any defective construction or operation of
equipment so long as Tenant pays all costs incurred by Landlord so acting.
Landlord makes no other express or implied warranty with respect to the
construction or operation of the Building Shell.
10. Ownership of the Improvements. The Building Shell for the
approximately 58,785 square foot Building which is constructed by Landlord shall
become the property of Landlord upon installation and shall not be removed or
altered by Tenant except as expressly permitted by the Lease. Anything in this
Improvement Agreement or in the Lease to the contrary notwithstanding, in the
event Tenant requests any specialized or supplemental shell improvements be
constructed as part of the Building Shell (e.g. specialized reinforcement of the
roof), Landlord shall have the right, pursuant to the terms set forth below, to
require that Tenant remove such specialized or supplemental shell improvements
from the Building Shell, at Tenant's sole cost, prior to the expiration of the
Lease Term. Within ten (10) days after Tenant's written request, Landlord shall
advise Tenant as to whether Landlord will require any specialized or
supplemental shell improvements to be constructed as part of the Building Shell
to be removed or surrendered at the expiration (or earlier termination) of the
Lease
<PAGE> 82
Term. In the absence of any such request by Tenant, Landlord shall give Tenant
written notice, not less than ninety (90) days prior to the expiration of the
Lease Term, of any specialized or supplemental shell improvements Landlord
requires to be removed. Failure or Landlord to respond timely to Tenant's
request or, otherwise to give timely notice of the specialized or supplemental
shell improvements Landlord requires to be removed at the expiration of the
Lease Term shall constitute Landlord's consent to the surrender of such
specialized or supplemental improvements. Unless Landlord requires that Tenant
remove any such specialized or supplemental shell improvements as provided
above, the same shall, once constructed or installed in the Building Shell,
become the property of Landlord upon termination or expiration of the Lease and
shall remain upon and be surrendered with the Total Project at the termination
or expiration of the Lease. Any such specialized or supplemental shell
improvements that Landlord timely requests be removed from the Building Shell at
the expiration (or earlier termination of the Lease Term) shall be so removed by
Tenant at its sole cost, and Tenant shall repair all damage, if any, to the
Total Project caused by such removal.
11. Arbitration. Any question, dispute or controversy specifically
required to be determined by arbitration pursuant to this Improvement Agreement
shall be determined by arbitration as provided in this paragraph, and shall in
no way delay or affect the commencement of the Lease Term and/or Tenant's
obligation to pay rent pending the outcome of such arbitration. Neither Landlord
or Tenant shall have the right and hereby waive such right, to request or
require arbitration of any other questions, dispute or controversy arising under
the Lease. Arbitrable questions, disputes or controversies shall be arbitrated
according to the following procedure. Either Landlord or Tenant may initiate
arbitration by giving written notice to the other stating an intention to
arbitrate, the issue to be arbitrated, and the relief sought. Such arbitration
shall be conducted pursuant to the provisions of the laws of the State of
California then in force and the procedural rules of the American Arbitration
Association or its successor insofar as said rules of procedure do not conflict
with said laws or this paragraph. Once notice to arbitrate has been given,
Landlord and Tenant shall within ten (10) days select one joint arbitrator, or
if they cannot agree on one joint arbitrator then each shall select an
arbitrator within fifteen (15) days of delivery of said notice and notify the
other party of its selection. The two arbitrators selected shall designate the
third arbitrator forthwith. No arbitrator may be related to or affiliated with
either Landlord or Tenant. The three arbitrators shall convene in the county in
which the Premises are located as soon as practicable and offer Landlord and
Tenant the opportunity to present their cases. If any party fails to appear,
participate or produce evidence in an arbitration proceeding, the arbitrators
may make their award and decision based solely on the evidence actually
presented. The arbitrators shall, by majority vote, make such award and
decisions as is appropriate and in accord with the terms of the Lease and such
award and decision shall be binding upon Landlord and Tenant and enforceable in
a court of law. Said award and decision shall include an award to the prevailing
party of reasonable attorneys' fees and expenses and costs of arbitration. In
the event their party fails to appoint an arbitrator or the two arbitrators fail
to select a third arbitrator within the time required by this paragraph, upon
application of either party the arbitrator shall be appointed by the American
Arbitration Association, or if there be no American Arbitration Association or
it shall refuse to perform this function, then by the then Presiding Judge of
the Superior Court of the State of California for the County in which the
Premises are located.
IN WITNESS WHEREOF, the parties hereto shall have executed this
Improvement Agreement as of the date of the Lease referred to herein.
LANDLORD: TENANT:
ENZO DRIVE WESTERN DIGITAL CORPORATION,
a California limited liability company a Delaware corporation
By: /s/ J.D. Mair By: /s/ Richard Salva
Name: James D. Mair Name: Richard Salva
<PAGE> 83
Title: Member Title: Vice President
<PAGE> 84
EXHIBIT "E"
(Existing Environmental Report)
Phase I Environmental Site Assessment
Unoccupied Parcel
Rue Ferrari and Enzo Drive
San Jose, California
ATC Project No. 62296.0003
Prepared For:
South Bay Development Company
511 Division Street
Campbell, California 95008
Attn.: Mr. Dan Rosenbaum
8 August 1997
<PAGE> 85
EXHIBIT "F"
DEFINITION OF WATER-TIGHT SHELL
A "water tight" shell shall consist of the construction of the
foundation, floor slab, and exterior walls comprising the approximately 58,785
square foot Building (as defined in the Lease to which this Exhibit is attached)
and the placement of the roof and roof membrane thereon. A "water tight" shell
shall not include the construction of specialized or supplemental shell or core
improvements contemplated to be part of the aforementioned Building.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 25, 2000 (except Note 12, as to which the date
is May 8, 2000) in Amendment No. 7 to the Registration Statement (Form S-1 No.
333-31396) and related Prospectus of New Focus, Inc. for the registration of
5,750,000 shares of its common stock.
Our audits also included the financial statement schedule listed in Item 16(b)
of this Registration Statement. Our responsibility is to express an opinion
based on our audits. In our opinion, the financial statement schedule referred
to above, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
San Jose, California
May 15, 2000
