<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 26, 2000
REGISTRATION NO. 333-31396
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NEW FOCUS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
CALIFORNIA
(PRIOR TO REINCORPORATION)
DELAWARE 3674 33-0404910
(AFTER REINCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
(STATE OR OTHER JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
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2630 WALSH AVENUE
SANTA CLARA, CALIFORNIA 95051-0905
(408) 980-8088
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
KENNETH E. WESTRICK
PRESIDENT AND CHIEF EXECUTIVE OFFICER
2630 WALSH AVENUE
SANTA CLARA, CALIFORNIA 95051-0905
(408) 980-8088
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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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. [ ]
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 APRIL 26, 2000
5,000,000
Shares
Newfocus 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 $14.00 and $16.00 per share. We applied to have our common stock quoted
on The Nasdaq Stock Market's National Market under the symbol "NUFO."
The underwriters have an option to purchase a maximum of 750,000 additional
shares to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 7.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS NEW FOCUS
----------------- ----------------- -----------------
<S> <C> <C> <C>
Per Share...................................... $ $ $
Total.......................................... $ $ $
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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
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY.................... 3
RISK FACTORS.......................... 7
SPECIAL NOTE REGARDING FORWARD-
LOOKING STATEMENTS.................. 19
USE OF PROCEEDS....................... 20
DIVIDEND POLICY....................... 20
CAPITALIZATION........................ 21
DILUTION.............................. 22
SELECTED CONSOLIDATED FINANCIAL
DATA................................ 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 24
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PAGE
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BUSINESS.............................. 35
MANAGEMENT............................ 49
CERTAIN TRANSACTIONS.................. 62
PRINCIPAL STOCKHOLDERS................ 66
DESCRIPTION OF CAPITAL STOCK.......... 68
SHARES ELIGIBLE FOR FUTURE SALE....... 70
UNDERWRITING.......................... 72
NOTICE TO CANADIAN RESIDENTS.......... 74
LEGAL MATTERS......................... 75
EXPERTS............................... 75
ADDITIONAL INFORMATION................ 75
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.......................... F-1
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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 intend to
reincorporate in Delaware prior to the completion of this offering. Our
principal executive offices are located at 2630 Walsh Avenue, Santa Clara,
California 95051, and our telephone number is (408) 980-8088. Our web site is
located at "www.newfocus.com." Information contained on our web site does not
constitute a part of this prospectus.
"New Focus," our logo, and "Smart Optics for Networks" are some of the
trademarks, trade names or service marks that we use. This prospectus contains
other trademarks and trade names of our company and other entities.
4
<PAGE> 7
THE OFFERING
Common stock offered.................. 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.
Proposed Nasdaq National Market
symbol................................ NUFO
The total number of outstanding shares of our common stock is as of March
31, 2000, and excludes:
- 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
October 1999 and the 2-for-1 stock split of our common and preferred
stock in February 2000 (all share and per share amounts have been
restated to reflect the stock splits), see note 8 of notes to
consolidated financial statements regarding these stock splits;
- assumes the exercise of warrants to purchase 121,140 shares of common
stock at an exercise price of $1.20 per share prior to this offering;
- reflects the conversion of the 41,939,144 outstanding shares of our
preferred stock into 41,939,144 shares of common stock immediately prior
to the closing of this offering; and
- assumes no exercise of the underwriters' over-allotment option.
5
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
You should be aware that we recently changed our fiscal year end to
December 31. Our previous fiscal years ended March 31. Fiscal year 1999 refers
to the twelve-month period ended March 31, 1999. Fiscal year 1998 refers to the
twelve-month period ended March 31, 1998.
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THREE-MONTH PERIOD
NINE-MONTH PERIOD ENDED ENDED
FISCAL YEAR ENDED MARCH 31, --------------------------- --------------------
------------------------------------- DECEMBER 31, DECEMBER 31, JUNE 30, 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 $ 4,581 $ 9,782
Cost of net revenues............. 5,095 5,946 8,186 9,225 6,625 12,525 2,821 10,786
Gross profit (loss).............. 5,299 4,597 7,296 8,060 5.919 5,576 1,760 (1,004)
Operating income (loss).......... 678 (1,449) 27 (4,666) (3,168) (7,594) (1,372) (12,685)
Net income (loss)................ 457 (1,661) (286) (4,971) (3,375) (7,677) (1,467) (12,461)
Historical net income (loss) per
share:
Basic(1)....................... $ 0.45 $ (1.52) $ (0.25) $ (2.18) $ (1.50) $ (3.11) $ (0.61) $ (2.12)
======= ======= ======= ======= ======= ======= ======= ========
Diluted(1)..................... $ 0.02 $ (1.52) $ (0.25) $ (2.18) $ (1.50) $ (3.11) $ (0.61) $ (2.12)
======= ======= ======= ======= ======= ======= ======= ========
Weighted average shares:
Basic(1)..................... 1,011 1,096 1,148 2,284 2,245 2,468 2,419 5,891
======= ======= ======= ======= ======= ======= ======= ========
Diluted(1)................... 18,768 1,096 1,148 2,284 2,245 2,468 2,419 5,891
======= ======= ======= ======= ======= ======= ======= ========
Pro forma net loss per share:
Basic and diluted(1)........... $ (0.24) $ (0.06) $ (0.26)
======= ======= ========
Weighted average shares(1)..... 32,223 25,184 47,830
======= ======= ========
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MARCH 31, 2000
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED(2)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $12,392 $ 80,987
Working capital........................................... 16,461 85,056
Total assets.............................................. 40,386 108,981
Long term debt, less current portion...................... 315 315
Total stockholders' equity................................ 28,868 97,463
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- -------------------------
(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
$15.00 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.
SALES TO ANY SINGLE CUSTOMER MAY VARY SIGNIFICANTLY FROM QUARTER TO QUARTER,
WHICH MAY CAUSE OUR OPERATING RESULTS TO FLUCTUATE.
Customers in our industry tend to order large quantities of products on an
irregular basis. This means that customers who account for a significant portion
of our net revenue in one quarter may not place any orders in the succeeding
quarter. These ordering patterns may result in significant quarterly
fluctuations in our revenues and operating results.
If current customers do not continue to place significant orders, we may
not be able to replace these orders with orders from new customers. None of our
current customers have any minimum purchase obligations, and they may stop
placing orders with us at any time, regardless of any forecast they may have
previously provided. 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.
7
<PAGE> 10
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.
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
8
<PAGE> 11
in the past year. At March 31, 1999, we had a total of 144 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 an additional 100,000 square feet in Northern California to facilitate
our 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
such additional space on reasonable terms, if at all. 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 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
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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. 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
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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.
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
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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 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
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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.
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
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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 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. We typically purchase our components and materials through
purchase orders and we have no guaranteed supply arrangements with any of these
suppliers. We may fail to obtain these supplies in a timely manner in the
future. We may experience difficulty identifying alternative sources of supply
for certain components used in our products. We would experience further delays
from evaluating and testing the products of these potential alternative
suppliers. Furthermore, financial or other difficulties faced by these suppliers
or significant changes in demand for these components or materials could limit
the availability. Any interruption or delay in the supply of any of these
components or materials, or the inability to obtain these components and
materials from alternate sources at acceptable prices and within a reasonable
amount of time, would impair our ability to meet scheduled product deliveries to
our customers and could cause customers to cancel orders.
IF WE DO NOT ACHIEVE ACCEPTABLE MANUFACTURING YIELDS OR SUFFICIENT PRODUCT
RELIABILITY, OUR ABILITY TO SHIP PRODUCTS TO OUR CUSTOMERS COULD BE DELAYED AND
OUR REVENUES MAY SUFFER.
The manufacture of our products involves complex and precise processes.
Changes in our manufacturing processes or those of our suppliers, or the use of
defective components or materials, could significantly reduce our manufacturing
yields and product reliability. Our manufacturing costs are relatively fixed,
and, thus, manufacturing yields are critical to our results of operations. We
have experienced problems related to product yields in the past, which resulted
in delays of customer shipments and lost 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
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customer qualification process determines whether our manufacturing lines meet
the customers' quality, performance and reliability standards. If there are
delays in qualification of our products, our customers may drop the product from
a long-term supply program, which would result in significant lost revenue
opportunity over the term of that program.
RISKS RELATED TO OUR INTELLECTUAL PROPERTY
WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, WHICH WOULD SERIOUSLY
HARM OUR ABILITY TO USE OUR PROPRIETARY TECHNOLOGY TO GENERATE REVENUE.
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
We cannot assure you that our patent applications will be approved, that any
patents that may issue will protect our intellectual property or that any issued
patents will not be challenged by third parties. Other parties may independently
develop similar or competing technology or design around any patents that may be
issued to us. We cannot be certain that the steps we have taken will prevent the
misappropriation of our intellectual property, particularly in foreign countries
where the laws may not protect our proprietary rights as fully as in the United
States. For a more detailed discussion about our intellectual property, see
"Business -- Intellectual Property."
WE ARE CURRENTLY DEFENDING A CLAIM THAT WE HAVE INFRINGED KAIFA'S INTELLECTUAL
PROPERTY RIGHTS, AND IF WE ARE UNSUCCESSFUL IN DEFENDING THIS CLAIM, WE MAY HAVE
TO EXPEND A SUBSTANTIAL AMOUNT OF RESOURCES TO MAKE OUR PRODUCTS NON-INFRINGING
AND MAY HAVE TO PAY A SUBSTANTIAL AMOUNT IN DAMAGES.
Kaifa Technology, Inc., recently acquired by E-Tek Dynamics, Inc., filed a
complaint against us in December 1999 in the United States District Court 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. These motions are scheduled to be heard on May 5, 2000.
For more information about current legal proceedings, see "Business -- Legal
Proceedings."
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.
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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.
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.
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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, 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 63.4% of
our outstanding common stock based on shares outstanding as of March 31, 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 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;
- 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.
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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.
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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 $68,450,000 from the
sale of the 5,000,000 shares of common stock or approximately $78,900,000 if the
underwriters' over-allotment option is exercised in full, at an assumed initial
public offering price of $15 per share, after deducting underwriting discounts
and commissions and estimated offering expenses payable by us.
We intend to use the net proceeds from this offering primarily for general
corporate purposes, including the repayment of approximately $10.0 million in
debt under a facility which we are currently negotiating, capital expenditures
of approximately $40 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
$15.00 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 90,646 159,236
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 97,463
-------- -------- --------
Total capitalization............................... $ 29,183 $ 29,183 $ 97,778
======== ======== ========
</TABLE>
The total number of outstanding shares of our common stock is as of March
31, 2000, and excludes:
- 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
$15.00 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 $97,183,000 or approximately $1.67 per share. This represents an
immediate increase in net tangible book value of $1.13 per share to existing
stockholders and an immediate dilution in net tangible book value of $13.33 per
share to new investors, or approximately 89% of the assumed initial public
offering price of $15.00 per share. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $15.00
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....................................... 1.13
-----
Pro forma net tangible book value per share after this
offering.................................................. 1.67
------
Dilution in net tangible book value per share to new
investors................................................. $13.33
======
</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 $15.00 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% $ 56,092,000 42.8% $ 1.05
New investors............................... 5,000,000 8.6 75,000,000 57.2 15.00
----------- ----- ------------ -----
Total..................................... 58,342,884 100.0% $131,092,000 100.0%
=========== ===== ============ =====
</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 $1.59 representing dilution
of $13.41 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 June
30, 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
PERIOD
FISCAL YEAR ENDED MARCH 31, ENDED
------------------------------------- DECEMBER 31,
1996 1997 1998 1999 1998
------- ------- ------- ------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net revenues....................... $10,394 $10,543 $15,482 $17,285 $12,544
Cost of net revenues............... 5,095 5,946 8,186 9,225 6,625
------- ------- ------- ------- -------
Gross profit..................... 5,299 4,597 7,296 8,060 5,919
Operating expenses:
Research and development......... 1,724 3,115 3,721 7,379 5,250
Sales and marketing.............. 1,289 1,662 2,193 2,987 2,113
General and administrative....... 1,608 1,269 1,355 2,360 1,724
Deferred compensation............ -- -- -- -- --
------- ------- ------- ------- -------
Total operating expenses..... 4,621 6,046 7,269 12,726 9,087
------- ------- ------- ------- -------
Operating income (loss)............ 678 (1,449) 27 (4,666) (3,168)
Interest expense and other income,
net.............................. (200) (210) (303) (303) (207)
------- ------- ------- ------- -------
Income (loss) before provision for
income taxes..................... 478 (1,659) (276) (4,969) (3,375)
Provision for income taxes......... 21 2 10 2 --
------- ------- ------- ------- -------
Net income (loss).................. $ 457 $(1,661) $ (286) $(4,971) $(3,375)
======= ======= ======= ======= =======
Historical net income (loss) per
share:
Basic............................ $ 0.45 $ (1.52) $ (0.25) $ (2.18) $ (1.50)
======= ======= ======= ======= =======
Diluted.......................... $ 0.02 $ (1.52) $ (0.25) $ (2.18) $ (1.50)
======= ======= ======= ======= =======
Weighted average shares:
Basic.......................... 1,011 1,096 1,148 2,284 2,245
======= ======= ======= ======= =======
Diluted........................ 18,768 1,096 1,148 2,284 2,245
======= ======= ======= ======= =======
Pro forma net loss per share:
Basic and diluted................
Weighted average shares..........
<CAPTION>
NINE-MONTH
PERIOD THREE-MONTH THREE-MONTH
ENDED PERIOD ENDED PERIOD ENDED
DECEMBER 31, JUNE 30, MARCH 31,
1999 1999 2000
------------ -------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net revenues....................... $18,101 $ 4,581 $ 9,782
Cost of net revenues............... 12,525 2,821 10,786
------- ------- --------
Gross profit..................... 5,576 1,760 (1,004)
Operating expenses:
Research and development......... 7,352 1,592 3,609
Sales and marketing.............. 2,982 926 1,100
General and administrative....... 2,704 605 1,424
Deferred compensation............ 132 9 5,548
------- ------- --------
Total operating expenses..... 13,170 3,132 11,681
------- ------- --------
Operating income (loss)............ (7,594) (1,372) (12,685)
Interest expense and other income,
net.............................. (81) (95) 224
------- ------- --------
Income (loss) before provision for
income taxes..................... (7,675) (1,467) (12,461)
Provision for income taxes......... 2 -- --
------- ------- --------
Net income (loss).................. $(7,677) $(1,467) $(12,461)
======= ======= ========
Historical net income (loss) per
share:
Basic............................ $ (3.11) $ (0.61) $ (2.12)
======= ======= ========
Diluted.......................... $ (3.11) $ (0.61) $ (2.12)
======= ======= ========
Weighted average shares:
Basic.......................... 2,468 2,419 5,891
======= ======= ========
Diluted........................ 2,468 2,419 5,891
======= ======= ========
Pro forma net loss per share:
Basic and diluted................ $ (0.24) $ (0.06) $ (0.26)
======= ======= ========
Weighted average shares.......... 32,223 25,184 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 and for the
three-month period ended March 31, 2000, none of our customers accounted for
more than 10% of our net revenues.
We market and sell our telecom products predominantly through our direct
sales force. To date, most of our direct sales have been in North America,
however, we recently began marketing and selling our telecom products
internationally, 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, 30.9% of international sales
were from telecom products and 69.1% were from commercial photonics products.
For the three-month period ended March 31, 2000, 47.6% of international sales
were from telecom products and 52.4% 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 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.
24
<PAGE> 27
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, JUNE 30, 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 61.6 110.3
----- ----- ----- ----- ------
Gross profit..................... 47.1 46.6 30.8 38.4 (10.3)
----- ----- ----- ----- ------
Operating expenses:
Research and development...... 24.0 42.7 40.6 34.8 36.8
Sales and marketing........... 14.2 17.3 16.5 20.2 11.3
General and administrative.... 8.8 13.6 14.9 13.2 14.6
Deferred compensation......... -- -- 0.7 0.2 56.7
----- ----- ----- ----- ------
Total operating
expenses............... 47.0 73.6 72.7 68.4 119.4
----- ----- ----- ----- ------
Operating income (loss).......... 0.1 (27.0) (41.9) (30.0) (129.7)
Interest expense and other
income, net................... (2.0) (1.8) (0.5) 2.0 2.3
----- ----- ----- ----- ------
Net loss......................... (1.9)% (28.8)% (42.4)% (32.0)% (127.4)%
===== ===== ===== ===== ======
</TABLE>
THREE MONTH PERIODS ENDED MARCH 31, 2000 AND JUNE 30, 1999
In 1999, we changed our fiscal year end to December 31. Our previous fiscal
years ended March 31. Our first fiscal quarter in our current fiscal year ended
on March 31, 2000 and our first fiscal quarter in the previous fiscal year ended
on June 30, 1999.
Net Revenues
Net revenues increased from $4.6 million for the three-month period ended
June 30, 1999, of which $450,000, or 9.8% of total net revenues, were from sales
of our telecom products, 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. The increase in net revenues was primarily as a result
of increased sales of our telecom products.
Gross Margins
Gross margin decreased from a positive 38.4% in the three-month period
ended June 30, 1999 to a negative 10.3% in the three-month period ended March
31, 2000. This decrease in gross margin percentage was 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. Increased manufacturing overhead
costs included increases in payroll costs for additional manufacturing
personnel, higher materials costs for manufacturing prototyping, and higher
depreciation costs related to increased investment in plant and equipment.
Research and Development Expenses
Research and development expenses increased from 34.8% of net revenues, or
$1.6 million, in the three-month period ended June 30, 1999 to 36.8% of net
revenues, or $3.6 million, in the three-month
26
<PAGE> 29
period ended March 31, 2000. This increase was primarily due to the costs
related to the development of existing and new telecom products.
Sales and Marketing Expenses
Sales and marketing expenses decreased from 20.2% of net revenues, or
$926,000, in the three-month period ended June 30, 1999 to 11.2% of net
revenues, or $1.1 million, in the three-month period ended March 31, 2000. Sales
and marketing expenses decreased as a percentage of net revenues as a result of
increased sales.
General and Administrative Expenses
General and administrative expenses increased from 13.2% of net revenues,
or $605,000, in the three-month period ended June 30, 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.
Amortization of Deferred Compensation
We recorded amortization of deferred compensation of $5.5 million in the
three-month period ended March 31, 2000, leaving an unamortized balance of $29.7
million on our March 31, 2000 consolidated balance sheet. The expense relates to
options awarded to employees at below deemed fair market value amortized over
the options' vesting periods.
Interest Expense and Other Income, Net
Interest expense and other income totaled a net expense of $95,000 for the
three-month period ended June 30, 1999 compared to other income of $224,000 for
the three-month period ended March 31, 2000. Interest expense aggregated
$103,000 and $5,000 in the three-month period ended June 30, 1999 and the
three-month period ended March 31, 2000, respectively. Interest income totaled
$236,000 in the three-month period ended March 31, 2000. No interest income was
earned in the three-month period ended June 30, 1999.
Income Taxes
Due to our loss position, there was no provision for income taxes for
either the three-month period ended June 30, 1999 or 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.
Gross Margins
Gross margin decreased from 47.1% in fiscal 1998 to 46.6% in fiscal 1999.
The absolute dollar amount of manufacturing costs increased by $1.0 million from
fiscal 1998 to fiscal 1999, due primarily to an increase in net revenues. Gross
margin decreased to 30.8% for the nine-month period ended December 31, 1999. The
decrease in gross margin from fiscal 1999 to the nine-month period ended
December 31, 1999, was primarily due to the costs related to the expansion of
our manufacturing facilities for our telecom products. Increases in
manufacturing overhead costs from fiscal 1999 to the nine-month period ended
December 31, 1999, included increases in payroll costs for additional
manufacturing personnel, higher
27
<PAGE> 30
materials costs for manufacturing prototyping, and higher depreciation costs
related to increased investment in plant and equipment. As we introduce
additional new products and expand our manufacturing capacity to meet
anticipated demand, we expect our gross margins 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 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 14.9% of net
revenues, or $2.7 million, for the nine-month period ended December 31, 1999.
The increase over these periods was primarily due to increased staffing and
associated expenses necessary to manage and support our increased scale of
operations. In addition, the increase in general and administrative costs for
the nine-month period ended December 31, 1999, was also attributable to hiring
and recruiting expenses for personnel associated with our telecom products.
Amortization of Deferred Compensation
We recorded amortization of deferred compensation of $132,000 during the
nine-month period ended December 31, 1999, leaving an unamortized balance of
$689,000 on our December 31, 1999 consolidated balance sheet. The amortization
expense relates to options awarded to employees in all operating expense
categories.
Interest Expense and Other Income, Net
Interest expense and other income, net totalled $303,000 in 1998 and 1999
and $81,000 for the nine-month period ended December 31, 1999. Interest expense
was the largest component of these amounts aggregating to $328,000, $327,000 and
$176,000 for fiscal 1998, 1999 and the nine-month period ended December 31,
1999, respectively. The interest expense for these periods consisted of interest
on debt and capital lease obligations.
Income Taxes
The provision for income taxes of approximately $2,000 for the nine-month
period ended December 31, 1999 and fiscal 1999 consists of current state minimum
taxes. The provision for income taxes of $10,000 for fiscal 1998, reflects
federal alternative minimum taxes and state minimum taxes.
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<PAGE> 31
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.
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<PAGE> 32
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 expense 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
====== ====== ======= ======= ======= ======= ======= ========
STATEMENT OF OPERATIONS DATA:
</TABLE>
<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
-------- --------- -------- --------- -------- --------- -------- ---------
1998 1998 1998 1999 1999 1999 1999 2000
-------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 expense 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>
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<PAGE> 33
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 $449,500, 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 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.
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<PAGE> 34
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,
$1.4 million for the three-month period ended June 30, 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 in the three-month period ended June 30, 1999 was
primarily due to our net loss of $1.5 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,
$910,000 for the three-month period ended June 30, 1999 and $6.8 million for the
three-month period ended March 31, 2000. In all three periods cash was used to
acquire property and equipment.
Cash generated by financing activities was $908,000 in fiscal 1998, $5.1
million in fiscal 1999 and $39.5 million in the nine-month period ended December
31, 1999, $10.8 million in the three-month period ended June 30, 1999 and
$503,000 in the three-month period ended March 31, 2000. Cash generated by
financing activities in fiscal 1998 was primarily due to net borrowings of
$567,000 under our bank lending facilities and proceeds of $400,000 from
promissory notes issued. Cash generated by financing activities in fiscal 1999
was primarily due to proceeds of $4.2 million from the sale of convertible
preferred stock and net borrowings of $750,000 under an equipment loan. Cash
generated by financing activities in the nine-month period ended December 31,
1999, was primarily due to proceeds of $43.7 million from the sales of
convertible preferred stock and $1.2 million under our bank lending facilities,
partially offset by $5.5 million of repayments of our bank lending facilities,
an equipment loan and promissory notes.
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.
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<PAGE> 35
We expect to incur approximately $40 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 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, we entered into negotiations for a senior term loan facility
with Credit Suisse First Boston Corporation. 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.
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
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<PAGE> 36
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.
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.
34
<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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<PAGE> 38
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
36
<PAGE> 39
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 Shipping
(C-Band) - Low loss counts
- Longer reach
- ----------------------------------------------------------------------------------------------
Optical Circulators - Wide wavelength range - Increased channel Beta testing
(L-Band) - Low loss counts
- Longer reach
- ----------------------------------------------------------------------------------------------
Polarization Beam - Low loss - Longer reach Shipping
Combiners - Efficient polarization - Cost-effectiveness
control
- Compact
- ----------------------------------------------------------------------------------------------
Isolator Arrays - Low loss - Longer reach Beta testing
- Reduced part count, - Cost-effectiveness
lower cost per port
- ----------------------------------------------------------------------------------------------
</TABLE>
- Optical circulators. Optical circulators are used for directing optical
signals into the appropriate sections of a fiber amplifier. Current
optical circulators are inadequate for the next generation of fiber
amplifiers because of their limited wavelength range and relatively high
losses. Our optical circulators have fewer parts than available
alternatives, resulting in wide wavelength operation and
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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 - Cost-effectiveness
cooling
- ----------------------------------------------------------------------------------------------
WDM Couplers - Low loss - Longer reach Beta testing
- Cost-effective - Cost-effectiveness
all-fiber product - Enables new services
- ----------------------------------------------------------------------------------------------
Optical Circulators - Wide wavelength range - Increased channel Shipping and
- Low loss counts Beta testing
- Enables new services
- ----------------------------------------------------------------------------------------------
</TABLE>
- DWDM interleavers. DWDM interleavers 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 Shipping
opto-mechanics fiber optic
manufacturing
- ----------------------------------------------------------------------------------------------
Picomotors - Precise positioning - Enables development of Shipping
next-generation
products
- ----------------------------------------------------------------------------------------------
Photodetectors - High speeds - Enables development of Shipping
high data rate
products
- ----------------------------------------------------------------------------------------------
</TABLE>
TECHNOLOGY
Our technical capabilities span several key areas that we believe will
result in rapid development and deployment of our Smart Optics for Networks
products.
Wideband passives technology. As more channels are needed in DWDM networks
to handle more data traffic, the fiber optic elements within the network need to
accommodate more wavelengths and hence more channels. Our wideband passives
technology, 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 or 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:
TELECOM PRODUCTS:
Agilent Technologies
Alcatel USA
Avanex Corporation
Corning Incorporated
Corvis Corporation
JDS Uniphase Corporation
COMMERCIAL PHOTONICS PRODUCTS:
Applied Laser Technology
BFI Optilas
Corning Incorporated
ERIM International
GSI Lumonics
INDECO
Jet Propulsion Laboratory
KLA-Tencor Corporation
Optima Research
Positive Light
Sandia National Laboratories
Schlumberger Technology Corporation
AGILENT TECHNOLOGIES
Agilent Technologies is a global, diversified technology company focusing
on high-growth markets in the communications, electronics, life sciences and
healthcare industries. In 1996, Agilent found that they
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required a low-cost tunable laser for testing long-range optical equipment.
In that year, we began collaborating with Agilent for the development of a
low-cost tunable laser product. From 1996 to 1999, we developed a low-cost
tunable laser according to Agilent's needs. In addition to funding a portion of
this project, Agilent agreed to begin commercial purchase of our low-cost
tunable laser product. We delivered the first product, a tunable laser module
along with the associated control electronics, in the second half of 1999. To
date, we have experienced a great deal of success with our tunable laser modules
as well as with the development of advanced tunable laser products. By
incorporating our products, Agilent has been able 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.
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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.
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.
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We have made, and will continue to make, a substantial investment in
research and development. Our research and development expenses totaled $6.2
million for our fiscal year ended March 31, 1998, $9.1 million for our fiscal
year ended March 31, 1999, $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
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.
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<PAGE> 49
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 Kaifa Technology, Inc., which
was recently acquired by E-Tek Dynamics, Inc., alleging, among other things,
that we have infringed some of their intellectual property rights. We cannot
make any assurances that additional third parties in the future will not claim
infringement by us with respect to our products and our associated technology.
The Kaifa claim and other 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. We anticipate that we will require an additional 100,000
square feet in Northern California to facilitate our growth over the next twelve
months.
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 is 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
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<PAGE> 50
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, Kaifa Technology, Inc., or Kaifa, recently acquired by
E-Tek Dynamics, Inc., filed a complaint against us for patent infringement in
the United States District Court, Northern District of California. In addition
to maintaining its original claim of patent infringement against us, Kaifa has
asserted other claims against us and several of our 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 and attorneys' fees. Discovery
has not begun and we intend to defend the action vigorously. On February 23,
2000, we filed a motion to dismiss Kaifa's complaint and joined one of our
employees named in the complaint in filing another motion to dismiss several of
Kaifa's claims against us. On the same date, our employees named in the
complaint also filed motions to dismiss Kaifa's complaint against them. These
motions are scheduled to be heard on May 5, 2000. If we are unsuccessful in
defending this action, any remedies awarded to Kaifa may harm our business.
Furthermore, defending this action will be costly and divert management's
attention regardless of whether we successfully defend the action.
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 filed a motion to dismiss two of
the causes of action for breach of contract and fraud. A hearing on our motion
to dismiss is scheduled for May 16, 2000. 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 Diego State
University.
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<PAGE> 52
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 Economics from the California Institute of Technology.
John Dexheimer has served as one of our directors since July 1998. Since
January 1999, he has served as President of Lightwave Advisors, Inc., a venture
capital and business development advisor to firms in optical communications,
software and Internet companies. From March 1990 through December 1998, Mr.
Dexheimer was a managing director and partner at C.E. Unterberg Towbin, an
investment banking and venture capital firm, and its predecessor, Unterberg
Harris. Mr. Dexheimer holds a B.S. from the University of Minnesota Institute of
Technology and an M.B.A. from Harvard University.
Dr. Winston S. Fu has served as one of our directors since June 1999. Dr.
Fu is an associate at U.S. Venture Partners, a venture capital firm. Prior to
joining U.S. Venture Partners in August 1997, Dr. Fu was enrolled in the MBA
program at Northwestern University. Prior to that, Dr. Fu served as the director
of product marketing and various other positions at Vixel Corporation. Dr. Fu
holds a B.S. in physics from
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<PAGE> 53
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 have in the past granted
non-employee directors options to purchase our common stock pursuant to the
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<PAGE> 54
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 Smith....................... $133,693(3) $22,917 -- -- -- --
Vice President, General
Manager, Telecom
Laurie Conner(4)................. $119,231(5) $ -- -- -- -- --
Dr. Timothy Day.................. $111,623(6) $18,499 -- -- -- --
Chief Technical Officer, Vice
President, Engineering, Telecom
</TABLE>
- -------------------------
(1) Kenneth Westrick's annual compensation for the twelve months ended December
31, 1999, was $227,093.69.
(2) George Yule's annual compensation for the twelve months ended December 31,
1999, was $182,055.53.
(3) Paul Smith's annual compensation for the twelve months ended December 31,
1999, was $192,758.16.
(4) 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 $144,224.72.
(6) Dr. Day's annual compensation for the twelve months ended December 31,
1999, was $163,173.71.
Option grants in the nine-month period ended December 31, 1999
There were no grants of stock options to any of the executive officers
named in the table above during the nine-month period ended December 31, 1999.
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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 $15.00 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 12,114,593 16,960,407
George Yule........................... 103,334 196,666 1,493,676 2,841,324
Paul G. Smith......................... 133,334 266,666 1,916,676 3,833,324
Laurie Conner......................... 85,000 215,000 1,221,875 3,090,625
Dr. Timothy Day....................... 527,334 162,666 7,845,164 2,352,336
</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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<PAGE> 56
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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<PAGE> 57
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 90 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 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 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 which the later of the following
events occur:
- the effective date of the 2000 Director Option Plan; or
- the date when a person first becomes a non-employee director.
After the initial grant, each non-employee director will automatically be
granted subsequent options to purchase 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 Smith and Dr. Timothy Day to give these officers the
right to purchase both vested and unvested shares and to pay for the shares with
a promissory note. In addition, we amended the stock option agreements to
provide that if the employment or consulting relationship of these officers is
terminated involuntarily within 18 months of a change in control then 50% of
their unvested options shall vest.
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. 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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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 an associate.
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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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 an associate.
LOANS FROM SHAREHOLDER
From April 1991 to September 1997, Dr. Milton Chang loaned us a total of
$1,600,000. On July 7, 1999, we repaid all of the outstanding principal and
interest owing under the promissory note, which totaled approximately
$2,400,000, however, Dr. Chang agreed to loan us up to $2,424,000 upon thirty
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 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.
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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 $80,539, $110,000 and $110,000 for
the nine-month period ended December 31, 1999, fiscal year ended March 31, 1999
and fiscal year ended March 31, 1998, respectively.
On March 3, 1999 and November 1, 1999, we entered into consulting
agreements with John Dexheimer, one of our directors, for services to be
rendered in connection with our Series E, Series F and Series G Preferred Stock
financings. Pursuant to these agreements, Mr. Dexheimer received warrants to
purchase 111,972 shares of Series E Preferred Stock at an exercise price of
$1.20 per share and a cash payment of $618,731.
INDEMNIFICATION
We will enter into indemnification agreements with each of our directors
and officers. These indemnification agreements will require us to indemnify our
directors and officers to the fullest extent
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<PAGE> 67
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> 68
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of March 31, 2000, and as adjusted
to reflect the sale of common stock offered hereby by the following:
- each stockholder known by us to own beneficially more than 5% of our
common stock;
- each of our current executive officers named in the compensation table
above;
- each of our directors; and
- all directors and executive officers as a group.
As of March 31, 2000, there were 53,342,884 shares of our common stock
outstanding, assuming that all outstanding preferred stock has been converted
into common stock and the exercise of warrants to purchase 121,140 shares of
common stock. Except as otherwise indicated, we believe that the beneficial
owners of the common stock listed below, based on the information furnished by
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 March 31, 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)................................... 2,553,654 4.8% 4.4%
Dr. Timothy Day(2)....................................... 1,100,000 2.1 1.9
Dr. Robert A. Marsland(3)................................ 970,000 1.8 1.7
Nicola Pignati(4)........................................ -- -- --
Paul G. Smith(5)......................................... 700,000 1.3 1.2
William L. Potts, Jr.(6)................................. 600,000 1.1 1.0
George Yule(7)........................................... 327,000 * *
Charles Boppell(8)....................................... 174,133 * *
Dr. Milton Chang(9)...................................... 10,471,856 19.6 17.9
John Dexheimer(10)....................................... 262,305 * *
Dr. Winston S. Fu(11).................................... 6,384,614 12.0 10.9
R. Clark Harris(12)...................................... 62,667 * *
Robert Pavey(13)......................................... 6,384,614 12.0 10.9
Dr. David L. Lee(14)..................................... -- -- --
All directors and officers as a group (14 persons)(15)... 29,213,884 54.6 49.9
5% STOCKHOLDERS
Dr. Milton Chang(9)...................................... 9,671,856 18.1 16.6
Morgenthaler Venture Partners V, L.P..................... 10,471,856 19.6 17.9
U.S. Venture Partners(11)................................ 6,384,614 12.0 10.9
London Pacific Life & Annuity Company.................... 4,615,386 8.7 7.9
</TABLE>
- ------------------------
* Denotes less than one percent of the outstanding stock.
(1) Includes 1,366,666 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> 69
(2) Includes 448,167 shares subject to our right of repurchase, which lapses
over time.
(3) Includes 150,167 shares subject to our right of repurchase, which lapses
over time.
(4) Mr. Pignati was appointed as our Chief Operating Officer on April 19, 2000
and granted an option to purchase 500,000 shares of our common stock at an
exercise price of $5.00 per share.
(5) Includes 546,667 shares subject to our right of repurchase, which lapses
over time.
(6) Includes 600,000 shares subject to our right of repurchase, which lapses
over time.
(7) Includes 118,333 shares subject to our right of repurchase, which lapses
over time.
(8) Includes 145,333 shares subject to options, which are exercisable within 60
days of March 31, 2000. Mr. Boppell resigned from our board of directors
effective April 19, 2000.
(9) Includes 800,000 shares held by Chang Partners, a California limited
partnership, of which Dr. Chang is a general partner.
(10) Includes a warrant for 111,972 shares of Series E Preferred Stock and
25,333 shares subject to an option, which is exercisable within 60 days of
March 31, 2000.
(11) Includes 6,384,614 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 an associate of U.S. Venture Partners. Dr. Fu
disclaims beneficial ownership of shares held by this entity, except to the
extent of his pecuniary interest in these entities.
(12) Includes 22,667 shares subject to an option exercisable within 60 days of
March 31, 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 these entities.
(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 193,333 shares subject to options exercisable
within 60 days of March 31, 2000 and 3,230,000 shares subject to our right
of repurchase, which lapses over time.
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<PAGE> 70
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 March 31, 2000, and assuming the conversion of all outstanding shares
of preferred stock into common stock and the exercise of warrants to purchase
121,140 shares of common stock, there were 53,342,884 shares of common stock
outstanding which were held of record by approximately 304 stockholders. There
will be 58,342,884 shares of common stock outstanding, assuming no exercise of
the underwriters' over-allotment option and no exercise of outstanding options
after March 31, 2000, after giving effect to the sale of our common stock in
this offering. In addition to 4,487,212 shares issuable upon exercise of
outstanding options under our 1990 Incentive Stock Option Plan, 1998 Stock Plan
and 1999 Stock Plan, as of January 31, 2000, there are an aggregate of 2,200,000
shares reserved for issuance under our 2000 Stock Plan, 2000 Employee Stock
Purchase Plan and 2000 Director Option Plan. See "Management -- Stock Plans" for
a description of our stock plans.
The holders of our common stock are entitled to one vote per share held of
record on all matters submitted to a vote of the stockholders. Our amended and
restated certificate of incorporation to be filed concurrently with completion
of this offering does not provide for cumulative voting in the election of
directors. Subject to preferences that may be applicable to any outstanding
preferred stock, the holders of our common stock are entitled to receive ratably
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 34,051,438 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
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<PAGE> 71
propose to register any securities under the Securities Act, either for our own
account or for the account of other security holders exercising registration
rights, they are entitled to notice of the registration and are entitled to
include shares of their common stock in the registration. This right is subject
to conditions and limitations, including the right of the underwriters in an
offering to limit the number of shares included in the registration. The holders
of these shares may also require us to file up to two registration statements
under the Securities Act at our expense with respect to their shares of common
stock. We are required to us our best efforts to effect this registration,
subject to conditions and limitations. Furthermore, the holders of these shares
may require us to file additional registration statements on Form S-3, subject
to conditions and limitations. These rights terminate on the earlier of five
years after the effective date of this offering, or when a holder is able to
sell all its shares pursuant to Rule 144 under the Securities 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
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "NUFO."
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our stock.
Future sales of substantial amounts of our common stock in the public market
following this offering or the possibility of 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 58,342,884 shares of common
stock outstanding (assuming conversion of all of the currently outstanding
shares of preferred stock and the exercise of warrants to purchase 121,140
shares of common stock) based on shares outstanding as of March 31, 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 53,342,884 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 53,342,884 shares, 43,863,149 shares will become
eligible for sale 180 days after the effective date subject to Rules 144 and
701.
As of March 31, 2000, there were a total of 4,486,212 shares of common
stock subject to outstanding options under our 1990 Incentive Stock Option Plan,
1998 Stock Plan and our 1999 Stock Plan, 827,747 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
1,570,577 shares of our common stock subject to outstanding options will be
vested. After the effective dates of the registration statements on Form S-8,
shares purchased upon exercise of options granted pursuant to our 1998 Stock
Plan, our 1990 Incentive Stock Option Plan, our 2000 Employee Stock Purchase
Plan and our 2000 Director Option Plan generally would be available for resale
in the public market.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell shares. An
affiliate who has owned shares of our common stock for at least one year would
be entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering; or
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- the average weekly trading volume of the common stock on the Nasdaq Stock
Market's National Market during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to 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.
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Chase Securities
Inc., 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 have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 750,000 additional shares at the initial public offering price
less the underwriting discounts and commissions. The option may be exercised
only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
------------------------------- -------------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts and
Commissions paid by us................... $ $ $ $
Expenses payable by us..................... $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933
relating to, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
issuances pursuant to the exercise of employee stock options outstanding on the
date hereof or pursuant to our dividend reinvestment plan.
Our officers and directors and stockholders have agreed that they will not
offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, enter into a
transaction which would have the same effect, or enter into any swap, hedge or
other arrangement that
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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 have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be required
to make in that respect.
We have applied to list the shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "NUFO".
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on The
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time. The underwriters will deliver a prospectus to all purchasers of shares
in any short sales and such purchasers would be entitled to the same remedies
under the federal securities laws as any other purchaser of shares in the
offering.
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.
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NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions".
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
74
<PAGE> 77
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.
75
<PAGE> 78
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> 79
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 April , 2000
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion of
the Company's reincorporation in the state of Delaware.
/s/ ERNST & YOUNG LLP
San Jose, California
April 24, 2000
F-2
<PAGE> 80
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> 81
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, JUNE 30, MARCH 31,
1998 1999 1999 1999 2000
--------- --------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues....................... $15,482 $17,285 $18,101 $ 4,581 $ 9,782
Cost of net revenues(1)............ 8,186 9,225 12,525 2,821 10,786
------- ------- ------- ------- --------
Gross profit....................... 7,296 8,060 5,576 1,760 (1,004)
Operating expenses:
Research and development(2)...... 6,188 9,115 8,386 1,908 4,144
Less funding received from
research and development
contracts..................... (2,467) (1,736) (1,034) (316) (535)
------- ------- ------- ------- --------
Net research and development..... 3,721 7,379 7,352 1,592 3,609
Sales and marketing(3)........... 2,193 2,987 2,982 926 1,100
General and administrative(4).... 1,355 2,360 2,704 605 1,424
Deferred compensation............ -- -- 132 9 5,548
------- ------- ------- ------- --------
Total operating expenses...... 7,269 12,726 13,170 3,132 11,681
------- ------- ------- ------- --------
Operating income (loss)............ 27 (4,666) (7,594) (1,372) (12,685)
Interest expense................... (328) (327) (176) (103) (5)
Other income, net.................. 25 24 95 8 229
------- ------- ------- ------- --------
Loss before provision for income
taxes............................ (276) (4,969) (7,675) (1,467) (12,461)
Provision for income taxes......... 10 2 2 -- --
------- ------- ------- ------- --------
Net loss...................... $ (286) $(4,971) $(7,677) $(1,467) $(12,461)
======= ======= ======= ======= ========
Historical basic and diluted net
loss per share................... $ (0.25) $ (2.18) $ (3.11) $ (0.61) $ (2.12)
======= ======= ======= ======= ========
Shares used to compute historical
basic and diluted net loss per
share............................ 1,148 2,284 2,468 2,419 5,891
======= ======= ======= ======= ========
Pro forma basic and diluted net
loss per share................... $ (0.24) $ (0.06) $ (0.26)
======= ======= ========
Shares used to compute pro forma
basic and diluted net loss per
share............................ 32,223 25,184 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> 82
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> 83
NEW FOCUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED MARCH NINE MONTHS --------------------------
31, ENDED
------------------ DECEMBER 31, JUNE 30, MARCH 31,
1998 1999 1999 1999 2000
------- ------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss........................................ $ (286) $(4,971) $(7,677) $(1,467) $(12,461)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of fixed assets.................. 475 588 756 167 548
Amortization of intangibles................... 41 10 27 9 11
Amortization of deferred compensation......... -- -- 132 9 5,548
Deferred rent................................. 184 -- (43) (11) 35
Changes in operating assets and liabilities:
Accounts receivable and unbilled
receivables.............................. (1,231) 372 (967) (127) (1,606)
Inventories................................. (1,515) 184 (2,563) (218) (2,531)
Prepaid expenses and other current assets... (78) 93 (102) (41) (670)
Accounts payable............................ 1,137 (884) 3,870 585 1,733
Accrued expenses and accrued interest to
stockholder.............................. 440 697 856 (310) 218
Deferred research and development funding... 250 -- -- -- (250)
------- ------- ------- ------- --------
Net cash used in operating activities........... (583) (3,911) (5,711) (1,404) (9,425)
INVESTING ACTIVITIES
Acquisition of property and equipment........... (396) (1,359) (5,771) (910) (5,463)
Decrease (increase) in other assets............. 17 2 24 -- (1,290)
------- ------- ------- ------- --------
Net cash used in investing activities........... (379) (1,357) (5,747) (910) (6,753)
FINANCING ACTIVITIES
Proceeds from notes payable to stockholders..... 400 200 -- -- --
Proceeds from issuance of preferred stock....... -- 4,217 43,686 12,568 --
Proceeds from equipment loan.................... -- 800 -- -- --
Proceeds from capital lease obligations......... -- 35 -- -- --
Payments on notes payable....................... (19) (21) (2,305) -- --
Payments on bank loan........................... (828) (1,772) (3,000) (1,800) --
Proceeds from bank loans........................ 1,395 1,755 1,245 -- --
Payments on equipment loan...................... -- (50) (195) -- (57)
Payments under capital lease obligations........ (55) (36) (12) (3) --
Proceeds from exercise of stock options......... 16 188 55 41 560
Repurchase of common stock...................... (1) (193) -- -- --
------- ------- ------- ------- --------
Net cash provided by financing activities....... 908 5,123 39,474 10,806 503
------- ------- ------- ------- --------
Increase (decrease) in cash..................... (54) (145) 28,016 8,492 (15,675)
Cash at beginning of period..................... 250 196 51 (5) 28,067
------- ------- ------- ------- --------
Cash at end of period........................... $ 196 $ 51 $28,067 $ 8,487 $ 12,392
======= ======= ======= ======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest.......................... $ 174 $ 155 $ 188 $ 103 $ 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 $ -- $ -- $ --
Stock issued in business acquisition............ $ -- $ -- $ -- $ -- $ 208
</TABLE>
See accompanying notes.
F-6
<PAGE> 84
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 2000 AND JUNE 30, 1999 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> 85
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 2000 AND JUNE 30, 1999 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.
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 June 30, 1999 and
March 31, 2000 were approximately $316,000, $342,000, $257,000, $40,000 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 June 30, 1999 and
March 31, 2000 were $6,188,000, $9,115,000, $8,386,000, $1,908,000 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, $316,000 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 June 30, 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.
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
F-8
<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, 2000 AND JUNE 30, 1999 IS UNAUDITED)
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 June 30, 1999 and March 31, 2000.
Interim Financial Information
The interim financial information at March 31, 2000 and for the three-month
periods ended June 30, 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 CREDIT RISK
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 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.
F-9
<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, 2000 AND JUNE 30, 1999 IS UNAUDITED)
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.
Equipment Loan Payable
On February 9, 1999, the Company entered into an agreement for an equipment
loan facility for a maximum of $2,000,000, which expired on December 31, 1999.
The loan facility charges interest at 8.4% per annum and has a termination
payment for 10% of the original principal amount. Certain equipment of the
Company secures the loan facility. Under the terms of this agreement the Company
is restricted from paying cash dividends, until the time it has completed a
qualified initial public offering of not less than $20,000,000. At March 31,
1999, the Company had borrowed $800,000 under this loan facility of which
$750,000 and $598,000, and $543,000 was outstanding at March 31, 1999, December
31, 1999, and March 31, 2000 respectively.
F-10
<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, 2000 AND JUNE 30, 1999 IS UNAUDITED)
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
June 30, 1999 and March 31, 2000 respectively. These amounts are net of
$230,000, $2 55,000, $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 June 30, 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.
Litigation
On December 8, 1999, Kaifa Technology, Inc., recently acquired by E-Tek
Dynamics, Inc., filed a complaint against the Company for patent infringement in
the United States District Court, 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
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. These motions are scheduled to be heard on May 5, 2000. The Company
intends to defend the action vigorously. If the Company is unsuccessful in
defending this action,
F-11
<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, 2000 AND JUNE 30, 1999 IS UNAUDITED)
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>
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
F-12
<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, 2000 AND JUNE 30, 1999 IS UNAUDITED)
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> 91
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 2000 AND JUNE 30, 1999 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> 92
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 2000 AND JUNE 30, 1999 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> 93
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 2000 AND JUNE 30, 1999 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 June 30,
1999 and March 31, 2000 the Company amortized $132,000, $9,000 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> 94
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 2000 AND JUNE 30, 1999 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> 95
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 2000 AND JUNE 30, 1999 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> 96
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 2000 AND JUNE 30, 1999 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
JUNE 30, 1999
-----------------------------
TELECOM CPG TOTAL
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues from external customers............................ $ 450 $ 4,131 $ 4,581
Depreciation expense........................................ $ 51 $ 116 $ 167
Operating segment profit (loss)............................. $(1,822) $ 459 $(1,363)
</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, JUNE 30, MARCH 31,
1999 1999 1999 2000
----------- ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
LOSS
Total loss for reportable segments...... $(4,666) $(7,462) $(1,363) $ (7,137)
Other income (expense), net............. (303) (81) (95) 224
Amortization of deferred compensation... -- (132) (9) (5,548)
------- ------- ------- --------
Loss before income taxes................ $(4,969) $(7,675) $(1,467) $(12,461)
======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
REVENUES REVENUES REVENUES REVENUES
GEOGRAPHIC INFORMATION ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
United States........................... $12,445 $13,214 $ 3,363 $ 6,886
Asia.................................... 2,247 1,629 554 567
Europe.................................. 2,593 3,258 664 2,328
------- ------- ------- --------
Consolidated total.................... $17,285 $18,101 $ 4,581 $ 9,782
======= ======= ======= ========
</TABLE>
F-19
<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, 2000 AND JUNE 30, 1999 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, JUNE 30, 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) $(1,467) $(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 2,419 9,384
Less shares subject to repurchase........ -- -- -- -- (3,493)
------ ------- ------- ------- --------
Denominator for basic and diluted net
loss per share......................... 1,148 2,284 2,468 2,419 5,891
------ ------- ------- ------- --------
Conversion of preferred stock (pro
forma)................................. 29,755 22,765 41,939
------- ------- --------
Denominator for pro forma basic and
diluted net loss per share............. 32,223 25,184 47,830
======= ======= ========
Historical basic and diluted net loss per
share.................................. $(0.25) $ (2.18) $ (3.11) $ (0.61) $ (2.12)
====== ======= ======= ======= ========
Pro forma basic and diluted net loss per
share.................................. $ (0.24) $ (0.06) $ (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, 41,139,000 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 June 30, 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> 98
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 2000 AND JUNE 30, 1999 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 us 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. Under the terms of the Directors' Plan, as of the
initial public offering, each non-employee Director, and each person who is
thereafter elected or appointed for the first time to be a non-employee, or
Director, be granted an option to purchase 25,000 shares of common stock. In
addition, upon the date of each annual stockholders' meeting subsequent to the
date of each non-employee 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. 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> 99
NEW FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 2000 AND JUNE 30, 1999 IS UNAUDITED)
On February 28, 2000, the Company issued 116,000 shares of the Company's
common stock in connection with a business acquisition. The acquisition was
accounted for as a purchase and resulted in $208,000 in intangible assets and
$1.3 million in deferred compensation.
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 negotiations for a senior term loan
facility with Credit Suisse First Boston Corporation. The facility will provide
for a maximum borrowing of $10 million 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 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.
F-22
<PAGE> 100
Newfocus Logo
<PAGE> 101
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........................................ $ 25,576
NASD filing fee............................................. 9,700
Nasdaq National Market listing fee.......................... 90,000
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...................................... 41,724
----------
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> 102
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> 103
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.
II-3
<PAGE> 104
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1** Amended and Restated Certificate of Incorporation of the
Registrant
3.2** Bylaws of the Registrant
4.1 Form of stock certificates
4.2** Warrant to Purchase Series D Preferred Stock dated February
1999, between Registrant and Venture Lending and Leasing,
see Exhibit 10.15.
4.3** Warrant to Purchase Series E Preferred Stock dated February
9, 2000, between Registrant and John Dexheimer.
4.4** Warrant to Purchase Series E Preferred stock dated February
9, 2000, between Registrant and Pamela York.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1** Form of Indemnification Agreement between the Registrant and
each of its directors and officers
10.2** 2000 Stock Plan
10.3** 2000 Employee Stock Purchase Plan
10.4** 2000 Director Option Plan and form of agreement thereunder
10.5** Form of Amendment to New Focus, Inc. Non Statutory Stock
Option Agreement, Restated Stock Purchase Agreement,
including Security Agreement and Promissory Note between
Registrant and Kenneth E. Westrick, Paul Smith, Bao-Tong Ma,
George Yule, Robert Marsland, Timothy Day, William L. Potts,
Jr., 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
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 will request confidential treatment with respect to certain
portions of this Exhibit. The omitted portions will be separately filed with
the Commission.
* To be filed by amendment.
** Previously filed.
II-4
<PAGE> 105
(b) FINANCIAL STATEMENT SCHEDULES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
<TABLE>
<CAPTION>
ADDITIONS-
BALANCES AT CHARGED TO BALANCES
BEGINNING COSTS AND DEDUCTIONS- AT END OF
OF PERIOD EXPENSES WRITE-OFFS PERIOD
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Year ended March 31, 1998...................... $ 70 $ 63 -- $$133
Year ended March 31, 1999...................... $133 $ 40 $(38) $135
Nine months ended December 31, 1999............ $135 $ 39 $(14) $160
</TABLE>
Schedules other than that listed above have been omitted since they are not
required or are not applicable or the required information is shown in the
financial statements or related notes.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by a director,
officer or controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 106
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 4 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 26th day of April, 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. 4 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 April 26, 2000
- -------------------------------------------------------- Officer and Director
Kenneth E. Westrick (Principal Executive
Officer)
* Chief Financial Officer April 26, 2000
- -------------------------------------------------------- (Principal Financial and
William L. Potts, Jr. Accounting Officer)
Director April 26, 2000
- --------------------------------------------------------
Dr. David L. Lee
* Director April 26, 2000
- --------------------------------------------------------
Dr. Milton Chang
* Director April 26, 2000
- --------------------------------------------------------
John Dexheimer
* Director April 26, 2000
- --------------------------------------------------------
Dr. Winston Fu
* Director April 26, 2000
- --------------------------------------------------------
R. Clark Harris
* Director April 26, 2000
- --------------------------------------------------------
Robert D. Pavey
*By: /s/ KENNETH E. WESTRICK
------------------------------------------------
Kenneth E. Westrick
Attorney-in-fact
</TABLE>
II-6
<PAGE> 107
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1** Amended and Restated Certificate of Incorporation of the
Registrant
3.2** Bylaws of the Registrant
4.1 Form of stock certificates
4.2** Warrant to Purchase Series D Preferred Stock dated February
1999, between Registrant and Venture Lending and Leasing,
see Exhibit 10.15.
4.3** Warrant to Purchase Series E Preferred Stock dated February
9, 2000, between Registrant and John Dexheimer.
4.4** Warrant to Purchase Series E Preferred stock dated February
9, 2000, between Registrant and Pamela York.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1** Form of Indemnification Agreement between the Registrant and
each of its directors and officers
10.2** 2000 Stock Plan
10.3** 2000 Employee Stock Purchase Plan
10.4** 2000 Director Option Plan and form of agreement thereunder
10.5** Form of Amendment to New Focus, Inc. Non Statutory Stock
Option Agreement, Restated Stock Purchase Agreement,
including Security Agreement and Promissory Note between
Registrant and Kenneth E. Westrick, Paul Smith, Bao-Tong Ma,
George Yule, Robert Marsland, Timothy Day, 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.
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 will request confidential treatment with respect to certain
portions of this Exhibit. The omitted portions will be separately filed with
the Commission.
* To be filed by amendment.
** Previously filed.
<PAGE> 1
EXHIBIT 4.1
NUF
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
COMMON STOCK
THIS CERTIFICATE IS TRANSFERABLE
IN BOSTON, MA AND NEW YORK, NY
CUSIP 644383 10 1
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS IS TO CERTIFY THAT
is the owner of
fully paid and non-assessable shares, $.001 par value, of the COMMON STOCK of
NEW FOCUS, INC.
(hereinafter called the "Corporation"), transferable on the books of the
Corporation in person, or by duly authorized attorney, upon surrender of this
certificate properly endorsed. This certificate is not valid until countersigned
by a Transfer Agent and registered by a Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
SECRETARY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
EQUISERVE TRUST COMPANY, N.A.
TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE> 2
NEW FOCUS, INC.
The Company will furnish without charge to each stockholder who so requests, a
copy of the designations, powers, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights. Any such requests may be addressed to the Secretary of the Corporation.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT-D - ______________________ Custodian ____________________
(Cust) (Minor)
under Uniform Gifts to Minors
Act _________________________________________________
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, _______________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
______________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS,
INCLUDING ZIP OR POSTAL CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
<PAGE> 3
_________________________________________________________________________ Shares
of the Common Stock represented by the within certificate, and do hereby
irrevocably constitute and appoint Attorney to transfer the said stock on the
books of the within named Corporation with full power of substitution in the
premises.
Dated ___________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
________________________________________________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE
17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR
DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO
THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
<PAGE> 1
EXHIBIT 5.1
OPINION OF WILSON SONSINI GOODRICH & ROSATI
April 26, 2000
New Focus, Inc.
2630 Walsh Avenue
Santa Clara, CA 95051-0905
RE: REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed by you with
the Securities and Exchange Commission on March 1, 2000 (Registration No.
333-31396), as amended (the "Registration Statement"), in connection with the
registration under the Securities Act of 1933, as amended, of up to 5,750,000
shares of your Common Stock, $0.001 par value per share (the "Shares"). The
Shares include an over-allotment option granted to the underwriters of the
offering to purchase up to 750,000 shares. We understand that the Shares are to
be sold to the underwriters of the offering for resale to the public as
described in the Registration Statement. As your legal counsel, we have examined
the proceedings taken, and are familiar with the proceedings proposed to be
taken, by you in connection with the sale and issuance of the Shares to be sold
by you.
It is our opinion that upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, including the proceedings being taken in order to permit such
transaction to be carried out in accordance with applicable state securities
laws, the Shares, when issued and sold in the manner described in the
Registration Statement, will be duly authorized, validly issued, fully paid and
non-assessable.
We are members of the Bar of the State of California only and express no
opinion as to any matter relating to the laws of any jurisdiction other than the
laws of the State of California and the federal laws of the United States.
Without limiting the foregoing, we express no opinion as to the securities laws
of the State of Delaware.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendments thereto.
Very truly yours,
/s/ WILSON SONSINI GOODRICH & ROSATI, P.C.
------------------------------------------
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE> 1
EXHIBIT 10.16
SHENZHEN REAL ESTATE SALES AND PURCHASE CONTRACT
Shen Fu Bao (_____) Fang Yu Mai Zi ( ) No. ______
Seller ("Party A"): SHENZHEN LIBAOYI INDUSTRY DEVELOPMENT CO., LTD.
Address: NO. 2 FENG HUANG ROAD, FUTIAN FREE TRADE ZONE,
SHENZHEN, PEOPLE'S REPUBLIC OF CHINA ("PRC")
Legal representative: Wang Teng Qin; position: GENERAL MANAGER
I.D. Card/Passport No.: 230106581025042
Appointed agent: BLANK ; nationality/ancestral home: BLANK
telephone: BLANK
I.D. Card/Passport No.: BLANK
Address: BLANK
Buyer ("Party B") BLANK
Name: BLANK ; nationality/ancestral home: BLANK
telephone: BLANK
I.D. Card/Passport No.: BLANK
Address: BLANK
Name of company or
organization: NEW FOCUS INC. (FOR ITSELF AND ON BEHALF OF ITS
WHOLLY FOREIGN-OWNED ENTERPRISE TO BE ESTABLISHED
IN THE FUTIAN FREE TRADE ZONE, SHENZHEN, PRC)
Address: 2630 WALSH AVENUE, ; telephone: _________________
SANTA CLARA, CA, 95051, USA
Legal representative; Bob Ma; position: General Manager
I.D. Card/Passport No.: 700848160
Appointed agent: BLANK ; nationality/ancestral home: BLANK
<PAGE> 2
telephone: BLANK
I.D. Card/Passport No.: BLANK
Address: BLANK
2
<PAGE> 3
Article 1. This Contract is made in accordance with the relevant laws and
regulations of the People's Republic of China and the Regulations for the
Assignment of Real Estate in the Shenzhen Special Economic Zone.
Article 2. Having entered into a Contract for the Grant of Land Use Rights (ref.
Shen Bao Shui Tu Di Zi ( ) No. _________ with the Shenzhen Futian Bonded Zone
Administration (the "Municipal Administration"), Party A has obtained the land
use rights to Lot No. B105-93(2) in the Shenzhen Futian Bonded Zone with an area
of 9,520.8 square meters. The purpose of the land is INDUSTRIAL USE. The land
use term runs from 29 SEPTEMBER 1997 to 28 SEPEMBER 2047, a total of 50 years.
Ownership of the land vests in the People's Republic of China. The number of the
Real Estate Title Certificate obtained for the land is (NOT YET APPLIED).
Having obtained approval, Party A is constructing real estate named WANLI
INDUSTRIAL BUILDING on the said land. The principal building is INDUSTRIAL in
nature and has a FRAMEWORK structure of 7 floors. Party A is currently carrying
out approved pre-sale of the real estate. The number of its Real Estate Pre-Sale
Permit is BLANK and the number of its Permit for Foreign Sale of Commodity
Residences is BLANK. (PLEASE SEE THE ATTACHED SUPPLEMENTARY PROVISIONS)
Article 3. Party B shall purchase from Party A Unit BLANK, Building/Block BLANK
of the said real estate. The said unit is located on the 5TH TO 7TH floor and
has a floor area of 10,796.31 square meters. (PLEASE SEE THE ATTACHED
SUPPLEMENTARY PROVISIONS)
Article 4. The Parties agree that the selling price of the said real estate
shall be RMB2,827.95/square meter (of floor area), totaling 30,526,985
Yuan Renminbi Exactly.
Article 5. Party A has appointed BLANK as pre-sale collection agent and escrow
and BLANK as the project's supervising engineers, and warrants that it will
perform the pre-sale moneys escrow agreement executed among the three parties.
Party B agrees to remit the pre-sale moneys set forth in Schedule BLANK to the
said collection agent. The name and number of the pre-sale collection agent's
account are BLANK and BLANK, respectively. (PLEASE SEE THE ATTACHED
SUPPLEMENTARY PROVISIONS)
Article 6. If Party B fails to make timely payment in accordance with Schedule
BLANK as specified in Article 5 hereof, Party A shall have the right to claim
liquidated damages from Party B. If the amount of the unit's price paid by Party
B is 50 percent or more of the amount payable, Party B shall pay to Party A
liquidated damages for late payment at the rate of 0.05 percent of the overdue
amount of the unit's price for each day of delay. If the amount of the unit's
price paid by Party B is less than 50 percent of the amount payable, Party A may
claim liquidated damages from Party B at the rate of BLANK percent of the total
price of the unit.
If the delay exceeds 60 days, Party A shall have the right to unilaterally
3
<PAGE> 4
terminate this Contract. In such case Party A shall, within 10 days, deduct the
liquidated damages specified in the preceding paragraph from the real estate
price already paid by Party B and refund the balance to Party B, together with
written notification. (PLEASE SEE THE ATTACHED SUPPLEMENTARY PROVISIONS)
Article 7. Party A must deliver the real estate provided for herein, after it
has been accepted, to Party B for its use on BLANK. (PLEASE SEE THE ATTACHED
SUPPLEMENTARY PROVISIONS)
Article 8. If Party A fails to deliver the real estate to Party B for its use at
the time specified in the preceding Article, it shall pay liquidated damages to
Party B equal to 0.05 percent of the above-mentioned real estate price for each
day of delay.
If the delay exceeds 30 days, Party B shall have the right to unilaterally
terminate the Contract by written notice to Party A, in which case Party A
shall, within 10 days, refund to Party B the entire amount paid by Party B
(without interest) and pay liquidated damages at the rate of 10 percent of the
price of the real estate. If Party B does not terminate the Contract, Party A
shall pay liquidated damages to Party B equal to 0.03 percent of the
above-mentioned said real estate price for each day of delay. (PLEASE SEE THE
ATTACHED SUPPLEMENTARY PROVISIONS)
Article 9. If the Real Estate Sales and Purchase Contract becomes
non-performable or only partially performable as a result of an event of force
majeure such as a fire, earthquake, flood or war, etc., Party A must obtain
documentary evidence from the relevant municipal authority of Shenzhen.
Article. 10. The real estate sold by Party A may be delivered to Party B for its
use only after the entire construction project has been completed in accordance
with the engineering drawings approved by the Futian Bonded Zone Administration
and accepted by the Shenzhen municipal authority in charge of construction
projects, and the road access and water and power supply have been connected,
and the Certificate of Acceptance Upon Completion of Construction has been
obtained.
Article 11. If the actual floor area of the real estate delivered is larger or
smaller than the area provided for herein, Party A or Party B shall have the
right to demand that the other Party make up or refund the portion of the
purchase price which corresponds to the difference in area. If the finishing of
the real estate delivered is not according to the finishing standards stipulated
in Schedule 3 hereto, Party B shall have the right to demand compensation from
Party A for the portion of the price which corresponds to the difference in the
level of the finishing. (PLEASE SEE THE ATTACHED SUPPLEMENTARY PROVISIONS)
Article 12. Party A shall issue a receipt for full payment of the unit's
purchase price after Party B has paid the same in full. (PLEASE SEE THE ATTACHED
SUPPLEMENTARY PROVISIONS)
4
<PAGE> 5
Article 13. BLANK shall be responsible for management of the real estate for the
period between the delivery of the real estate and the appointment of a
management organization for the residential area by the owner's committee. Party
B shall abide by the relevant property management regulations. Party A gives a
one-year maintenance warranty from the date of delivery of the real estate to
Party B. If the real estate suffers damage not attributable to Party A, Party A
may assist with repairs, but the repair expenses shall be borne by Party B
itself.
(PLEASE SEE THE ATTACHED SUPPLEMENTARY PROVISIONS)
Article 14. Within 150 days after obtaining the Certificate of Acceptance Upon
Completion of Construction, Party A shall notify Party B that they should
jointly apply to the Shenzhen Futian Bonded Zone Administration for registration
of the real estate transfer. After the transfer of title to the real estate has
been registered and a certificate issued, Party B shall legally have the rights
of occupation, use, receipt of earnings and disposal. (PLEASE SEE THE ATTACHED
SUPPLEMENTARY PROVISIONS)
Article 15. Each of the Parties shall bear its own taxes and fees pertaining to
the obtaining of the Real Estate Title Certificate, in accordance with state,
provincial and municipal regulations.
Article 16. If Party B is unable to obtain the Real Estate Title Certificate
within the statutory period due to the fault of Party A, Party A shall pay rent
to Party B at the rent guidance rate specified by the authority in charge of
leasing of premises. Such rent shall be payable from the 180th day of the date
on which Party A obtains the Certificate of Acceptance Upon Completion of
Construction until the date on which the Futian Bonded Zone Administration
issues the Real Estate Title Certificate. (PLEASE SEE THE ATTACHED SUPPLEMENTARY
PROVISIONS)
Article 17. Lot No. BLANK on which the real estate sold by Party A is located as
well as the public facilities are owned in common by the real estate title
owners within that area (except where agreed otherwise). Party B shall bear
obligations according to the area apportioned to the land occupied by it.
(PLEASE SEE THE ATTACHED SUPPLEMENTARY PROVISIONS)
Article 18. Party A reserves for itself the rights and interests in the projects
set forth in Schedule 4. (PLEASE SEE THE ATTACHED SUPPLEMENTARY PROVISIONS)
Article 19. Party B shall pay land use fees in accordance with relevant
municipal regulations after it has obtained title to the real estate.
Article 20. When title to the real estate passes, Party A shall deliver a
photocopy of the Contract for the Grant of Land Use Rights to Party B. The
rights and obligations provided for in the Contract for the Grant of Land Use
Rights shall pass simultaneously with the passing of title.
Article 21. Party A shall file this Contract with the Shenzhen Futian Bonded
5
<PAGE> 6
Zone Administration for registration within seven days of its entry into effect.
Article 22. The Parties may stipulate other terms in Schedule 5. Schedule 5
which must be signed and sealed by the Parties.
Article 23. Disputes arising in connection with this Contract shall be resolved
through consultations between the Parties. If consultations are unsuccessful,
the dispute shall be resolved by one of the following methods (check the box of
the method selected; only one method may be selected): degrees1/4 application to
the Shenzhen Arbitration Commission for arbitration; degrees1/4 institution of
legal proceedings in a People's Court; degrees1/4 application to a Chinese
international economic and trade arbitration institution for arbitration
(applicable only if one or both Parties are organizations or individuals outside
China). (PLEASE SEE THE ATTACHED SUPPLEMENTARY PROVISIONS)
Article 24. Schedules 1, 2, 3, 4 and 5 and the Map attached hereto all form part
of this Contract. Text entered in the Contract with a fountain pen shall be as
valid as the typed and printed text. (PLEASE SEE THE ATTACHED SUPPLEMENTARY
PROVISIONS)
Article 25. This Contract, together with Schedules 1, 2, 3, 4 and 5 and the Map,
has a total of BLANK pages and is made in BLANK, equally authentic copies, of
which Party A, Party B, the notary public's office (in the case of a real estate
sales and purchase contract with a foreign element) and the Shenzhen Futian
Bonded Zone Administration shall each hold one copy. (PLEASE SEE THE ATTACHED
SUPPLEMENTARY PROVISIONS)
Article 26. This Contract shall enter into effect on the date of execution by
both Parties. If one or both of the Parties are organizations or individuals
outside China, this Contract shall enter into effect on the date of notarization
by a Shenzhen notary public's office.
Party A (affix signature/seal): Party B (affix signature/seal):
SHENZHEN LIBAOYI INDUSTRY NEW FOCUS INC.
DEVELOPMENT CO., LTD. (FOR ITSELF AND ON BEHALF OF ITS
WHOLLY FOREIGN-OWNED ENTERPRISE TO
BE ESTABLISHED IN FUTIAN FREE TRADE
ZONE, SHENZHEN)
By: /s/ WANG BAO CHENG By: /s/ BOB MA
--------------------------------- ---------------------------------
Name: Wang Bao Cheng Name: Bob Ma
Title: Chairman Title: General Manager
Nationality: China Nationality: USA
6
<PAGE> 7
Agent of Party A Agent of Party B
(affix signature/seal): (affix signature/seal):
Date: 6 April 2000
Certification unit:
Certifying representative (affix seal):
Date:
7
<PAGE> 8
SCHEDULE 1
Payment of the unit's price in a lump sum during the construction period:
A BLANK percent discount on the sales price is available for full payment if the
unit's price is paid in full at the time of execution of this Contract, in which
case the total price will be BLANK Yuan Renminbi/Hong Kong Dollars Exactly.
<PAGE> 9
SCHEDULE 2
Payment of the unit's price in BLANK installments during the construction
period:
1. BLANK percent of the entire price of the unit, i.e. BLANK Yuan
Renminbi/Hong Kong Dollars, shall be paid within BLANK days of the date
of execution.
2. BLANK percent of the entire price of the unit, i.e. BLANK Yuan
Renminbi/Hong Kong Dollars, shall be paid by BLANK.
3. BLANK percent of the entire price of the unit, i.e. BLANK Yuan
Renminbi/Hong Kong Dollars, shall be paid by BLANK.
4. BLANK percent of the entire price of the unit, i.e. BLANK Yuan
Renminbi/Hong Kong Dollars, shall be paid by BLANK.
5. BLANK percent of the entire price of the unit, i.e. BLANK Yuan
Renminbi/Hong Kong Dollars, shall be paid by BLANK; or mortgage loan
procedures shall be duly carried out with the relevant bank before that
date and payment made within the prescribed time limit.
<PAGE> 10
SCHEDULE 3
Finishing standards:
1. Exterior walls: lath face bricks
building floors: first floor: wearproof
tiles; other floors: cement plaster
2. Interior walls: latex paint
3. Ceilings: corridors: false ceilings; rooms: white
latex paint
4. Floors: first floor: wearproof tiles; other floors:
cement plaster
5. Doors and windows: doors: fire doors windows: white aluminum
alloy frames; green panes
6. Kitchen: /
7. Bathrooms: each unit has separate ladies' and gents'
toilets
8. Balcony: /
9. Elevators: two 3-tonne goods elevators and two 2-tonne
goods elevators
10. Miscellaneous: (a) each unit has a fire door
(b) automatic sprinkler system, fire hydrant
system
<PAGE> 11
SCHEDULE 4
The rights and interests in the projects set forth below shall vest in Party A:
1. PARTY A AND PARTY B SHALL JOINTLY OWN ALL THE COMMON FACILITIES OF WANLI
INDUSTRIAL BUILDING. THEIR SHARE OF INTEREST IN SUCH FACILITIES SHALL BE
PROPORTIONAL TO THE AMOUNT OF GROSS FLOOR AREAS OF WANLI INDUSTRIAL
BUILDING OWNED BY THEM RESPECTIVELY.
2. BLANK
3. BLANK
4. BLANK
5. BLANK
<PAGE> 12
SCHEDULE 5
Stipulations of the Parties: PLEASE SEE THE ATTACHED SUPPLEMENTARY PROVISIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Party A (affix signature/seal): Party B (affix signature/seal):
Date:
<PAGE> 13
MAP
Floor plan:
<PAGE> 14
SCHEDULE 5
SUPPLEMENTARY PROVISIONS TO THE SHENZHEN REAL ESTATE SALES AND PURCHASE CONTRACT
THESE SUPPLEMENTARY PROVISIONS TO THE SHENZHEN REAL ESTATE SALES AND PURCHASE
CONTRACT ("SUPPLEMENTARY PROVISIONS") are formulated by Party A and Party B to
supplement the Shenzhen Real Estate Sales and Purchase Contract ("CONTRACT") to
which these Supplementary Provisions is attached.
1. DEFINITIONS
In this Contract and these Supplementary Provisions, Party A and Party B shall
be individually referred to as a "PARTY" and together as the "PARTIES". In
addition, the terms below shall have the following meanings ascribed to them:
1.1 "AFFILIATE" means any company which, through ownership of voting stock
or otherwise, directly or indirectly, is controlled by, under common
control with, or in control of, a Party; the term "control" meaning
ownership of fifty percent (50%) or more of the voting stock of a
company, or the power to appoint or elect a majority of the directors of
a company, or the power to direct the management of a company.
1.2 "BUILDING" means Wanli Industrial Building located in FFTZ.
1.3 "CANCELLATION DATE" means 30 June 2000 or such later date as mutually
agreed in writing by the Parties.
1.4 "DELIVERY DATE" means the date on which Party A delivers the Leased
Portion to Party B in accordance with the Tenancy Agreement or a later
date as agreed in writing by the Parties, being the date on which vacant
possession of the Transfer Portion is delivered to Party B WFOE (or
Party B, as the case may be).
1.5 "ESCROW AGENT" means the Bank of East Asia, Shenzhen Branch or any other
bank operated in Shenzhen as mutually agreed in writing by the Parties.
1.6 "ESCROW AGREEMENT" means an escrow agreement to be entered into among
the Parties and the Escrow Agent in accordance with Article 2.2 of these
Supplementary Provisions.
1.7 "ESCROWED FUNDS" means US$3,677,950 (i.e. US$8,500,000 x 43.27%) which
shall be deposited by Party B with the Escrow Agent pursuant to Article
2.3 of these Supplementary Provisions.
1.8 "FFTZ" means Futian Free Trade Zone, Shenzhen, PRC.
1
<PAGE> 15
1.9 "LAND PARCEL" means the land parcel on which the Building is located.
1.10 "LEASE TERM" means the term of the Tenancy as more particularly set out
in the Tenancy Agreement.
1.11 "LEASED PORTION" means that portion of the Building representing 50.27 %
of the total Building gross floor area which is to be leased by Party A
to Party B WFOE (or Party B, as the case may be) pursuant to the Tenancy
Agreement, as more particularly described in Schedule 7.
1.12 "MORTGAGEE" means the Agricultural Bank of China, Shenzhen Branch, China
Everbright Bank, Shenzhen Branch and Shenzhen Development Bank, Shenzhen
Branch.
1.13 "OPTION" means the option granted to Party B WFOE (or Party B, as the
case may be) as referred to in Article 4.3 of these Supplementary
Provisions.
1.14 "PARTY B WFOE" means a PRC wholly-foreign owned enterprise to be
established by Party B in FFTZ.
1.15 "PAYMENT DATE" means 17 April 2000.
1.16 "STS" means Shenzhen STS Microelectronics Co., Ltd.
1.17 "STS LEASE" means the lease contract dated 9 March 1999 between Party A
and STS, a copy of which is attached hereto as Attachment 3.
1.18 "STS PORTION" means that portion of the Building currently occupied by
STS, representing approximately 6.46% of the total Building gross floor
area.
1.19 "TENANCY" means the lease of the Leased Portion by Party A to Party B
pursuant to the terms of the Tenancy Agreement.
1.20 "TENANCY AGREEMENT" means the Shenzhen Futian Free Trade Zone Premises
Lease entered into by Party A and Party B for the lease of the Leased
Portion on the date hereof, a copy of which is attached hereto as
Attachment 1.
1.21 "TRANSFER PORTION" means the 5th to 7th Floor of the Building with an
aggregate gross floor area of 10,796.31 square meters (representing
approximately 43.27% of the total Building gross floor area) to be
transferred by Party A to Party B pursuant to the terms of this
Contract, as more particularly described in Articles 2 and 3 and
Schedule 7 of this Contract.
1.22 "TRANSFER DATE" means the date on which FFTZ Land Planning Department
issues the Real Estate Title Certificate of the Transfer Portion to
Party B WFOE (or Party B, as the case may be), after this Contract has
been duly registered with the FFTZ Land Planning Department.
1.23 "WAIVER" means a written waiver to be provided by STS to Party A and
Party
2
<PAGE> 16
B, a form of which is attached hereto as Attachment 2.
2. TRANSFER AND PAYMENT OF TRANSFER PORTION
2.1 Within 14 days after the issue of the business license of Party B WFOE,
the board of directors of Party B WFOE shall ratify and adopt this
Contract. This Contract shall become binding on both Party A and Party B
WFOE as if they (instead of Party A and Party B) were the original
parties thereto. Party A agrees and acknowledges that, as from such
date, Party B shall be released of all its obligations under this
Contract.
2.2 The Parties shall enter into the Escrow Agreement within 7 days of the
signing of this Contract, and the Escrow Agreement shall incorporate the
relevant terms of this Contract, including Schedule 6 hereto.
2.3 The consideration of the transfer of the Transfer Portion (as stated in
Article 4 of this Contract) ("CONSIDERATION") shall be paid by Party B
to Party A in the following manner:
(i) Party B shall pay the Escrowed Funds to the Escrow Agent on or
before the Payment Date.
(ii) The terms governing the deposit and release by the Escrow Agent
of the Escrowed Funds deposited into the Escrow Account are set
out in Schedule 6 hereof, and the Parties agree to comply with
such terms.
(iii) Within 7 days after the release of the Escrowed Funds by the
Escrow Agent to Party A, Party A shall pay to Party B any amount
in excess of the Consideration or Party B shall pay to Party A
any amount in shortfall of the Consideration, as the case may
be.
(iv) Party B is deemed to have fulfilled its payment obligations
under Article 4 of this Contract and Article 2.3 of these
Supplementary Provisions upon remittance by Party B of the
relevant payment amount from a bank designated by Party B to the
Escrow Agent or Party A or upon presentation of a cheque by
Party B to the Escrow Agent or Party A.
(v) If Party B fails to pay the Escrowed Funds to the Escrow Agent
on or before the Payment Date, Party B shall pay to Party A
liquidated damages for late payment at the rate of 0.05% of the
Escrowed Funds for each date of delay. If the delay in payment
lasts for thirty (30) days or more, Party A shall have the right
to terminate this Contract and claim the aforesaid liquidated
damages and a default penalty equal to two percent (2%) of the
Consideration from Party B.
2.4 If Party B WFOE has not been established on or before the Cancellation
Date for whatever reason, Party B shall have the right to assume title
to the Transfer Portion and obtain in its own name the Real Estate Title
Certificate pursuant to Article 14 of this Contract, and Party B
undertakes to inform the Escrow Agent after it has received such a Real
Estate Title Certificate in its
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<PAGE> 17
own name.
2.5 Article 5 and Article 6 of this Contract shall be deleted in its
entirety.
2.6 Article 7 of this Contract shall be amended as follows:
"Article 7. Party A shall deliver vacant possession of the Transfer
Portion to Party B WFOE (or Party B, as the case may be) on or before
the Delivery Date."
2.7 Article 8 of this Contract shall be deleted in its entirety.
2.8 Articles 11, 12 and 13 of this Contract shall be amended and replaced to
read as follows:
"Article 11. If the actual floor area of the real estate delivered is
larger or smaller than the area provided for herein, Party A or Party B
shall have the right to demand that the other Party make up or refund
the portion of the purchase price which corresponds to the difference in
area. Party A represents and warrants to Party B that such deviance in
the area of the Transfer Portion shall not exceed 5%, failing which
Party B shall have the right to terminate this Contract and obtain full
refund of the Escrowed Funds paid to the Escrow Agent and Party A
undertakes to immediately inform the Escrow Agent in writing to release
the Escrowed Funds to Party B. If the finishing of the real estate
delivered is not according to the finishing standards stipulated in
Schedule 3 hereto, Party B shall have the right to demand compensation
from Party A for the portion of the price which corresponds to the
difference in the level of the finishing.
Article 12. Party A shall issue a receipt for full payment of the
purchase price for the Transfer Portion after the Escrowed Funds have
been released by the Escrow Agent to Party A in full and Party B has
paid up any amount in shortfall of the Consideration in accordance with
the terms herein.
Article 13. Party A shall give a one-year maintenance warranty with
respect to the Transfer Portion from the date of delivery of the
Transfer Portion to Party B. If the Transfer Portion suffers damage not
attributable to Party A, Party A may assist with repairs, but the repair
expenses shall be borne by Party B itself."
2.9 Article 14 of this Contract shall be amended and replaced to read as
follows:
"Article 14. Party A shall submit an application to the Shenzhen FFTZ
Administration Committee for registration of the transfer of the
Transfer Portion in accordance with the terms of this Contract and the
Supplementary Provisions attached hereto within 7 days after the signing
of this Contract. After the transfer of title to the Transfer Portion
has been registered with the relevant department of Shenzhen FFTZ
Administration Committee, and a Real Estate Title Certificate is issued
in the name of Party B WFOE (or Party B, as the case may be), Party B
WFOE (or Party B, as the case may be) shall
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<PAGE> 18
legally have the rights of occupation, use, receipt of earnings and
disposal."
2.10 Article 16, 17, 18 and Schedules 1, 2 and 4 shall be deleted in their
entirety.
3. INSPECTION, SIGNAGE, MANAGEMENT RIGHT AND RENOVATIONS
3.1 The Parties hereby acknowledge and confirm that before signing this
Contract they had conducted and completed a joint inspection of the
Transfer Portion and the Leased Portion.
3.2 Party A shall provide Party B at the time of delivery of the Transfer
Portion approval documents evidencing that the Transfer Portion are in
full compliance with PRC governmental requirements with respect to
construction safety, environmental protection, building standard and
fire safety and that the floor areas stated in this Contract are
accurate and not misleading.
3.3 Party B shall be entitled to put out one or more signs, and to remove
any existing signs, posters, etc., anywhere on, attached to or inside
the Transfer Portion.
3.4 Forthwith after the delivery of the Transfer Portion and the Leased
Portion by Party A to Party B, Party B shall have the sole right to
manage the Building, provided that Party B shall manage the Building in
accordance with applicable PRC laws and regulations.
3.5 Forthwith after the delivery of the Transfer Portion and the Leased
Portion, Party B shall have the free and uninterrupted right to carry
out any renovations to the Transfer Portion and the Leased Portion and
increase the electricity and other utilities supply to the Building at
any time provided that Party B has obtained the relevant PRC government
approvals and that the relevant renovations will not alter the external
appearances of the Building or damage the main structures of the
Building. Party A is deemed to have given its consent to all such
renovations shall use its best endeavours to assist Party B to obtain
the relevant PRC government approvals. Party B undertakes to use its
best endeavors to minimize any disturbances that may be caused to STS
resulting from such renovations.
3.6 Upon issuance of Real Estate Title Certificate for the Transfer Portion
to Party B WFOE (or Party B, as the case may be), Party A shall provide
Party B WFOE (or Party B, as the case may be) with a full and
uninterrupted right of access to the construction plans, maps, records,
agreements and any other documents relating to the Building (including
the right to make photocopies of such documents at Party B's or Party B
WFOE's expense). Upon the exercise of the Option by Party B WFOE (or
Party B, as the case may be) in accordance with Article 4.3 of these
Supplementary Provisions, Party A shall deliver all such documents to
Party B WFOE (or Party B, as the case may be) without any costs to Party
B WFOE or Party B.
4. OPTION ON LEASED PORTION AND STS PORTION
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<PAGE> 19
4.1 Party A shall use its best efforts to vacate STS from the STS Portion.
The reasonable costs associated with such vacation shall be borne by
Party B WFOE, but only upon Party B WFOE's prior written consent.
4.2 Party A shall lease the STS Portion to Party B WFOE (or Party B, as the
case may be), on the same terms and conditions stipulated in the Tenancy
Agreement immediately after the STS Portion is vacated by STS.
4.3 Party B WFOE (or Party B, as the case may be) shall have an option
("OPTION") to purchase the Leased Portion and the STS Portion from Party
A on or before the expiration of the first three years of the Lease Term
in accordance with the following terms:
(a) The Option may be exercised by Party B WFOE (or Party B, as the
case may be) by way of a written notice to Party A on or before
the expiration of the first three years of the Lease Term.
(b) Following Party B WFOE's or Party B's written notice to Party A
stating its intention to exercise the Option in accordance with
Article 4.3(a) of these Supplementary Provisions, Party A agrees
to enter into a separate purchase and sale contract with Party B
WFOE (or Party B, as the case may be) for the transfer of the
Leased Portion and the STS Portion. The terms of the transfer of
the Leased Portion and the STS Portion shall be substantially
the same as the terms governing the transfer of the Transfer
Portion by Party A to Party B under this Contract. Party A
agrees and acknowledges that Party B WFOE (or Party B, as the
case may be) shall be the purchaser thereunder and shall take
title of the Leased Portion and the STS Portion.
(c) The consideration for the transfer of the Leased Portion and the
STS Portion by Party A to Party B WFOE (or Party B, as the case
may be) shall be RMB40,023,015 ("OPTION PRICE") less the full
amount of the rental deposit and the aggregate amount of the
rental payment already paid under the Tenancy Agreement by Party
B WFOE (or Party B, as the case may be) as at the date of
exercise of the Option by Party B WFOE (or Party B, as the case
may be), which deduction shall be subject to the following
limits:
(i) 70% of the rental payment amounts actually paid by Party
B WFOE (or Party B, as the case may be) to Party A in
the first year of the Lease Term;
(ii) 70% of the rental payment amounts actually paid by Party
B WFOE (or Party B, as the case may be) to Party A in
the second year of the Lease Term, if applicable;
(iii) 50% of the rental payment amounts actually paid by Party
B WFOE (or Party B, as the case may be) to Party A in
the third year of the Lease Term, if applicable.
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<PAGE> 20
All duties, fees and taxes associated with the transfer of the Leased
Portion and the STS Portion upon exercise of the Option by Party B WFOE
(or Party B, as the case may be) as contemplated under this Article 4.3
of these Supplementary Provisions shall be borne by the parties thereto
as stipulated and listed in the relevant sale and purchase agreement.
4.4 Party A shall use its best endeavours to procure STS to provide the
Parties with a duly executed Waiver on or before the Payment Date. If
Party A fails to produce the Waiver to Party B on or before the Payment
Date, Party B may elect to:
(a) terminate this Contract. In such a case, neither Party shall
have the right to claim any compensation against the other Party
save for any antecedent breaches committed by either Party; or
(b) continue with the purchase of Transfer Portion in accordance
with this Contract. In such a case, Party A shall warrant and
undertake to Party B that STS will not exercise its first right
of refusal to lease or purchase Units A, B and C on the first
floor of the Building (comprising an aggregate gross floor area
of 2,130.48 square meters) or any other parts of the Building
which STS may have under the STS Lease and applicable PRC laws
and regulations and that Party B will be able to enjoy fully all
its rights and benefits under this Contract without any
interruption from STS (including, but not limited to, Party B's
rights to lease and purchase the STS Portion in accordance with
Articles 4.2 and 4.3 of these Supplementary Provisions).
4.5 If the Option has not been exercised by Party B WFOE (or Party B, as the
case may be) pursuant to the terms herein, and the Tenancy either was
terminated or has expired, Party A represents and warrants to Party B
that Party B WFOE (or Party B, as the case may be) and subsequent users
or occupiers of the Transfer Portion shall have full right of access to
the Transfer Portion from public roads, through the front gate and the
front door of the Building.
5. TERMINATION
5.1 Party B shall have the right to terminate this Contract by written
notification in writing to Party A if:
(a) Party A materially breaches a provision of this Contract;
(b) the documents set out in Article 4 of Schedule 6 have not been
provided in full to the Escrow Agent on or before the
Cancellation Date; or
(c) an event of Force Majeure (as defined in Article 5 hereof)
continues for more than 3 months and the Parties cannot agree in
writing as to how the rights and obligations of the Parties
hereunder can be adjusted.
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<PAGE> 21
in which case the Parties shall immediately instruct the Escrow Agent to
release the Escrowed Funds and the accrued interest in the Escrow
Account to Party B; provided however that Party B shall be entitled to
all remedies under PRC law and reserve the right to claim against Party
A if this Contract is terminated as a result of any of the events stated
in sub-paragraphs 5.1(a) and (b) of these Supplementary Provisions.
5.2 Upon termination of this Contract by Party B in accordance with Articles
4.4 and 5.1 of these Supplementary Provisions, if Party B already has
obtained possession of the Transfer Portion in accordance with Article 7
of this Contract, Party B shall return possession of the Transfer
Portion at the then existing state to Party A without further liability
to Party B.
6. REPRESENTATIONS, WARRANTIES, UNDERTAKINGS AND INDEMNITIES
6.1 Party A hereby represents, warrants and undertakes to Party B that:
(a) immediately prior to the issue of the Real Estate Title
Certificate to Party B WFOE (or Party B, as the case may be), it
will be the sole and duly registered owner of the granted land
use rights and the building ownership rights of the Transfer
Portion, and there is no lien, charge or other encumbrances on
such rights as of the date hereof, and upon the issue of the
Real Estate Title Certificate to Party B WFOE (or Party B, as
the case may be), and if the Option is exercised by Party B,
then immediately prior to the transfer of the Leased Portion and
the STS Portion to Party B WFOE (according to Section 4 of these
Supplementary Provisions), Party A shall be the sole and
registered owner of the granted land use rights and building
ownership rights of the Leased Portion and STS Portion and there
will be no lien, charge or other encumbrances on such rights as
of the effective date of the transfer thereof;
(b) it has all requisite power, authority and approval required to
enter into this Contract and has all requisite power, authority
and approval to perform fully each of its obligations hereunder;
(c) it has taken all action necessary to authorize it to enter into
this Contract and its representative whose signature is affixed
hereto is fully authorized to sign such documents;
(d) the provisions of this Contract shall constitute its legal and
binding obligations;
(e) there is no lawsuit, arbitration, or legal, administrative or
other proceeding or governmental investigation pending or, to
the best of its knowledge, threatened against it with respect to
the subject matter of this Contract or that would affect in any
way its ability to enter into or perform this Contract;
8
<PAGE> 22
(f) the transactions contemplated hereunder can be lawfully and
effectively carried out by the Parties and Party B WFOE under
the PRC laws and regulations without undue or unreasonable costs
to the Parties or Party B WFOE;
(g) the Transfer Portion shall meet the following specifications:
(i) term of granted land use rights: 50 years, commencing
from 29 September 1997 until 28 September 2047
(ii) use: industrial
(iii) plot ratio: 2.62
(iv) site coverage: 33%
(v) maximum height of building: 31.9 meters
(vi) assignability and transferability: Party B may at any
time freely sell, lease, transfer or mortgage the
granted land use rights and the building ownership of
the Transfer Portion to any legal person
(vii) environmental fitness: compliance with PRC legal
requirements
(viii) water and power supply: power supply of 2,000 KVA; water
supply from the local government network and
self-equipped water pumping station
(ix) communications: each unit is equipped with 5 to 10
telephone lines
(x) other building specifications (including fixtures) as
listed in Attachment 4 hereof.
(h) site formation works and connection of electricity and water
supplies to the boundary of Land Parcel will be completed before
delivery of vacant possession of the Transfer Portion;
(i) upon issuance of Real Estate Title Certificate for the Transfer
Portion to Party B WFOE, Party B WFOE will acquire unencumbered
ownership of the Transfer Portion;
(j) there is no existing or latent environmental damage or hazard on
the Land Parcel or in the areas surrounding the Land Parcel, and
that Party B and Party B WFOE shall not be liable for any
environmental liability in connection with the Land Parcel or
the surrounding areas of the Land Parcel, including, without
limitation, liability arising out of the disposal of polluted
wastes on or in the area surrounding the Land Parcel or
elsewhere to the extent the cause of such environmental
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<PAGE> 23
liability occurred prior to the Transfer Date;
(k) the layout, design, construction and operation of the Transfer
Portion, the Leased Portion and the STS Portion are in full
compliance with all requirements of relevant governmental
authorities for land administration, water and soil
conservation, construction standards, fire prevention and work
safety;
(l) prior to and including the Transfer Date, Party A shall pay and
discharge all taxes and fees related to the Land Parcel and the
Transfer Portion, including but not limited to, effecting or
otherwise relating to, their transfer to Party B WFOE so that no
payments of any such taxes and fees are required from Party B
WFOE or any third party regarding the transfer of the Transfer
Portion;
(m) STS Lease represents the only and the complete lease agreement
between STS and Party A with respect to the STS Portion, and
STS's right to lease the STS Portion shall expire on 1 April
2002, at which time STS shall be required to vacate the STS
Portion under the STS Lease, subject to the terms of the STS
Lease;
(n) Party A shall not amend, extend or agree to amend or extend the
terms of the provisions of STS Lease without Party B's prior
written consent;
(o) the Building has remained in the same state and condition since
the date of joint inspection by both Parties referred to in
Article 3.1 of these Supplementary Provisions and up to the
Delivery Date; and
(p) save for an existing mortgage created over the first and third
floor of the Building in favour of the Mortgagee, the Building
is not currently subject to any other mortgages, charges,
encumbrances and third party rights.
6.2 Party A hereby indemnifies fully and holds harmless Party B and Party B
WFOE from and against all claims, demands, actions, damages, losses
(including loss of profit), liabilities, penalties and expenses
sustained by Party B or Party B WFOE directly or indirectly in respect
of any breach by Party A of any of the above provisions of this
Contract, particularly this Article 6.
7. GOVERNING LAW AND DISPUTE RESOLUTIONS
7.1 This Contract and these Supplementary Provisions shall be governed by
and construed in accordance with the laws of the PRC.
7.2 Article 23 of this Contract shall be amended and replaced as follows:
"Article 23.(i) 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
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<PAGE> 24
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 Party for the commencement of
consultations, then either Party may refer the dispute
to arbitration in accordance with the provisions of
Article 23 of this Contract.
(ii) With respect to any disputes which have not been
resolved through consultations, they shall be submitted
for arbitration to the China International Economic And
Trade Arbitration Commission (hereinafter referred to as
ARBITRATION INSTITUTE) in Shanghai, 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 and the
Supplementary Provisions;
(b) all proceedings in any arbitration shall be
conducted in English and Mandarin Chinese; and
(c) there shall be three (3) arbitrators. Party A
and Party B shall each select one (1)
arbitrator. The third arbitrator shall be
appointed by the Arbitration Institute and shall
serve as chairman of the arbitration tribunal."
(iii) The arbitration award shall be final and binding on the
Parties, and the Parties agree to be bound thereby and
to act accordingly.
(iv) The costs of arbitration shall be borne by the Party or
Parties as designated in the arbitration award.
(v) 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 and the Supplementary
Provisions."
8. FORCE MAJEURE
8.1 Article 9 of this Contract shall be replaced as follows:
"Article 9. (i) In the event that Party A or Party B shall be
rendered unable to
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<PAGE> 25
perform or perform within the stipulated time the whole
or any part of its obligations under this Contract by
reason of force majeure, including serious fires not
originating in the Transfer Portion, severely bad
weather, floods, earthquakes, plagues or other
contagious diseases, wars, acts of government, and any
other causes of such nature (the occurrence or result of
which being unforeseeable and unavoidable, as well as
insurmountable by human efforts), the time limit for the
performance of this Contract or any provision thereof
should be extended for a period corresponding to the
effects of such cause.
(ii) The Party affected by the event of force majeure shall
inform the other Party in the shortest possible time
after the occurrence of such event and provide the other
party with documents sufficiently evidencing the cause,
nature and severity of the occurrence of such event as
soon as possible.
Upon the occurrence of an event of force majeure, the
Parties shall use their best endeavours to reduce the
effects of such event on the performance of this
Contract to a minimum."
9. NOTICE
9.1 Any notice or written communication provided for in this Contract from
one Party to the other Party shall be made in writing in English and
Chinese and sent by courier service delivered letter, or by facsimile or
electronic mail with a confirmation copy sent by courier service
delivered letter. The date of a notice or communication hereunder shall
be deemed to the date when the notice is sent or dispatched, whether by
courier service, facsimile or electronic mail. 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.
SHENZHEN LIBAOYI INDUSTRY DEVELOPMENT CO., LTD.
No.2 Feng Huang Road,
Futian Free Trade Zone,
Shenzhen, PRC
Facsimile No: (86755) 359-2282
Attention: Mr. Wang Bao Cheng / Mr. Wang Jin Cheng
NEW FOCUS INC.
c/o New Focus Pacific Co., Ltd.
Building R3-B, Unit A, 1st Floor,
Shenzhen High-Tech Industrial Park,
Nanshan District, Shenzhen, PRC
Facsimile No: (86755) 652-5150
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<PAGE> 26
Attention: Mr. Hui (Tom) Tang
Email Address: [email protected]
10. DUTIES AND FEES
10.1 All duties, fees and taxes associated with the transfer of the Transfer
Portion as contemplated under this Contract shall be borne by Party A
and Party B WFOE as stipulated and listed in Schedule 8 hereof.
11. EXCLUSIVITY AND NON ASSIGNABILITY
11.1 Upon execution of this Contract, Party A shall be bound to deal
exclusively with Party B and Party B WFOE, and Party A shall be
prohibited from contacting, approaching, liaising or otherwise
communicating with any other party or person or signing any contract and
agreement, letter of intent, memorandum of understanding or any written
document in any manner and in any form whatsoever in relation to the
lease and/or the transfer of the Transfer Portion, the Leased Portion
and the STS Portion, save as provided herein or under the Tenancy
Agreement.
11.2 Upon execution of this Contract until the expiration or early
termination of the Tenancy (as the case may be), Party A undertakes with
Party B that it shall not assign, lease, transfer, or otherwise charge,
mortgage or encumber or use as a security for indebtedness the aggregate
of which is in excess of the Option Price the Transfer Portion, Leased
Portion and the STS Portion, its interests in this Contract and the
Tenancy Agreement respectively, except for this Contract, the Tenancy
Agreement and the STS Lease.
12. CONFIDENTIALITY
12.1 The Parties shall agree to keep this Contract and all information
exchanged in connection therewith confidential at all times.
12.2 The Parties shall further agree to co-ordinate with each other on all
press releases and other public announcements to be made in connection
with this Contract.
13. MISCELLANEOUS
13.1 Article 24 of this Contract shall be deleted in its entirety and
replaced as follows:
"Article 24. The Schedules and Attachments attached hereto are an
integral part of this Contract and have the same binding force of this
Contract. This Contract, including the Supplementary Provisions, the
Schedules and the Attachments attached hereto constitute the entire
agreement between the Parties with respect to the subject matter hereof
and supersede all prior discussions, negotiations and agreements between
them. In the event of any discrepancy between the Supplementary
Provisions and other provisions of this Contract, the provisions of
these Supplementary Provisions shall prevail."
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<PAGE> 27
13.2 To the extent permitted by Chinese law, failure or delay on the part of
any of the Parties hereto to exercise a right, power or privilege under
this Contract shall not operate as a waiver thereof; nor shall any
single or partial exercise of a right, power or privilege preclude any
other future exercise thereof.
13.3 This Contract may not be assigned in whole or in part by any Party
without the prior written consent of the other Party hereto, except that
Party B may assign its interests in this Contract to its Affiliate
without prior written consent from Party A. In the latter case, Party B
shall provide an advance written notice to Party A and shall procure its
Affiliate to comply with and perform all the obligations imposed upon
Party B in this Contract.
13.4 This Contract are made for the benefit of the Parties and their
respective lawful successors and assignees and are legally binding on
them. This Contract may not be changed orally, but only by a written
instrument signed by the Parties.
13.5 The invalidity of any provision of this Contract shall not affect the
validity of any other provision of this Contract.
13.6 Article 25 of this Contract shall be replaced as follows:
"This Contract is executed in the Chinese language in five (5) originals
and in the English language in five (5) originals. Both language
versions shall be equally authentic. In the event of any discrepancies
between the two versions, the Chinese version shall prevail. Party A,
Party B, the notary public's office (in the case of a real estate sales
and purchase contract with a foreign element) and the Shenzhen Futian
Free Trade Zone Administration shall each hold at least one copy of each
language version of this Contract."
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<PAGE> 28
IN WITNESS WHEREOF, each of the Parties hereto have caused these Supplementary
Provisions to be executed by their duly authorized representatives on the date
first set forth above.
SHENZHEN LIBAOYI INDUSTRY NEW FOCUS INC.
DEVELOPMENT CO.,LTD. (FOR ITSELF AND ON BEHALF OF ITS
WHOLLY FOREIGN-OWNED ENTERPRISE TO
BE ESTABLISHED IN FUTIAN FREE TRADE
ZONE, SHENZHEN)
By: /s/ WANG BAO CHENG By: /s/ BOB MA
--------------------------------- ---------------------------------
Name: Wang Bao Cheng Name: Bob Ma
Title: Chairman Title: General Manager
Nationality: China Nationality: USA
Adopted and ratified by the Board of Directors of Party B WFOE upon its
establishment
[NAME OF PARTY B WFOE]
- ------------------------------------
By:
---------------------------------
Name:
Title:
Nationality:
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<PAGE> 29
SCHEDULE 6
TERMS GOVERNING THE ESCROW FUNDS
1. Party B shall pay the Escrowed Funds to the Escrow Agent in accordance
with this Contract.
2. The Escrow Agent shall agree to hold the Escrowed Funds and any moneys
arising from interest accrued in respect of the Escrowed Funds in escrow
on the terms and subject to the conditions of this Schedule 6.
3. The Escrowed Funds shall be placed in a fixed term seven daysi
interest-bearing or a similar interest bearing US Dollar deposit account
(i.e. the Escrow Account) and on each occasion when the deposit matures,
it shall be renewed for the same maturity period unless and until the
Escrow Agent receives further instructions as herein provided.
4. Subject to Article 5 and Article 6 of this Schedule 6, the Escrow Agent
shall release and pay the Escrowed Funds and all the accrued interests
in the Escrow Account to Party A only upon the satisfaction of all the
following conditions:-
(i) this Contract has been duly registered with by the FFTZ Land
Planning Department, the Real Estate Title Certificate in
respect of the Transfer Portion has been issued by the FFTZ Land
Planning Department in the name of Party B WFOE (or Party B, in
which case Party B shall notify the Escrow Agent in writing of
its intention to take title of the Transfer Portion in Party B's
own name), and certified copies of this Contract and the Real
Estate Title Certificate, as well as evidence of the
registration of this Contract have been provided by the Parties
to the Escrow Agent;
(ii) the Real Estate Title Certificate and Lease Registration
Certificates in respect of the Lease Portion and STS Portion has
been issued by FFTZ Land Planning Department in the name of
Party A, certified copies of which have been forwarded by Party
A to Party B and to the Escrow Agent;
(iii) the Tenancy Agreement in respect of the Leased Portion is duly
executed simultaneously with this Contract and is duly
registered, and a copy of the Tenancy Agreement and evidence of
its registration have been provided to the Escrow Agent by the
Parties;
(iv) Party B has obtained a satisfactory written undertaking issued
by the Mortgagee acknowledging (1) its consent to the leasing of
the Leased Portion by Party A to Party B in accordance with the
Tenancy Agreement and the granting by Party A to Party B of the
Option to purchase the Leased Portion in accordance with this
Contract; and (2) its agreement to enable Party B to exercise
the Option in accordance
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<PAGE> 30
with this Contract, and a copy of such written undertaking has
been forwarded to the Escrow Agent;
(v) Party B has obtained a satisfactory legal opinion from its PRC
legal counsel confirming the validity, legality and
enforceability of the sale of the Transfer Portion, the Waiver
and the Option contemplated in this Contract and the
Supplementary Provisions and the lease transaction contemplated
in the Tenancy Agreement, and a copy of the legal opinion has
been forwarded to the Escrow Agent;
(vi) Party B has informed the Escrow Agent in writing that Party A
has delivered possession of the Transfer Portion to Party B WFOE
(or Party B, as the case may be) in accordance with Article 7 of
this Contract; and
(vii) Both Parties have informed the Escrow Agent that the
representations and warranties made by Party A under this
Contract (including those contained in the Supplementary
Provisions) remain true and accurate as of the Transfer Date.
5. The Escrow Agent shall release and pay the Escrowed Funds and the
accrued interests in the Escrow Account to Party B:
(i) on the first business day after the Cancellation Date if the
Escrow Agent has not received all the documents set out in
Article 4 of this Schedule 6, or the conditions therein have not
been fulfilled.
6. Save as otherwise provided in this Contract, the Escrowed Funds shall be
dealt with only upon the joint written direction of Party B and Party A.
7. Party A and Party B agree to equally share any fees which may be payable
to the Escrow Agent for the performance of its obligations and duties
under the escrow arrangement described in this Schedule 6.
8. Both Parties shall not unreasonably withhold or delay the production of
the relevant documents to the Escrow Agent set out in Article 4 of this
Schedule 6.
17
<PAGE> 31
SCHEDULE 7
DESCRIPTION OF TRANSFER PORTION, LEASED PORTION AND STS PORTION
A. DESCRIPTION OF LAND PARCEL AND BUILDINGS
1. Location
No.2 Feng Huang Road, Futian Free Trade Zone, Shenzhen, PRC.
2. Land Plot
Lot No. B105-93(2). Approximately 9,520.8 square meters, subject to
final survey.
3. Gross Floor Area of Building
Approximately 24,947.37 square meters, subject to final survey.
4. Physical Completion
Shenzhen Libaoyi Industry Development Co., Ltd. is the owner of Wanli
Industrial Building with 100% title to it, all of which can be provided
for New Focus Inc.'s use.
B. PORTION OF BUILDING TO BE TRANSFERRED
43.27% of the whole of Wanli Industrial Building
1. Land Plot
Approximately 4,119.65 square meters, subject to final survey.
2. Gross Floor Area of Transfer Portion
Approximately 10,796.31 square meters, subject to final survey.
3. Physical Completion
Completed building, ready for immediate use.
C. PORTION OF BUILDING TO BE LEASED
1. Location
50.27% of the whole of Wanli Industrial Building.
2. Land Plot
18
<PAGE> 32
Approximately 4,786.10 square meters, subject to final survey.
3. Gross Floor Area of Leased Portion
Approximately 12,537.06 square meters, subject to final survey.
4. Physical Completion
Completed building, ready for immediate use.
D. PORTION CURRENTLY OCCUPIED BY STS
1. Location
Units A and B on the first floor of Wanli Industrial Building,
comprising a 6.46% of the whole of Wanli Industrial Building.
2. Land Plot
Approximately 615.04 square meters, subject to final survey.
3. Gross Floor Area of STS Portion
Approximately 1,614 square meters, subject to final survey.
4. Physical Completion
Completed building, ready for immediate use.
19
<PAGE> 33
SCHEDULE 8
LIST OF FEES AND CHARGES
TAXES AND FEES TO BE LEVIED IN THE COURSE
OF THE TRANSFER OF THE TRANSFER PORTION
<TABLE>
<CAPTION>
Party subject
Basis for to levy of tax
Tax and fee rate (amount) calculation & fee
------------------------- ----------- --------------
<S> <C> <C> <C>
1 Business tax 5% Transfer Party A
price
2 Land According to the tax rate Rise in Party A
Value-added Tax specified in the value
iDetailed Implementing
Rules of the Interim
Provision on Land
Value-added taxi
3 Stamp Seller and buyer will Transfer Party A and
each have to pay 0.05% price Party B / Party
B WFOE will
each pay 0.05%
4 Notarisation 0.2 - 0.3% Transfer Party B / Party
fee price B WFOE
5 Deed tax 1% Transfer Party B / Party
price B WFOE
6 Construction 0.05% Business Party A
tax tax
7. Registration 0.1% Transfer Party B / Party
fee price B WFOE
</TABLE>
20
<PAGE> 34
ATTACHMENT 1
TENANCY AGREEMENT
21
<PAGE> 35
ATTACHMENT 2
WAIVER BY STS
[on the letterhead of Shenzhen STS Microelectronics Co., Ltd.]
[Date]
To: 1. Shenzhen Libaoyi Industry Development Co., Ltd. ("LiBaoYi")
2. New Focus Inc. ("NF")
Dear Sirs,
RE: WAIVER OF FIRST RIGHT OF REFUSAL TO PURCHASE/LEASE
We refer to the Premises Lease Contract ("Lease") executed between us and
LiBaoYi on 9 March 1999 for the lease of certain premises ("Property") at Wanli
Industrial Building as described in the Lease, a copy of which is attached
hereto.
Pursuant to Article 15 of the Lease and under PRC law, we have the first right
of refusal to purchase the Property in the event that LiBaoYi intends to
transfer part or the whole of the same. In this regard, we hereby irrevocably
and unconditionally waive our said first right of refusal against and over NF in
respect of NF's purchase of the Property now and in the future.
Also, pursuant to Article 4 of the Attachment to the Lease, we have the first
right of refusal to lease and purchase 516.48m(2) of floor space being Unit C on
the first floor of Wanli Industrial Building. We hereby irrevocably and
unconditionally waive our said first right of refusal against and over NF in
respect of NF's lease or purchase of the said floor space now and in the future.
In addition, we hereby waive any other prior rights that we may have under
relevant PRC laws and regulations against and over NF in respect of the purchase
of the Property from LiBaoYi now and in the future.
22
<PAGE> 36
Finally, we confirm that the term of the Lease shall expire on 1 April 2002 and
we agree to vacate the premises on or before that date.
Yours faithfully,
(chop)
- ------------------------------------
[Shenzhen STS Microelectronics Co., Ltd.]
23
<PAGE> 37
ATTACHMENT 3
STS LEASE
24
<PAGE> 38
ATTACHMENT 4
BUILDING SPECIFICATION (INCLUDING FIXTURES)
1. Two 3-tonne goods elevator and two 2-tonne goods elevators
2. Automatic sprinkler system, fire hydrant system
3. Hi-and-low Voltage Electricity Supply System and Equipment (including
self-equipped electricity system)
4. Equipment inside the water pump room:
<TABLE>
<CAPTION>
Names Output Pipe width m2/h Quantity
----- ------ ---------- ---- --------
<S> <C> <C> <C> <C>
Living water pump 7.5 kW 100 33 2
Fire hydrant pump 30 kW 150 108 2
Sprinkler pump 37 kW 150 108 2
Water discharge pump 2.2 kW
</TABLE>
5. Diesel generator: 150 kW
6. There are power distribution boxes in the Building. Each of floors 1-7
has four distribution boxes, and each unit has one box. Each box has a
three-phase, five-wire power source, of which the ground wire has been
substituted by a steel bar.
25
<PAGE> 1
EXHIBIT 10.17
No.:
SHENZHEN FUTIAN FREE TRADE ZONE
PREMISES LEASE
Printed by the Shenzhen Futian Free Trade Zone Administration
<PAGE> 2
Premises Lease Registration Procedure
Notarization
Registration refused; reply made
Registration granted
The lessee completes a Tenant Registration Form
Examination by the Futian Free Trade Zone Administration
The Parties to the lease submit the following documents to the Lease Office:
1. the Tenant Registration Form;
2. a photocopy of the Premises Lease Permit;
3. the Lessee's Identification Card or legal document; and
4. the Premises Lease.
<PAGE> 3
PREMISES LEASE
Lessor (Party A): SHENZHEN LIBAOYI INDUSTRY DEVELOPMENT CO., LTD.
Address: NO. 2 FENG HUANG ROAD, FUTIAN FREE TRADE ZONE,
SHENZHEN, PEOPLE'S REPUBLIC OF CHINA ("PRC")
Premises Lease Permit No.: (2000) FANG ZU ZHENG NO.9
Appointed agent: BLANK
Address BLANK
Lessee (Party B): NEW FOCUS INC. (FOR ITSELF AND ON BEHALF OF ITS
WHOLLY FOREIGN-OWNED ENTERPRISE TO BE ESTABLISHED
IN THE FUTIAN FREE TRADE ZONE, SHENZHEN, PRC)
Address: 2630 WALSH AVENUE, SANTA CLARA, CA, 95051, USA
I.D. Card No.: BLANK
Appointed agent: BLANK
Having reached a consensus through consultations, the Parties conclude this
Lease in accordance with the Regulations for the Lease of Premises in the
Shenzhen Special Economic Zone, their detailed implementing rules and Article 25
of the Regulations of the Futian Free Trade Zone of the Shenzhen Special
Economic Zone.
The content of the Lease is as follows:
Article 1. Party A shall lease to Party B for its use Unit(s) BLANK, BLANK
Floor, Block BLANK, BLANK Street (Lane), WANLI INDUSTRIAL BUILDING, NO. 2 FENG
HUANG Road (Village), FUTIAN FREE TRADE ZONE, Shenzhen Municipality (the "Leased
Premises").
The Leased Premises shall have BLANK bedrooms and BLANK living rooms. The total
floor area shall be 12,537.06 square meters.
The state of refurbishment of the Leased Premises shall be (PLEASE SEE THE
<PAGE> 4
ATTACHED SUPPLEMENTARY PROVISIONS).
The Leased Premises shall contain the following facilities (furniture):
(1) (PLEASE SEE THE ATTACHED SUPPLEMENTARY PROVISIONS);
(2) BLANK .
(3) BLANK ;
(4) BLANK .
During the term of this Lease, Party B may use the above-mentioned facilities
(furniture). Such use shall be free of charge, except for the use of the BLANK.
Article 2. The term of Party B's lease of the Leased Premises shall be 5 years
and BLANK months, namely from BLANK to BLANK. (PLEASE SEE THE ATTACHED
SUPPLEMENTARY PROVISIONS)
Article 3. Party B may use the Leased Premises for the following purpose(s):
(1) INDUSTRIAL USE ;
(2) BLANK ;
(3) BLANK .
Party B's use of the Leased Premises for any purposes other than those set forth
above shall be subject to the written consent of Party A and may not be contrary
to the provisions of laws and regulations or to the provisions of government
regulations in respect of the purpose(s) of the Leased Premises.
Article 4. Party A warrants that the purpose(s) of the Leased Premises set forth
in the preceding Article conform(s) to the provisions of laws and regulations
and the provisions of government regulations.
Article 5. The unit monthly rental per square meter for the Leased Premises
shall be TWENTY-SIX YUAN AND EIGHTY CENTS Yuan Renminbi (RMB 26.80).
The rental for the Leased Premises shall be calculated on the basis of the floor
area. (PLEASE SEE THE ATTACHED SUPPLEMENTARY PROVISIONS)
Party B shall pay the rental of THREE HUNDRED AND THIRTY-FIVE THOUSAND NINE
HUNDRED AND NINETY-THREE Yuan Renminbi (RMB 335,993) to Party A by the 5TH day
of each month (the BLANK day of the BLANK month of each quarter).
4
<PAGE> 5
Party B shall pay the rent in cash or by check (the bank with which Party B's
account is held is BLANK and the account no. is BLANK; the bank with which Party
A's account is held is CITIC BANK SHENZHEN BRANCH BAGUA LING SUB-BRANCH and the
account no. is 74414101 82200020 852).
Article 6. Party A shall deliver the Leased Premises to Party B by BLANK (within
BLANK days after BLANK). (PLEASE SEE THE ATTACHED SUPPLEMENTARY PROVISIONS)
If Party A delivers the Leased Premises after the time set forth in the
preceding paragraph, Party B may request an extension of the term of this Lease,
provided that the period of such extension does not exceed the period of Party
A's delay in delivery.
Article 7. Before (when) Party A delivers the Leased Premises, it may collect a
lease deposit from Party B equivalent to BLANK month's (months') rent, namely
BLANK Yuan Renminbi/Hong Kong Dollars (RMBYen/HK$ BLANK).
When collecting the lease deposit, Party A shall issue a receipt to Party B.
Party A shall refund the lease deposit to Party B by BLANK (upon expiration of
this Lease) or set off the same against the rental for the period from BLANK to
BLANK. (PLEASE SEE THE ATTACHED SUPPLEMENTARY PROVISIONS)
Article 8. During the term of this Lease, the following taxes and fees relating
to the Leased Premises shall be paid by Party A:
(1) the property tax;
(2) the land use fee;
(3) the premises lease administration fee;
(4) THE REGISTRATION FEE AND STAMP DUTY OF THIS LEASE;
(5) THE CONNECTION FEES IN RELATION TO THE CONNECTION OF ALL THE UTILITIES
SUPPLY TO THE LEASED PREMISES STIPULATED IN THIS LEASE;
(6) ALL OTHER TAXES AND FEES ARISING FROM OR IN CONNECTION WITH THIS LEASE,
UNLESS OTHERWISE STATED HEREIN.
Party B agrees to pay the taxes and fees in items (/), (/), (/), (/), (/) and
(/) on behalf of Party A. The amounts may be deducted from the rental.
Article 9. During the term of this Lease, the following charges relating to the
Leased Premises shall be paid by Party B:
5
<PAGE> 6
(1) tap water charges;
(2) electricity charges;
(3) sanitation charges;
(4)
(5) OTHER UTILITIES CHARGES INCURRED BY PARTY B INSIDE THE LEASED PREMISES;
(6) BLANK;
(7) BLANK.
The charges in items (/), (/), (/) and (/) above shall be paid to Party A. The
charges in items (/), (/), (/) and (/) above that are collected by Party A on
behalf of others shall be paid by Party B to Party A.
Article 10. Party B shall use the Leased Premises and the facilities (furniture)
therein in a normal and reasonable way. Party B may not carry out the following
activities in the Leased Premises:
(1) illegal activities;
(2) alteration of the structure of the Leased Premises without the written
consent of Party A and the Futian Free Trade Zone Administration;
(PLEASE SEE THE ATTACHED SUPPLEMENTARY PROVISIONS)
(3) (such as playing music between 12 noon and 2 p.m. or after 11 p.m.)
BLANK ;
(4) BLANK ;
(5) BLANK ;
(6) BLANK ;
(7) BLANK .
Article 11. Party A may not interfere with or hinder Party B's normal and
reasonable use of the Leased Premises.
During the term of this Lease, Party A may not carry out the following
activities:
(1) enter the Leased Premises without Party B's explicit or tacit consent;
6
<PAGE> 7
(2) (PLEASE SEE THE ATTACHED SUPPLEMENTARY PROVISIONS);
(3) BLANK ;
(4) BLANK ;
(5) BLANK ;
(6) BLANK ;
(7) BLANK .
Article 12. Party A shall inspect and maintain the Leased Premises and the
facilities therein and ensure the safety and the normal state of the premises
and the facilities therein at regular intervals of 3 days (months).
If damage or a malfunction that compromises safety or hinders normal use arises
or occurs in respect of the Leased Premises or the facilities therein, Party B
shall timely notify Party A and take effective measures to prevent or reduce the
spread of the damage or malfunction. Party A shall carry out repairs within 7
days after receipt of Party B's notice. If Party B is unable to notify Party A
or Party A refuses to carry out repairs, Party B may carry out repairs on behalf
of Party A.
The expenses for repairs (including repairs carried out by Party B on behalf of
Party A) under this Article shall be borne by Party A.
Article 13. If damage arises or a malfunction occurs in respect of the Leased
Premises or the facilities therein due to improper or unreasonable use by Party
B, Party B shall be responsible for timely repair or compensation. If Party A
carries out repairs on behalf of Party B, Party B shall pay the repair costs to
Party A.
Article 14. During the term of this Lease, Party A may, if truly necessary and
after obtaining Party B's consent, alter, expand or renovate the Leased
Premises. During the alteration, expansion or renovation period, the
implementation of this Lease may be suspended and the alteration, expansion or
renovation period excluded from the term of lease fixed herein, unless Party A
provides Party B with other premises. (PLEASE SEE THE ATTACHED SUPPLEMENTARY
PROVISIONS)
Article 15. Party B may renovate the Leased Premises during the term of this
Lease, subject to the consent of Party A and the approval of the Futian Free
Trade Zone Administration. The Parties shall enter into a separate written
agreement in respect thereof. (PLEASE SEE THE ATTACHED SUPPLEMENTARY PROVISIONS)
7
<PAGE> 8
Party B shall compensate for any loss caused to Party A due to renovation done
by Party B without authorization.
Article 16. Party B may assign the lease of the Leased Premises to another party
during the term of this Lease, subject to the consent of Party A. The Parties
shall enter into a separate written agreement in respect thereof. (PLEASE SEE
THE ATTACHED SUPPLEMENTARY PROVISIONS)
Article 17. If Party A assigns all or part of the Leased Premises during the
term of this Lease, it shall give Party B one month's prior notice. Given equal
conditions, Party B shall have a preemptive right of purchase. (PLEASE SEE THE
ATTACHED SUPPLEMENTARY PROVISIONS)
If the Leased Premises are assigned to a third party, Party A shall ensure that
the assignee performs the obligations of Party A specified herein.
Article 18. This Lease shall automatically terminate if any of the following
circumstances occurs during the term of this Lease:
(1) an event of force majeure or an accident occurs, making it impossible to
perform this Lease; (PLEASE SEE THE ATTACHED SUPPLEMENTARY PROVISIONS)
(2) the Leased Premises need to be demolished because the government has
decided to requisition the land on which the Leased Premises are
situated; or
(3) Party A's Premises Lease Permit (No. (2000) FANG ZU ZHENG NO.9) becomes
void.
Party B may claim compensation from Party A if he suffers loss as a result of
termination of the Lease due to the circumstance mentioned in item (3) of the
preceding paragraph.
(PLEASE SEE THE ATTACHED SUPPLEMENTARY PROVISIONS)
Article 19. If Party B dies (assigns his property rights) during the term of
this Lease, this Lease shall terminate. However, if the person using the Leased
Premises in common with Party B (the assignee of the property rights) requests a
continuation of the use of all or a part of the Leased Premises, Party A shall
continue to perform the obligations specified herein, and may not increase the
amount of rent for the unit or shorten the lease term specified herein, after
the corresponding changes have been made to this Lease. (PLEASE SEE THE ATTACHED
SUPPLEMENTARY PROVISIONS)
Article 20. During the term of this Lease, this Lease may be terminated if the
Parties reach a consensus thereon after consultations.
8
<PAGE> 9
Article 21. Party A may terminate this Lease if:
(1) Party B fails to pay the rent for a consecutive period of three months
or more;
(2) Party A provides Party B with the Leased Premises specified herein, and
Party B, without legitimate reason, does not move in to use (reside in)
the Leased Premises for a consecutive period of one month or more;
(PLEASE SEE THE ATTACHED SUPPLEMENTARY PROVISIONS)
(3) Party B, without legitimate reason, does not use (reside in) the Leased
Premises, leaving them vacant, for a consecutive period of 6 months or
more; (PLEASE SEE THE ATTACHED SUPPLEMENTARY PROVISIONS)
(4) Party B, without the consent of Party A, uses the Leased Premises for a
purpose not specified in Article 3 hereof and fails to rectify such
situation;
(5) Party B breaches Article 10 hereof and fails to rectify such breach;
(6) Party B breaches Article 13 hereof by failing to assume his repair
responsibility or to pay the repair costs;
(7) Party B renovates the Leased Premises without the consent of Party A;
(8) Party B assigns the lease of the Leased Premises to a third party
without the consent of Party A;
(9) Party A truly needs to use the Leased Premises due to residential or
business requirements; or (PLEASE SEE THE ATTACHED SUPPLEMENTARY
PROVISIONS)
(10) there are other reasonable grounds for terminating this Lease. (PLEASE
SEE THE ATTACHED SUPPLEMENTARY PROVISIONS)
If the circumstance in item (1), (2), (3), (4), (5), (6), (7) or (8) of the
preceding paragraph causes Party A to suffer loss, Party B shall compensate
Party A. If the circumstance in item (9) or (10) of the preceding paragraph
causes Party B to suffer loss, Party A shall compensate Party B. (PLEASE SEE THE
ATTACHED SUPPLEMENTARY PROVISIONS)
Article 22. Party B may terminate this Lease if:
(1) Party A delays the delivery of the Leased Premises by 1 month or more; -
(2) the premises delivered by Party A for Party B's use do not conform
9
<PAGE> 10
with the premises specified herein;
(3) Party A breaches Article 4 hereof, making it impossible for Party B to
use the Leased Premises for his objective(s);
(4) Party A breaches Article 11 hereof and fails to rectify such breach;
(5) Party A breaches Article 12 hereof by failing to assume its repair
responsibility or to pay the repair expenses;
(6) it has become impossible to use the Leased Premises for the purpose(s)
specified herein;
(7) Party B truly needs to move out of the Leased Premises due to living,
work or business reasons, etc.; or
(8) there are other reasonable grounds for terminating this Lease.
If the circumstance in item (1), (2), (3), (4), (5) or (6) of the preceding
paragraph causes Party B to suffer loss, Party A shall compensate Party B. If
the circumstance in item (7) or (8) of the preceding paragraph causes Party A to
suffer loss, Party B shall compensate Party A. (PLEASE SEE THE ATTACHED
SUPPLEMENTARY PROVISIONS)
Article 23. If the Parties fail to reach a consensus on termination of the Lease
after consultations, the authority that registered this Lease may be requested
to mediate.
The authority that registered this Lease may confirm the reasonable grounds as
referred to in item (10) of Article 21 and item (8) of Article 22. (PLEASE SEE
THE ATTACHED SUPPLEMENTARY PROVISIONS)
Article 24. If Party B needs to continue to lease and use the Leased Premises
after the expiration of the term hereof, he shall request an extension from
Party A BLANK month(s) before expiration of the term. If Party A needs to
continue to lease out the Leased Premises, Party B shall, given equal
conditions, have a preemptive right to lease the Leased Premises.
If the Parties reach an agreement on extending the lease, they shall conclude a
separate lease.
(PLEASE SEE THE ATTACHED SUPPLEMENTARY PROVISIONS)
Article 25. If the Parties have not reached an extension agreement at the
expiration of the term hereof, Party B shall vacate the Leased Premises and
return them to Party A within BLANK days after expiration of the said term. If
Party B fails to vacate and to return the Leased Premises within the specified
term, he shall pay double rent to Party A. (PLEASE SEE THE ATTACHED
10
<PAGE> 11
SUPPLEMENTARY PROVISIONS)
Article 26. If Party A fails to deliver the Leased Premises to Party B for his
use by the time specified herein, it shall pay liquidated damages to Party B in
the amount of BLANK Yuan Renminbi/Hong Kong Dollars (RMBYen/HK$ BLANK) for each
day of delay.
Article 27. If the Leased Premises and the facilities (furniture) therein
delivered by Party A fail to conform with the Leased Premises and the facilities
(furniture) stipulated herein or the Leased Premises cannot be used for the
purpose(s) specified herein, Party A shall pay liquidated damages to Party B in
the amount of BLANK Yuan Renminbi/Hong Kong Dollars (RMBYen/HK$ BLANK).
Article 28. If Party B delays the rental payment, he shall pay liquidated
damages to Party A in the amount of BLANK Yuan Renminbi/Hong Kong Dollars
(RMBYen/HK$ BLANK) for each day of delay.
Article 29. If Party B assigns the lease to all or part of the Leased Premises
to a third party without permission, he shall pay liquidated damages to Party A
at a daily (monthly) rate of BLANK Yuan Renminbi/Hong Kong Dollars (RMBYen/HK$
BLANK) per square meter of the area of the premises whose lease has been
assigned (BLANK percent of the difference between the rent of the assigned lease
and the rent specified herein). (PLEASE SEE THE ATTACHED SUPPLEMENTARY
PROVISIONS)
Article 30. If either Party's failure to perform its or his obligations
hereunder causes the other Party to suffer loss, it or he shall compensate the
other Party for that Party's actual loss and foreseeable earnings.
Article 31. For other matters agreed upon by the Parties, see the Attached
Page(s) hereto. The contents of the Attached Page(s) shall be as valid and
effective as this Lease.
Article 32. Any matters not covered herein may be provided for in supplementary
agreements made by the Parties upon separate consultations. Such supplementary
agreements shall be as valid and effective as this Lease.
Article 33. Any dispute between the Parties concerning the performance of this
Lease shall be settled through consultations. If consultations are unsuccessful,
the authority that registered this Lease may be requested to mediate or
proceedings may be instituted in the People's Court. (PLEASE SEE THE ATTACHED
SUPPLEMENTARY PROVISIONS)
Article 34. The original of this Lease is written in Chinese. The ENGLISH
language version shall be a duplicate.
Article 35. This Lease is made in five copies, of which Party A and Party B
11
<PAGE> 12
shall each hold one copy and the contract registration authority shall hold two
copies.
Article 36. This Lease shall be effective from BLANK (BLANK). (PLEASE SEE THE
ATTACHED SUPPLEMENTARY PROVISIONS)
Party A (signature/seal):
Legal representative: Wang Bao Cheng /s/ WANG BAO CHENG
Contact telephone: (86755) 359-2282
Appointed agent (signature/seal):
Party B (signature/seal):
Legal representative: Bob Ma /s/ BOB MA
Contact telephone: 86755-6525100
Appointed agent (signature/seal):
6 April, 2000
-----------------------------
Witness (signature/seal):
Handled by (signature/seal):
______________________, 199__
Contract registration authority
(signature/seal):
______________________, 199__
12
<PAGE> 13
SUPPLEMENTARY PROVISIONS
1. Supplement to Article 1 of the Standard Form Contract
(a) The Leased Premises shall comprise 50.27% of the total gross floor area
of Wan Li Industrial Building (the "Building") as delineated in pink in
the floor plan attached to this Lease as Attachment 1. The total gross
floor area of the Leased Premises shall be 12,537.06 square metres.
(b) At the time of the delivery of the Leased Premises by Party A to Party
B, the Leased Premises shall be equipped with all the facilities and
equipment listed in Attachment 2 hereto.
2. Supplement to Article 2 of the Standard Form Contract
The term of the Leased Premises shall be five (5) years commencing on the
Handover Date as defined in Article 5 (a) of these Supplementary Provisions (the
"Lease Term").
3. Supplement to Article 4 of the Standard Form Contract
In addition to the warranty sets out in Article 4 of the Standard Form Contract,
Party A also represents, warrants and undertakes to Party B that:
(a) as of the date of this Lease and throughout the Lease Term, it is and
will continue to be the legal and sole owner of the Leased Premises and
has the right to lease the Leased Premises in accordance with the terms
and conditions of this Lease;
(b) as of the date of this Lease and throughout the Lease Term, the Leased
Premises and the STS Portion (as defined in the Shenzhen Real Estate
Sales and Purchase Contract dated 6 April 2000 between Party A and Party
B ("S&P Contract")) are not and will not be subject to any mortgages,
liens or other encumbrances or third party rights or interests the
aggregate amount of which is in excess of RMB40,023,015;
(c) it has all the requisite power, authority and approval required to enter
into this Lease and has all the requisite power, authority and approval
to fully perform each of its obligations hereunder;
(d) its representative whose signature is affixed hereto is fully authorized
to sign this Lease;
(e) there is no lawsuit, arbitration, or legal administrative or other
proceedings or government investigations pending or, to the best of its
knowledge, threatened against it with respect to the Leased Premises or
that would affect in any way its ability to enter into or perform this
Lease;
(f) the transaction contemplated in this Lease can be lawfully and
effectively carried out by the Parties under PRC laws and regulations
without undue or
<PAGE> 14
unreasonable clauses to the Parties;
(g) the Leased Premises have been built and refurbished in accordance with
the specifications agreed by the Parties as set out in Attachment 2
hereto attached and in compliance with all relevant PRC requirements,
standards and specifications;
(h) as of the date of this Lease and throughout the Lease Term, the Leased
Premises are and will continue to be structurally sound with proper
drainage and sewage system and the various utilities listed in
Attachment 2 hereto are and will continue to be connected and supplied
to the Leased Premised in accordance with the respective capacities
listed in Attachment 2;
(i) as of the date of this Lease and throughout the Lease Term, the Leased
Premises are and will continue to be fit for use by Party B for
industrial purposes;
(j) throughout the Lease Term, Party B shall be able to peacefully and
quietly hold and enjoy the Leased Premises provided that Party B
performing and observing all its obligations under this Lease;
(k) as of the date of this Lease and throughout the Lease Term, Party A has
complied and will continue to comply with all relevant PRC laws and
regulations and directions and orders of relevant PRC authorities
relating to:
(i) the Building (where applicable);
(ii) the ownership and the lease of the Leased Premises hereunder;
(iii) the observance or performance of its obligations hereunder; or
(iv) town and country planning and environmental protection or safety
in relation to the Building.
Party A shall immediately inform Party B in writing of any notice
received in relation to this paragraph (k);
(l) throughout the Lease Term, it shall maintain, repair and keep the
following aspects of the Leased Premises in good condition and repair:
(i) the exterior, structural parts, concealed parts, cables, ducts,
wiring and roof of the Building and the Leased Premises;
(ii) the fire fighting and protection equipment on the Leased
Premises;
(iii) all the facilities and equipment installed or provided by Party
A on the Leased Premises; and
(iv) the entrances, staircases, toilets and other conveniences and
all other common areas and facilities of the Leased Premises
intended for the
2
<PAGE> 15
use of Party B;
(m) it shall indemnify Party B in full and hold Party B harmless against all
proceedings, costs, expenses, claims, losses, damages, penalties and
liabilities in respect of any act, matter or thing done, omitted to be
done or permitted or suffered to be done in contravention of its
obligations, representations, warranties and undertakings hereunder.
4. Supplement to Article 5 of the Standard Form Contract
The rental for the Leased Premises shall be calculated on the basis of the gross
floor area. If the actual gross floor area of the Leased Premises is larger or
smaller than 12,537.06 square meters, the rental of the Leased Premises shall be
adjusted in accordance with the difference in area. If the actual gross floor
area of the Leased Premises differs from the area stated above by 5% or more,
Party B shall have the right to terminate this Lease. In such a case, Party A
shall pay compensation to Party B in accordance with Article 30 of the Standard
Form Contract.
Party B shall be exempted from its obligation to pay the rental of the Leased
Premises for the first two (2) months of the Lease Term. For the avoidance of
doubt, Party B shall be responsible for payment of the charges set out in
Article 9 of the Standard Form Contract during the aforesaid rent-free period.
5. Supplement to Article 6 of the Standard Form Contract
(a) Party A shall deliver vacant possession of the Leased Premises (except
Unit A on the second floor of the Building) to Party B on the date when
all of the following events have occurred (the "Handover Date"):
(i) this Lease and the S&P Contract have been duly notarized and
registered with the Land Planning Department of the Shenzhen
Futian Free Trade Zone in accordance with relevant PRC laws and
regulations; and
(ii) Party B has obtained a satisfactory written undertaking issued
by the Mortgagee (as defined in the S&P Contract) acknowledging
(1) its consent to the leasing of the Leased Portion by Party A
to Party B in accordance with this Lease and the granting by
Party A to Party B of the Option to purchase the Leased Portion
in accordance with the S&P Contract; and (2) its agreement to
enable Party B to exercise the Option in accordance with the S&P
Contract. Party A undertakes to Party B that it shall provide
the abovementioned written undertaking to Party B within seven
(7) days after the signing of this Lease.
(b) After this Lease is signed, Party A shall provide Party B with all the
necessary approval documents requested by Party B evidencing that the
Leased Premises are in full compliance with PRC governmental
requirements with respect to construction safety, environmental
protection, building standard and fire safety and that the gross floor
area of the Leased Premises as stated
3
<PAGE> 16
in this Lease is accurate and not misleading.
(c) Party A shall deliver vacant possession of Unit A on the second floor of
the Building to Party B within two (2) months after the issuance of Real
Estate Title Certificate for the Transfer Portion (as defined in the S&P
Contract) to Party B. Until Party B has actually obtained vacant
possession of the aforesaid portion of the Building, Party B shall not
be liable to pay any rental in respect of such portion.
6. Supplement to Article 7 of the Standard Form Contract
Article 7 of the Standard Form Contract shall be replaced by the following
provisions:
"As security against Party B's performance of its obligations hereunder,
Party B shall pay to Party A a rental deposit of 671,986 Yuan Renminbi
(equivalent to two months' rental of the Leased Premises) within 3 days
after the Escrow Agent (as defined in the S&P Contract) has released the
Escrowed Monies (as defined in the S&P Contract) to Party A in
accordance with the S&P Contract. Party A shall issue a receipt to Party
B upon receiving the rental deposit. At the expiry or early termination
of this Lease, Party A shall refund the rental deposit (without
interest) to Party B within 7 days after Party B has vacated and
returned the Leased Premises to Party A."
7. Supplement to Article 10(2) of the Standard Form Contract
Article 10(2) of the Standard Form Contract shall be amended by inserting
"(whose consent shall not be unreasonably withheld or delayed)" after the words
"Party A".
8. Supplement to Article 14 of the Standard Form Contract
Article 14 of the Standard Form Contract shall be deleted entirely.
9. Supplement to Article 15 of the Standard Form Contract
The following provision shall be inserted at the end of the first paragraph of
Article 15 of the Standard Form Contract:
"Party A shall not unreasonably withhold or delay in giving its consent
to any renovations of the Leased Premises requested by Party B provided
that the relevant renovations will not alter the external appearances of
the Building or damage the main structures of the Building."
10. Supplement to Article 16 of the Standard Form Contract
Article 16 of the Standard Form Contract shall be replaced by the following
provisions:
"(1) Party A acknowledges that Party B will apply to establish a PRC wholly
foreign-owned enterprise in the Futian Free Trade Zone ("Party B WFOE").
4
<PAGE> 17
The Parties hereby agree that within 14 days after the issue of the
business license of Party B WFOE, the board of directors of Party B WFOE
shall ratify and adopt this Lease. This Lease shall become binding on
both Party A and Party B WFOE as if they (instead of Party A and New
Focus Inc.) were the original parties thereto. Party A agrees and
acknowledges that, as from such date, New Focus Inc. shall be released
of all its obligations under this Lease.
(2) Party B shall have the right to sub-let all or any part of the Leased
Premises or assign all or part of this Lease to any third party by
giving a written notice to Party A and Party A is deemed to have given
its consent to such sub-letting or assignment. In such cases, Party B
shall provide an advance written notice to Party A and shall procure the
third party to comply with and perform all the obligations imposed upon
Party B in this Lease. Party A hereby undertakes to Party B that it will
take all necessary actions and execute all necessary documents
reasonably requested by Party B for effecting such sub-letting or
assignment in accordance with PRC laws and regulations."
11. Supplement to Article 17 of the Standard Form Contract
Without prejudice to Party B's right provided in Article 17 of the Standard Form
Contract, Party B shall have an option to purchase the Leased Premises from
Party A on or before the expiration of the first three (3) years of the Lease
Term in accordance with the terms and conditions set out in the S&P Contract.
12. Supplement to Article 18 of the Standard Form Contract
(a) Article 18(1) of the Standard Form Contract shall be replaced by the
following provisions:
"(1a) In the event that Party A or Party B shall be rendered unable to
perform or perform within the stipulated time the whole or any
part of its obligations under this Lease by reason of force
majeure, including serious fires not originating in the Leased
Premises, severely bad weather, floods, earthquakes, plagues or
other contagious diseases, wars, acts of government, and any
other causes of such nature (the occurrence or result of which
being unforeseeable and unavoidable, as well as insurmountable
by human efforts), the time limit for the performance of this
Lease or any provision thereof should be extended for a period
corresponding to the effects of such cause.
(1b) The Party affected by the event of force majeure shall inform
the other Party in the shortest possible time after the
occurrence of such event and provide the other party with
documents sufficiently evidencing the cause, nature and severity
of the occurrence of such event as soon as possible.
(1c) Upon the occurrence of an event of force majeure, the Parties
shall use their best endeavours to reduce the effects of such
event on the performance of this Lease to a minimum.
5
<PAGE> 18
(1d) If the occurrence or effects of a force majeure event lasts for
a continuous period of six (6) months and the Parties have not
found an equitable solution, then either Party may terminate
this Lease, provided that the terminating Party has performed
its obligations under this sub-article."
(b) Without prejudice to the provisions of Article 18 of the Standard Form
Contract, this Lease shall be automatically terminated upon Party B's
exercise of its option to purchase the Leased Premises in accordance
with Clause 11 of these Supplementary Provisions and the S&P Contract.
13. Supplement to Article 19 of the Standard Form Contract
Article 19 of the Standard Form Contract shall be deleted entirely.
14. Supplement to Article 21 of the Standard Form Contract
(a) Provided that Party B continues to pay the rental of the Leased Premises
in accordance with this Lease, Party A shall not have the right to
terminate this Lease under Article 21(2) and (3) of the Standard Form
Contract.
(b) Article 21(9) and (10) of the Standard Form Contract shall be deleted
entirely.
(c) Without prejudice to the provisions of Article 21 of the Standard Form
Contract, Party A shall have the right to terminate this Lease if Party
B materially breaches its obligations hereunder and fails to remedy such
breach within one (1) month after receiving a notice in writing from
Party A requesting for rectification of the breach. In such a case,
Party B shall pay compensation to Party A in accordance with Article 30
of the Standard Form Contract.
15. Supplement to Article 22 of the Standard Form Contract
Without prejudice to the provisions of Article 22 of the Standard Form Contract,
Party B shall also have the right to terminate this Lease if:
(a) Party A materially breaches its obligations hereunder and fails to
remedy such breach within 14 days after receiving a notice in writing
from Party B requesting for rectification of the breach. In such a case,
Party A shall pay compensation to Party B in accordance with Article 30
of the Standard Form Contract; or
(b) the S&P Contract is terminated for whatever reason.
16. Supplement to Article 23 of the Standard Form Contract
The second paragraph of Article 23 of the Standard Form Contract shall be
amended by deleting the words "item (10) of Article 21 and" from such paragraph.
17. Supplement to Article 24 of the Standard Form Contract
6
<PAGE> 19
Article 24 of the Standard Form Contract shall be replaced by the following
provisions:
"Party B shall have the right to extend the Lease Term of the Leased
Premises for another five (5) years commencing immediately after the
expiration of the first 5-year term. If Party B decides to exercise this
right of renewal, Party B shall inform Party A in writing at least one
(1) month before the expiration of the Lease Term. The terms and
conditions for the lease of the Leased Premises during the renewal term
shall be the same as in this Lease, except that the rental for the
renewal term shall be negotiated and agreed by the Parties based on the
prevailing market rates. The Parties shall conclude a separate contract
for the renewal term."
18. Supplement to Articles 25 of the Standard Form Contract
The first sentence of Article 25 of the Standard Form Contract shall be replaced
by the following sentence:
"If Party B does not exercise its right to extend the Lease Term of the
Leased Premises in accordance with Clause 17 of these Supplementary
Provisions, Party B shall vacate the Leased Premises and return them in
their original state (fair wear and tear excepted) to Party A within 14
days after expiration of the said term."
19. Supplement to Article 29 of the Standard Form Contract
Article 29 of the Standard Form Contract shall be deleted entirely.
20. Supplement to Article 33 of the Standard Form Contract
Article 33 of the Standard Form Contract shall be replaced by the following
provisions:
"(1) This Lease shall be governed by and construed in accordance with the
laws of the PRC.
(2) In the event any dispute arises in connection with the interpretation or
implementation of this Lease, 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 Party for
the commencement of consultations, then either Party may refer the
dispute to arbitration in accordance with the provisions of paragraph
(3) below.
(3) With respect to any disputes which have not been resolved through
consultations, they shall be submitted for arbitration to the China
International Economic And Trade Arbitration Commission (hereinafter
referred to as iArbitration Institutei) in Shanghai, for final decision
pursuant to the provisions
7
<PAGE> 20
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 Lease;
(b) all proceedings in any arbitration shall be conducted in English
and Mandarin Chinese; and
(c) there shall be three (3) arbitrators. Party A and Party B shall
each select one (1) arbitrator. The third arbitrator shall be
appointed by the Arbitration Institute and shall serve as
chairman of the arbitration tribunal.
(4) The arbitration award shall be final and binding on the Parties, and the
Parties agree to be bound thereby and to act accordingly.
(5) The costs of arbitration shall be borne by the Party or Parties as
designated in the arbitration award.
(6) 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 Lease."
21. Supplement to Article 36 of the Standard Form Contract
Article 36 of the Standard Form Contract shall be amended as follows:
"This Lease shall be effective upon signing by the authorized
representatives of the Parties."
22. Miscellaneous
(a) During the Lease Term, Party B shall be entitled to put up one or more
signs, and to remove any existing signs, posters, etc., anywhere on,
attached to or inside the Building, except for such portion of the
Building currently leased and occupied by STS.
(b) Without prejudice to the right of Party B to put up signs on the
Building as stipulated in paragraph (a) above, if Party B does not
exercise the option to purchase the Leased Premises in accordance with
this Lease and the S&P Contract, then commencing from the fourth year
until the expiration or early termination of this Lease, Party B shall,
upon request by Party A and at Party B's expense, also put up a sign on
the Building with the name "WAN LI".
(c) During the Lease Term or thereafter upon the exercise of the option to
purchase the Leased Premises in accordance with this Lease and the S&P
8
<PAGE> 21
Contract, Party B shall have the right to name the Building.
(d) Each party shall bear its own legal costs of and incidental to this
Lease.
(e) Immediately after the signing of this Lease, Party A shall carry out the
registration of this Lease with the Land Planning Department of the
Shenzhen Futian Free Trade Zone in accordance with relevant PRC laws and
regulations. Party A shall promptly provide a photocopy set of the
registration documents to Party B.
(f) The Standard Form Contract, these Supplementary Provisions and all the
attachments attached thereto and hereto shall form an integral part of
this Lease and have the same legal effect. In the event of any
inconsistency between the Standard Form Contract and these Supplementary
Provisions, these Supplementary Provisions shall prevail.
(g) This Lease may not be amended orally, and any amendments hereto must be
agreed to in a written instrument signed by both Parties before taking
effect.
(h) The invalidity of any of the provisions of this Lease shall not affect
the validity and effectiveness of the other provisions of this Lease.
(i) To the extent permitted by Chinese law, failure or delay on the part of
any of the Parties hereto to exercise a right, power or privilege under
this Lease shall not operate as a waiver thereof; nor shall any single
or partial exercise of a right, power or privilege preclude any other
future exercise thereof.
(j) This Lease is made for the benefit of the Parties and their respective
lawful successors and assignees and are legally binding on them.
(k) Any notice or written communication provided for in this Lease from one
Party to the other Party shall be made in writing in English and sent by
courier service delivered letter, or by facsimile or electronic mail
with a confirmation copy sent by courier service delivered letter. The
date of a notice or communication hereunder shall be deemed to the date
when the notice is sent or dispatched, whether by courier service,
facsimile or electronic mail. 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.
SHENZHEN LIBAOYI INDUSTRY DEVELOPMENT CO., LTD.
No.2 Bagua 5 Road, Futian District,
Shenzhen, PRC
Facsimile No: (86755) 359-2282
Attention: Mr. Wang Bao Cheng / Mr. Wang Jin Cheng
NEW FOCUS INC.
Building R3-B, Unit A, 1st Floor,
Shenzhen High-Tech Industrial Park,
Nanshan District, Shenzhen, PRC
9
<PAGE> 22
Facsimile No: (86755) 652-5150
Attention: Mr. Hui (Tom) Tang
Email Address:[email protected]
10
<PAGE> 23
IN WITNESS WHEREOF, each of the Parties hereto have caused these Supplementary
Provisions to be executed by their duly authorized representatives on the date
first set forth above.
SHENZHEN LIBAOYI INDUSTRY NEW FOCUS INC.
DEVELOPMENT CO., LTD. (FOR ITSELF AND ON BEHALF OF ITS WHOLLY
FOREIGN-OWNED ENTERPRISE TO BE
ESTABLISHED IN FUTIAN FREE TRADE ZONE,
SHENZHEN)
By: /s/ WANG BAO CHENG By: /s/ BOB MA
--------------------------- ------------------------------------
Name: Wang Bao Cheng Name: Bob Ma
Title: Chairman Title: General Manager
Nationality: China Nationality: USA
Adopted and ratified by the Board of Directors of Party B WFOE upon its
establishment
[NAME OF PARTY B WFOE]
___________________________________
By: _______________________________
Name:
Title:
Nationality:
11
<PAGE> 24
ATTACHMENT 1
FLOOR PLAN OF THE LEASED PREMISES
<PAGE> 25
ATTACHMENT 2
SPECIFICATIONS
<TABLE>
- --------------------------------------------------------------------------------------------
<S> <C>
BUILDING STRUCTURE AND TYPE Pipe pile foundation, framework structure with seven
floors
- --------------------------------------------------------------------------------------------
LAND AREA 9,520.8 square meters
- --------------------------------------------------------------------------------------------
TOTAL GROSS FLOOR AREA 24,947.37 square meters
- --------------------------------------------------------------------------------------------
FLOOR HEIGHT First floor: 4.8 meters; Second to sixth floor: 3.8
meters;
Seventh floor: 3.9 meters
- --------------------------------------------------------------------------------------------
CLEAR HEIGHT 31.9 meters
- --------------------------------------------------------------------------------------------
FLOOR LOADING First to third floor: 800 kg/square meter;
Fourth to seventh floor: 500 kg/square meter.
- --------------------------------------------------------------------------------------------
UTILITIES PROVISION
(a) POWER 2,000 KVA, three-phase, five-wire power
source. Each unit is equipped with a
distribution box.
(b) WATER Connected to the local government network
and from self-equipped water pumping station
(c) TELECOMMUNICATIONS Each unit is equipped with 5 to 10 telephone lines with
international direct dialing
- --------------------------------------------------------------------------------------------
FIRE FIGHTING EQUIPMENT Automatic sprinkler system, fire hydrant system
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 26
<TABLE>
- --------------------------------------------------------------------------------------------
<S> <C>
FURNISHING STANDARDS (a) Exterior walls: lath face bricks
building floors: first
floor: wearproof tiles;
other floors: cement plaster
(b) Interior walls: latex paint
(c) Ceilings: corridors: false ceilings;
rooms: white latex paint
(d) Floors: first floor: wearproof
tiles; other floors: cement
plaster
(e) Doors and windows: doors: fire doors
windows: white aluminum
alloy frames; green panes
(f) Bathrooms: each unit has separate
ladies' and gents' toilets
(g) Elevators: two 3-tonne goods
elevators and two
2-tonne goods elevators
(h) Miscellaneous: (a) each unit has a fire door
(b) automatic sprinkler system,
fire hydrant system
- --------------------------------------------------------------------------------------------
</TABLE>
<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 April , 2000) in Amendment No. 4 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.
Ernst & Young LLP
San Jose, California
April , 2000
- --------------------
The foregoing consent is in the form that will be signed upon the completion of
the Company's reincorporation in the state of Delaware.
San Jose, California
April 24, 2000
