<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 5, 2000
REGISTRATION NO. 333-32206
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
SONUS NETWORKS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3661 04-3387074
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
5 CARLISLE ROAD, WESTFORD, MASSACHUSETTS 01886
(978) 692-8999
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
HASSAN M. AHMED
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SONUS NETWORKS, INC.
5 CARLISLE ROAD
WESTFORD, MASSACHUSETTS 01886
(978) 692-8999
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
DAVID L. ENGEL, ESQ. DAVID C. CHAPIN, ESQ.
JOHAN V. BRIGHAM, ESQ. ROPES & GRAY
BINGHAM DANA LLP ONE INTERNATIONAL PLACE
150 FEDERAL STREET BOSTON, MASSACHUSETTS 02110
BOSTON, MASSACHUSETTS 02110 TELEPHONE (617) 951-7000
TELEPHONE (617) 951-8000 TELECOPY (617) 951-7050
TELECOPY (617) 951-8736
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date hereof.
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,
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 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 number of the earlier effective registration statement for the same
offering. / / _________________________________________________________________
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS
OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO BE AGGREGATE OFFERING AGGREGATE AMOUNT OF
REGISTERED REGISTERED(1) PRICE PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE(3)
<S> <C> <C> <C> <C>
Common Stock, $0.001
par value per
share.............. 5,750,000 $21.00 $120,750,000 $31,878
</TABLE>
(1) Includes 750,000 shares of common stock which may be purchased by the
underwriters to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
(3) A registration fee of $30,360 was paid upon the initial filing of this
registration statement based on an estimate of the maximum aggregate
offering price. Accordingly, an additional registration fee of of $1,518 is
being paid herewith.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 5, 2000.
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
5,000,000 Shares
[LOGO]
Common Stock
------------------
This is an initial public offering of shares of common stock of Sonus
Networks, Inc. All of the 5,000,000 shares of common stock are being sold by
Sonus Networks.
Prior to this offering, there has been no public market for the common
stock. It is currently estimated that the initial public offering price per
share will be between $19.00 and $21.00. We have applied to list our common
stock on the Nasdaq National Market under the symbol "SONS".
SEE "RISK FACTORS" BEGINNING ON PAGE 4 TO READ ABOUT FACTORS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF THE COMMON STOCK.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
<TABLE>
<CAPTION>
Per Share Total
--------- --------
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Sonus Networks................ $ $
</TABLE>
To the extent that the underwriters sell more than 5,000,000 shares of
common stock, the underwriters have the option to purchase up to an additional
750,000 shares from Sonus Networks at the initial public offering price less the
underwriting discount.
------------------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 2000.
GOLDMAN, SACHS & CO.
J.P. MORGAN & CO.
LEHMAN BROTHERS
ROBERTSON STEPHENS
------------------------
Prospectus dated , 2000.
<PAGE>
[Inside front cover: Graphics titled "Enabling the New Public Network"
depicting telephone, computer mouse, globe, world map and Sonus GSX9000 Open
Services Switch, all superimposed.]
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION REGARDING US AND THE COMMON STOCK BEING SOLD IN THIS OFFERING AND
OUR CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES TO THOSE STATEMENTS,
APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THIS
PROSPECTUS ASSUMES:
- THE CONVERSION OF OUR OUTSTANDING SHARES OF REDEEMABLE CONVERTIBLE
PREFERRED STOCK INTO AN AGGREGATE OF 32,319,074 SHARES OF COMMON STOCK
UPON THE CLOSING OF THIS OFFERING; AND
- THAT THE UNDERWRITERS DO NOT EXERCISE THEIR OPTION GRANTED BY US TO
PURCHASE ADDITIONAL SHARES IN THIS OFFERING.
ABOUT SONUS NETWORKS
We are a leading provider of voice infrastructure products for the new
public network. Our products are a new generation of carrier-class switching
equipment and software that enable voice services to be delivered over
packet-based networks. Our target customers include new and established
communications service providers, including long distance carriers, local
exchange carriers, Internet service providers, cable operators, international
telephone companies and carriers that provide services to other carriers. These
service providers are rapidly building packet-based networks to support the
dramatic growth in data traffic resulting from Internet use. Packet-based
networks, which transport traffic in small bundles, or "packets," offer a
significantly more flexible, cost-effective and efficient means for providing
communications services than existing circuit-based networks, designed years ago
for telephone calls. By enabling voice traffic to be carried over these
packet-based networks, our products will accelerate the convergence of voice and
data into the new public network.
Our suite of voice infrastructure products includes the GSX9000 Open
Services Switch, PSX6000 SoftSwitch, SGX2000 SS7 Signaling Gateway and System
9200 Internet offload solution. Our products, designed for deployment at the
core of a service provider's network infrastructure, significantly reduce the
cost to build and operate voice services compared to traditional alternatives.
Moreover, our products offer a powerful and open platform for service providers
to increase their revenues through the creation and delivery of new and
innovative voice and data services. Our switching equipment and software can be
rapidly and easily deployed, and readily expanded to accommodate growth in
traffic volumes. Our products also interoperate with service providers' existing
telephone infrastructure, allowing them to preserve the investment in their
current networks. Designed for the largest telephone networks in the world, our
products offer the reliability and voice quality that have been hallmarks of the
public telephone network for decades.
Two global forces -- deregulation and the Internet -- are expected to
revolutionize the 100-year old public telephone network worldwide. Deregulation
has fueled intense competition among service providers and is driving them to
reduce their costs and establish new revenue sources. The dramatic rise in
Internet use and accompanying growth in data traffic has led service providers
to make major investments in high-capacity, packet-based networks. Building and
maintaining these packet-based networks in parallel with traditional
circuit-switched telephone networks is complex and expensive, driving the demand
for a new public network that integrates both voice and data. Synergy Research
Group projects that the market for voice infrastructure products to enable just
two applications for the new public network, voice over Internet protocol and
Internet offload, will grow dramatically to $19 billion in 2003.
Our customers include Global Crossing, Intermedia Communications and
Williams Communications, three of the world's leading service providers. We sell
our products through a direct sales force, distributors and resellers. We also
collaborate with our customers to identify and develop new advanced services and
applications that they can offer to their customers.
1
<PAGE>
Our objective is to capitalize on our early technology and market lead and
build the premier franchise in voice infrastructure solutions for the new public
network. The following are key elements of our strategy:
- Leverage our technology leadership to achieve key service provider design
wins;
- Expand and broaden our customer base by targeting specific market
segments;
- Expand our global sales, marketing, support and distribution capabilities;
- Grow our base of software applications and development partners;
- Leverage our technology platform from the core of the network out to the
access edge;
- Actively contribute to the standards definition and adoption process; and
- Expand through investments in and acquisitions of complementary products,
technologies and businesses.
Our principal executive offices are located at 5 Carlisle Road, Westford,
Massachusetts 01886, and our telephone number is (978) 692-8999. Sonus is a
trademark and service mark of Sonus Networks. Each trademark, trade name or
service mark of any other company appearing in this prospectus belongs to its
holder. Information contained on our Web site, WWW.SONUSNET.COM, does not
constitute part of this prospectus. We were incorporated as a Delaware
corporation in August 1997.
THE OFFERING
<TABLE>
<S> <C>
Shares offered by Sonus Networks........................... 5,000,000 shares
Shares to be outstanding after the offering (1)............ 60,277,103 shares
Use of proceeds............................................ For general corporate purposes, including
working capital and capital expenditures.
Proposed Nasdaq National Market symbol..................... "SONS"
</TABLE>
- ------------------------
(1) Based on the number of shares outstanding as of April 10, 2000. Excludes
2,852,923 shares of common stock issuable upon exercise of outstanding stock
options. Includes 14,201,842 shares of restricted common stock, which are
subject to our right to repurchase upon termination of employment.
2
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table contains summary financial data which should be read
together with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEAR ENDED THREE MONTHS ENDED
(AUGUST 7, 1997) TO DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------ ------------------------
1997 1998 1999 1999 2000
------------------- ---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues................... $ -- $ -- $ -- $ -- $ 1,093
Loss from operations....... (486) (7,228) (24,374) (4,163) (16,263)
Net loss................... (461) (6,914) (23,887) (4,043) (16,035)
Net loss applicable to
common stockholders...... (461) (6,914) (26,387) (4,043) (16,035)
Net loss per share (1):
Basic and diluted........ $ -- $ (4.27) $ (5.53) $ (1.23) $ (2.07)
Pro forma basic and
diluted................ (0.75) (0.41)
Shares used in computing
net loss per share (1):
Basic and diluted........ -- 1,619,289 4,774,763 3,285,170 7,742,970
Pro forma basic and
diluted................ 32,062,786 38,921,794
</TABLE>
The following table is a summary of our consolidated balance sheet as of
March 31, 2000:
- on an actual basis;
- on a pro forma basis to reflect the conversion of all outstanding shares
of our redeemable convertible preferred stock into 32,319,074 shares of
common stock upon the closing of this offering; and
- on a pro forma as adjusted basis to give effect to the sale of the
5,000,000 shares of common stock offered in this prospectus at an assumed
initial public offering price of $20.00 per share, the mid-point of the
range set forth on the cover of this prospectus, and after deducting
underwriting discounts and estimated offering expenses.
<TABLE>
<CAPTION>
MARCH 31, 2000 (UNAUDITED)
---------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
-------- -------- -----------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities............ $ 41,779 $41,779 $133,529
Working capital............................................. 35,122 35,122 126,872
Total assets................................................ 52,361 52,361 144,111
Long-term obligations, less current portion................. 3,293 3,293 3,293
Redeemable convertible preferred stock...................... 70,859 -- --
Total stockholders' equity (deficit)........................ (32,695) 38,164 129,914
</TABLE>
- ------------------------
(1) See note (1)(q) to our consolidated financial statements for an explanation
of the method of calculation. Pro forma per share calculation reflects the
conversion upon the closing of the offering of all the outstanding shares of
Series A, Series B, Series C and Series D redeemable convertible preferred
stock into shares of common stock, as if the conversion occurred at the date
of original issue.
3
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS DESCRIBED BELOW BEFORE BUYING OUR COMMON STOCK. IF ANY OF THE
FOLLOWING RISKS ACTUALLY OCCURS, THE TRADING PRICE OF OUR COMMON STOCK COULD
DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATING TO OUR BUSINESS AND FINANCIAL PERFORMANCE
WE EXPECT THAT A MAJORITY OF OUR REVENUES WILL BE GENERATED FROM A LIMITED
NUMBER OF CUSTOMERS, AND OUR REVENUES WILL NOT GROW IF WE DO NOT SUCCESSFULLY
SELL PRODUCTS TO THESE CUSTOMERS
To date, we have shipped our products to a limited number of customers, and
only during the first quarter of fiscal 2000 did we begin to recognize revenues.
We expect that in the foreseeable future, substantially all of our revenues will
depend on sales of our products to a limited number of customers. Our customers
are not contractually committed to purchase any minimum quantities of products
from us. The customers to whom we have shipped are currently using our products
in laboratory testing and internal trials. Our customers may not deploy our
products in their commercial networks on a timely basis, or at all, and any
delay or failure by our customers to introduce commercial services based on our
products, or a downturn in their business, would seriously harm our ability to
sell products and generate revenues.
WE WILL NOT BE SUCCESSFUL IF WE DO NOT GROW OUR CUSTOMER BASE BEYOND OUR INITIAL
FEW CUSTOMERS
Our future success will depend on our ability to attract additional
customers beyond our current limited number. The growth of our customer base
could be adversely affected by:
- customer unwillingness to implement our new voice infrastructure products;
- any delays or difficulties that we may incur in completing the development
and introduction of our planned products or product enhancements;
- new product introductions by our competitors;
- any failure of our products to perform as expected; or
- any difficulty we may incur in meeting customers' delivery requirements.
If we do not expand our customer base to include additional customers that
deploy our products in operational, commercial networks, our revenues will not
grow significantly, or at all.
THE MARKET FOR VOICE INFRASTRUCTURE FOR THE NEW PUBLIC NETWORK IS NEW AND
EVOLVING AND OUR BUSINESS WILL SUFFER IF IT DOES NOT DEVELOP AS WE EXPECT
The market for our products is rapidly evolving. Packet-based technology may
not be widely accepted as a platform for voice and a viable market for our
products may not develop or be sustainable. If this market does not develop, or
develops more slowly than we expect, we may not be able to sell our products in
significant volumes, or at all.
WE ARE ENTIRELY DEPENDENT UPON OUR VOICE INFRASTRUCTURE PRODUCTS AND OUR FUTURE
REVENUES DEPEND UPON THEIR COMMERCIAL SUCCESS
Our future growth depends upon the commercial success of our voice
infrastructure products, particularly the GSX9000 Open Services Switch and the
System 9200 Internet offload solution. We intend to develop and introduce new
products and enhancements to existing products in the future. We may not
successfully complete the development or introduction of these products. If our
target
4
<PAGE>
customers do not adopt, purchase and successfully deploy our current or planned
products, our revenues will not grow.
BECAUSE OUR PRODUCTS ARE SOPHISTICATED AND DESIGNED TO BE DEPLOYED IN COMPLEX
ENVIRONMENTS, THEY MAY HAVE ERRORS OR DEFECTS THAT WE FIND ONLY AFTER FULL
DEPLOYMENT, WHICH COULD SERIOUSLY HARM OUR BUSINESS
Our products are sophisticated and are designed to be deployed in large and
complex networks. Because of the nature of our products, they can only be fully
tested when completely deployed in very large networks with high volumes of
traffic. Our customers have not yet commercially deployed our products and they
may discover errors or defects in the software or hardware, or the products may
not operate as expected, after full deployment.
If we are unable to fix errors or other performance problems that may be
identified after full deployment of our products, we could experience:
- loss of, or delay in, revenues;
- loss of customers and market share;
- a failure to attract new customers or achieve market acceptance for our
products;
- increased service, support and warranty costs and a diversion of
development resources; and
- costly and time-consuming legal actions by our customers.
IF WE DO NOT RESPOND RAPIDLY TO TECHNOLOGICAL CHANGES OR TO CHANGES IN INDUSTRY
STANDARDS, OUR PRODUCTS COULD BECOME OBSOLETE
The market for voice infrastructure products for the new public network is
likely to be characterized by rapid technological change and frequent new
product introductions. We may be unable to respond quickly or effectively to
these developments. We may experience difficulties with software development,
hardware design, manufacturing or marketing that could delay or prevent our
development, introduction or marketing of new products and enhancements. The
introduction of new products by competitors, the market acceptance of products
based on new or alternative technologies or the emergence of new industry
standards could render our existing or future products obsolete. If the
standards adopted are different from those that we have chosen to support,
market acceptance of our products may be significantly reduced or delayed. If
our products become technologically obsolete, we may be unable to sell our
products in the marketplace and generate revenues.
WE DEPEND UPON CONTRACT MANUFACTURERS AND ANY DISRUPTION IN THESE RELATIONSHIPS
MAY CAUSE US TO FAIL TO MEET THE DEMANDS OF OUR CUSTOMERS AND DAMAGE OUR
CUSTOMER RELATIONSHIPS
We rely on a small number of contract manufacturers to manufacture our
products according to our specifications and to fill orders on a timely basis.
Our contract manufacturers provide comprehensive manufacturing services,
including assembly of our products and procurement of materials. Each of our
contract manufacturers also builds products for other companies and may not
always have sufficient quantities of inventory available to fill our orders, or
may not allocate their internal resources to fill these orders on a timely
basis. We do not have long-term supply contracts with our manufacturers and they
are not required to manufacture products for any specified period. We do not
have internal manufacturing capabilities to meet our customers' demands.
Qualifying a new contract manufacturer and commencing commercial-scale
production is expensive and time consuming and could result in a significant
interruption in the supply of our products. If a change in contract
manufacturers results in delays of our fulfillment of customer orders or if a
contract
5
<PAGE>
manufacturer fails to make timely delivery of orders, we may lose revenues and
suffer damage to our customer relationships.
WE HAVE BEEN IN BUSINESS FOR A SHORT PERIOD OF TIME AND YOUR BASIS FOR
EVALUATING US IS LIMITED
We were founded in August 1997, and only during the first quarter of fiscal
2000 did we begin to recognize any revenues. We have a limited meaningful
operating history upon which you may evaluate us and our prospects. Moreover, we
cannot be sure that we have accurately identified all of the risks to our
business. Also, our assessment of the prospects for our success may prove
inaccurate.
WE MAY NOT BECOME PROFITABLE
We have incurred significant losses since inception and expect to continue
to incur losses in the future. As of March 31, 2000, we had an accumulated
deficit of $50.0 million and had only recognized our first revenues of $1.1
million during the first quarter of fiscal 2000. We have not achieved
profitability on a quarterly or annual basis. Our revenues may not grow and we
may never generate sufficient revenues to achieve or sustain profitability. We
expect to continue to incur significant and increasing sales and marketing,
product development, administrative and other expenses. As a result, we will
need to generate significant revenues to achieve and maintain profitability.
WE WILL NOT RETAIN CUSTOMERS OR ATTRACT NEW CUSTOMERS IF WE DO NOT ANTICIPATE
AND MEET SPECIFIC CUSTOMER REQUIREMENTS AND IF OUR PRODUCTS DO NOT INTEROPERATE
WITH OUR CUSTOMERS' EXISTING NETWORKS
To achieve market acceptance for our products, we must effectively
anticipate, and adapt in a timely manner to, customer requirements and offer
products and services that meet changing customer demands. Prospective customers
may require product features and capabilities that our current products do not
have. The introduction of new or enhanced products also requires that we
carefully manage the transition from older products in order to minimize
disruption in customer ordering patterns and ensure that adequate supplies of
new products can be delivered to meet anticipated customer demand. If we fail to
develop products and offer services that satisfy customer requirements, or to
effectively manage the transition from older products, our ability to create or
increase demand for our products would be seriously harmed and we may lose
current and prospective customers.
Many of our customers will require that our products be designed to
interface with their existing networks, each of which may have different
specifications. Issues caused by an unanticipated lack of interoperability may
result in significant warranty, support and repair costs, divert the attention
of our engineering personnel from our hardware and software development efforts
and cause significant customer relations problems. If our products do not
interoperate with those of our customers' networks, installations could be
delayed or orders for our products could be cancelled, which would seriously
harm our gross margins and result in loss of revenues or customers.
IF WE FAIL TO COMPETE SUCCESSFULLY, OUR ABILITY TO INCREASE OUR REVENUES OR
ACHIEVE PROFITABILITY WILL BE IMPAIRED
Competition in the telecommunications market is intense. This market has
historically been dominated by large companies, such as Lucent Technologies and
Nortel Networks, both of whom are our direct competitors. We also face
competition from other large telecommunications and networking companies,
including Cisco Systems, Siemens and Tellabs, that have entered our market by
acquiring companies that design competing products. In addition, a number of
private
6
<PAGE>
companies have announced plans for new products that address the same market
opportunity that we address. Because this market is rapidly evolving, additional
competitors with significant financial resources may enter these markets and
further intensify competition.
Many of our current and potential competitors have significantly greater
selling and marketing, technical, manufacturing, financial and other resources,
including the ability to offer vendor-sponsored financing programs. If we are
unable or unwilling to offer vendor-sponsored financing, prospective customers
may decide to purchase products from one of our competitors who offers this type
of financing. Furthermore, some of our competitors are currently selling
significant amounts of other products to our current and prospective customers.
Our competitors' broad product portfolios coupled with already existing
relationships may cause our customers to buy our competitors' products.
To compete effectively, we must deliver products that:
- provide extremely high reliability and voice quality;
- scale easily and efficiently;
- interoperate with existing network designs and other vendors' equipment;
- provide effective network management;
- are accompanied by comprehensive customer support and professional
services; and
- provide a cost-effective and space-efficient solution for service
providers.
If we are unable to compete successfully against our current and future
competitors, we could experience price reductions, order cancellations, loss of
revenues and reduced gross margins.
THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS MAY ADVERSELY AFFECT THE TRADING
PRICE OF OUR COMMON STOCK
Our revenues and operating results will vary significantly from quarter to
quarter due to a number of factors, many of which are outside of our control and
any of which may cause our stock price to fluctuate. Generally, purchases by
service providers of telecommunications equipment from manufacturers have been
unpredictable and clustered, rather than steady, as the providers build out
their networks. The primary factors that may affect our revenues and results
include the following:
- fluctuation in demand for our voice infrastructure products and the timing
and size of customer orders;
- the length and variability of the sales cycle for our products and the
corresponding timing of recognizing revenues and deferred revenues;
- new product introductions and enhancements by our competitors and us;
- changes in our pricing policies, the pricing policies of our competitors
and the prices of the components of our products;
- our ability to develop, introduce and ship new products and product
enhancements that meet customer requirements in a timely manner;
- the mix of product configurations sold;
- our ability to obtain sufficient supplies of sole or limited source
components;
- our ability to attain and maintain production volumes and quality levels
for our products;
- costs related to acquisitions of complementary products, technologies or
businesses; and
7
<PAGE>
- general economic conditions, as well as those specific to the
telecommunications, networking and related industries.
As with other telecommunications product suppliers, we may recognize a
substantial portion of our revenue in a given quarter from sales booked and
shipped in the last weeks of that quarter. As a result, a delay in customer
orders is likely to result in a delay in shipments and recognition of revenue
beyond the end of a given quarter, which would have a significant impact on our
operating results for that quarter.
Our operating expenses are largely based on anticipated organizational
growth and revenue trends. As a result, a delay in generating or recognizing
revenues for the reasons set forth above, or for any other reason, could cause
significant variations in our operating results. We believe that
quarter-to-quarter comparisons of our operating results are not a good
indication of our future performance. It is likely that in some future quarters,
our operating results may be below the expectations of public market analysts
and investors. In this event, the price of our common stock will probably
substantially decrease.
WE AND OUR CONTRACT MANUFACTURERS RELY ON SINGLE OR LIMITED SOURCES FOR SUPPLY
OF SOME COMPONENTS OF OUR PRODUCTS AND IF WE FAIL TO ADEQUATELY PREDICT OUR
MANUFACTURING REQUIREMENTS OR IF OUR SUPPLY OF ANY OF THESE COMPONENTS IS
DISRUPTED, WE WILL BE UNABLE TO SHIP OUR PRODUCTS
We and our contract manufacturers currently purchase several key components
of our products, including commercial digital signal processors, from single or
limited sources. We purchase these components on a purchase order basis. If we
overestimate our component requirements, we could have excess inventory, which
would increase our costs. If we underestimate our requirements, we may not have
adequate supply, which could interrupt manufacturing of our products and result
in delays in shipments and revenues.
We currently do not have long-term supply contracts with our component
suppliers and they are not required to supply us with products for any specified
periods, in any specified quantities or at any set price, except as may be
specified in a particular purchase order. In the event of a disruption or delay
in supply, or inability to obtain products, we may not be able to develop an
alternate source in a timely manner or at favorable prices, or at all. A failure
to find acceptable alternative sources could hurt our ability to deliver
high-quality products to our customers and negatively affect our operating
margins. In addition, our reliance on our suppliers exposes us to potential
supplier production difficulties or quality variations. Our customers rely upon
our ability to meet committed delivery dates, and any disruption in the supply
of key components would seriously impact our ability to meet these dates and
could result in legal action by our customers, loss of customers or harm to our
ability to attract new customers.
IF WE ARE NOT ABLE TO OBTAIN NECESSARY LICENSES OF THIRD-PARTY TECHNOLOGY AT
ACCEPTABLE PRICES, OR AT ALL, OUR PRODUCTS COULD BECOME OBSOLETE
We have incorporated third-party licensed technology into our current
products. From time to time, we may be required to license additional technology
from third parties to develop new products or product enhancements. Third-party
licenses may not be available or continue to be available to us on commercially
reasonable terms. The inability to maintain or re-license any third-party
licenses required in our current products, or to obtain any new third-party
licenses to develop new products and product enhancements could require us to
obtain substitute technology of lower quality or performance standards or at
greater cost, and delay or prevent us from making these products or
enhancements, any of which could seriously harm the competitiveness of our
products.
8
<PAGE>
OUR FAILURE TO MANAGE OUR EXPANSION EFFECTIVELY IN A RAPIDLY CHANGING MARKET
COULD INCREASE OUR COSTS, HARM OUR ABILITY TO SELL FUTURE PRODUCTS AND IMPAIR
OUR FUTURE GROWTH
We intend to expand our operations rapidly and plan to hire a significant
number of employees during 2000. Our growth has placed, and our anticipated
growth will continue to place, a significant strain on our management systems
and resources. Our ability to successfully offer our products and implement our
business plan in a rapidly evolving market requires effective planning and
management processes. We expect that we will need to continue to improve our
financial, managerial and manufacturing controls and reporting systems, and will
need to continue to expand, train and manage our work force worldwide. If we
fail to implement adequate control systems in an efficient and timely manner,
our costs may be increased and our growth could be impaired and we may not be
able to accurately anticipate and fulfill market demand, the result of which
will be a loss of revenues and customers.
IF WE FAIL TO HIRE AND RETAIN NEEDED PERSONNEL, THE IMPLEMENTATION OF OUR
BUSINESS PLAN COULD SLOW OR OUR FUTURE GROWTH COULD HALT
Competition for highly skilled engineering, sales, marketing and support
personnel is intense because there are a limited number of people available with
the necessary technical skills and understanding of our market. Any failure to
attract, assimilate or retain qualified personnel to fulfill our current or
future needs could impair our growth. The support of our products requires
highly trained customer support and professional services personnel. Once we
hire them, they may require extensive training in our voice infrastructure
products. If we are unable to hire, train and retain our customer support and
professional services personnel, we may not be able to increase sales of our
products.
Our future success depends upon the continued services of our executive
officers who have critical industry experience and relationships that we rely on
to implement our business plan. None of our officers or key employees is bound
by an employment agreement for any specific term. The loss of the services of
any of our officers or key employees could delay the development and
introduction of, and negatively impact our ability to sell, our products.
OUR ABILITY TO COMPETE AND OUR BUSINESS COULD BE JEOPARDIZED IF WE ARE UNABLE TO
PROTECT OUR INTELLECTUAL PROPERTY OR BECOME SUBJECT TO INTELLECTUAL PROPERTY
RIGHTS LITIGATION, WHICH COULD REQUIRE US TO INCUR SIGNIFICANT COSTS
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use our products or technology.
Monitoring unauthorized use of our products is difficult and we cannot be
certain that the steps we have taken will prevent unauthorized use of our
technology, particularly in foreign countries where the laws may not protect our
proprietary rights as fully as in the United States. If competitors are able to
use our technology, our ability to compete effectively could be harmed.
In addition, we may also become involved in litigation as a result of
allegations that we infringe intellectual property rights of others. Any parties
asserting that our products infringe upon their proprietary rights would force
us to defend ourselves and possibly our customers or contract manufacturers
against the alleged infringement. These claims and any resulting lawsuit, if
successful, could subject us to significant liability for damages and
invalidation of our proprietary rights. 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;
9
<PAGE>
- 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 those products that use any allegedly infringing technology.
Any lawsuits regarding intellectual property rights, regardless of their
success, would be time-consuming, expensive to resolve and would divert our
management's time and attention.
IF WE ARE SUBJECT TO UNFAIR HIRING CLAIMS, WE COULD INCUR SUBSTANTIAL COSTS IN
DEFENDING OURSELVES
Companies in our industry whose employees accept positions with competitors
frequently claim that their competitors have engaged in unfair hiring practices.
We may be subject to claims of this kind in the future as we seek to hire
qualified personnel. Those claims may result in material litigation. We could
incur substantial costs defending ourselves or our employees against those
claims, regardless of their merits. In addition, defending ourselves from those
types of claims could divert our management's attention from our operations. If
we are found to have engaged in unfair hiring practices, or our employees are
found to have violated agreements with previous employers, we may suffer a
significant disruption in our operations.
WE MAY FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL EXPANSION THAT COULD IMPAIR
OUR ABILITY TO GROW OUR REVENUES ABROAD
We intend to expand into international markets. This expansion will require
significant management attention and financial resources to successfully develop
direct and indirect international sales and support channels. In addition, we
may not be able to develop international market demand for our products, which
could impair our ability to grow our revenues.
We have limited experience marketing and distributing our products
internationally and, to do so, we expect that we will need to develop versions
of our products that comply with local standards. Furthermore, international
operations are subject to other inherent risks, including:
- greater difficulty collecting accounts receivable and longer collection
periods;
- difficulties and costs of staffing and managing foreign operations;
- the impact of differing technical standards outside the United States;
- the impact of recessions in economies outside the United States;
- unexpected changes in regulatory requirements and currency exchange rates;
- certification requirements;
- reduced protection for intellectual property rights in some countries; and
- potentially adverse tax consequences.
ANY INVESTMENTS OR ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND SERIOUSLY
HARM OUR FINANCIAL CONDITION
Although we have no current agreements to do so, we intend to consider
investing in, or acquiring, complementary products, technologies or businesses.
In the event of any future investments or acquisitions, we could:
- issue stock that would dilute our current stockholders' percentage
ownership;
- incur debt or assume liabilities;
- incur significant amortization expenses related to goodwill and other
intangible assets; or
- incur large and immediate write-offs.
10
<PAGE>
Our integration of any acquired products, technologies or businesses will
also involve numerous risks, including:
- problems and unanticipated costs associated with combining the purchased
products, technologies or businesses;
- 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 limited or no
prior experience; and
- potential loss of key employees, particularly those of the acquired
organizations.
We may be unable to successfully integrate any products, technologies,
businesses or personnel that we might acquire in the future without significant
costs or disruption to our business.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE, WHICH MAY NOT BE AVAILABLE TO US,
AND IF IT IS AVAILABLE, MAY DILUTE YOUR OWNERSHIP OF OUR COMMON STOCK
We may need to raise additional funds through public or private debt or
equity financings in order to:
- fund ongoing operations;
- take advantage of opportunities, including more rapid expansion or
acquisition of complementary products, technologies or businesses;
- develop new products; or
- respond to competitive pressures.
Any additional capital raised through the sale of equity may dilute your
percentage ownership of our common stock. Furthermore, additional financings may
not be available on terms favorable to us, or at all. A failure to obtain
additional funding could prevent us from making expenditures that may be
required to grow or maintain our operations.
RISKS RELATING TO THIS OFFERING
OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT
OR ABOVE THE INITIAL OFFERING PRICE
The market for technology stocks has been extremely volatile. The following
factors could cause the market price of our common stock to fluctuate
significantly from the price you pay in this offering:
- loss of any of our major customers;
- the addition or departure of key personnel;
- variations in our quarterly operating results;
- announcements by us or our competitors of significant contracts, new
products or product enhancements, acquisitions, distribution partnerships,
joint ventures or capital commitments;
- changes in financial estimates by securities analysts;
- sales of common stock or other securities by us in the future;
- changes in market valuations of telecommunications and networking
companies; and
- fluctuations in stock market prices and volumes.
In addition, the stock market in general, and the Nasdaq National Market and
technology companies in particular, have experienced extreme price and volume
fluctuations that have often
11
<PAGE>
been unrelated or disproportionate to the operating performance of these
companies. The trading prices of many technology companies' stocks are at or
near historical highs and these trading prices and multiples are substantially
above historical levels and may not be sustained. These broad market and
industry trends may materially and adversely affect the market price of our
common stock, regardless of our actual operating performance. In the past,
following periods of volatility in the market price of a company's securities,
securities class-action litigation has often been initiated against these
companies. Class-action litigation, if initiated, could result in substantial
costs and a diversion of management's attention and resources. All of these
factors could cause the market price of our stock to drop and you may not be
able to sell your shares at or above the initial offering price.
AN ACTIVE TRADING MARKET FOR OUR COMMON STOCK MAY NOT DEVELOP
Prior to this offering, you could not buy or sell our common stock publicly.
Although we expect our common stock to be quoted on the Nasdaq National Market,
an active trading market for our shares may not develop or be sustained
following this offering. You may not be able to resell your shares at prices
equal to or greater than the initial public offering price. The initial public
offering price will be determined through negotiations between us and our
underwriters and may not be indicative of the market price for these shares
following this offering. You should read "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price.
OUR MANAGEMENT MAY APPLY THE PROCEEDS OF THIS OFFERING TO USES THAT DO NOT
PRODUCE PROFITABILITY OR INCREASE MARKET VALUE
Our management will have considerable discretion in applying the net
proceeds of this offering, and you will not have the opportunity, as part of
your investment decision, to assess whether the proceeds are being used
appropriately. The net proceeds may be used for corporate purposes that do not
generate revenues or increase our market value. Pending application of the
proceeds, they may be placed in investments that do not produce income or that
lose value.
INSIDERS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER US AFTER THIS OFFERING
AND COULD LIMIT YOUR ABILITY TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS,
INCLUDING CHANGES OF CONTROL
We anticipate that our executive officers, directors and entities affiliated
with them will, in the aggregate, beneficially own approximately 42.4% of our
outstanding common stock following the completion of this offering, assuming the
underwriters do not exercise their over-allotment option. These stockholders, if
acting together, would be able to influence significantly all matters requiring
approval by our stockholders, including the election of directors and the
approval of mergers or other business combination transactions. See "Principal
Stockholders."
PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY HAVE ANTI-TAKEOVER
EFFECTS THAT COULD PREVENT A CHANGE OF CONTROL
Provisions of our amended and restated certificate of incorporation, amended
and restated by-laws, and Delaware law could make it more difficult for a third
party to acquire us, even if doing so would be beneficial to our stockholders.
See "Description of Capital Stock."
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 within a short period of time
after this offering could cause our stock price to fall. In addition, the
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<PAGE>
sale of these shares could impair our ability to raise capital through the sale
of additional stock. See "Shares Eligible for Future Sale."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about ourselves and our
industry. These forward-looking statements involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these
forward-looking statements, as more fully described in the "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" sections and elsewhere in this prospectus. We undertake no
obligation to update publicly any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.
USE OF PROCEEDS
Our net proceeds from the sale of the 5,000,000 shares of common stock in
this offering will be approximately $91.75 million, assuming an initial public
offering price of $20.00 per share, the mid-point of the range set forth on the
cover of this prospectus, after deducting the underwriting discounts and
estimated offering expenses payable by us. If the underwriters' over-allotment
option is exercised in full, we estimate that the net proceeds will be
approximately $105.70 million.
The principal purposes of this offering are to fund our operations, to
obtain additional working capital, to establish a public market for our common
stock, to increase our visibility in the marketplace, to facilitate future
access to public capital markets and to provide currency for potential
acquisitions.
We expect to use the net proceeds from this offering for general corporate
purposes, including the funding of operating losses, the expansion of sales,
marketing and product development activities, working capital, capital
expenditures and the repayment of outstanding amounts under our equipment line
of credit. In addition, we may use a portion of the net proceeds to acquire
complementary products, technologies or businesses; however, we currently have
no plans, commitments or agreements with respect to any of these types of
transactions. Pending their use, we plan to invest the net proceeds in
investment-grade, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock or
other securities. We currently expect to retain future earnings, if any, for use
in the operation and expansion of our business and do not anticipate paying any
cash dividends in the foreseeable future. Our credit agreement with a commercial
bank prohibits the payment of dividends without prior approval.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000:
- on an actual basis;
- on a pro forma basis to reflect the conversion of all outstanding shares
of our redeemable convertible preferred stock into 32,319,074 shares of
common stock upon the closing of this offering; and
- on a pro forma as adjusted basis to give effect to the sale of the
5,000,000 shares of common stock offered in this offering after deducting
the underwriting discounts and estimated offering expenses payable by us
assuming an initial public offering price of $20.00 per share, the
mid-point of the range set forth on the cover of this prospectus.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and the notes to those statements included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 2000
---------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
-------- -------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term obligations, less current portion................. $ 3,293 $ 3,293 $ 3,293
Redeemable convertible preferred stock, $0.01 par value;
17,000,000 shares authorized, 13,833,122 shares issued and
outstanding, actual; no shares authorized, issued and
outstanding, on a pro forma and pro forma as adjusted
basis..................................................... 70,859 -- --
Stockholders' equity (deficit):
Preferred stock, $0.01 par value; no shares authorized,
issued and outstanding on an actual basis; 5,000,000
shares authorized, no shares issued and outstanding, on
a pro forma and pro forma as adjusted basis............. -- -- --
Common stock, $0.001 par value; 70,000,000 shares
authorized, 22,713,920 shares issued, 22,683,920 shares
outstanding, actual; 300,000,000 shares authorized,
55,032,994 shares issued, 55,002,994 shares outstanding,
on a pro forma basis; 300,000,000 shares authorized,
60,032,994 shares issued, 60,002,994 shares outstanding,
on a pro forma as adjusted basis (1).................... 23 55 60
Capital in excess of par value............................ 54,674 125,501 217,246
Accumulated deficit....................................... (49,957) (49,957) (49,957)
Stock subscriptions receivable............................ (346) (346) (346)
Deferred compensation..................................... (37,069) (37,069) (37,069)
Treasury stock, at cost: 30,000 common shares............. (20) (20) (20)
-------- -------- --------
Total stockholders' equity (deficit)...................... (32,695) 38,164 129,914
-------- -------- --------
Total capitalization.................................... $ 41,457 $ 41,457 $133,207
======== ======== ========
</TABLE>
- --------------------------
(1) Based on shares outstanding as of March 31, 2000. Excludes 3,127,032 shares
of common stock issuable upon exercise of outstanding stock options at a
weighted average exercise price of $6.00 per share. Includes
14,106,616 shares of restricted common stock which are subject to our right
to repurchase upon termination of employment of the holder at a weighted
average repurchase price of $0.23 per share.
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<PAGE>
DILUTION
Our pro forma net tangible book value as of March 31, 2000 was approximately
$37.2 million, or $0.68 per share of common stock outstanding. Pro forma net
tangible book value per share represents the amount of total tangible assets
less total liabilities, divided by the pro forma shares of common stock
outstanding as of March 31, 2000, after giving effect to the conversion of all
shares of redeemable convertible preferred stock into 32,319,074 shares of
common stock. After giving effect to the issuance and sale of the
5,000,000 shares of common stock offered in this offering and after deducting
the underwriting discounts and estimated offering expenses payable by us,
assuming an initial public offering price of $20.00 per share, the mid-point of
the range set forth on the cover of this prospectus, our pro forma as adjusted
net tangible book value as of March 31, 2000 would have been $128.9 million, or
$2.15 per share. This represents an immediate increase in pro forma as adjusted
net tangible book value of $1.47 per share to existing stockholders and an
immediate dilution of $17.85 per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $20.00
Pro forma net tangible book value per share at March 31,
2000.................................................... $ 0.68
Increase in pro forma net tangible book value per share
attributable to new investors........................... 1.47
------
Pro forma as adjusted net tangible book value per share
after this offering....................................... 2.15
------
Dilution per share to new investors......................... $17.85
======
</TABLE>
Assuming the exercise of all outstanding stock options as of March 31, 2000,
and after giving effect to the issuance and sale of the common stock in this
offering, after deducting the underwriting discounts and estimated offering
expenses payable by us, assuming an initial public offering price of $20.00 per
share, the mid-point of the range set forth on the cover of this prospectus, our
pro forma as adjusted net tangible book value as of March 31, 2000 would have
been $147.7 million, or $2.34 per share, representing an immediate increase in
pro forma as adjusted net tangible book value of $1.66 per share to existing
stockholders from the pro forma net tangible book value at March 31, 2000 of
$0.68 per share and an immediate dilution of $17.66 per share to new investors.
The following table summarizes, on a pro forma basis, as of March 31, 2000,
the differences between the number of shares of common stock purchased from us,
the total consideration provided to us, and the average price per share paid by
existing stockholders and by new investors purchasing stock in this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ------------------------ PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- -------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. 55,002,994 91.7% $ 74,524,000 42.7% $ 1.35
New investors......................... 5,000,000 8.3 100,000,000 57.3 20.00
----------- ------- ------------ -------
Total............................. 60,002,994 100.0% $174,524,000 100.0%
=========== ======= ============ =======
</TABLE>
The table above excludes as of March 31, 2000, 3,127,032 shares of common
stock issuable upon exercise of outstanding stock options at a weighted average
exercise price of $6.00 per share under our 1997 Stock Incentive Plan. To the
extent any of these options are exercised, there will be further dilution to new
investors. If the underwriters' over-allotment option is exercised in full, the
number of shares held by new investors will increase to 5,750,000 shares, or
9.5% of the total number of shares of common stock outstanding after this
offering. See "Management--Benefit Plans" and note 9 to our consolidated
financial statements.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and notes
to those statements included elsewhere in this prospectus. The consolidated
statement of operations data for the period from our inception on August 7, 1997
to December 31, 1997 and the years ended December 31, 1998 and 1999 and the
consolidated balance sheet data as of December 31, 1998 and 1999 are derived
from our consolidated financial statements, audited by Arthur Andersen LLP,
independent public accountants, which are included elsewhere in this prospectus.
The consolidated statement of operations data for the three months ended
March 31, 1999 and 2000 and the consolidated balance sheet data as of March 31,
2000 are derived from our unaudited consolidated financial statements, which are
included elsewhere in this prospectus. In the opinion of management, these
unaudited interim consolidated financial statements include all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of Sonus' financial position and operating results for these
periods. The consolidated balance sheet data as of December 31, 1997 have been
derived from our consolidated financial statements audited by Arthur Andersen
LLP, independent public accountants, not included in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 7, THREE MONTHS ENDED
1997) TO YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------ ------------------------
1997 1998 1999 1999 2000
--------------- ---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues............................... $ -- $ -- $ -- $ -- $ 1,093
Operating expenses:
Manufacturing and product costs
(1)................................ -- -- 1,861 223 1,462
Research and development (1)......... 299 5,824 10,780 2,684 4,844
Sales and marketing (1).............. -- 426 5,606 438 3,358
General and administrative (1)....... 187 919 1,723 301 713
Stock-based compensation............. -- 59 4,404 517 6,979
----- ---------- ----------- ---------- -----------
Total operating expenses............... 486 7,228 24,374 4,163 17,356
----- ---------- ----------- ---------- -----------
Loss from operations................... (486) (7,228) (24,374) (4,163) (16,263)
Interest income (expense), net......... 25 314 487 120 228
----- ---------- ----------- ---------- -----------
Net loss............................... (461) (6,914) (23,887) (4,043) (16,035)
Beneficial conversion feature of Series
C preferred stock.................... -- -- (2,500) -- --
----- ---------- ----------- ---------- -----------
Net loss applicable to common
stockholders......................... $(461) $ (6,914) $ (26,387) $ (4,043) $ (16,035)
===== ========== =========== ========== ===========
Net loss per share (2):
Basic and diluted.................... $ -- $ (4.27) $ (5.53) $ (1.23) $ (2.07)
Pro forma basic and diluted.......... (0.75) (0.41)
Shares used in computing net loss per
share (2):
Basic and diluted.................... -- 1,619,289 4,774,763 3,285,170 7,742,970
Pro forma basic and diluted.......... 32,062,786 38,921,794
</TABLE>
- --------------------------
(FOOTNOTES ON FOLLOWING PAGE)
16
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ MARCH 31,
1997 1998 1999 2000
-------- -------- -------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities............ $6,606 $16,501 $23,566 $41,779
Working capital............................................. 6,308 15,321 19,604 35,122
Total assets................................................ 6,987 18,416 30,782 52,361
Long-term obligations, less current portion................. 6 1,220 3,402 3,293
Redeemable convertible preferred stock...................... 7,100 22,951 46,109 70,859
Total stockholders' deficit................................. (447) (7,097) (25,199) (32,695)
</TABLE>
- --------------------------
(1) Excludes non-cash, stock-based compensation expense as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
--------------------- ---------------------
1998 1999 1999 2000
--------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Manufacturing and product costs......................... $ -- $ 92 $ 8 $ 73
Research and development................................ 29 1,537 121 3,647
Sales and marketing..................................... 12 2,104 214 2,739
General and administrative.............................. 18 671 174 520
-------- -------- -------- --------
$ 59 $ 4,404 $ 517 $ 6,979
======== ======== ======== ========
</TABLE>
(2) See note (1)(q) to our consolidated financial statements for an explanation
of the method of calculation. Pro forma per share calculation reflects the
conversion upon the closing of the offering of all the outstanding shares of
Series A, Series B, Series C and Series D redeemable convertible preferred
stock into shares of common stock, as if the conversion occurred at the date
of original issue.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES TO THOSE STATEMENTS AND OTHER FINANCIAL
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. THE FOLLOWING DISCUSSION
CONTAINS FORWARD-LOOKING INFORMATION THAT INVOLVES RISKS AND UNCERTAINTIES. OUR
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF FACTORS, INCLUDING THE
RISKS DISCUSSED IN "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We are a leading provider of voice infrastructure products for the new
public network. We offer a new generation of carrier-class switching equipment
and software that enable the delivery of voice services to be delivered over
packet-based networks. From our inception in August 1997 through March 31, 2000,
our operating activities consisted primarily of research and development,
product design, development and testing. We also staffed and trained our
administrative, marketing and sales organizations and began sales and marketing
activities.
Since our inception, we have incurred significant losses and, as of
March 31, 2000, had an accumulated deficit of $50.0 million. We have not
achieved profitability on a quarterly or an annual basis, and anticipate that we
will continue to incur net losses. We have a lengthy sales cycle for our
products and, accordingly, we expect to incur sales and other expenses before we
realize the related revenues. We expect to incur significant sales and
marketing, research and development and general and administrative expenses and,
as a result, we will need to generate significant revenues to achieve and
maintain profitability.
We sell our products through a direct sales force, resellers and
distributors. In the future, we anticipate expanding our sales efforts to
include additional overseas distribution partners. Customers' decisions to
purchase our products to deploy in commercial networks involve a significant
commitment of resources and a lengthy evaluation, testing and product
qualification process. We believe these long sales cycles, as well as our
expectation that customers will tend to sporadically place large orders with
short lead times, will cause our revenues and results of operations to vary
significantly and unexpectedly from quarter to quarter. We expect to recognize
revenues from a limited number of customers for the foreseeable future.
We recognize revenue from product sales to end users, resellers and
distributors upon shipment, provided there are no uncertainties regarding
acceptance, persuasive evidence of an arrangement exists, the sales price is
fixed or determinable and collection of the related receivable is probable. If
uncertainties exist, we recognize revenue when those uncertainties are resolved.
Service revenue is recognized as the services are performed. Amounts collected
prior to satisfying our revenue recognition criteria are reflected as deferred
revenue. We estimate and record warranty costs at the time of product revenue
recognition. In November 1999, we began shipping our products and during the
first quarter of fiscal 2000 recognized our first revenues of $1.1 million. As
of March 31, 2000, we had a total of $1.0 million in deferred revenue that we
expect will be recognized in 2000. See note 1(i) to our consolidated financial
statements.
GROSS PROFIT MARGINS. We believe that our gross profit margins will be
affected primarily by the following factors:
- demand for our products and services;
- new product introductions both by us and by our competitors;
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- product service and support costs associated with initial deployment of
our products in customers' networks;
- changes in our pricing policies and those of our competitors;
- the mix of product configurations sold;
- the mix of sales channels through which our products and services are
sold; and
- the volume of manufacturing and costs of manufacturing and components.
MANUFACTURING EXPENSES. Our manufacturing expenses consist primarily of
amounts paid to third-party manufacturers, manufacturing start-up expenses and
manufacturing personnel and related costs. Commencing in 1999, we outsourced our
manufacturing to third-parties. Manufacturing engineering, documentation
control, final testing and assembly are performed at our facility.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist primarily of salaries and related personnel costs, recruiting expenses
and prototype costs related to the design, development, testing and enhancement
of our products. We have expensed our research and development costs as
incurred. Some aspects of our research and development effort require
significant short-term expenditures, the timing of which can cause significant
quarterly variability in our expenses. We believe that research and development
is critical to our strategic product development objectives and we intend to
enhance our technology to meet the changing requirements of our customers. As a
result, we expect our research and development expenses to increase in absolute
dollars in the future.
SALES AND MARKETING EXPENSES. Sales and marketing expenses consist
primarily of salaries and related personnel expenses, commissions, recruiting
expenses, promotions, customer evaluations and other marketing expenses. We
expect that sales and marketing expenses will increase substantially in absolute
dollars in the future as we increase our direct sales efforts, expand our
operations internationally, hire additional sales and marketing personnel,
initiate additional marketing programs and establish sales offices in new
locations.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of salaries and related expenses for executive, finance, and
accounting personnel, recruiting expenses and professional fees. We expect that
general and administrative expenses will increase in absolute dollars as we add
personnel and incur additional costs related to the growth of our business and
our operation as a public company.
STOCK-BASED COMPENSATION. In connection with our grant of stock options and
issuance of restricted common stock during the year ended December 31, 1999 and
the three months ended March 31, 2000, we recorded deferred compensation of
$20.9 million and $25.1 million, respectively. Stock-based compensation includes
the amortization of stock compensation charges resulting from the granting of
stock options and the sales of restricted common stock to employees with
exercise or sales prices that may be deemed for accounting purposes to be below
the fair value of our common stock on the date of grant and compensation expense
associated with the grant of stock options and issuance of restricted stock to
non-employees. Deferred compensation amounts are being amortized over the
vesting periods of the applicable options or restricted stock, which are four to
five years. The compensation expense associated with non-employees is recorded
at the time services are provided. See note 9(f) to our consolidated financial
statements.
BENEFICIAL CONVERSION OF PREFERRED STOCK. In 1999, we recorded a charge to
accumulated deficit of $2.5 million representing the beneficial conversion
feature of our Series C redeemable convertible preferred stock that was sold in
November and December 1999. This charge is
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accounted for as a dividend to preferred stockholders and, as a result, will
increase the net loss available to common stockholders and the related net loss
per share.
RESULTS OF OPERATIONS
Because we were incorporated in August 1997 and commenced our principal
operations in November 1997 after obtaining our initial funding, management
believes that a discussion of the period from inception to December 31, 1997
would not be meaningful.
YEARS ENDED DECEMBER 31, 1998 AND 1999
MANUFACTURING EXPENSES. Manufacturing expenses were $1.9 million in 1999,
compared to no expense in 1998. The increase was due to the commencement of
manufacturing operations.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$10.8 million in 1999, an increase of $5.0 million, or 85%, from $5.8 million in
1998. The increase reflects costs primarily associated with a significant
increase in personnel and personnel-related expenses and, to a lesser extent,
recruiting expenses and prototype expenses for the development of our products.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were
$5.6 million in 1999, an increase of $5.2 million from $426,000 in 1998. The
increase reflects costs primarily associated with the hiring of additional sales
and marketing personnel and, to a lesser extent, marketing program costs,
including Web development, trade shows and product launch activities.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $1.7 million in 1999, an increase of $804,000, or 87%, from $919,000 in
1998. The increase reflects costs primarily associated with the hiring of
additional general and administrative personnel and, to a lesser extent,
expenses necessary to support and scale our operations.
STOCK-BASED COMPENSATION. Stock-based compensation expenses were
$4.4 million in 1999, an increase of $4.3 million, from $59,000 in 1998. The
increase in stock-based compensation is due to the amortization of deferred
stock-based compensation resulting from the granting of stock options and sales
of restricted common stock to employees with exercise or sales prices below the
deemed fair value of our common stock on the date of grant or sale for
accounting purposes.
INTEREST INCOME (EXPENSE), NET. Interest income consists of interest earned
on our cash balances and marketable securities. Interest expense consists of
interest incurred on equipment debt. Interest income, net of interest expense
was $487,000 and $314,000 for 1999 and 1998, respectively. This increase
reflects higher invested balances partially offset by an increase in interest
expense from incurred borrowings.
NET OPERATING LOSS CARRYFORWARDS. As of December 31, 1999, we had
approximately $23.0 million of state and federal net operating loss
carryforwards for tax reporting purposes available to offset future taxable
income. These net operating loss carryforwards expire at dates through 2019, to
the extent that they are not used. We have not recognized any benefit from the
future use of loss carryforwards for these periods, or for any other periods
since inception. Use of the net operating loss carryforwards may be limited in
future years if there is a significant change in our ownership. Management has
recorded a full valuation allowance for the related net deferred tax asset due
to the uncertainty of realizing the benefit of this asset.
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THREE MONTHS ENDED MARCH 31, 1999 AND 2000
REVENUES. In November 1999, we began shipping our products and recognized
$1.1 million of revenues in the first quarter of 2000. Sales to Lucent
Technologies accounted for substantially all of our revenues.
MANUFACTURING EXPENSES AND PRODUCT COSTS. Manufacturing expenses and
product costs were $1.5 million in the first quarter of 2000, an increase of
$1.2 million from $223,000 in the first quarter of 1999. The increase primarily
represents product and related costs associated with our first quarter of 2000
revenue and an increase in personnel associated with initial production start-
up. The gross profit was lower than we anticipate it will be in the future, due
to high start-up costs and the low volume of sales.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$4.8 million in the first quarter of 2000, an increase of $2.1 million, or 80%,
from $2.7 million in the first quarter of 1999. The increase reflects costs
primarily associated with a significant increase in personnel and
personnel-related expenses, offset in part by lower prototype expenses for the
development of our products.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were
$3.4 million in the first quarter of 2000, an increase of $2.9 million from
$438,000 in the first quarter of 1999. The increase reflects costs primarily
associated with the hiring of additional sales and marketing personnel, and to a
lesser extent increases in marketing programs, travel and related expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $713,000 in the first quarter of 2000, an increase of $412,000, or 137%,
from $301,000 in the first quarter of 1999. The increase reflects costs
associated with the hiring of additional finance personnel and increased costs
for professional services.
STOCK-BASED COMPENSATION. Stock-based compensation expense was
$7.0 million in the first quarter of 2000, an increase of $6.5 million from
$517,000 in the first quarter of 1999. The increase is due to the additional
amortization of deferred stock-based compensation resulting from the granting of
additional stock options and sale of restricted common stock to employees during
the last three quarters of 1999 and first quarter of 2000 and compensation
expense associated with non-employees. Based on the grant of stock options and
sale of restricted common stock through March 31, 2000, we expect to incur
stock-based compensation expense of approximately $22.3 million in 2000,
$11.7 million in 2001, $6.5 million in 2002, $3.1 million in 2003 and $500,000
in 2004.
INTEREST INCOME (EXPENSE), NET. Interest income, net of interest expense
was $228,000 and $120,000 for the three months ended March 31, 2000 and 1999,
respectively. The increase reflects higher invested balances because of the
completion of private financings, partially offset by an increase in interest
expense from incurred borrowings.
QUARTERLY RESULTS OF OPERATIONS
The following table presents our operating results for the quarters ended
March 31, 1999, June 30, 1999, September 30, 1999, December 31, 1999 and
March 31, 2000. The information for each of these quarters is unaudited and has
been prepared on the same basis as the audited consolidated financial statements
appearing elsewhere in this prospectus. In the opinion of management, all
necessary adjustments, consisting only of normal recurring adjustments, have
been included to present fairly the unaudited consolidated quarterly results
when read in conjunction with our audited consolidated financial statements and
related notes appearing
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elsewhere in this prospectus. These operating results are not necessarily
indicative of the results of any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1999 1999 1999 1999 2000
---------- --------- --------- -------------- ----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues................................................ $ -- $ -- $ -- $ -- $ 1,093
Operating expenses:
Manufacturing and product costs....................... 223 349 519 770 1,462
Research and development.............................. 2,684 2,387 2,434 3,275 4,844
Sales and marketing................................... 438 834 1,475 2,859 3,358
General and administrative............................ 301 375 438 609 713
Stock-based compensation.............................. 517 564 1,090 2,233 6,979
------- ------- ------- -------- --------
Total operating expenses................................ 4,163 4,509 5,956 9,746 17,356
------- ------- ------- -------- --------
Loss from operations.................................... (4,163) (4,509) (5,956) (9,746) (16,263)
Interest income (expense), net.......................... 120 92 71 204 228
------- ------- ------- -------- --------
Net loss................................................ (4,043) (4,417) (5,885) (9,542) (16,035)
Beneficial conversion feature of Series C preferred
stock................................................. -- -- -- (2,500) --
------- ------- ------- -------- --------
Net loss applicable to common stockholders.............. $(4,043) $(4,417) $(5,885) $(12,042) $(16,035)
======= ======= ======= ======== ========
</TABLE>
Our revenues and operating results will vary significantly from quarter to
quarter due to a number of factors, many of which are outside of our control and
any of which may cause our stock price to fluctuate. Generally, purchases by
service providers of telecommunications equipment from manufacturers have been
unpredictable and clustered, rather than steady, as the providers build out
their networks. The primary factors that may affect our revenues and results
include the following:
- fluctuation in demand for our voice infrastructure products and the timing
and size of customer orders;
- the length and variability of the sales cycle for our products and the
corresponding timing of recognizing revenues and deferred revenues;
- new product introductions and enhancements by our competitors and us;
- changes in our pricing policies, the pricing policies of our competitors
and the prices of the components of our products;
- our ability to develop, introduce and ship new products and product
enhancements that meet customer requirements in a timely manner;
- the mix of product configurations sold;
- our ability to obtain sufficient supplies of sole or limited source
components;
- our ability to attain and maintain production volumes and quality levels
for our products;
- costs related to acquisitions of complementary products, technologies or
businesses; and
- general economic conditions, as well as those specific to the
telecommunications, networking and related industries.
As with other telecommunications product suppliers, we may recognize a
substantial portion of our revenue in a given quarter from sales booked and
shipped in the last weeks of that quarter. As a result, a delay in customer
orders is likely to result in a delay in shipments and recognition of
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revenue beyond the end of a given quarter, which would have a significant impact
on our operating results for that quarter.
Our operating expenses are largely based on anticipated organizational
growth and revenue trends. As a result, a delay in generating or recognizing
revenues for the reasons set forth above, or for any other reason, could cause
significant variations in our operating results. We believe that
quarter-to-quarter comparisons of our operating results are not a good
indication of our future performance. It is likely that in some future quarters,
our operating results may be below the expectations of public market analysts
and investors. In this event, the price of our common stock will probably
substantially decrease.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
sales of redeemable convertible preferred stock totaling $70.7 million in net
proceeds through March 31, 2000. Upon the closing of this offering, all of our
redeemable convertible preferred stock will convert into 32,319,074 shares of
common stock. We have also financed our operations through net long-term
borrowings of $4.7 million for the purchase of fixed assets. At March 31, 2000,
cash, cash equivalents and marketable securities totaled $41.8 million.
Net cash used in operating activities was $5.7 million for the three months
ended March 31, 2000, $16.0 million for 1999 and $5.9 million for 1998. Net cash
flows from operating activities in each period reflect increasing net losses as
compared to the comparable period of the preceding year and, to a lesser extent,
inventory purchases offset in part by increases in accounts payable and accrued
expenses.
Net cash used in investing activities was $3.8 million for the three months
ended March 31, 2000, $6.4 million for 1999 and $14.8 million for 1998. Net cash
used for investing activities in each period reflects purchases of property and
equipment, primarily computers and test equipment for our development and
manufacturing activities and net purchases and maturities of marketable
securities. We used amounts invested in marketable securities in 1998 to fund
operations in 1999. We expect capital expenditures to continue to increase in
the year 2000 to approximately $11.0 million, due to our expansion and
expenditures for software licenses, computers and test equipment.
Net cash provided by financing activities was $26.3 million for the three
months ended March 31, 2000, $27.6 million for 1999 and $17.7 million for 1998.
Net cash provided by financing activities for these periods was derived
primarily from private sales of redeemable convertible preferred stock and
long-term borrowings. We also have a $7.0 million bank equipment line of credit
with available borrowings of $1.4 million as of March 31, 2000. This line of
credit is collateralized by all of our assets, except intellectual property, and
bears interest at the bank's prime rate plus 0.5%. At March 31, 2000, an
aggregate of approximately $4.7 million was outstanding under this line of
credit. We are required to comply with various financial and restrictive
covenants, and as of March 31, 2000, are in compliance with these covenants.
We believe that the net proceeds from this offering, together with our
current cash, cash equivalents and marketable securities and available line of
credit, will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least 12 months. If our existing
resources, proceeds from this offering and cash generated from operations are
insufficient to satisfy our liquidity requirements, we may seek to sell
additional equity or debt securities. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders, and we cannot be certain that additional financing will 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
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required to reduce the scope of our planned product development and sales and
marketing efforts, which could harm our business, financial condition and
operating results.
MARKET RISK
We do not currently use derivative financial instruments. We generally place
our marketable security investments in high-quality credit instruments,
primarily U.S. Government obligations and corporate obligations with contractual
maturities of less than one year. We do not expect any material loss from our
marketable security investments and therefore believe that our potential
interest rate exposure is not material.
RECENT ACCOUNTING PRONOUNCEMENT
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS. This
bulletin established guidelines for revenue recognition. We recognize revenues
in accordance with this recent pronouncement.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVES AND HEDGING
ACTIVITIES, which establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts, and
for hedging activities. We do not currently engage in trading market risk
sensitive instruments or purchase hedging instruments or "other than trading"
instruments that are likely to expose us to market risk, whether interest rate,
foreign currency exchange, commodity price or equity price risk. We may do so in
the future as our operations expand domestically and abroad. We will evaluate
the impact of foreign currency exchange risk and other derivative instrument
risk on our results of operations when appropriate. We will adopt SFAS No. 133
as required by SFAS No. 137, DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT
NO. 133, in fiscal year 2001. The adoption of SFAS No. 133 is not expected to
have a material impact on our financial condition or results of operations.
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BUSINESS
OVERVIEW
We are a leading provider of voice infrastructure products for the new
public network. We offer a new generation of carrier-class switching equipment
and software that enable voice services to be delivered over packet-based
networks.
We expect two global forces--deregulation and the expansion of the
Internet--to revolutionize the public telephone network worldwide. Packet
networks more efficiently use available network bandwidth as compared to
traditional circuit-switched telephone networks, which were designed for voice
traffic and built long before the advent of the Internet. Packet-based networks,
which transport voice and data in small bundles, or "packets," offer a highly
flexible, cost-effective and efficient means to provide communications services,
including data, voice and multimedia. Our GSX9000 Open Services Switch, PSX6000
SoftSwitch, SGX2000 SS7 signaling gateway and System 9200 Internet offload
solution are designed to offer high-reliability, toll-quality voice, improved
economics, interoperability, rapid deployment and an open architecture enabling
the design and implementation of new services and applications.
Our objective is to be the primary supplier of voice infrastructure products
for the new public network. We intend to capitalize on our early technology and
market lead to build the premier franchise in voice infrastructure solutions for
the new public network.
INDUSTRY BACKGROUND
The public telephone network is an integral part of our everyday lives. For
most of its 100-year history, the telephone industry has been heavily regulated,
which has slowed the evolution of its underlying circuit-switching technologies
and limited innovation in service offerings and the pricing of telephone
services. We expect two global forces--deregulation and the expansion of the
Internet--to revolutionize the public telephone network worldwide.
Deregulation of the telephone industry accelerated with the passage of the
Telecommunications Act of 1996. The barriers that once restricted service
providers to a specific geography or service offering, such as local or long
distance, are disappearing. The opportunity created by opening up the
$750 billion telephone services market has been attracting thousands of new
service providers. Intense competition between new players and incumbents is
driving down prices. With limited ability to reduce the cost structure of the
public telephone network, profit margins for traditional telephone services are
eroding. In response, service providers are seeking both new, creative and
differentiated service offerings and the means to reduce their costs.
Simultaneously, the rapid adoption of the Internet is driving dramatic
growth of data traffic. Today, a significant portion of this data traffic is
carried over the traditional circuit-switched telephone network. However, the
circuit-switched network, designed for voice traffic and built long before the
advent of the Internet, is not suited to efficiently transport data traffic. In
a circuit-switched network, a dedicated path, or circuit, is established for
each call, reserving a fixed amount of capacity or bandwidth in each direction.
The dedicated circuit is maintained for the duration of the call across all of
the circuit switches spanning the path from origination to the destination of
the call, even when no traffic is being sent. As a result, a circuit-switched
architecture is highly inefficient for Internet applications, which tend to
create large bursts of data traffic followed by long periods of silence.
In contrast, a packet network divides traffic into distinct units called
packets, and routes each packet independently. By combining traffic from users
with differing capacity demands at different times, packet networks more
efficiently fill available network bandwidth with packets of data from many
users, thereby reducing the bandwidth wasted due to silence from any single
user. The
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volume of data traffic continues to increase as use of the Internet and the
number of connected users grow, driving service providers to build large-scale,
more efficient packet networks.
With voice traffic carried over the vast installed base of traditional
circuit-switched networks, and data traffic carried over rapidly expanding
packet networks, service providers are faced with the expense and complexity of
building and maintaining parallel networks.
The following diagrams depict these parallel voice and data networks.[Two
diagrams appear: the first diagram is symmetric and depicts a circuit-switched
network. A large, rectangular box labeled "Circuit Switched Network" is in the
center. The box contains a series of small shapes aligned linearly and connected
by a straight bold line. From left to right, the shapes are a small circle
labeled "End Office," two small hexagons labeled "Tandem/Toll" and a small
circle labeled "End Office." Outside of the rectangular box on each side is an
icon representing a telephone connected to the outer circle labeled "End Office"
by a bold line. Also on each side and connected to the outer "End Office" circle
by dotted lines are icons representing a fax machine and second telephone. Above
the rectangular box and connected by dotted lines to each of the small shapes
inside of the large rectangle is a shaded oval labeled "SS7."
Lower diagram is symmetric and depicts a generic packet-switched network. Shaded
cloud labeled "Packet Network" is aligned directly below the rectangular box of
the upper diagram. On left and right side of the cloud, aligned linearly, is an
icon representing a computer, connected to the cloud by a dotted line. Connected
to the bottom of the cloud by dotted lines are three additional computers.]
THE NEED FOR, AND BENEFITS OF, COMBINING VOICE AND DATA NETWORKS
We believe significant opportunities exist in uniting these separate,
parallel networks into a new integrated public network capable of transporting
both voice and data traffic. Enormous potential savings can be realized by
eliminating redundant or overlapping equipment purchases and reducing network
operating costs. Also, combining traditional voice services with Internet or
Web-based services in a single network is expected to enable new and powerful
high-margin, revenue-generating service offerings such as single-number dialing,
unified messaging, Internet click-to-talk, sophisticated call centers and other
services.
The packet network is the platform for the new public network. The volume of
data traffic has already eclipsed voice traffic and is growing much faster than
voice. Packet architectures are more efficient at moving data, more flexible,
and reduce equipment and operating costs. The key to realizing the full
potential of a converged, packet-based network is to enable the world's voice
traffic to run over those networks.
Early attempts to develop new technologies to carry voice traffic over
packet networks have included voice over Internet protocol, or VoIP, systems
using a personal computer platform and
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devices that added VoIP capability to existing data devices such as remote
access servers. While demonstrating the viability of transmitting voice over
packet technology, these approaches have fallen far short of the quality,
reliability and scalability required by the public telephone network.
These early VoIP systems have also lacked the ability to interoperate with
the signaling infrastructure of the circuit-switched network. Without this
signaling capability, VoIP applications cannot provide the consistent "look,
sound and feel" of traditional telephone calls and are not well-suited to more
complex applications such as voicemail, unified messaging and other value-added
services.
The public telephone network is large, highly complex and generates
significant revenues, a substantial majority of which are derived from voice
services. Given service providers' substantial investment in, and dependence
upon, traditional circuit-switched technology, their transition to the new
public network will be gradual. During this transition, an immediate opportunity
exists to reduce the burden on overloaded and expensive circuit-switched
resources. Internet offload will allow modem-connected Internet calls to be
identified and diverted from the circuit-switched network to the packet network,
thus optimizing use of valuable network bandwidth.
With $45 billion spent on traditional circuit switches in 1999, according to
Synergy Research Group, a market research firm, the market opportunity for
providers of voice infrastructure is significant. For example, spending on voice
infrastructure products to enable just two applications in the new public
network, VoIP and Internet offload, is projected to grow dramatically to
$19 billion in 2003.
REQUIREMENTS FOR VOICE INFRASTRUCTURE PRODUCTS FOR THE NEW PUBLIC NETWORK
Users demand high levels of quality and reliability from the public
telephone network, and service providers require a cost-efficient network that
enables new revenue-generating services. As a result, voice infrastructure
products for the new public network must satisfy the following requirements:
CARRIER-CLASS PERFORMANCE. Because they operate complex, mission-critical
networks, service providers have clear infrastructure requirements. These
include extremely high reliability, quality and interoperability. For example,
service providers typically require equipment that complies with their 99.999%
availability standard.
SCALABILITY AND DENSITY. Infrastructure solutions for the new public
network face challenging scalability requirements. Service providers' central
offices typically support tens or even hundreds of thousands of simultaneous
calls. In order to be economically attractive, the new infrastructure must
compare favorably with existing networks in terms of cost per port, space
occupied, power consumption and cooling requirements.
COMPATIBILITY WITH STANDARDS AND EXISTING INFRASTRUCTURE. New
infrastructure equipment and software must support the full range of telephone
network standards, including signaling protocols such as SS7 and various
physical interfaces such as ISDN, primary rate interface, or PRI, and T1. It
must also support data networking protocols such as Internet protocol, or IP,
and asynchronous transfer mode, or ATM, as well as newer protocols such as
H.323, IPDC and SIP. When operating, the new equipment and software cannot
hinder, and ideally should enhance, the capabilities of the existing
infrastructure, for example, by alleviating Internet access bottlenecks.
INTELLIGENT SOFTWARE IN AN OPEN AND FLEXIBLE PLATFORM. The architecture for
the new public network will decouple the capabilities of traditional
circuit-switching equipment into robust hardware elements and highly intelligent
software platforms that provide control, signaling and service creation
capabilities. This approach will transform the closed, proprietary
circuit-switched public
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telephone network into a flexible, open environment accessible to a wide range
of software developers. Service providers and third-party vendors will be able
to develop and implement new applications independent of switch vendors.
Moreover, the proliferation of independent software providers promises to drive
the creation of innovative voice and data services that could expand service
provider revenues.
SIMPLE AND RAPID INSTALLATION, DEPLOYMENT AND SUPPORT. Infrastructure
solutions must be easy to install, deploy, configure and manage. These
attributes will enable rapid growth and effective management of dynamic and
complex service provider networks.
THE SONUS SOLUTION
We develop, market and sell what we believe to be the first comprehensive
suite of voice infrastructure products purpose-built for the deployment and
management of voice and data services over the new public network. Our solution
consists of four carrier-class products:
- the GSX9000 Open Services Switch;
- the PSX6000 SoftSwitch;
- the SGX2000 SS7 Signaling Gateway; and
- the System 9200 Internet offload solution.
These products are designed to offer high reliability, toll-quality voice,
improved economics, interoperability, rapid deployment and an open architecture
enabling the design and implementation of new services and applications. Our
solution has been specifically designed to meet the requirements of the new
public network. As shown in the following diagram, our products unite the voice
and data networks, unleashing the potential of the new public network.
[Symmetric diagram with shaded cloud labeled "Packet Network" at the center.
Aligned on the horizontal axis extending from each of the left and right sides
of the "Packet Network" cloud is a box with caption reading "Sonus GSX9000 Open
Services Switch" and a small cloud labeled "Public Telephone Network." Connected
to the small cloud by bold lines are icons representing telephones and fax
machines. Below the center "Packet Network" cloud and connected by bold lines
are a stacked figure labeled "3rd Party Application Servers" and an icon
representing a computer. Above the center "Packet Network" cloud on the left
side is a small box labeled "Sonus SGX2000 SS7 Signaling Gateway" connected by a
bold line. Above that box to the left, connected by a dotted line, is an oval
labeled "SS7." Above the center "Packet Network" cloud on the right side is a
small box labeled "Sonus PSX6000 SoftSwitch."]
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CARRIER-CLASS PERFORMANCE. Our products are designed to offer the highest
levels of quality, reliability and interoperability, including:
- full redundancy, enabling 99.999% availability;
- voice quality as good as, or superior to, today's circuit-switched
network;
- system hardware designed for network equipment building standards, or
NEBS, Level 3 compliance;
- a complete set of service features, addressing those found in the existing
voice network and extending them to offer greater flexibility; and
- sophisticated network management and configuration capabilities.
COMPATIBILITY WITH STANDARDS AND EXISTING INFRASTRUCTURE. Our products are
designed to be compatible with all applicable voice and data networking
standards and interfaces, including:
- SS7 and other telephone network signaling protocols, including advanced
services as well as simple call management and routing;
- IP, ATM, Ethernet and optical data networking standards;
- encoding, compression and call management standards including H.323, IPDC,
SIP and others;
- voice coding standards such as G.711, and echo cancellation standard
G.168; and
- all common interfaces, including T1, T3, E1 and PRI, and optical
interfaces.
Our solution is designed to interface with legacy circuit-switching
equipment, supporting the transparent flow of calls and other information
between the circuit and packet networks. As a result, our products allow service
providers to migrate to the new public network, while preserving their
significant legacy infrastructure investments.
COST EFFECTIVENESS AND HIGH SCALABILITY. Our solution can be used to
cost-effectively build packet-based switch configurations supporting a range
from a few hundred calls to hundreds of thousands of simultaneous calls. In
addition, the capital cost of our equipment is typically half that of
traditional circuit-switched equipment. At the same time, our GSX9000 Open
Services Switch offers unparalleled density, requires less than one-tenth of the
space needed by circuit-switching implementations and requires significantly
less power and cooling. This enables a significant reduction in expensive
central office facilities' cost and allows service providers to deploy our
equipment in locations where traditional circuit switches are not even an option
given the limited space and environmental services.
The GSX9000 Open Services Switch can create central office space savings as
shown below.
[Three dimensional diagram with a set of four rectangular bars parallel to
one another and lined up evenly with caption reading "Traditional Circuit Switch
(50,000 calls)." Depicted in front of the rectangular bars is a single, small,
upright rectangular box labeled "Sonus GSX9000 Open Services Switch (50,000
calls)." Extending from each of the left and right sides of the small
rectangular box back to the sides of the first of the four larger bars is a thin
line.]
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<PAGE>
OPEN SOFTWARE ARCHITECTURE AND FLEXIBLE PLATFORM. Our Open Services
Architecture, or OSA, is based on a software-centric design and a flexible
platform, allowing rapid development of new products and services. For example,
software intelligence in our System 9200 can detect Internet modem calls as they
enter the network and divert them to remote access servers to be routed directly
to a packet network. New services may be developed by us, by service providers
or by any number of third parties including software developers and systems
integrators. The OSA also facilitates the creation of services that were
previously not possible on the circuit-switched network. In addition, we have
partnered with a number of third-party application software developers to
stimulate the growth of new applications available for our platform.
EASE OF INSTALLATION AND DEPLOYMENT. Our equipment and software can be
installed and placed in service by our customers much more quickly than
circuit-switching equipment. By offering comprehensive testing, configuration
and management software, we expedite the deployment process as well as the
ongoing management and operation of our products. We believe that typical
installations of our solution require just weeks of time from product arrival to
final testing, thereby reducing the cost of deployment and speeding the time to
market for new services.
THE SONUS STRATEGY
Our objective is to be the primary supplier of voice infrastructure for the
new public network. We intend to capitalize on our early technology and market
lead to build the premier franchise in voice infrastructure solutions for the
new public network. Principal elements of our strategy include:
LEVERAGE TECHNOLOGY LEADERSHIP TO ACHIEVE KEY SERVICE PROVIDER DESIGN
WINS. As the first company to provide voice infrastructure for the new public
network, we plan to achieve key design wins with market-leading service
providers as they develop the architecture for their new voice networks. We
expect service providers to select vendors that provide leading technology and
the ability to maintain that technology leadership. Our equipment is an integral
part of the network architecture, and achieving design wins will enable us to
rapidly grow our business as these networks are deployed. We have already been
awarded contracts by three major service providers: Global Crossing, Intermedia
Communications and Williams Communications. Furthermore, by working closely with
our customers as they deploy these networks, we will gain valuable knowledge
regarding their requirements, positioning us to develop product enhancements and
extensions that address evolving service provider needs.
EXPAND AND BROADEN OUR CUSTOMER BASE BY TARGETING SPECIFIC MARKET
SEGMENTS. We plan to leverage our early success to penetrate new customer
segments. We believe new and incumbent service providers will build the new
public network at different rates. Initially, the new service providers, also
called greenfield carriers, who are relatively unencumbered by legacy equipment,
will be the most likely first purchasers of our equipment and software, as they
compete aggressively with the incumbent service providers. Other newer entrants,
such as competitive local exchange carriers, or CLEC's, and Internet service
providers, or ISP's, are also likely to be early adopters of our products. As
competitive service providers achieve greater market presence and leverage the
lower costs and advanced services inherent in packet-switching technology, we
believe incumbents will face further competitive pressure, increasing the
likelihood that, and pace at which, they will adopt our products.
EXPAND OUR GLOBAL SALES, MARKETING, SUPPORT AND DISTRIBUTION
CAPABILITIES. Becoming the primary supplier of voice infrastructure for the new
public network will require a strong worldwide presence. We are rapidly
expanding our sales, marketing, support and distribution capabilities to address
this need. We have recently opened regional sales offices in the United States
and a European headquarters in the United Kingdom. In addition, we plan to
augment our global direct
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<PAGE>
sales effort with international distribution partners. As a carrier-class
solution provider, we are making a significant investment in professional
services and customer support.
GROW OUR BASE OF SOFTWARE APPLICATIONS AND DEVELOPMENT PARTNERS. We have
established and promote the Open Services Partner Alliance, or OSPA, which
brings together a broad range of development partners to provide our customers
with a variety of advanced services and application options. This alliance
includes more than twenty members that are enabling new IP-based enhanced
services, call processing, billing, provisioning, network management and
operations systems. We plan to expand this program to maximize the services
available to our customers, and speed their time to market.
LEVERAGE OUR TECHNOLOGY PLATFORM FROM THE CORE OF THE NETWORK OUT TO THE
ACCESS EDGE. Our robust and sophisticated technology platform has been designed
to operate at the heart of the largest networks in the world. From a fundamental
position in this trunking infrastructure, we plan to extend our reach by moving
outward to the access segments of the network. For example, we have already
announced our System 9200 Internet offload solution, a turnkey product that
gives service providers a cost effective means to manage Internet data traffic.
Over time, we plan to expand our product offerings into other high-growth areas,
such as business and residential access. This approach will allow our customers
to design and execute a coordinated migration and expansion strategy as they
build entirely new networks or transition from their legacy circuit-switched
infrastructure.
ACTIVELY CONTRIBUTE TO THE STANDARDS DEFINITION AND ADOPTION PROCESS. To
advance our technology and market leadership, we will continue to actively lead
and contribute to standards bodies such as the International Softswitch
Consortium, the Internet Engineering Task Force and the International
Telecommunications Union. The definition of standards for the new public network
is in an early stage and we intend to drive these standards to meet the
requirements for an open, accessible, scalable and powerful new public network
infrastructure.
PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES. We intend to expand our
products and services through selected acquisitions and alliances. These may
include acquisitions of complementary products, technologies and businesses that
further enhance our technology leadership or product breadth. We also believe
that allying with companies providing complementary products or services for the
new public network will enable us to bring greater value to our customers and
extend our lead over potential competitors.
PRODUCTS
GSX9000 OPEN SERVICES SWITCH
Our GSX9000 Open Services Switch enables voice traffic to be transported
over packet networks. Its carrier-class hardware is designed to be NEBS Level 3
compliant and provide 99.999% availability, with no single point of failure, and
offers optional full redundancy and full hot-swap capability. It is powered from
- -48VDC sources standard in central offices and attaches to the central office
timing network. The basic building block of a GSX9000 is a shelf. Each shelf is
28" high, mounts in a standard 19" or 23" rack, and provides 16 slots for server
and adapter
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<PAGE>
modules. The first 2 slots are reserved for management modules, while the other
14 slots may be used for any mix of other module types. It supports the
following interfaces:
<TABLE>
<S> <C>
- T1; [Diagram depicting a large box with caption reading "GSX9000 Open
- T3; Services Switch." Detail on the face includes the Sonus logo in the upper
- E1; left corner and a set of vertical slots.]
- OC3;
- 100BaseT; and
- OC12c/STM-4.
</TABLE>
The GSX9000 is designed to deliver voice quality equal, or superior, to that
of the public network. It is designed to support the G.711 approach used in
circuit switches, and will deliver a number of other voice compression
algorithms. It also is designed to provide world-class echo cancellation,
conforming to the latest G.168 standard, on every circuit port. It automatically
disables echo cancellation when it detects a modem signal. The GSX9000 is also
designed to minimize delay, further enhancing perceived voice quality. The
GSX9000 scales to the very large configurations required by major carriers. A
single GSX9000 shelf can support up to 8,064 simultaneous calls. A single
GSX9000 consisting of multiple shelves, can support 100,000 or more simultaneous
calls. The GSX9000 is designed to operate with our PSX6000 SoftSwitch and with
softswitches and network products offered by other vendors.
PSX6000 SOFTSWITCH
The PSX6000 SoftSwitch controls the operation of the GSX9000. It contains
the service provider's specifications of the features to be used for each
subscriber or group of subscribers, the available services and when to provide
them, and the policies for routing calls across the packet core. The PSX6000
does not handle voice calls directly; instead, it controls a GSX9000 to
implement the necessary services. The PSX6000 supports a broad range of carrier
switching requirements and provides a platform upon which new services can be
easily and quickly created and implemented. It allows carriers to deploy a
circuit-switched, packet, or converged circuit/packet infrastructure with the
capacity, reliability and intelligence that they require. Functions such as
provisioning, service selection and routing can be centralized in a small number
of PSX6000 SoftSwitches.
The PSX6000 can reside in a wide range of standard hardware platforms to fit
any size network. It may be replicated as required for high availability or to
support very high call processing requirements. The service provider can
designate a primary softswitch to control each GSX9000 gateway. In case of a
failure of the primary PSX6000, the GSX9000 will transparently transfer control
to another PSX6000 without affecting calls.
We believe the PSX6000 has the flexibility to support the requirements of
the full range of service providers. Typical applications include Internet
offload, PRI switching, domestic and international direct dial, business direct
access, virtual private networks, and toll/tandem switching. The PSX6000 also
facilitates new applications and services, integrating enhanced applications on
IP-based platforms similar to Internet Web servers.
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SGX2000 SS7 SIGNALING GATEWAY
The Sonus SGX2000 SS7 Signaling Gateway offers carriers a comprehensive and
cost-effective SS7 signaling solution that provides interconnection between the
traditional public telephone network and elements of our Open Services
Architecture. With the SGX2000, existing public telephone network voice switches
can interact with the Sonus GSX9000 using the same signaling methods they would
use with other circuit switches. This compatibility means that carriers can
preserve their existing investment in infrastructure, and can offer their
customers the full range of normal public telephone network services, such as
800 services and 1+ dialing in the new public network.
The SGX2000 also supports full access to SS7 service control points. Using
the SGX2000, our products gain access to signal control processor-based
applications such as 800 number translation and local number portability. This
support allows service providers to preserve their application investment and
ensure compatibility between applications common to both circuit and packet
voice services. The SGX2000 supports up to 64 A-links to the SS7 network, and
transports the SS7 messages to other network devices using IP protocols. The
SGX2000 can be deployed in a redundant configuration, providing the performance
and high availability required of a carrier-class SS7 solution.
SYSTEM 9200
Our System 9200 Internet offload solution is a turnkey product that allows
local service providers, including CLEC's and ISP's, to more effectively handle
the rapidly increasing amount of modem-originated Internet traffic traversing
voice networks. The System 9200 is designed to divert Internet traffic from
expensive circuit switches as calls enter the network, enabling service
providers to improve network performance and significantly reduce network
operating costs.
The System 9200 utilizes the technology delivered in the GSX9000, PSX6000
and SGX2000 to provide a smooth migration to packetized voice and data
transport.
CUSTOMER SUPPORT AND PROFESSIONAL SERVICES
We believe our comprehensive technical customer support and professional
services capabilities are an important element of our solution for customers.
These services cover the full network lifecycle: planning; design; installation;
and operations. We help our customers create or revise their business plans and
design their networks and also provide the following:
- turnkey network installation services;
- 24-hour technical support; and
- educational services to customer personnel on the installation, operation
and maintenance of our equipment.
We have established a technical assistance center at our headquarters in
Westford, Massachusetts. The technical assistance center provides customers with
periodic updates to our software and product documentation. We offer our
customers a variety of service plans.
A key differentiator of our support activities is our professional services
group, many members of which hold advanced technical degrees in electrical
engineering or related disciplines. We offer a broad range of professional
services, including sophisticated network deployment, assistance with logistics
and project management support. We also maintain a customer support laboratory
in which customers can test the utility of our products for their specific
applications and in which they can gain an understanding of the applications
enabled by the converged network.
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<PAGE>
CUSTOMERS
Our target customer base includes long distance carriers, local exchange
carriers, Internet service providers, cable operators, international telephone
companies and carriers that provide services to other carriers. We have shipped
products to Global Crossing, Intermedia Communications, Lucent Technologies and
Williams Communications, and to other customers and prospective customers.
Currently, our customers are using our products in laboratory testing and
internal trials.
SALES AND MARKETING
We sell our products through a direct sales force, distributors and
resellers, including Nissho Electronics Corporation and Lucent Technologies.
Lucent Technologies currently represents us as a sales agent for one of our
customers, Global Crossing. In addition, we intend to establish relationships
with selected original equipment manufacturers and other marketing partners in
order to serve particular markets or geographies and provide our customers with
opportunities to purchase our products in combination with related services and
products. As of March 31, 2000, our sales and marketing organization consisted
of 40 employees, of which 14 are located in our headquarters in Westford,
Massachusetts, and 26 are located in sales and support offices around the United
States and in the United Kingdom.
RESEARCH AND DEVELOPMENT
We believe that strong product development capabilities are essential to our
strategy of enhancing our core technology, developing additional applications,
incorporating that technology into new products and maintaining the
comprehensiveness of our product and service offerings. Our research and
development process is driven by the availability of new technology, market data
and customer feedback. We have invested significant time and resources in
creating a structured process for undertaking all product development projects.
We have assembled a team of highly skilled engineers with significant
telecommunications and networking industry experience. Our engineers have
experience in, and have been drawn, from leading computer data networking,
telecommunications and multimedia companies. As of March 31, 2000, we had 110
employees responsible for research and development, of which 87 were software
and quality assurance engineers and 23 were hardware engineers. Our engineering
effort is focused on new applications and network access features, new network
interfaces, improved scalability, quality, reliability and next generation
technologies.
We have made, and intend to continue to make, a substantial investment in
research and development. Research and development expenses were $299,000 for
the period from inception on August 7, 1997 to December 31, 1997, $5.8 million
for the year ended December 31, 1998, $10.8 million for the year ended
December 31, 1999 and $4.8 million for the three months ended March 31, 2000.
COMPETITION
The market for voice infrastructure products for the new public network is
intensely competitive, subject to rapid technological change and significantly
affected by new product introductions and other market activities of industry
participants. We expect competition to persist and intensify in the future. Our
primary sources of competition include vendors of networking and
telecommunications equipment, such as Cisco Systems, Lucent Technologies, Nortel
Networks, Siemens and Tellabs, and private companies that have focused on our
target market. In addition, Lucent Technologies, who currently represents us as
a sales agent for one of our customers, Global Crossing, is also a direct
competitor. Many of our competitors have significantly greater financial
resources than we do
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<PAGE>
and are able to devote greater resources to the development, promotion, sale and
support of their products. In addition, many of our competitors have more
extensive customer bases and broader customer relationships than we do,
including relationships with our potential customers.
In order to compete effectively, we must deliver products that:
- provide extremely high network reliability and voice quality;
- scale easily and efficiently;
- interoperate with existing network designs and other vendors' equipment;
- provide effective network management;
- are accompanied by comprehensive customer support and professional
services; and
- provide a cost-effective and space-efficient solution for service
providers.
In addition, we believe that the ability to provide vendor-sponsored
financing, which some of our competitors currently offer, is an important
competitive factor in our market.
INTELLECTUAL PROPERTY
Our success and ability to compete are dependent on our ability to develop
and maintain our technology and operate without infringing on the proprietary
rights of others. We rely on a combination of patent, trademark, trade secret
and copyright law and contractual restrictions to protect the proprietary
aspects of our technology. These legal protections afford only limited
protection for our technology. We presently have two patent applications pending
in the United States and abroad and we cannot be certain that patents will be
granted based on these or any other applications. We seek to protect our
intellectual property by:
- protecting our source code for our software, documentation and other
written materials under trade secret and copyright laws;
- licensing our software pursuant to signed license agreements, which impose
restrictions on others' ability to use our software; and
- seeking to limit disclosure of our intellectual property by requiring
employees and consultants with access to our proprietary information to
execute confidentiality agreements.
Due to rapid technological change, we believe that factors such as the
technological and creative skills of our personnel, new product developments and
enhancements to existing products are more important than the various legal
protections of our technology to establishing and maintaining technology
leadership.
We have incorporated third-party licensed technology into our current
products. From time to time, we may be required to license additional technology
from third parties to develop new products or product enhancements. Third-party
licenses may not be available or continue to be available to us on commercially
reasonable terms. The inability to maintain or re-license any third-party
licenses required in our current products, or to obtain any new third-party
licenses to develop new products and product enhancements could require us to
obtain substitute technology of lower quality or performance standards or at
greater cost, and delay or prevent us from making these products or
enhancements, any of which could seriously harm the competitiveness of our
products.
MANUFACTURING
Currently, we outsource the manufacturing of our products. Our contract
manufacturers provide comprehensive manufacturing services, including assembly
of our products and procurement of
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<PAGE>
materials on our behalf. We perform final test and assembly at our facility to
ensure that we meet our internal and external quality standards. We believe that
outsourcing our manufacturing will enable us to conserve working capital, better
adjust manufacturing volumes to meet changes in demand and more quickly deliver
products. At present, we purchase products from our outside contract
manufacturers on a purchase order basis. We may not be able to enter into
long-term contracts with outside manufacturers on terms acceptable to us, if at
all.
EMPLOYEES
As of March 31, 2000, we had a total of 198 employees, including 110 in
research and development, 40 in sales and marketing, 22 in customer support and
professional services, 18 in manufacturing and eight in finance and
administration. Our employees are not represented by any collective bargaining
unit. We believe our relations with our employees are good.
PROPERTIES
Our headquarters are currently located in a leased facility in Westford,
Massachusetts, consisting of approximately 41,500 square feet under a lease that
expires in 2004. In April 2000, we executed a lease for an additional facility
in Littleton, Massachusetts consisting of approximately 23,000 square feet under
a sublease that expires in 2003. We also lease short-term office space in
Colorado and New Jersey. We believe our existing facilities are adequate for our
current needs and that suitable additional space will be available as needed.
LEGAL PROCEEDINGS
We are not currently a party to any material litigation.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth our executive officers and directors, their
respective ages and positions as of March 31, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------
<S> <C> <C>
Rubin Gruber.............................. 55 Chairman of the Board of Directors
Hassan M. Ahmed........................... 42 President, Chief Executive Officer and
Director
Michael G. Hluchyj........................ 45 Chief Technology Officer, Vice President
and Secretary
Jeffrey Mayersohn......................... 49 Vice President of Customer Support and
Professional Services
Stephen J. Nill........................... 48 Chief Financial Officer, Vice President of
Finance and Administration and Treasurer
Gary A. Rogers............................ 45 Vice President of Worldwide Sales and
Marketing
Frank T. Winiarski........................ 57 Vice President of Manufacturing
Kwok P. Wong.............................. 42 Vice President of Engineering
Edward T. Anderson (1).................... 50 Director
Paul J. Ferri (1) (2)..................... 61 Director
Paul J. Severino (1) (2).................. 53 Director
</TABLE>
- ------------------------
(1) Member of audit committee.
(2) Member of compensation committee.
RUBIN GRUBER is one of our founders and has been a Director since
November 1997 and Chairman of our Board of Directors since November 1998. From
November 1997 until November 1998, Mr. Gruber was our President. Before founding
Sonus, Mr. Gruber was a founder of VideoServer, Inc., now Ezenia!, Inc., a
manufacturer of videoconference network equipment and from February 1992 until
September 1996 served as Vice President of Business Development. Previously,
Mr. Gruber was a founder and served as President of both Cambridge
Telecommunications, Inc., a manufacturer of networking equipment, and Davox
Corporation, a developer of terminals supporting voice and data applications,
and served as a Senior Vice President of Bolt, Beranek and Newman Communications
Corporation, a subsidiary of Bolt, Beranek and Newman, Inc., a manufacturer of
data communications equipment. Mr. Gruber also serves on the board of directors
of the International Softswitch Consortium. Mr. Gruber holds a B.Sc. in
mathematics from McGill University and a M.A. in mathematics from Wayne State
University.
HASSAN M. AHMED has been our President and Chief Executive Officer and a
member of our Board of Directors since November 1998. From July 1998 to
November 1998, Mr. Ahmed was Executive Vice President and General Manager of the
Core Switching Division of Ascend Communications, Inc., a provider of wide area
network switches and access data networking equipment, and from July 1997 until
July 1998 was a Vice President and General Manager of the Core Switching
Division. From June 1995 to July 1997, Mr. Ahmed was Chief Technology Officer
and Vice President of Engineering for Cascade Communications Corp., a provider
of wide area network switches. From 1993 until June 1995, Mr. Ahmed was a
founder and President of WaveAccess, Inc., a supplier of wireless
communications. Prior to that, he was an Associate Professor at Boston
University, Engineering Manager at Analog Devices, a chip manufacturer, and
director of VSLI Systems at Motorola Codex, a supplier of communications
equipment. Mr. Ahmed
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<PAGE>
holds a B.S. and M.S. in engineering from Carleton University and a Ph.D. in
engineering from Stanford University.
MICHAEL G. HLUCHYJ is one of our founders and has been our Chief Technology
Officer and Vice President since November 1997. He also has been our Secretary
since our inception, our President from August 1997 to November 1997, our
Treasurer from inception until March 2000 and a Director from our inception
until November 1998. From July 1994 until July 1997, he was Vice President and
Chief Technology Officer at Summa Four, Inc., a supplier of switches for carrier
networks. Previously, he was Director of Networking Research at Motorola Codex
and on the technical staff at AT&T Bell Laboratories. Mr. Hluchyj holds a B.S.
degree in engineering from the University of Massachusetts, and M.S. and Ph.D.
degrees in engineering from the Massachusetts Institute of Technology.
JEFFREY MAYERSOHN has been our Vice President of Customer Support and
Professional Services since July 1999. From March 1998 until July 1999, he was
our Vice President of Carrier Relations. From June 1997 to March 1998,
Mr. Mayersohn was a Senior Vice President at GTE Internetworking, an Internet
service provider. From January 1995 to June 1997, he was with BBN Corporation,
formerly Bolt, Beranek and Newman, Inc., and was a Vice President at the BBN
Planet division, an Internet service provider. From 1978 to January 1995, he
held a number of positions at Bolt, Beranek and Newman Communications
Corporation, including Senior Vice President of Engineering, Senior Vice
President responsible for U.S. Government Networks and Vice President of
Professional Services. Mr. Mayersohn holds an A.B. in physics from Harvard
College and a M.Phil. in physics from Yale University.
STEPHEN J. NILL has been our Chief Financial Officer and Vice President of
Finance and Administration since September 1999 and our Treasurer since
March 2000. From June 1994 until August 1999, he was Vice President of Finance
and Chief Financial Officer of VideoServer, Inc., now
Ezenia!, Inc. Previously, he served at Lotus Development Corporation, a
software supplier, as Corporate Controller and Chief Accounting Officer. Prior
to that, Mr. Nill held various financial positions with Computervision, Inc., a
supplier of workstation-based software, International Business Machines
Corporation and Arthur Andersen LLP. Mr. Nill has a B.A. in accounting from New
Mexico State University and a M.B.A. from Harvard University.
GARY A. ROGERS has been our Vice President of Worldwide Sales and Marketing
since March 1999. From February 1997 to March 1999, Mr. Rogers was Senior Vice
President of Worldwide Sales and Operations at Security Dynamics, Inc., now RSA
Security, Inc., a supplier of network security products. Previously, he served
at Bay Networks, Inc., a provider of Internetworking communications products, as
Vice President of International Sales from July 1996 to February 1997 and as
Vice President of Europe, Middle East and Africa from 1994 until July 1996.
Prior to that, he held sales and marketing positions with International Business
Machines Corporation. Mr. Rogers holds a B.S. degree in mathematics from
Dartmouth College and a M.B.A. from the University of Chicago.
FRANK T. WINIARSKI has been our Vice President of Manufacturing since
July 1998. From June 1997 until June 1998, he was Vice President of
Manufacturing at Net2Net, Inc., a supplier of network analyzers. From June 1992
until June 1997, he was Vice President of Manufacturing at VideoServer, Inc.,
now Ezenia!, Inc. Previously, Mr. Winiarski was Vice President of Manufacturing
at Synernetics, a supplier of local area networks, Vice President of Operations
at Ashton-Tate Corporation, a software supplier, and held various positions with
Digital Equipment Corporation, a computer equipment manufacturer. He holds a
B.S. in engineering from the University of Idaho and a M.B.A. from Boston
University.
KWOK P. WONG is one of our founders and has been our Vice President of
Engineering since November 1997. From 1991 to November 1997, he was director of
software development at
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VideoServer, Inc., now Ezenia!, Inc. Previously, Mr. Wong was Manager of
Systems Networks Architecture at Bolt, Beranek and Newman Communications
Corporation and was a software engineer at Davox Corporation. Mr. Wong has a
B.S. in engineering and a M.S. in computer science from Northeastern University.
EDWARD T. ANDERSON has been a Director since November 1997. Mr. Anderson has
been managing general partner of North Bridge Venture Partners, a venture
capital firm, since 1994. Previously, he was a general partner for ABS Ventures,
the venture capital affiliate of Alex Brown & Sons. He also serves on the board
of directors of Arrowpoint Communications, Inc. He has a M.F.A. from the
University of Denver and a M.B.A. from Columbia University.
PAUL J. FERRI has been a Director since November 1997. Mr. Ferri has been a
general partner of Matrix Partners, a venture capital firm, since 1982. He also
serves on the board of directors of Applix, Inc., Arrowpoint Communications,
Inc. and Sycamore Networks, Inc. Mr. Ferri has a B.S. in engineering from
Cornell University, a M.S. in engineering from Polytechnic Institute of New York
and a M.B.A. from Columbia University.
PAUL J. SEVERINO has been a Director since March 1999. Mr. Severino is a
private investor. He has been Chairman of NetCentric Corporation, a provider of
Internet telephony applications since January 1998 and was Acting Chief
Executive Officer from January 1998 to March 1999. From November 1996 until
January 1998, Mr. Severino was a private investor. From 1994 to October 1996, he
was Chairman of Bay Networks, Inc. after its formation from the merger of
Wellfleet Communications, Inc. and Synoptics Communications, Inc. Prior to
that, he was a founder, President and Chief Executive Officer of Wellfleet
Communications, Inc. He also serves on the board of directors of
Interspeed, Inc., MCK Communications, Inc., Media 100, Inc., and Silverstream
Software, Inc. Mr. Severino has a B.S. in engineering from Rensselaer
Polytechnic Institute.
Each executive officer serves at the discretion of the board of directors
and holds office until his or her successor is elected and qualified or until
his or her earlier resignation or removal. There are no family relationships
among any of our directors or executive officers. Each of the directors serves
on the board of directors pursuant to the terms of an agreement that will
terminate upon the closing of this offering.
ELECTION OF DIRECTORS
Following this offering, the board of directors will be divided into three
classes, with members of each class serving for a staggered three-year term.
Messrs. Ferri and Gruber will serve in the class whose term expires in 2001;
Messrs. Ahmed and Severino will serve in the class whose term expires in 2002;
and Mr. Anderson will serve in the class whose term expires in 2003. Upon the
expiration of the term of a class of directors, directors in that class will be
elected for three-year terms at the annual meeting of stockholders in the year
in which their term expires.
COMPENSATION OF DIRECTORS
We reimburse directors for reasonable out-of-pocket expenses incurred in
attending meetings of the board of directors. See "Certain Transactions--Common
Stock and Option Issuances" and "Management--Benefit Plans; 1997 Stock Incentive
Plan."
BOARD COMMITTEES
The board of directors has established a compensation committee and an audit
committee. The compensation committee, which consists of Messrs. Ferri and
Severino, reviews executive salaries, administers bonuses, incentive
compensation and stock plans, and approves the salaries
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<PAGE>
and other benefits of our executive officers. In addition, the compensation
committee consults with our management regarding our benefit plans and
compensation policies and practices.
The audit committee, which consists of Messrs. Anderson, Ferri and Severino,
reviews the professional services provided by our independent accountants, the
independence of our accountants from our management, our annual financial
statements and our system of internal accounting controls. The audit committee
also reviews other matters with respect to our accounting, auditing and
financial reporting practices and procedures as it may find appropriate or may
be brought to its attention.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the appointment of the compensation committee, our full board of
directors, which includes Messrs. Gruber and Ahmed, was responsible for the
functions of a compensation committee. Messrs. Gruber and Ahmed did not
participate in deliberations regarding their own compensation. No interlocking
relationship exists between any member of our board of directors or our
compensation committee and any member of the board of directors or compensation
committee of any other company, and none of these interlocking relationships
have existed in the past.
Messrs. Ferri and Severino are the members of our compensation committee.
Neither Mr. Ferri nor Mr. Severino is an executive officer of Sonus, nor has
either received any compensation from us within the last three years other than
in his capacity as a director.
Since November 1997, we have issued and sold shares of Series A, Series B,
Series C and Series D redeemable convertible preferred stock. Matrix Partners
and affiliated entities hold 2,100,000 shares of our Series A preferred stock,
600,000 shares of our Series B preferred stock and 230,266 shares of our
Series C preferred stock. Mr. Ferri is a general partner of Matrix Partners V
Management Co., L.L.C., the general partner of the Matrix Partners entities that
hold the preferred stock. Mr. Severino also purchased 50,000 shares of Series B
preferred stock and 4,264 shares of Series C preferred stock. In addition, we
sold 87,500 shares of common stock to Mr. Severino in April 1999. In March 2000,
both Messrs. Ferri and Severino each purchased 10,000 shares of common stock
under our 1997 Stock Incentive Plan. See "Certain Transactions."
EXECUTIVE COMPENSATION
The following table sets forth, for the year ended December 31, 1999, the
compensation earned by:
- our Chairman of the Board of Directors;
- our Chief Executive Officer; and
- the other three most highly compensated executive officers who received
annual compensation in excess of $100,000.
40
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION AWARDS
COMPENSATION --------------------
-------------------- ALL OTHER RESTRICTED STOCK
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION AWARDS (3)
- --------------------------- --------- -------- ------------- --------------------
<S> <C> <C> <C> <C>
Rubin Gruber
Chairman of the Board of Directors........ $150,000 $ -- $ -- $ --
Hassan M. Ahmed
President and Chief Executive Officer..... 186,417 75,000 -- --
Michael G. Hluchyj
Chief Technology Officer,
Vice President and Secretary.............. 150,000 -- -- --
Jeffrey Mayersohn
Vice President of Customer Support and
Professional Services..................... 150,000 -- -- --
Gary A. Rogers
Vice President of Worldwide Sales and
Marketing................................. 111,371(1) -- 99,107(2) 0(4)
</TABLE>
- ------------------------
(1) Represents the total amount of compensation Mr. Rogers received in fiscal
1999 for the portion of the year during which he was one of our executive
officers. Mr. Rogers joined us in March 1999.
(2) Represents commission income.
(3) On December 31, 1999, the remaining number of shares of restricted common
stock held by the above executive officers that had not vested and the value
of this stock as of December 31, 1999, was as follows: Mr. Gruber: 908,124
shares, $18,158,848; Mr. Ahmed: 2,031,805 shares, $40,432,920; Mr. Hluchyj:
1,084,219 shares, $21,683,930; Mr. Mayersohn: 487,499 shares, $9,740,230;
and Mr. Rogers: 625,000 shares, $12,375,000. The value is based on the
mid-point of the estimated public offering price range set forth on the
cover page of this prospectus less the purchase price paid. The holders of
these shares of restricted common stock will be entitled to receive any
dividends we pay on our common stock.
(4) In April 1999, we sold 625,000 shares of restricted common stock to
Mr. Rogers, subject to our right to repurchase at $0.20 per share, the then
current fair market value of the common stock as determined by our board of
directors. Our repurchase right lapses 20% one year from the date
Mr. Rogers commenced employment and thereafter lapses an additional 1.6667%
of the shares for each month of employment. There was no public trading
market for the common stock in April 1999. Our board of directors determined
the market value of the common stock based on various factors including the
illiquid nature of an investment in our common stock, our historical
performance, the preferences, including liquidation and redemption of our
outstanding redeemable convertible preferred stock, our future prospects and
the price for securities sold in arms' length issuances to third parties.
BENEFIT PLANS
1997 STOCK INCENTIVE PLAN
In November 1997, our board of directors approved our 1997 Stock Incentive
Plan, which was amended in November 1998, October 1999 and March 2000. The
initial adoption of the plan and each of its amendments were subsequently
approved by our stockholders. Our 1997 Stock Incentive Plan provides for the
grant of incentive stock options, non-qualified stock options,
41
<PAGE>
restricted common stock awards and common stock grants to our employees,
directors and consultants.
In March 2000, our stockholders approved an amendment to increase the
maximum number of shares of common stock reserved for issuance under our 1997
plan to 27,000,000. This maximum number of shares will increase, effective as of
January 1, 2001 and each January 1 thereafter during the term of the plan, by an
additional number of shares of common stock in an amount equal to the lesser of
(1) 5% of the total number of shares of common stock issued and outstanding as
of the close of business on December 31 of the preceding year or (2) a number of
shares determined by our board of directors. However, no more than an aggregate
of 27,000,000 shares will be available for incentive stock options during the
life of the 1997 plan. As of March 31, 2000, we had granted options for the
purchase of 3,127,032 shares of common stock and issued 14,113,693 shares of
restricted common stock, and had 9,481,778 shares remaining available for future
grant under the 1997 plan.
Our board of directors has authorized the compensation committee to
administer our 1997 plan, including the granting of options and restricted
common stock to our executive officers. Subject to any applicable limitations
contained in our 1997 plan, our board of directors, our compensation committee
or executive officers to whom our board of directors delegates authority, as the
case may be, selects the recipients of awards and determines:
- the number of shares of common stock covered by options and the dates upon
which any option grants vest and become exercisable;
- the exercise price of options;
- the duration of options; and
- the number of shares of common stock subject to any restricted stock or
other stock awards and the terms and conditions of these awards, including
the conditions for repurchase, issue price and repurchase price.
Generally, options and restricted common stock under the 1997 plan vest over
four to five year periods from the date of grant. In the event of a merger,
consolidation or other acquisition event resulting in a change in control of
Sonus, outstanding options and restricted common stock will accelerate in
vesting by 12 months. Our board of directors may in its discretion accelerate
the vesting of any options or restricted grant at any time. The vesting of
restricted common stock granted to some of our executive officers will fully
accelerate upon a change in control. Upon a change in control, the acquiring or
successor corporation may assume or make substitutions for options or restricted
common stock outstanding under our 1997 plan.
The board of directors may amend, modify, suspend or terminate our 1997 plan
at any time, subject to applicable law and the rights of holders of outstanding
options and restricted common stock awards. Our 1997 plan will terminate in
November 2007, unless the board of directors terminates it prior to that time.
2000 EMPLOYEE STOCK PURCHASE PLAN
Our 2000 Employee Stock Purchase Plan was adopted by our board of directors
in March 2000, and our stockholders approved the purchase plan in May 2000. The
purchase plan authorizes the issuance of up to a total of 1,200,000 shares of
our common stock to participating employees. This number of shares will
increase, effective as of January 1, 2001 and each January 1 thereafter during
the term of the plan, by an additional number of shares of common stock in an
amount equal to the lesser of (1) 2% of the total number of shares of common
stock issued and outstanding as of the close of business on December 31 of the
preceding year or (2) a number of
42
<PAGE>
shares determined by our board of directors. However, no more than an aggregate
of 25,000,000 shares will be available for the grant of options during the life
of the plan. Unless terminated earlier by our board of directors, the purchase
plan shall terminate in May 2020.
The employee stock purchase plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, will be implemented by a series of
overlapping 24-month offering periods. New offering periods, other than the
first offering period, are expected to commence on February 1 and August 1 of
each year. Each offering period will generally consist of four consecutive
six-month purchase periods, and at the end of each six-month period an automatic
purchase will be made for participants. The initial offering and initial
purchase periods are expected to commence on the date of this offering. The 2000
employee stock purchase plan will be administered by the board of directors or
by a committee appointed by the board. Employees of ours, or of any
majority-owned subsidiary designated by the board, are eligible to participate
if we or any subsidiary employs them for at least 20 hours per week and more
than five months per year. Eligible employees may purchase common stock through
payroll deductions, which in any event may not exceed 20% of an employee's
compensation, at a price equal to the lower of 85% of the fair market value of
the common stock at the beginning of each offering period or at the end of each
purchase period. Employees may end their participation in the 2000 employee
stock purchase plan at any time during an offering period and participation ends
automatically on termination of employment.
Under the 2000 employee stock purchase plan, no employee shall be granted an
option under the plan if immediately after the grant the employee would own
stock and/or hold outstanding options to purchase stock equaling 5% or more of
the total voting power or value of all classes of our stock. In addition, no
employee shall be granted an option under the 2000 employee stock purchase plan
if the option would permit the employee to purchase stock under all of our
employee stock purchase plans in an amount that exceeds $25,000 of fair market
value for each calendar year in which the option is outstanding at any time. In
addition, no employee may purchase more than 2,500 shares of common stock under
the 2000 employee stock purchase plan in any one purchase period. If the fair
market value of the common stock on a purchase date other than the final
purchase date of an offering is less than the fair market value at the beginning
of the offering period, each participant shall automatically be withdrawn from
the offering period as of the purchase date and re-enrolled in a new 24 month
offering period beginning on the first business day following the purchase date.
In the event of a merger, consolidation or other acquisition event resulting
in any change of control of Sonus, each right to purchase stock under the 2000
employee stock purchase plan will be assumed or an equivalent right will be
substituted by the successor corporation. Our board of directors will shorten
any ongoing offering period, however, so that employees' rights to purchase
stock under the 2000 employee stock purchase plan are exercised prior to the
transaction in the event that the successor corporation refuses to assume each
purchase right or to substitute an equivalent right. The board of directors has
the power to amend or terminate the 2000 employee stock purchase plan and to
change or terminate offering periods as long as any action does not adversely
affect any outstanding rights to purchase stock. Our board of directors may
amend or terminate the 2000 employee stock purchase plan or an offering period
even if it would adversely affect outstanding options in order to avoid us
incurring adverse accounting charges. We have not issued any shares under the
2000 employee stock purchase plan to date.
401(K) PLAN
On February 27, 1998, we adopted an employee savings and retirement plan,
qualified under Section 401(k) of the Internal Revenue Code, covering all of our
employees. Pursuant to the 401(k) plan, employees may elect to reduce their
current compensation by up to the statutorily prescribed annual limit and have
the amount of the reduction contributed to the 401(k) plan. We may make matching
or additional contributions to the 401(k) plan in amounts to be determined
annually by our board of directors. We have made no contributions to the 401(k)
plan to date.
43
<PAGE>
CERTAIN TRANSACTIONS
PREFERRED STOCK ISSUANCES
Since November 1997, we have issued and sold shares of Series A, Series B
and Series C redeemable convertible preferred stock to the following persons and
entities who are our executive officers, directors or 5% or greater
stockholders. Upon the closing of this offering, each share of Series A,
Series B and Series C redeemable convertible preferred stock will automatically
convert into 2.5 shares of common stock. For more detail on shares to be held by
these purchasers after conversion, see "Principal Stockholders."
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
INVESTOR PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
- -------- --------------- --------------- ---------------
<S> <C> <C> <C>
Matrix Partners and affiliated entities (1)..... 2,100,000 600,000 230,266
North Bridge Venture Partners and affiliated
entities (2).................................. 2,100,000 600,000 230,266
Charles River Ventures and affiliated
entities...................................... 2,100,000 600,000 230,265
Bedrock Capital Partners and affiliated
entities...................................... 275,000 1,180,000 124,088
Paul J. Severino................................ -- 50,000 4,264
Rubin Gruber.................................... 25,000 -- --
Kwok P. Wong.................................... 25,000 -- --
Michael G. Hluchyj.............................. 20,000 -- --
Frank T. Winiarski.............................. -- 10,000 853
</TABLE>
- ------------------------
(1) Composed of Matrix Partners V, L.P. and Matrix V Entrepreneurs Fund, L.P.
with the general partner being Matrix V Management Co., L.L.C. Paul J.
Ferri, one of our directors, is a general partner of Matrix V Management
Co., L.L.C.
(2) Composed of North Bridge Venture Partners II, L.P. and North Bridge Venture
Partners III, L.P. with the general partners being North Bridge Venture
Management II, L.P. and North Bridge Venture Management III, L.P. Edward T.
Anderson, one of our directors, is a general partner of North Bridge Venture
Management II and III, L.P.
SERIES A FINANCING. In November 1997 and July 1998, we issued an aggregate
of 7,180,000 shares of Series A preferred stock to investors, including Rubin
Gruber, Kwok P. Wong, Michael G. Hluchyj, and entities affiliated with Matrix
Partners, North Bridge Venture Partners, Charles River Ventures and Bedrock
Capital Partners. The per share purchase price for our Series A preferred stock
was $1.00.
SERIES B FINANCING. In September and December 1998, and May 1999, we issued
an aggregate of 3,204,287 shares of Series B preferred stock to investors,
including Paul J. Severino, Frank T. Winiarski, and entities affiliated with
Matrix Partners, North Bridge Venture Partners, Charles River Ventures and
Bedrock Capital Partners. The per share purchase price for our Series B
preferred stock was $5.00.
SERIES C FINANCING. In September, November and December 1999, we issued an
aggregate of 1,939,681 shares of Series C preferred stock to investors,
including Paul J. Severino, Frank T. Winiarski, and entities affiliated with
Matrix Partners, North Bridge Venture Partners, Charles River Ventures and
Bedrock Capital Partners. The per share purchase price for our Series C
preferred stock was $11.81.
SERIES D FINANCING. In March 2000, we issued an aggregate of 1,509,154
shares of Series D preferred stock to investors, which did not include any
officer, director or 5% or greater stockholder of Sonus. Upon the closing of
this offering, each share of Series D preferred stock will automatically
44
<PAGE>
convert into one share of common stock. The per share purchase price for our
Series D preferred stock was $16.40.
COMMON STOCK AND OPTION ISSUANCES
The following table presents information regarding our issuances of common
stock to some of our executive officers. We issued the shares of common stock
set forth below in the table pursuant to stock restriction agreements with each
of the executive officers that give us rights to repurchase all or a portion of
the shares at their original purchase price in the event the officer ceases to
be our employee. Some of these stock restriction agreements prohibit us from
repurchasing some or all of the shares following a change in control of Sonus.
<TABLE>
<CAPTION>
NUMBER OF
DATE OF RESTRICTED SHARES AGGREGATE
NAME ISSUANCE PURCHASED PURCHASE PRICE
- ---- -------- ----------------- --------------
<S> <C> <C> <C>
Rubin Gruber....................................... 11/10/97 3,212,499 $ 12,850
Hassan M. Ahmed.................................... 11/4/98 3,212,499 321,250
Michael G. Hluchyj................................. 8/26/97 2,409,375 1,000
Jeffrey Mayersohn.................................. 4/14/98 749,999 15,000
Gary A. Rogers..................................... 4/30/99 625,000 125,000
Stephen J. Nill.................................... 9/1/99 562,500 112,500
</TABLE>
Other executive officers have purchased shares of common stock pursuant to
similar stock restriction agreements for aggregate purchase prices that did not
exceed $60,000 for any one executive officer. The repurchase right generally
lapses as to 20% of the shares approximately one year from the hire date of the
executive officer and thereafter lapses as to an additional 1.6667% of the
shares for each month of employment completed by the executive officer.
In April 1999, we issued 87,500 shares of common stock for $17,500 to Paul
J. Severino, one of our directors. See "Certain Transactions-Preferred Stock
Issuances" for additional issuances of stock to Mr. Severino.
In March 2000, we granted options to purchase shares of our common stock or
the right to purchase restricted common stock to our executive officers and
non-employee directors, under our 1997 Stock Incentive Plan, each at a price of
$10.00 per share, as listed below:
<TABLE>
<CAPTION>
NUMBER NUMBER OF
OF OPTIONS RESTRICTED SHARES
NAME GRANTED PURCHASED
- ---- ---------- -----------------
<S> <C> <C>
Rubin Gruber................................................ 296,000 25,000
Hassan M. Ahmed............................................. 271,000 50,000
Michael G. Hluchyj.......................................... 241,000 --
Kwok P. Wong................................................ 98,000 50,000
Jeffrey Mayersohn........................................... 56,250 18,750
Gary A. Rogers.............................................. 13,000 50,000
Stephen J. Nill............................................. 46,000 10,000
Frank T. Winiarski.......................................... -- 25,000
Edward T. Andersen.......................................... -- 10,000
Paul J. Ferri............................................... -- 10,000
Paul J. Severino............................................ -- 10,000
</TABLE>
These options vest, and the restrictions on the common stock lapse, over a
four year period with 25% of the aggregate number of options and restricted
shares vesting, or being released from
45
<PAGE>
restrictions, on March 9, 2001 and monthly thereafter at the rate of 2.0833% for
each month of employment or service completed by the executive officer or
non-employee director.
AGREEMENTS WITH EXECUTIVE OFFICERS
On November 4, 1998, in connection with the issuance of restricted common
stock, we loaned $257,000 to Hassan M. Ahmed, our President and Chief Executive
Officer. The loan is secured by 2,570,000 shares of our restricted common stock
and bears interest at 8% per year. The loan is due upon the earlier of
November 4, 2003 or 180 days after his shares are eligible for public sale. As
of April 10, 2000, the aggregate amount of principal and interest outstanding
under Mr. Ahmed's loan was approximately $265,000, and the largest amount
outstanding to date was approximately $279,000.
The Company has agreed to pay Mr. Ahmed a $275,000 bonus upon the closing of
this offering or upon a merger, consolidation or other acquisition event
resulting in any change of control of Sonus for a minimum purchase price of
$100 million.
On September 1, 1999, in connection with the issuance of restricted common
stock, we loaned $110,250 to Stephen J. Nill, our Chief Financial Officer, Vice
President of Finance and Administration and Treasurer. The loan is secured by
562,500 shares of his common stock and is a full recourse note, which bears
interest at 8% per year. The loan is due upon the earlier of September 1, 2004
or 180 days after his shares are eligible for public sale. As of April 10, 2000,
the aggregate amount of principal and interest outstanding under Mr. Nill's loan
was approximately $115,000, which is also the largest amount outstanding to
date.
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. All future transactions, including loans between us and our officers,
directors, principal stockholders and their affiliates will be approved by a
majority of the board of directors, including a majority of the independent and
disinterested directors on the board of directors, and will be on terms no less
favorable to us than could be obtained from unaffiliated third parties.
46
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership of
our common stock as of April 10, 2000 and as adjusted to reflect the sale of our
common stock offered in this prospectus by:
- each person who beneficially owns more than 5% of the outstanding shares
of our common stock;
- each of our executive officers listed in the Summary Compensation Table;
- each of our directors; and
- all of our executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting and investment power
with respect to shares. Unless otherwise indicated below, to our knowledge, all
persons named in the table have sole voting and investment power with respect to
their shares of common stock, except to the extent authority is shared by
spouses under applicable law.
The number of shares of common stock deemed outstanding prior to this
offering includes 55,277,103 shares of common stock outstanding as of April 10,
2000, assuming conversion of all outstanding shares of redeemable convertible
preferred stock into common stock. The number of shares of common stock deemed
outstanding after this offering includes the 5,000,000 shares that are being
offered for sale by us in this offering. Unless otherwise indicated below, the
address of each listed stockholder is care of Sonus Networks, Inc., 5 Carlisle
Road, Westford, Massachusetts 01886.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF COMMON STOCK
SHARES ----------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING
- ------------------------ ------------ -------- --------
<S> <C> <C> <C>
Paul J. Ferri (1)........................................ 7,335,664 13.3% 12.2%
Matrix Partners and affiliated entities (2).............. 7,325,664 13.3 12.2
Edward T. Anderson (3)................................... 7,335,664 13.3 12.2
North Bridge Venture Partners and affiliated entities
(4).................................................... 7,325,664 13.3 12.2
Charles River Ventures and affiliated entities (5)....... 7,325,661 13.3 12.2
Bedrock Capital Partners and affiliated entities (6)..... 3,947,718 7.1 6.5
Hassan M. Ahmed (7)...................................... 3,227,499 5.8 5.4
Michael G. Hluchyj (8)................................... 2,317,375 4.2 3.8
Rubin Gruber (9)......................................... 1,339,916 2.4 2.2
Jeffrey Mayersohn (10)................................... 697,999 1.3 1.2
Gary A. Rogers (11)...................................... 667,000 1.2 1.1
Paul J. Severino (12).................................... 163,160 * *
All executive officers and directors
as a group (11 persons)(13)............................ 25,540,515 46.2 42.4
</TABLE>
- ------------------------
* Less than 1% of the outstanding common stock.
(1) Composed of 6,593,097 shares held by Matrix Partners V, L.P., 732,567 shares
held by Matrix V Entrepreneurs Fund, L.P. and includes 10,000 shares which
are subject to our right to repurchase at cost if Mr. Ferri ceases to serve
as one of our directors. Matrix V Management Co., L.L.C. is the general
partner of the aforementioned entities. Paul J. Ferri is a director of Sonus
and is a general partner of Matrix V Management Co., L.L.C. Mr. Ferri
disclaims
47
<PAGE>
beneficial ownership of the shares held by these entities except to the
extent of his proportionate pecuniary interest therein. Mr. Ferri, by virtue
of his management position in the Matrix entities, has sole voting and
dispositive power with respect to the shares owned by Matrix Partners V,
L.P. and Matrix V Entrepreneurs Fund, L.P. The address of Mr. Ferri is in
care of Matrix V Management Co., L.L.C., 1000 Winter Street, Suite 4500,
Waltham, MA 02154.
(2) Composed of 6,593,097 shares held by Matrix Partners V, L.P. and 732,567
shares held by Matrix V Entrepreneurs Fund, L.P. Matrix V Management Co.,
L.L.C. is the general partner of the aforementioned entities. Mr. Ferri, by
virtue of his management position in the Matrix entities, has sole voting
and dispositive power with respect to the shares owned by Matrix Partners V,
L.P. and Matrix V Entrepreneurs Fund, L.P. The address of Matrix Partners
and its affiliated entities is in care of Matrix V Management Co., L.L.C.,
1000 Winter Street, Suite 4500, Waltham, MA 02154.
(3) Composed of 6,300,017 shares held by North Bridge Venture Partners II, L.P.,
1,025,647 shares held by North Bridge Venture Partners III, L.P. and
includes 10,000 shares which are subject to our right to repurchase at cost
if Mr. Andersen ceases to serve as one of our directors. The general partner
for North Bridge Venture Partners II, L.P. is North Bridge Venture
Management II, L.P., and for North Bridge Venture Partners III, L.P. is
North Bridge Venture Management III, L.P. Edward T. Anderson is a director
of Sonus, and is a general partner of both North Bridge Venture Management
II and III, L.P. Mr. Anderson disclaims beneficial ownership of the shares
held by these entities except to the extent of his proportionate pecuniary
interest therein. Edward T. Andersen, William J. Geary, Richard D'Amore and
Jeffrey P. McCarthy, by virtue of their management position in the North
Bridge entities, each have voting and dispositive power with respect to the
shares owned by North Bridge Venture Partners II, L.P. and North Bridge
Venture Partners III, L.P. The address of Mr. Anderson is in care of North
Bridge Venture Management II and III, L.P., 950 Winter Street, Suite 4600,
Waltham, MA 02451.
(4) Composed of 6,300,017 shares held by North Bridge Venture Partners II, L.P.
and 1,025,647 shares held by North Bridge Venture Partners III, L.P. The
general partner for North Bridge Venture Partners II, L.P is North Bridge
Venture Management II, L.P., and for North Bridge Venture Partners III, L.P.
is North Bridge Venture Management III, L.P. Edward T. Andersen,
William J. Geary, Richard D'Amore and Jeffrey P. McCarthy, by virtue of
their management position in the North Bridge entities, each have voting and
dispositive power with respect to the shares owned by North Bridge Venture
Partners II, L.P. and North Bridge Venture Partners III, L.P. The address of
North Bridge Venture Partners and its affiliated entities is in care of
North Bridge Venture Management II and III, L.P., 950 Winter Street, Suite
4600, Waltham, MA 02451.
(5) Composed of 7,193,032 shares held by Charles River Partnership VIII, L.P.
and 132,629 shares held by Charles River VIII-A LLC. Charles River
Partnership VIII GP Limited Partnership is the general partner of the
Charles River Partnership VIII, L.P. and Charles River Friends VIII, Inc. is
the manager of Charles River VIII-A LLC. Richard M. Burnes, Jr., Michael J.
Zak and Ted R. Dintersmith, by virtue of their management position in the
Charles River entities, each have voting and dispositive power with respect
to the shares owned by Charles River Partnership VIII, L.P. and Charles
River VIII-A LLC. The address of Charles River Ventures and its affiliated
entities is in care of Charles River VIII GP Limited Partnership, 1000
Winter Street, Suite 3300, Waltham, MA 02154.
(6) Composed of 3,657,832 shares held by Bedrock Capital Partners I, L.P.,
127,464 shares held by VBW Employee Bedrock Fund, and 162,422 shares held by
Credit Suisse First Boston Bedrock Fund, L.P. Bedrock General Partner I,
LLC is the general partner for these entities. James McLean, David Duval,
Paul Brown and Jason Rosenbluth, by virtue of their management position in
the Bedrock entities, each have voting and dispositive power with respect to
the
48
<PAGE>
shares owned by Bedrock Capital Partners I, L.P., Credit Suisse First Boston
Bedrock Fund, L.P. and VBW Employee Bedrock Fund. The address of Bedrock
Capital Partners and its affiliated entities is in care of Bedrock General
Partner, I, L.L.C., One Boston Place, Suite 3310, Boston, MA 02108.
(7) Includes 2,570,000 shares subject to a stock pledge agreement in favor of
Sonus. Includes 2,317,291 shares that are subject to our right to repurchase
at cost if Mr. Ahmed ceases to be employed by us. Includes 401,500 shares
held by the Hassan and Aliya Family Trust and by his minor children, and
566,666 shares held by the 1999 Hassan M. Ahmed Generation Skipping Family
Trust on behalf of his family. Mr. Ahmed disclaims beneficial ownership of
the shares held by these trusts.
(8) Includes 913,594 shares that are subject to our right to repurchase at cost
if Mr. Hluchyj ceases to be employed by us. Includes an aggregate of 705,000
shares held by the Michael G. and Theresa M. Hluchyj Family Trust and by his
minor children. Mr. Hluchyj disclaims beneficial ownership of the shares
held by the Michael G. and Theresa M. Hluchyj Family Trust and his minor
children.
(9) Includes 770,408 shares that are subject to our right to repurchase at cost
if Mr. Gruber ceases to be employed by us.
(10) Includes 447,999 shares that are subject to our right to repurchase at cost
if Mr. Mayersohn ceases to be employed by us. Includes 181,817 shares held
by the Mayersohn Seamonson Family Irrevocable Trust-1999 on behalf of his
minor children. Mr. Mayersohn disclaims beneficial ownership of the shares
held by the Mayersohn Seamonson Family Irrevocable Trust-1999.
(11) Includes 542,000 shares that are subject to our right to repurchase at cost
if Mr. Rogers ceases to be employed by us. Includes 300,000 shares held by
the Gary A. Rogers GRAT, and 4,000 shares held in trust for his minor
children. Mr. Rogers disclaims beneficial ownership of the shares held by
the Gary A. Rogers GRAT and trusts for his minor children.
(12) Includes 10,000 shares that are subject to our right to repurchase at cost
if Mr. Severino ceases to serve as one of our directors. Includes 17,000
shares for the benefit of Mr. Severino's minor child under the Massachusetts
Uniform Transfer to Minors Act.
(13) Includes 6,381,182 shares which are subject to our right to repurchase at
cost if our executive officers cease to be employed by us or our directors
cease to serve as directors.
49
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
After this offering, we will be authorized to issue 300,000,000 shares of
common stock, $0.001 par value, per share, and 5,000,000 shares of undesignated
preferred stock, $0.01 par value per share. As of April 10, 2000, there were
55,277,103 shares of common stock outstanding held by 744 stockholders of
record, assuming conversion of all shares of the redeemable convertible
preferred stock into common stock. Based on the number of shares outstanding as
of that date and giving effect to the issuance of the 5,000,000 shares of common
stock offered by us in this offering, there will be 60,277,103 shares of common
stock outstanding upon the closing of the offering.
COMMON STOCK
Holders of our common stock are entitled to one vote for each share held on
all matters submitted to a vote of the stockholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the shares voted can elect
all of the directors then standing for election. Holders of common stock are
entitled to receive ratably any dividends that may be declared by the board of
directors out of legally available funds, subject to any preferential dividend
rights of any outstanding preferred stock. Upon our liquidation, dissolution or
winding up, the holders of common stock are entitled to receive ratably our net
assets available after the payment of all debts and other liabilities and
subject to the prior rights of any outstanding preferred stock. Holders of
common stock have no preemptive, subscription, redemption or conversion rights.
The outstanding shares of common stock are, and the shares offered by us in this
offering will be upon receipt of payment for these shares, fully paid and
non-assessable. The rights, preferences and privileges of holders of common
stock are subject to, and may be adversely affected by, the rights of holders of
shares of any series of preferred stock that we may designate and issue in the
future without further stockholder approval. Upon the closing of this offering,
there will be no shares of preferred stock outstanding.
PREFERRED STOCK
Upon the closing of this offering, our board of directors will be authorized
without further stockholder approval to issue from time to time up to an
aggregate of 5,000,000 shares of preferred stock in one or more series. The
board of directors has discretion to fix or alter the designations, preferences,
rights, qualifications, limitations or restrictions of the shares of each
series, including the dividend rights, dividend rates, conversion rights, voting
rights, term of redemption including sinking fund provisions, redemption price
or prices, liquidation preferences and the number of shares constituting any
series or designations of any series without further vote or action by the
stockholders.
The purpose of authorizing the board of directors to issue preferred stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could make it more difficult for a third party to
acquire, or could discourage a third party from acquiring, a majority of our
outstanding voting stock. We have no current plans to issue any shares of
preferred stock.
DELAWARE LAW AND CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER EFFECTS
We are subject to the provisions of Section 203 of the General Corporation
Law of Delaware. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the
50
<PAGE>
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Subject to some exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.
Our amended and restated certificate of incorporation and amended and
restated by-laws to be effective on the closing of this offering provide:
- that the board of directors be divided into three classes, as nearly equal
in size as possible, with staggered three-year terms;
- that directors may be removed only for cause by the affirmative vote of
the holders of at least 66 2/3% of the shares of our capital stock
entitled to vote; and
- that any vacancy on the board of directors, however occurring, including a
vacancy resulting from an enlargement of the board, may only be filled by
vote of a majority of the directors then in office.
The classification of the board of directors and the limitations on the
removal of directors and filling of vacancies could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring, Sonus.
Our amended and restated certificate of incorporation and amended and
restated by-laws also provide that, after the closing of this offering:
- any action required or permitted to be taken by the stockholders at an
annual meeting or special meeting of stockholders may only be taken if it
is properly brought before the meeting and may not be taken by written
action in lieu of a meeting; and
- special meetings of the stockholders may only be called by the chairman of
the board of directors, the president or by the board of directors.
Our amended and restated by-laws provide that, in order for any matter to be
considered "properly brought" before a meeting, a stockholder must comply with
requirements regarding advance notice to us. These provisions could delay until
the next stockholders' meeting stockholder actions that are favored by the
holders of a majority of our outstanding voting securities. These provisions may
also discourage another person or entity from making a tender offer for our
common stock, because the person or entity, even if it acquired a majority of
our outstanding voting securities, would be able to take action as a
stockholder, such as electing new directors or approving a merger, only at a
duly called stockholders meeting, and not by written consent.
Delaware's corporation law provides generally that the affirmative vote of a
majority of the shares entitled to vote on any matter is required to amend a
corporation's certificate of incorporation or by-laws, unless a corporation's
certificate of incorporation or by-laws, as the case may be, requires a greater
percentage. Our amended and restated certificate of incorporation requires the
affirmative vote of the holders of at least 66 2/3% of the shares of our capital
stock entitled to vote to amend or repeal any of the provisions of our amended
and restated certificate of incorporation described in the preceding paragraphs.
Generally, our amended and restated by-laws may be amended or repealed by a
majority vote of the board of directors or the holders of a majority of the
shares of our capital stock issued and outstanding and entitled to vote. To
amend our amended and restated by-laws regarding special meetings of
stockholders, written actions of stockholders in lieu of a meeting and the
election, removal and classification of members of the board of directors
requires the affirmative vote of the holders of at least 66 2/3% of the shares
of our capital stock entitled to vote. The stockholder vote would be in addition
to any separate class vote
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<PAGE>
that might in the future be required pursuant to the terms of any series of
preferred stock that might be outstanding at the time any of these amendments
are submitted to stockholders.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our amended and restated certificate of incorporation provides that our
directors and officers shall be indemnified by us to the fullest extent
authorized by Delaware law. This indemnification would cover all expenses and
liabilities reasonably incurred in connection with their services for or on
behalf of us. In addition, our amended and restated certificate of incorporation
provides that our directors will not be personally liable for monetary damages
to us for breaches of their fiduciary duty as directors, unless they violated
their duty of loyalty to us or our stockholders, acted in bad faith, knowingly
or intentionally violated the law, authorized illegal dividends or redemptions
or derived an improper personal benefit from their action as directors.
REGISTRATION RIGHTS
After this offering, the holders of approximately 32,319,074 shares of
common stock will be entitled to rights with respect to the registration of
these shares under the Securities Act. Set forth below is a summary of the
registration rights of the holders of our Series A preferred stock, Series B
preferred stock, Series C preferred stock and Series D preferred stock, each of
which will convert into common stock upon the closing of this offering.
DEMAND REGISTRATION RIGHTS. At any time after the earlier of November 18,
2000, or the closing of our initial public offering, the holders of 35% or more
of the shares having registration rights may request that we register shares of
common stock. We will be obligated to effect only two registrations pursuant to
a demand request by holders of registrable shares.
We are not obligated to effect a registration 90 days prior to, and
extending up to three months from the effective date of, the anticipated filing
of the most recent company-initiated registration. We are also not required to
effect a stockholder requested registration, if the requested registration of
shares would adversely affect, to our material harm, any other activity in which
we are then engaged. We may only delay stockholder initiated registrations once
every twelve months.
PIGGYBACK REGISTRATION RIGHTS. Stockholders with registration rights have
unlimited rights to request that shares be included in any company-initiated
registration of common stock other than registrations of shares issued in
connection with employee benefit plans, shares issued in connection with
business combinations subject to Rule 145 under the Securities Act, convertible
debt or other specified registrations. If the registration that we initiate
involves an underwriting, however, we will not be obligated to register any
shares unless the holders agree to the terms of the underwriting agreement. It
may also be necessary, at the discretion of the lead underwriter, to limit the
number of selling stockholders in the offering, as a result of which
stockholders may only be able to register a pro rata number of registrable
shares, if any.
FORM S-3 REGISTRATION RIGHTS. Once we have become eligible, under
applicable securities laws, to file a registration statement on Form S-3, which
will not be until at least 12 months after the closing of this offering, one or
more stockholders may request that we file a registration statement on
Form S-3, so long as the shares offered have an aggregate offering price of at
least $1,000,000 based on the public market price at the time of the request. We
will be obligated to effect no more than three registrations pursuant to an S-3
request by holders of registration rights.
FUTURE GRANTS OF REGISTRATION RIGHTS. Without the consent of current
stockholders owning at least 66 2/3% of the then outstanding registrable shares,
we may not grant further registration rights that would be on more favorable
terms than the existing registration rights.
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<PAGE>
TRANSFERABILITY. The registration rights are transferable upon transfer of
registrable securities and notice by the holder to us of the transfer, provided
that, in most cases, a specified minimum number of shares, as adjusted for
splits, dividends, recapitalizations and similar events, are transferred and the
transferee or assignee assumes the rights and obligations of the transferor of
the shares.
TERMINATION. The registration rights will terminate as to any particular
registrable securities on the date on which the shares are sold pursuant to a
registration statement and are no longer subject to Rule 144 under the
Securities Act. The piggyback registration rights will expire upon the third
anniversary of this offering.
WAIVER. The holders of 32,207,379 shares of common stock entitled to the
registration rights described above have agreed not to exercise these rights for
a period of 180 days after the date of this prospectus.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock will be American Stock
Transfer & Trust Company.
LISTING
We have filed an application for our common stock to be quoted on the Nasdaq
National Market under the symbol "SONS".
53
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have 60,277,103 shares of common
stock outstanding, or 61,027,103 shares if the underwriters' over-allotment
option is exercised in full, in each case, assuming no exercise of options after
April 10, 2000. Of this amount, the 5,000,000 shares offered by this prospectus
will be available for immediate sale in the public market as of the date of this
prospectus. The remaining 55,277,103 shares of common stock held by existing
stockholders that will be outstanding after the offering will be "restricted
securities" as defined in Rule 144 under the Securities Act, and may be sold in
the future without registration under the Securities Act subject to compliance
with the provisions of Rule 144, Rule 701 or any other applicable exemption
under the Securities Act.
Approximately 50,250,000 shares will be available for sale in the public
market 180 days after the date of this prospectus, subject in some cases to
compliance with applicable stock restriction agreements and the volume and other
limitations of Rule 144. See "Shares Eligible for Future Sale--Lock-Up
Agreements."
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares, including shares attributed to them, for at least one
year is entitled to sell within any three-month period commencing 90 days after
the date of this prospectus a number of shares that does not exceed the greater
of:
- 1% of the then outstanding shares of common stock, which will be equal to
approximately 603,000 shares immediately after the offering; or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale, subject to the filing of a Form 144
with respect to the sale.
A person, or persons whose shares are aggregated, who is not deemed to have
been an affiliate of Sonus at any time during the 90 days immediately preceding
the sale and who has beneficially owned his or her shares for at least two years
is entitled to sell these shares pursuant to Rule 144(k) without regard to the
volume limitations described above. Persons deemed to be affiliates must always
sell pursuant to Rule 144, even after the applicable holding periods have been
satisfied.
We are unable to estimate the number of shares that will be sold under
Rule 144, since this will depend on the market price for our common stock, the
personal circumstances of the sellers and other factors. Any future sale of
substantial amounts of the common stock in the open market may adversely affect
the market price of the common stock we are offering.
We have also agreed not to issue any shares during the 180 days after the
date of this prospectus without the consent of the representatives of the
underwriters, except that we may, without consent, issue or sell shares under
our 1997 Stock Incentive Plan and 2000 Employee Stock Purchase Plan.
Any of our employees, consultants or advisors who purchased shares pursuant
to a written compensatory plan or other agreement is entitled to rely on the
resale previsions of Rule 701, which permits non-affiliates to sell their
Rule 701 shares without having to comply with the public information, holding
period, volume limitation or notice provisions of Rule 144 and permits
affiliates to sell their Rule 701 shares without having to comply with the
Rule 144 holding period restrictions, in each case commencing 90 days after the
date of this prospectus.
We intend to file a registration statement on Form S-8 under the Securities
Act within 90 days after the completion of the offering to register the shares
of common stock issued or reserved for future issuance under our 1997 Stock
Incentive Plan, thus permitting the resale of these shares by non-affiliates in
the public market without restriction under the Securities Act. As of April 10,
2000,
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<PAGE>
there were a total of approximately 17,235,000 shares of outstanding common
stock and options to purchase shares of common stock under our 1997 Stock
Incentive Plan.
In addition, some of our stockholders have registration rights with respect
to 32,319,074 shares of common stock. Registration of these registrable shares
under the Securities Act would result in those shares becoming freely tradeable
without restriction under the Securities Act. See "Description of Capital
Stock-Registration Rights."
LOCK-UP AGREEMENTS
Our officers, directors and stockholders holding an aggregate of 55,273,853
shares of our common stock have entered into lock-up agreements with the
representatives of the underwriters or have agreed with Sonus to enter into
lock-up agreements with the representatives. Optionholders having the right to
acquire an aggregate of 2,852,923 shares of our common stock have also entered
into lock-up agreements with the representatives or have agreed with Sonus to
enter into lock-up agreements with the representatives. The lock-up agreements
provide that these persons will not offer, sell, contract to sell, grant any
option to purchase or otherwise dispose of our common stock or any securities
exercisable for, or convertible into, our common stock for a period of 180 days
after the date of this prospectus without the prior written consent of Goldman,
Sachs & Co. The lock-up agreements do not restrict the transfer of shares of our
common stock purchased under the directed share program in connection with this
offering or in the open market following the date of this prospectus.
However, if the reported last sale price of our common stock on the Nasdaq
National Market is greater than twice the initial public offering price per
share for 20 of the 30 consecutive trading days ending on the last trading day
preceding the 90(th) day after the date of this prospectus, then 15% of the
securities subject to lock-up agreements as of the date of this prospectus will
be released from the transfer restrictions of the lock-up agreements. The
release of these securities will occur on the 90(th) day after the date of this
prospectus or, if the 90(th) day after the date of this prospectus would fall
within the period beginning on September 12, 2000 and continuing until and
including the second trading day after the release of our operating results for
the quarter ending on September 30, 2000, the release will occur on the 20(th)
trading day after the end of the preceding period if the reported last sale
price of our common stock on the Nasdaq National Market is greater than twice
the initial public offering price per share for 20 of the 30 consecutive trading
days ending on the trading day preceding the 20(th) trading day.
In addition, if the reported last sale price of our common stock on the
Nasdaq National Market is greater than twice the initial public offering price
per share for 20 of the 30 consecutive trading days ending on the second trading
day after the date of the public release of our operating results for the
quarter ending September 30, 2000, an additional 25% of the securities subject
to lock-up agreements as of the date of this prospectus will be released from
the transfer restrictions of the lock-up agreements. The release of these
securities will occur on the third trading day after the date of the public
release of our operating results for the quarter ending September 30, 2000.
LEGAL MATTERS
The validity of the shares of common stock we are offering will be passed
upon for us by Bingham Dana LLP, Boston, Massachusetts. As of March 31, 2000,
partners at Bingham Dana LLP owned shares of Series A, Series B and Series C
redeemable convertible preferred stock, which will convert into an aggregate of
87,210 shares of common stock upon the completion of this offering. The validity
of the shares of common stock we are offering will be passed upon for the
underwriters by Ropes & Gray, Boston, Massachusetts.
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<PAGE>
EXPERTS
The consolidated financial statements of Sonus Networks, Inc. as of
December 31, 1998 and 1999 and for the period from inception (August 7, 1997)
through December 31, 1997, and for the years ended December 31, 1998 and 1999
included in this prospectus and elsewhere in this registration statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included in reliance
upon the authority of said firm as experts in giving said report.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, including exhibits and schedules, under the Securities
Act with respect to the shares to be sold in the offering. This prospectus does
not contain all the information set forth in the registration statement. For
further information with respect to us and the shares to be sold in the
offering, reference is made to the registration statement and the exhibits and
schedules attached to the registration statement. Statements contained in this
prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete. As a result of this offering, we will
become subject to the information and reporting requirements of the Securities
Exchange Act of 1934, as amended and will file annual, quarterly and current
reports, proxy statements and other information with the Commission.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information that we file at the Commission's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
request copies of these documents, upon payment of a duplicating fee, by writing
to the Commission. Please call the Commission at 1-800-SEC-0330 for further
information on the operation of the Public Reference Room. Our Commission
filings, including the registration statement, are also available to you on the
Commission's Web site at http://WWW.SEC.GOV.
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<PAGE>
UNDERWRITING
Sonus and the underwriters named below have entered into an underwriting
agreement with respect to the shares being offered. Subject to the conditions in
the underwriting agreement, each underwriter has severally agreed to purchase
the number of shares indicated in the following table. Goldman, Sachs & Co.,
FleetBoston Robertson Stephens Inc., J.P. Morgan Securities Inc. and Lehman
Brothers Inc. are the representatives of the underwriters.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------ -----------
<S> <C>
Goldman, Sachs & Co. .......................................
FleetBoston Robertson Stephens Inc. ........................
J.P. Morgan Securities Inc. ................................
Lehman Brothers Inc. .......................................
-----------
Total....................................................... 5,000,000
===========
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional 750,000
shares from us to cover these sales. They may exercise that option for 30 days.
If any shares are purchased pursuant to this option, the underwriters will
severally purchase shares in approximately the same proportion as set forth in
the table above.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by Sonus. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase 750,000 additional shares.
<TABLE>
<CAPTION>
PAID BY SONUS
----------------------------
NO EXERCISE FULL EXERCISE
------------ -------------
<S> <C> <C>
Per Share...................................... $ $
Total.......................................... $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any of these
securities dealers may resell any shares purchased from the underwriters to
other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
public offering price, the representatives may change the offering price and the
other selling terms.
Sonus has agreed with the underwriters not to dispose of or hedge any of its
common stock or securities convertible into or exchangeable for shares of common
stock during the period from the date of this prospectus continuing through the
date 180 days after the date of this prospectus, except with the prior written
consent of the representatives. See "Shares Eligible for Future Sale" for a
discussion of transfer restrictions.
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be negotiated among Sonus and the
representatives. Among the factors to be
57
<PAGE>
considered in determining the initial public offering price of the shares, in
addition to prevailing market conditions, will be our historical performance,
estimates of our business potential and earnings prospects, an assessment of our
management and the consideration of the above factors in relation to market
valuation of companies in related businesses.
We have applied to have common stock approved for quotation on the Nasdaq
National Market under the symbol "SONS".
In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in this offering.
Stabilizing transactions consist of some bids or purchases made for the purpose
of preventing or retarding a decline in the market price of the common stock
while this offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discounts received by it because the representatives have repurchased shares
sold by or for the account of that particular underwriter in stabilizing or
short covering transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on The Nasdaq
National Market, in the over-the-counter market or elsewhere.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
At the request of Sonus, the underwriters are reserving up to
700,000 shares of common stock for sale at the initial public offering price to
some of our directors, officers, employees, customers, other friends and
business associates under a directed share program. The number of shares
available for sale to the general public will be reduced by the number of
reserved shares sold. Any reserved shares not so purchased will be offered by
the underwriters to the general public on the same basis as other shares offered
hereby.
A prospectus in electronic format may be made available on the Web sites
maintained by one or more underwriters or securities dealers. The
representatives of the underwriters may agree to allocate a number of shares to
underwriters for sale to their online brokerage account holders. Internet
distribution will be allocated by the representatives to underwriters that may
make Internet distributions on the same basis as other allocations. In addition,
shares may be sold by the underwriters to securities dealers who resell shares
to online brokerage account holders.
Sonus estimates that its share of the total expenses of this offering,
excluding underwriting discounts and commissions, will be approximately $1.25
million.
Sonus has agreed to indemnify the several underwriters against liabilities,
including liabilities under the Securities Act of 1933.
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SONUS NETWORKS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Redeemable Convertible Preferred
Stock and Stockholders' Equity (Deficit).................. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Sonus Networks, Inc.:
We have audited the accompanying consolidated balance sheets of Sonus
Networks, Inc. (a Delaware corporation) as of December 31, 1998 and 1999, and
the related consolidated statements of operations, redeemable convertible
preferred stock and stockholders' equity (deficit) and cash flows for the period
from inception (August 7, 1997) to December 31, 1997, and for the years ended
December 31, 1998 and 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sonus
Networks, Inc. as of December 31, 1998 and 1999, and the results of its
operations and its cash flows for the period from inception (August 7, 1997) to
December 31, 1997, and for the years ended December 31, 1998 and 1999, in
conformity with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Boston, Massachusetts
March 10, 2000
F-2
<PAGE>
SONUS NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------- MARCH 31, MARCH 31,
1998 1999 2000 2000
-------- -------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,584 $ 8,885 $25,668 $25,668
Marketable securities..................................... 12,917 14,681 16,111 16,111
Inventories............................................... -- 2,210 3,680 3,680
Other current assets...................................... 162 298 567 567
------- ------- ------- -------
Total current assets.................................. 16,663 26,074 46,026 46,026
PROPERTY AND EQUIPMENT, net of accumulated depreciation and
amortization.............................................. 1,506 4,269 5,329 5,329
OTHER ASSETS, net of accumulated amortization of $57, $301,
$362 and $362 at December 31, 1998 and 1999, March 31,
2000 and pro forma March 31, 2000, respectively........... 247 439 1,006 1,006
------- ------- ------- -------
$18,416 $30,782 $52,361 $52,361
======= ======= ======= =======
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term obligations.................. $ 430 $ 1,336 $ 1,455 $ 1,455
Accounts payable.......................................... 422 1,412 3,773 3,773
Accrued expenses.......................................... 490 2,691 4,631 4,631
Deferred revenue.......................................... -- 1,031 1,045 1,045
------- ------- ------- -------
Total current liabilities............................. 1,342 6,470 10,904 10,904
LONG-TERM OBLIGATIONS, less current portion................. 1,220 3,402 3,293 3,293
COMMITMENTS (Note 7)
REDEEMABLE CONVERTIBLE PREFERRED STOCK, $0.01 par value;
17,000,000 shares authorized; 10,334,287, 12,323,968 and
13,833,122 shares issued and outstanding, at December 31,
1998 and 1999 and March 31, 2000, respectively; No shares
authorized, issued and outstanding, pro forma............. 22,951 46,109 70,859 --
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $0.01 par value; Pro forma, 5,000,000
shares authorized; none issued and outstanding.......... -- -- -- --
Common stock, $0.001 par value; 70,000,000 shares
authorized and 300,000,000 pro forma; 16,523,353,
21,836,974, 22,713,920 and 55,032,994 shares issued at
December 31, 1998 and 1999, March 31, 2000 and pro forma
March 31, 2000, respectively; 16,523,353, 21,836,974,
22,683,920 and 55,002,994 shares outstanding at
December 31, 1998 and 1999, March 31, 2000 and pro forma
March 31, 2000, respectively............................ 17 22 23 55
Capital in excess of par value............................ 589 25,611 54,674 125,501
Accumulated deficit....................................... (7,446) (33,882) (49,957) (49,957)
Stock subscriptions receivable............................ (257) (346) (346) (346)
Deferred compensation..................................... -- (16,604) (37,069) (37,069)
Treasury stock, at cost: 30,000 common shares at
March 31, 2000 and pro forma March 31, 2000............. -- -- (20) (20)
------- ------- ------- -------
Total stockholders' equity (deficit).................. (7,097) (25,199) (32,695) 38,164
------- ------- ------- -------
$18,416 $30,782 $52,361 $52,361
======= ======= ======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
SONUS NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 7, THREE MONTHS ENDED
1997) TO YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------ ------------------------
1997 1998 1999 1999 2000
------------ ---------- ----------- --------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES.................................... $ -- $ -- $ -- $ -- $ 1,093
OPERATING EXPENSES:
Manufacturing and product costs (1)....... -- -- 1,861 223 1,462
Research and development (1).............. 299 5,824 10,780 2,684 4,844
Sales and marketing (1)................... -- 426 5,606 438 3,358
General and administrative (1)............ 187 919 1,723 301 713
Stock-based compensation.................. -- 59 4,404 517 6,979
----- --------- ---------- --------- --------
Total operating expenses................ 486 7,228 24,374 4,163 17,356
----- --------- ---------- --------- --------
LOSS FROM OPERATIONS........................ (486) (7,228) (24,374) (4,163) (16,263)
Interest expense............................ -- (78) (224) (37) (116)
Interest income............................. 25 392 711 157 344
----- --------- ---------- --------- --------
NET LOSS.................................... (461) (6,914) (23,887) (4,043) (16,035)
Beneficial conversion feature of Series C
preferred stock........................... -- -- (2,500) -- --
----- --------- ---------- --------- --------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS.. $(461) $ (6,914) $ (26,387) $ (4,043) $(16,035)
===== ========= ========== ========= ========
NET LOSS PER SHARE (Note 1(q)):
Basic and diluted......................... $ -- $ (4.27) $ (5.53) $ (1.23) $ (2.07)
===== ========= ========== ========= ========
Pro forma basic and diluted............... $ (0.75) $ (0.41)
========== ========
SHARES USED IN COMPUTING NET LOSS PER SHARE
(Note 1(q)):
Basic and diluted......................... -- 1,619,289 4,774,763 3,285,170 7,742,970
===== ========= ========== ========= ========
Pro forma basic and diluted............... 32,062,786 38,921,794
========== ========
</TABLE>
- ------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
(1) Excludes non-cash, stock-based
compensation expense as follows:
Manufacturing and product costs....... $ -- $ 92 $ 8 $ 73
Research and development.............. 29 1,537 121 3,647
Sales and marketing................... 12 2,104 214 2,739
General and administrative............ 18 671 174 520
--------- ---------- --------- --------
$ 59 $ 4,404 $ 517 $ 6,979
========= ========== ========= ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
SONUS NETWORKS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
REDEEMABLE CONVERTIBLE
PREFERRED STOCK
------------------------- COMMON STOCK CAPITAL IN
REDEMPTION ---------------------- EXCESS OF PAR
SHARES VALUE SHARES PAR VALUE VALUE
----------- ----------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, INCEPTION (AUGUST 7, 1997)......................... -- $ -- -- $ -- $ --
Issuance of common stock to founders...................... -- -- 8,205,231 8 18
Issuance of Series A preferred stock and issuance
costs of $28............................................ 7,100,000 7,100 -- -- --
Issuance of common stock to employees..................... -- -- 1,031,875 1 20
Net loss.................................................. -- -- -- -- --
----------- ------- ---------- ---- --------
BALANCE, DECEMBER 31, 1997.................................. 7,100,000 7,100 9,237,106 9 38
Payments on subscriptions receivable...................... -- -- -- -- --
Issuance of Series A preferred stock and issuance costs of
$2...................................................... 80,000 80 -- -- --
Issuance of Series B preferred stock and issuance
costs of $40............................................ 3,154,287 15,771 -- -- --
Issuance of common stock to officer....................... -- -- 3,212,499 4 317
Issuance of common stock to employees..................... -- -- 4,073,748 4 175
Compensation associated with the grant of stock options
and sale of restricted stock to non-employees........... -- -- -- -- 59
Net loss.................................................. -- -- -- -- --
----------- ------- ---------- ---- --------
BALANCE, DECEMBER 31, 1998.................................. 10,334,287 22,951 16,523,353 17 589
Issuance of Series B preferred stock to a director and
issuance costs of $9.................................... 50,000 250 -- -- --
Issuance of Series C preferred stock and issuance
costs of $40............................................ 1,939,681 22,908 -- -- --
Beneficial conversion feature of Series C preferred
stock................................................... -- -- -- -- 2,500
Payments on subscriptions receivable...................... -- -- -- -- --
Issuance of common stock to employees, officers and a
director................................................ -- -- 5,076,871 5 1,498
Exercise of stock options................................. -- -- 236,750 -- 16
Compensation associated with the grant of stock options
and sale of restricted stock to non-employees........... -- -- -- -- 149
Deferred compensation related to stock option grants and
sale of restricted common stock......................... -- -- -- -- 20,859
Amortization of deferred compensation..................... -- -- -- -- --
Net loss.................................................. -- -- -- -- --
----------- ------- ---------- ---- --------
BALANCE, DECEMBER 31, 1999.................................. 12,323,968 46,109 21,836,974 22 25,611
Issuance of Series D preferred stock and issuance costs of
$40 (unaudited)......................................... 1,509,154 24,750 -- -- --
Issuance of common stock to employees (unaudited)......... -- -- 836,199 1 1,608
Exercise of stock options (unaudited)..................... -- -- 40,747 -- 11
Repurchase of common stock (unaudited).................... -- -- -- -- --
Compensation associated with the grant of stock options
and sale of restricted stock to non-employees
(unaudited)............................................. -- -- -- -- 2,379
Deferred compensation related to stock option grants and
sale of restricted common stock (unaudited)............. -- -- -- -- 25,065
Amortization of deferred compensation (unaudited)......... -- -- -- -- --
Net loss (unaudited)...................................... -- -- -- -- --
----------- ------- ---------- ---- --------
BALANCE, MARCH 31, 2000 (UNAUDITED)......................... 13,833,122 70,859 22,713,920 23 54,674
Pro forma conversion of preferred stock to common
stock (unaudited)....................................... (13,833,122) (70,859) 32,319,074 32 70,827
----------- ------- ---------- ---- --------
PRO FORMA BALANCE, MARCH 31, 2000 (UNAUDITED)............... -- $ -- 55,032,994 $ 55 $125,501
=========== ======= ========== ==== ========
<S> <C> <C> <C> <C> <C>
STOCK TREASURY STOCK
ACCUMULATED SUBSCRIPTIONS DEFERRED --------------------
DEFICIT RECEIVABLE COMPENSATION SHARES COST
------------ ------------- ------------- --------- --------
BALANCE, INCEPTION (AUGUST 7, 1997)......................... $ -- $ -- $ -- -- $ --
Issuance of common stock to founders...................... (1) -- -- -- --
Issuance of Series A preferred stock and issuance
costs of $28............................................ (28) -- -- -- --
Issuance of common stock to employees..................... -- (4) -- -- --
Net loss.................................................. (461) -- -- -- --
-------- ------- -------- --------- --------
BALANCE, DECEMBER 31, 1997.................................. (490) (4) -- -- --
Payments on subscriptions receivable...................... -- 4 -- -- --
Issuance of Series A preferred stock and issuance costs of
$2...................................................... (2) -- -- -- --
Issuance of Series B preferred stock and issuance
costs of $40............................................ (40) -- -- -- --
Issuance of common stock to officer....................... -- (257) -- -- --
Issuance of common stock to employees..................... -- -- -- -- --
Compensation associated with the grant of stock options
and sale of restricted stock to non-employees........... -- -- -- -- --
Net loss.................................................. (6,914) -- -- -- --
-------- ------- -------- --------- --------
BALANCE, DECEMBER 31, 1998.................................. (7,446) (257) -- -- --
Issuance of Series B preferred stock to a director and
issuance costs of $9.................................... (9) -- -- -- --
Issuance of Series C preferred stock and issuance
costs of $40............................................ (40) -- -- -- --
Beneficial conversion feature of Series C preferred
stock................................................... (2,500) -- -- -- --
Payments on subscriptions receivable...................... -- 21 -- -- --
Issuance of common stock to employees, officers and a
director................................................ -- (110) -- -- --
Exercise of stock options................................. -- -- -- -- --
Compensation associated with the grant of stock options
and sale of restricted stock to non-employees........... -- -- -- -- --
Deferred compensation related to stock option grants and
sale of restricted common stock......................... -- -- (20,859) -- --
Amortization of deferred compensation..................... -- -- 4,255 -- --
Net loss.................................................. (23,887) -- -- --
-------- ------- -------- --------- --------
BALANCE, DECEMBER 31, 1999.................................. (33,882) (346) (16,604) -- --
Issuance of Series D preferred stock and issuance costs of
$40 (unaudited)......................................... (40) -- -- -- --
Issuance of common stock to employees (unaudited)......... -- -- -- -- --
Exercise of stock options (unaudited)..................... -- -- -- -- --
Repurchase of common stock (unaudited).................... -- -- -- 30,000 (20)
Compensation associated with the grant of stock options
and sale of restricted stock to non-employees
(unaudited)............................................. -- -- -- -- --
Deferred compensation related to stock option grants and
sale of restricted common stock (unaudited)............. -- -- (25,065) -- --
Amortization of deferred compensation (unaudited)......... -- -- 4,600 -- --
Net loss (unaudited)...................................... (16,035) -- -- -- --
-------- ------- -------- --------- --------
BALANCE, MARCH 31, 2000 (UNAUDITED)......................... (49,957) (346) (37,069) 30,000 (20)
Pro forma conversion of preferred stock to common
stock (unaudited)....................................... -- -- -- -- --
-------- ------- -------- --------- --------
PRO FORMA BALANCE, MARCH 31, 2000 (UNAUDITED)............... $(49,957) $ (346) $(37,069) 30,000 $ (20)
======== ======= ======== ========= ========
<S> <C>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
BALANCE, INCEPTION (AUGUST 7, 1997)......................... $ --
Issuance of common stock to founders...................... 25
Issuance of Series A preferred stock and issuance
costs of $28............................................ (28)
Issuance of common stock to employees..................... 17
Net loss.................................................. (461)
--------
BALANCE, DECEMBER 31, 1997.................................. (447)
Payments on subscriptions receivable...................... 4
Issuance of Series A preferred stock and issuance costs of
$2...................................................... (2)
Issuance of Series B preferred stock and issuance
costs of $40............................................ (40)
Issuance of common stock to officer....................... 64
Issuance of common stock to employees..................... 179
Compensation associated with the grant of stock options
and sale of restricted stock to non-employees........... 59
Net loss.................................................. (6,914)
--------
BALANCE, DECEMBER 31, 1998.................................. (7,097)
Issuance of Series B preferred stock to a director and
issuance costs of $9.................................... (9)
Issuance of Series C preferred stock and issuance
costs of $40............................................ (40)
Beneficial conversion feature of Series C preferred
stock................................................... --
Payments on subscriptions receivable...................... 21
Issuance of common stock to employees, officers and a
director................................................ 1,393
Exercise of stock options................................. 16
Compensation associated with the grant of stock options
and sale of restricted stock to non-employees........... 149
Deferred compensation related to stock option grants and
sale of restricted common stock......................... --
Amortization of deferred compensation..................... 4,255
Net loss.................................................. (23,887)
--------
BALANCE, DECEMBER 31, 1999.................................. (25,199)
Issuance of Series D preferred stock and issuance costs of
$40 (unaudited)......................................... (40)
Issuance of common stock to employees (unaudited)......... 1,609
Exercise of stock options (unaudited)..................... 11
Repurchase of common stock (unaudited).................... (20)
Compensation associated with the grant of stock options
and sale of restricted stock to non-employees
(unaudited)............................................. 2,379
Deferred compensation related to stock option grants and
sale of restricted common stock (unaudited)............. --
Amortization of deferred compensation (unaudited)......... 4,600
Net loss (unaudited)...................................... (16,035)
--------
BALANCE, MARCH 31, 2000 (UNAUDITED)......................... (32,695)
Pro forma conversion of preferred stock to common
stock (unaudited)....................................... 70,859
--------
PRO FORMA BALANCE, MARCH 31, 2000 (UNAUDITED)............... $ 38,164
========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
SONUS NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 7, YEAR ENDED THREE MONTHS
1997) TO DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, ------------------- -------------------
1997 1998 1999 1999 2000
-------------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................... $ (461) $(6,914) $(23,887) $(4,043) $(16,035)
Adjustment to reconcile net loss to net cash used in
operating activities--
Depreciation and amortization........................ 11 466 1,632 220 759
Compensation expense associated with the grant of
stock options and issuance of restricted stock to
non-employees...................................... -- 59 149 22 2,379
Amortization of deferred compensation................ -- -- 4,255 508 4,600
Changes in current assets and liabilities--
Inventories........................................ -- -- (2,210) (68) (1,470)
Other current assets............................... (30) (132) (136) (186) (269)
Accounts payable................................... 229 193 990 203 2,361
Accrued expenses................................... 96 394 2,201 201 1,940
Deferred revenue................................... -- -- 1,031 -- 14
------ ------- -------- ------- --------
Net cash used in operating activities............ (155) (5,934) (15,975) (3,143) (5,721)
------ ------- -------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.................... (347) (1,577) (4,151) (516) (1,907)
Maturities of marketable securities.................... -- 7,295 22,020 8,922 16,151
Purchases of marketable securities..................... -- (20,212) (23,784) (3,033) (17,581)
Other assets........................................... (14) (292) (436) 13 (479)
------ ------- -------- ------- --------
Net cash provided by (used in) investing
activities..................................... (361) (14,786) (6,351) 5,386 (3,816)
------ ------- -------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock..................... 42 243 1,393 262 1,609
Proceeds from exercise of stock options................ -- -- 16 1 11
Net proceeds from issuance of preferred stock.......... 6,847 15,809 23,109 -- 24,710
Payment of stock subscriptions receivable.............. -- 4 21 -- --
Proceeds from long-term obligations.................... 8 1,749 3,609 379 298
Payments on long-term obligations...................... -- (107) (521) (100) (288)
Repurchase of common stock............................. -- -- -- -- (20)
Proceeds from notes payable............................ 225 -- -- -- --
------ ------- -------- ------- --------
Net cash provided by financing activities........ 7,122 17,698 27,627 542 26,320
------ ------- -------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... 6,606 (3,022) 5,301 2,785 16,783
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........... -- 6,606 3,584 3,584 8,885
------ ------- -------- ------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD................. $6,606 $ 3,584 $ 8,885 $ 6,369 $ 25,668
====== ======= ======== ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest............... $ -- $ 78 $ 208 $ 37 $ 111
====== ======= ======== ======= ========
SUPPLEMENTARY DISCLOSURE OF NONCASH TRANSACTIONS:
Conversion of notes payable to preferred stock......... $ 225 $ -- $ -- $ -- $ --
====== ======= ======== ======= ========
Issuance of common stock for subscriptions
receivable........................................... $ 4 $ 257 $ 110 $ -- $ --
====== ======= ======== ======= ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
<PAGE>
SONUS NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR MARCH 31, 1999 AND 2000 IS UNAUDITED)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Sonus Networks, Inc. (Sonus) was incorporated on August 7, 1997 and is a
leading provider of voice infrastructure products for the new public network.
Sonus offers a new generation of carrier-class switching equipment and software
that enable voice services to be delivered over packet-based networks. Sonus was
considered to be in the development stage through December 31, 1999 and was
principally engaged in research and development, raising capital and hiring its
management team.
Sonus is subject to risks common to technology-based companies including,
but not limited to, the development of new technology, development of markets
and distribution channels, dependence on key personnel, and the ability to
obtain additional capital as needed to meet its product plans. Sonus has a
limited operating history and has incurred significant operating losses since
inception. To date, Sonus has been funded principally by private equity
financings. Sonus' ultimate success is dependent upon its ability to raise
additional capital and to successfully develop and market its products.
The accompanying consolidated financial statements reflect the application
of certain significant accounting policies as described in this note and
elsewhere in the accompanying consolidated financial statements and notes.
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Sonus and its wholly owned subsidiary Sonus Networks Limited. All material
intercompany transactions and balances have been eliminated.
(B) INTERIM CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The consolidated financial statements for the three months ended March 31,
1999 and 2000 and related footnote information are unaudited and have been
prepared on the same basis as the audited consolidated financial statements. In
the opinion of management, the interim unaudited consolidated financial
statements include all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the results of these interim
periods. The results for the three months ended March 31, 2000 are not
necessarily indicative of the operating results to be expected for the entire
year.
(C) PRO FORMA PRESENTATION (UNAUDITED)
The unaudited pro forma consolidated balance sheet and consolidated
statement of redeemable convertible preferred stock and stockholders' equity
(deficit) as of March 31, 2000 reflect the automatic conversion of all
outstanding shares of Series A, B, C and D redeemable convertible preferred
stock into an aggregate of 32,319,074 shares of common stock, which will occur
upon the closing of Sonus' proposed initial public offering (IPO).
F-7
<PAGE>
SONUS NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR MARCH 31, 1999 AND 2000 IS UNAUDITED)
(D) CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash equivalents are stated at cost plus accrued interest, which
approximates market value, and have maturities of three months or less at the
date of purchase.
Marketable securities are classified as held-to-maturity, as Sonus has the
intent and ability to hold to maturity. Marketable securities are reported at
amortized cost. Cash equivalents and marketable securities are invested in
highly rated government securities. There have been no gains or losses to date.
(E) CONCENTRATIONS OF CREDIT RISK AND LIMITED SUPPLIERS
The financial instruments that potentially subject Sonus to concentrations
of credit risk are cash, marketable securities and receivables. Sonus has no
significant off-balance-sheet concentrations such as foreign exchange contracts,
options contracts or other foreign hedging arrangements. The majority of Sonus'
cash is maintained with a commercial bank. For the three months ended March 31,
2000, one customer accounted for substantially all of Sonus' revenues.
Certain components and software licenses from third-parties used in Sonus'
products are procured from a single source. The failure of a supplier, including
a subcontractor, to deliver on schedule could delay or interrupt Sonus' delivery
of products and thereby adversely affect Sonus' revenues and operating results.
(F) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
(G) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Expenditures for maintenance and repairs are charged to
expense as incurred, whereas major betterments are capitalized as additions to
property and equipment. Sonus provides for depreciation and amortization using
the straight-line method and charges to operations amounts estimated to allocate
the cost of the assets over their estimated useful lives.
(H) OTHER ASSETS
Other assets include licenses for certain technology embedded in Sonus'
products. These licenses are amortized over the lesser of their useful lives or
the term of the license.
(I) REVENUE RECOGNITION
Sonus recognizes revenue from product sales to end users, resellers and
distributors upon shipment, provided there are no uncertainties regarding
acceptance, persuasive evidence of an arrangement exists, the sales price is
fixed or determinable and collection of the related receivable is probable. If
uncertainties exist, Sonus recognizes revenue when those uncertainties are
resolved. In multiple element arrangements, Sonus will use the residual method
in accordance with Statement of Position 97-2 and 98-9. Service revenue is
recognized as the services are provided. Amounts collected prior to satisfying
the revenue recognition criteria are reflected as deferred revenue. Warranty
costs are estimated and recorded by Sonus at the time of product revenue
recognition.
F-8
<PAGE>
SONUS NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR MARCH 31, 1999 AND 2000 IS UNAUDITED)
(J) SOFTWARE DEVELOPMENT COSTS
Sonus accounts for its software development costs in accordance with
Statement of Financial Accounting Standards (SFAS) No. 86, ACCOUNTING FOR THE
COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED.
Accordingly, the costs for the development of new software and substantial
enhancements to existing software are expensed as incurred until technological
feasibility has been established, at which time any additional costs would be
capitalized. Sonus has determined that technological feasibility is established
at the time a working model of the software is completed. Because Sonus believes
its current process for developing software is essentially completed
concurrently with the establishment of technological feasibility, no costs have
been capitalized to date.
(K) STOCK-BASED COMPENSATION
Sonus uses the intrinsic value-based method of Accounting Principles Board
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, to account for all of
its employee stock-based compensation plans and uses the fair value method to
account for all non-employee stock-based compensation.
(L) COMPREHENSIVE LOSS
Sonus applies Financial Accounting Standards Board (FASB) SFAS No. 130,
REPORTING COMPREHENSIVE INCOME. The comprehensive loss for the period from
inception (August 7, 1997) to December 31, 1997, the years ended December 31,
1998 and 1999 and the three months ended March 31, 1999 and 2000 does not differ
from the reported loss.
(M) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of Sonus' financial instruments, which include cash
equivalents, marketable securities, stock subscriptions receivable, accounts
payable, accrued expenses and long-term obligations, approximate their fair
value.
(N) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
(O) NEW PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. Pursuant to SFAS No. 137,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL OF THE
EFFECTIVE DATE OF FASB NO. 133, SFAS No. 133 is effective in fiscal year 2001.
SFAS No. 133 is not expected to have a material impact on Sonus' financial
condition or results of operations.
F-9
<PAGE>
SONUS NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR MARCH 31, 1999 AND 2000 IS UNAUDITED)
(P) DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, establishes standards for reporting information regarding operating
segments and establishes standards for related disclosures about products and
services and geographic areas. Operating segments are identified as components
of an enterprise about which separate discrete financial information is
available for evaluation by the chief operating decision maker, or decision
making group, in making decisions regarding resource allocation and assessing
performance. To date, the Company has viewed its operations and manages its
business as principally one operating segment.
(Q) NET LOSS PER SHARE
Basic net loss per share is computed by dividing the net loss for the period
by the weighted average number of unrestricted common shares outstanding during
the period. Diluted net loss per share is computed by dividing the net loss for
the period by the weighted average number of unrestricted common shares and
potential common stock outstanding during the period, if dilutive. Potential
common stock is comprised of restricted shares of common stock and the
incremental common shares issuable upon the exercise of stock options. Shares of
common stock issuable upon the conversion of Sonus' redeemable convertible
preferred stock have also been excluded from the date of issuance. In accordance
with Staff Accounting Bulletin No. 98, EARNINGS PER SHARE IN AN INITIAL PUBLIC
OFFERING, Sonus determined there were no nominal issuances of Sonus' stock prior
to Sonus' IPO. For the period from inception through December 31, 1997, there
were no unrestricted outstanding shares of common stock.
Options to purchase 125,000, 557,500, 1,017,581, 723,750 and 3,127,032
shares of common stock have not been included in the computation of diluted net
loss per share for the period from inception to December 31, 1997, the years
ended December 31, 1998 and 1999 and the three months ended March 31, 1999 and
2000, respectively, as their effects would have been anti-dilutive (see Note
9(e)).
Pro forma basic and diluted net loss per share for the year ended
December 31, 1999 and the three months ended March 31, 2000 are computed using
the weighted average number of unrestricted common shares outstanding, including
the pro forma effects of the automatic conversion of Sonus' Series A, B, C and D
redeemable convertible preferred stock into shares of Sonus' common stock which
will occur upon the closing of Sonus' proposed IPO, as if such conversion
occurred at the date of original issuance. There were no dilutive shares of
potential common stock for these periods.
F-10
<PAGE>
SONUS NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR MARCH 31, 1999 AND 2000 IS UNAUDITED)
The following table sets forth the computation of basic and diluted net loss
per share and pro forma basic and diluted net loss per share:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 7, THREE MONTHS ENDED
1997) TO YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, --------------------------- ---------------------------
1997 1998 1999 1999 2000
-------------- ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
HISTORICAL--
Net loss applicable to common
stockholders........................ $ (461) $ (6,914) $ (26,387) $ (4,043) $ (16,035)
=========== ============ ============ ============ ============
Weighted average common shares
outstanding......................... 3,900,329 11,800,382 19,153,503 17,057,359 22,309,713
Less weighted average restricted
common shares outstanding........... (3,900,329) (10,181,093) (14,378,740) (13,772,189) (14,566,743)
----------- ------------ ------------ ------------ ------------
Shares used in computing basic and
diluted net loss per share........ -- 1,619,289 4,774,763 3,285,170 7,742,970
=========== ============ ============ ============ ============
Basic and diluted net loss per
share............................... $ -- $ (4.27) $ (5.53) $ (1.23) $ (2.07)
=========== ============ ============ ============ ============
PRO FORMA--
Net loss.............................. $ (23,887) $ (16,035)
============ ============
Shares used in computing historical
basic and diluted net loss per
share............................... 4,774,763 7,742,970
Weighted average number of shares
assumed upon conversion of
redeemable convertible preferred
stock............................... 27,288,023 31,178,824
------------ ------------
Shares used in computing pro forma
basic and diluted net loss per
share............................. 32,062,786 38,921,794
============ ============
Pro forma basic and diluted net loss
per share........................... $ (0.75) $ (0.41)
============ ============
</TABLE>
(2) INVENTORIES
Inventories consist of the following, in thousands:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ ---------
<S> <C> <C>
Raw materials........................................ $ 305 $ 234
Work in progress..................................... 941 1,289
Finished goods....................................... 964 2,157
------ ------
$2,210 $3,680
====== ======
</TABLE>
F-11
<PAGE>
SONUS NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR MARCH 31, 1999 AND 2000 IS UNAUDITED)
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following, in thousands:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED ------------------- MARCH 31,
USEFUL LIFE 1998 1999 2000
------------- -------- -------- ----------
<S> <C> <C> <C> <C>
Computer equipment and
software...................... 2-3 years $ 1,836 $ 5,956 $ 7,699
Furniture and fixtures.......... 3-5 years 88 69 76
Leasehold improvements.......... Life of lease -- 50 59
------- ------- -------
1,924 6,075 7,834
Less accumulated depreciation
and amortization.............. (418) (1,806) (2,505)
------- ------- -------
$ 1,506 $ 4,269 $ 5,329
======= ======= =======
</TABLE>
(4) LONG-TERM OBLIGATIONS
Sonus has a $7,000,000 equipment line of credit with a bank, bearing
interest at the bank's prime rate (8.5% at December 31, 1999 and 9.0% at
March 31, 2000) plus 0.5%, available through June 30, 2000. Amounts borrowed
under the line shall be repaid over a 42- or 48-month period. Under the
agreement, all of Sonus' assets, except intellectual property, have been pledged
as collateral and Sonus must maintain a certain minimum tangible stockholders'
equity and quick ratio, as defined. As of December 31, 1998 and 1999, and
March 31, 2000, Sonus had outstanding balances of $1,650,000, $4,738,000 and
$4,748,000, respectively. As of March 31, 2000, Sonus had additional borrowings
available under the equipment line of credit of $1,354,000.
The aggregate principal payments on long-term obligations as of
December 31, 1999 are as follows: $1,336,000 in 2000; $1,399,000 in 2001;
$1,201,000 in 2002; $763,000 in 2003; and $39,000 in 2004.
Sonus also has a $200,000 letter of credit with a bank available through
June 30, 2000. As of December 31, 1999 and March 31, 2000, Sonus has committed
approximately $166,000 against the letter of credit, representing the security
deposit for Sonus' leased property.
(5) ACCRUED EXPENSES
Accrued expenses consist of the following, in thousands:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1998 1999 2000
-------- -------- ----------
<S> <C> <C> <C>
Employee compensation and related costs....... $195 $1,381 $1,568
Professional fees............................. 132 609 1,832
Facilities.................................... 100 137 248
Other......................................... 63 564 983
---- ------ ------
$490 $2,691 $4,631
==== ====== ======
</TABLE>
F-12
<PAGE>
SONUS NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR MARCH 31, 1999 AND 2000 IS UNAUDITED)
(6) INCOME TAXES
Sonus provides for income taxes in accordance with SFAS No. 109, ACCOUNTING
FOR INCOME TAXES. Deferred tax assets and liabilities are determined based on
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts for income tax purposes. A valuation allowance has been
recorded for the net deferred tax asset due to the uncertainty of realizing the
benefit of this asset.
The following is a summary of the significant components of Sonus' deferred
tax assets and liabilities, in thousands:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Net operating loss carryforwards.......................... $2,230 $ 9,204
Tax credit carryforwards.................................. 308 761
Start-up costs............................................ 625 485
Deferred revenue.......................................... -- 412
Other temporary differences............................... 44 560
Valuation allowance....................................... (3,207) (11,422)
------ -------
$ -- $ --
====== =======
</TABLE>
As of December 31, 1999, Sonus has net operating loss carryforwards for
income tax purposes of approximately $23,000,000, which expire through 2019.
Sonus also has available research and development credit carryforwards of
approximately $761,000 that expire through 2019. The Internal Revenue Code
contains provisions that limit the net operating loss and tax credit
carryforwards available to be used in any given year in the event of certain
circumstances, including significant changes in ownership interests. Sonus has
completed several financings since inception and has incurred ownership changes
and may incur an ownership change upon completion of the IPO. Sonus does not
believe that these changes will have a material impact on its ability to use its
net operating loss and tax credit carryforwards.
(7) LEASE COMMITMENTS
Sonus leases its administrative and development facility under an operating
lease, which expires in March 2004. In April 2000, Sonus entered into a lease
for an additional facility, which expires in May 2003. Rent expense was
approximately $20,000 from inception to December 31, 1997 and $150,000,
$537,000, $38,000 and $172,000 for the years ended December 31, 1998 and 1999
and the three months ended March 31, 1999 and 2000, respectively. Sonus is
responsible for certain real estate taxes, utilities and maintenance costs. The
future minimum payments under operating lease payments as of December 31, 1999,
including the new 2000 facility lease, are as follows: $868,000 in 2000;
$938,000 in 2001; $973,000 in 2002; $829,000 in 2003; and $187,000 in 2004.
F-13
<PAGE>
SONUS NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR MARCH 31, 1999 AND 2000 IS UNAUDITED)
(8) REDEEMABLE CONVERTIBLE PREFERRED STOCK
Sonus has authorized 17,000,000 shares of preferred stock, $0.01 par value,
and designated four series of redeemable convertible preferred stock as of
March 31, 2000: 7,220,000 shares of Series A preferred stock; 3,247,857 shares
of Series B preferred stock; 2,153,072 shares of Series C preferred stock and
1,585,366 shares of Series D preferred stock. A summary of the redeemable
convertible preferred stock issuances as of March 31, 2000 are as follows:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER REDEMPTION
DESCRIPTION DATE SHARES SHARE VALUE
- --------------------- ------------------------------------------------- ---------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Series A November 1997 and July 1998 7,180,000 $ 1.00 $ 7,180
Series B September and December 1998, May 1999 3,204,287 5.00 16,021
Series C September, November and December 1999 1,939,681 11.81 22,908
Series D March 2000 1,509,154 16.40 24,750
---------- -------
13,833,122 $70,859
========== =======
</TABLE>
The rights, preferences and privileges of the Series A, Series B, Series C
and Series D redeemable convertible preferred stock are as follows:
REDEMPTION
If requested prior to the redemption dates specified below by holders of
66 2/3% of the then outstanding Series A, B, C and D preferred stock, Sonus is
required to redeem such stock at $1.00, $5.00, $11.81 and $16.40 per share,
respectively, as adjusted in the event of future dilution, plus declared but
unpaid dividends as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF THEN
OUTSTANDING
SERIES A, B AND C SERIES D PREFERRED SHARES TO
REDEMPTION DATE REDEMPTION DATE BE REDEEMED
- --------------------- --------------- --------------------
<S> <C> <C>
November 18, 2002 March 9, 2005 33.33%
November 18, 2003 March 9, 2006 50.00%
November 18, 2004 March 9, 2007 All shares then held
</TABLE>
DIVIDENDS
Series A, B, C and D preferred stockholders are entitled to receive any cash
dividend declared on common stock equal to the amount they would be entitled to
if such preferred stock had been converted into common stock. In connection with
the sale of an aggregate of 211,688 shares of Series C preferred stock in
November and December 1999, Sonus recorded a charge to accumulated deficit of
$2.5 million. This amount represents the beneficial conversion feature of the
Series C preferred stock. This amount has been accounted for as a dividend to
preferred stockholders and as a result, increased Sonus' capital in excess of
par value, net loss applicable to common stockholders and the related net loss
per share.
LIQUIDATION PREFERENCE
In the event of liquidation of Sonus and before any distribution to common
stockholders, the Series A, B, C and D preferred stockholders are entitled to
share pro rata, $1.00, $5.00, $11.81 and $16.40 per share, respectively, plus
all declared but unpaid dividends.
F-14
<PAGE>
SONUS NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR MARCH 31, 1999 AND 2000 IS UNAUDITED)
VOTING RIGHTS
Series A, B, C and D preferred stockholders are entitled to one vote per
common share equivalent on all matters voted on by holders of common stock. In
addition, the Series A preferred stockholders are entitled to elect 40% of the
board members as long as 1,775,000 shares of such preferred stock are
outstanding.
CONVERSION
Each share of Series A, B and C preferred stock is convertible into 2.5
shares of common stock and each share of Series D preferred stock is convertible
into one share of common stock, both adjustable for certain dilutive events.
Conversion is at the option of the holder, but becomes automatic upon the
closing of an IPO for the Series A, B and C preferred stock in which at least
$10,000,000 of net proceeds shall be received by Sonus at a price of at least
$8.00 per share and for the Series D preferred stock with at least $25,000,000
of net proceeds at a price of at least $19.68 per share.
(9) STOCKHOLDERS' EQUITY (DEFICIT)
(A) AUTHORIZED CAPITAL STOCK
In March 2000, the Board of Directors authorized, subject to stockholder
approval, an increase in the authorized shares of Sonus' common stock from
70,000,000 to 300,000,000 shares and authorized and approved 5,000,000 shares of
$0.01 par value undesignated preferred stock that may be issued by the Board of
Directors from time to time in one or more series. This amendment is to be
effective upon the closing of Sonus' IPO.
(B) STOCK SUBSCRIPTIONS RECEIVABLE
On November 4, 1998, Sonus entered into a stock subscription agreement for
$257,000 from an officer that bears interest at 8%. The note is secured by
2,570,000 shares of Sonus' restricted common stock and is due upon the earlier
of November 4, 2003 or 180 days after such shares are eligible for public sale.
The interest payments on the note are unconditional and are not limited to the
aforementioned stock. As of December 31, 1999 and March 31, 2000, this note due
Sonus had a remaining principal balance of $236,000.
On September 1, 1999, Sonus entered into a stock subscription agreement for
$110,250 from an officer that bears interest at 8%. The full recourse note is
secured by 562,500 shares of Sonus' restricted common stock and is due upon the
earlier of September 1, 2004 or 180 days after such shares are eligible for
public sale.
(C) COMMON STOCK PURCHASE RIGHT
In November 1999, Sonus signed a definitive purchase and license agreement
(the Agreement) with a customer to provide certain Sonus products. Under the
terms of the Agreement, the customer also has the right to purchase shares of
common stock in Sonus' IPO at the IPO price. The number of shares subject to
this right equals 5% of the dollar value of the customer's accumulated purchases
of Sonus' products and services as of the date of the IPO divided by the IPO per
share price, but in no event more than 5% of the shares offered in the IPO. The
ability of the customer to exercise its right to purchase such shares is
contingent upon a closing of an IPO on a national exchange.
F-15
<PAGE>
SONUS NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR MARCH 31, 1999 AND 2000 IS UNAUDITED)
(D) RESTRICTED COMMON STOCK
Sonus issued 8,205,231 and 87,500 shares of restricted common stock outside
of the 1997 Stock Incentive Plan (the Plan) in the period ended December 31,
1997 and in the year ended December 31, 1999, respectively. These shares are
subject to repurchase agreements which expire over a five-year period. Sonus may
repurchase any remaining restricted shares of common stock held by these
individuals upon termination of employment at their original purchase price
ranging from $0.0004 to $0.004 per share. All shares of common stock subject to
repurchase restrictions, contain the same rights and privileges as unrestricted
shares of common stock and are presented as outstanding as of the date of
issuance. As of December 31, 1999, 3,793,916 shares and as of March 31, 2000,
3,383,653 shares of this common stock were restricted and subject to Sonus'
repurchase.
(E) 1997 STOCK INCENTIVE PLAN
The Plan, which is administered by the Board of Directors, permits Sonus to
sell or award restricted common stock or to grant incentive and non-qualified
stock options for the purchase of common stock to employees, directors and
consultants. In March, 2000, Sonus' stockholders increased the shares authorized
under the Plan from 16,250,000 to 27,000,000. On January 1 of each year,
commencing with January 2001, the aggregate number of shares of common stock
available for purchase under the Plan shall increase by the lesser of (i) 5% of
the outstanding shares on December 31 of the preceding year or (ii) an amount
determined by the Board of Directors. At March 31, 2000, 9,481,778 shares were
available under the Plan for future sale of restricted common stock or grant of
stock options.
Sonus issued shares of restricted common stock to employees and consultants
which are subject to repurchase agreements and vest over a four or five-year
period. If the employee leaves or if the services are not performed, Sonus may
repurchase any restricted shares of common stock held by these individuals at
their original purchase price ranging from $0.02 to $10.00 per share. All shares
of common stock subject to repurchase restrictions, contain the same rights and
privileges as unrestricted shares of common stock and are presented as
outstanding as of the date of issuance. As of December 31, 1999, 10,827,839
shares and as of March 31, 2000, 10,722,963 shares of the outstanding common
stock issued under the Plan were restricted and subject to Sonus' repurchase.
F-16
<PAGE>
SONUS NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR MARCH 31, 1999 AND 2000 IS UNAUDITED)
A summary of activity under Sonus' Plan for the period from inception to
March 31, 2000, is as follows:
RESTRICTED COMMON STOCK ISSUANCES
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF PURCHASE PURCHASE
SHARES PRICE PRICE
---------- ------------------ --------
<S> <C> <C> <C>
Outstanding, August 7, 1997 (inception)................... -- $ -- $ --
Issued.................................................. 1,031,875 .02 .02
----------
Outstanding, December 31, 1997............................ 1,031,875 .02 .02
Issued.................................................. 7,286,247 .02-.20 .07
----------
Outstanding, December 31, 1998............................ 8,318,122 .02-.20 .06
Issued.................................................. 4,989,372 .20-.66 .30
----------
Outstanding, December 31, 1999............................ 13,307,494 .02-.66 .15
Repurchased............................................. (30,000) .66 .66
Issued.................................................. 836,199 .66-10.00 1.88
----------
Outstanding, March 31, 2000............................... 14,113,693 $ .02-10.00 $.25
========== ================== ====
Unrestricted common stock, December 31, 1999.............. 2,479,655 $ .02-.66 $.06
========== ================== ====
Unrestricted common stock, March 31, 2000................. 3,390,730 $ .02-2.00 $.08
========== ================== ====
</TABLE>
COMMON STOCK OPTION GRANTS
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE EXERCISE
SHARES PRICE PRICE
--------- ------------------ --------
<S> <C> <C> <C>
Outstanding, August 7, 1997 (inception).................... -- $ -- $ --
Granted.................................................. 125,000 .004 .004
---------
Outstanding, December 31, 1997............................. 125,000 .004 .004
Granted.................................................. 445,000 .02-.20 .16
Canceled................................................. (12,500) .20 .20
---------
Outstanding, December 31, 1998............................. 557,500 .004-.20 .13
Granted.................................................. 696,831 .20-.66 .39
Exercised................................................ (236,750) .004-.20 .07
---------
Outstanding, December 31, 1999............................. 1,017,581 .02-.66 .32
Granted.................................................. 2,150,531 2.00-10.00 8.57
Canceled................................................. (333) .66 .66
Exercised................................................ (40,747) .20-2.00 .26
---------
Outstanding, March 31, 2000................................ 3,127,032 $ .02-10.00 $6.00
========= ================== =====
Exercisable, December 31, 1999............................. 124,793 $ .02-.48 $ .17
========= ================== =====
Exercisable, March 31, 2000................................ 234,467 $ .02-10.00 $ .77
========= ================== =====
</TABLE>
F-17
<PAGE>
SONUS NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR MARCH 31, 1999 AND 2000 IS UNAUDITED)
The following table summarizes information relating to currently outstanding
and exercisable options as of December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------------------- --------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
PRICE SHARES LIFE(YEARS) PRICE SHARES PRICE
- --------------------- --------- ---------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ .02 50,000 9.43 $.02 25,000 $.02
.20 578,250 8.78 .20 95,293 .20
.48 245,750 9.74 .48 4,500 .48
.66 143,581 9.88 .66 -- --
--------- -------
1,017,581 $.32 124,793 $.17
========= ==== ======= ====
</TABLE>
(F) STOCK-BASED COMPENSATION
Stock-based compensation includes the amortization of deferred employee
compensation and other equity related expenses for non-employees.
In connection with certain employee stock option grants and the issuance of
employee restricted common stock during the year ended December 31, 1999, and
the first quarter of 2000, Sonus recorded deferred compensation of $20,859,000
and $25,065,000, respectively. This represents the aggregate difference between
the exercise price or purchase price and the fair value of the common stock on
the date of grant or sale for accounting purposes. The deferred compensation
will be recognized as an expense over the vesting period of the underlying stock
options and restricted common stock. Sonus recorded compensation expense of
$4,255,000 in the year ended December 31, 1999 and $508,000 and $4,600,000 for
the three months ended March 31, 1999 and 2000, respectively, related to these
options and restricted common stock. Based on the grant of stock options and the
sale of restricted common stock through March 31, 2000, Sonus expects to record
approximately $19,900,000, $11,700,000, $6,500,000, $3,100,000 and $500,000 in
employee compensation expense in the years ending December 31, 2000, 2001, 2002,
2003 and 2004, respectively.
Sonus granted 417,500 non-qualified stock options to non-employees for
services rendered in the period from inception to December 31, 1999. In 1998 and
1999, Sonus sold 125,000 shares of restricted common stock and 10,000 shares of
Series B preferred stock to consultants at their then current fair market value,
subject to repurchase provisions, in the event consulting services are no longer
provided. In the first quarter of 2000, Sonus granted 12,000 non-qualified stock
options and sold 13,000 shares of restricted common stock to consultants.
Sonus has valued the stock options and the issuances of restricted common
stock and Series B preferred stock to non-employees based upon the fair market
value of the services rendered where Sonus believes the value of these services
is more readily determinable than the value of the options or restricted stock.
All other grants of options and issuances of restricted stock to non-employees
are valued based upon the Black-Scholes option pricing model. As of
December 31, 1999, 135,000 stock options, 80,000 shares of restricted common
stock, and 6,000 shares of Series B preferred stock are restricted. As of
March 31, 2000, 45,000 stock options and 45,000 shares of common stock are
restricted. Sonus has recorded stock-based compensation expense of $59,000,
$149,000, $9,000 and $2,379,000 for the grant of options and issuances of
F-18
<PAGE>
SONUS NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR MARCH 31, 1999 AND 2000 IS UNAUDITED)
restricted stock to non-employees for the years ended December 31, 1998 and
1999, and the three months ended March 31, 1999 and 2000, respectively. In
accordance with Emerging Issues Task Force 96-18, Sonus will record the value at
the time the services are provided.
The value of the options granted to employees as calculated under SFAS
No. 123 for the period from inception to December 31, 1997 and during the year
ended December 31, 1998 was immaterial to the consolidated financial statements.
Sonus has computed the pro forma disclosures required under SFAS No. 123 for
options granted to employees for the year ended December 31, 1999, using the
Black-Scholes option pricing model with an assumed risk-free interest rate of
5%, 60% volatility and an expected life ranging from 2-5 years with the
assumption that no dividends will be paid. Had compensation expense for Sonus'
stock option plan been determined consistent with SFAS No. 123 for the year
ended December 31, 1999, the pro forma net loss and pro forma net loss per share
would have been as follows:
<TABLE>
<S> <C>
Net loss applicable to common stockholders, in thousands--
As reported............................................... $(26,387)
Pro forma................................................. (26,400)
Basic and diluted net loss per share--
As reported............................................... $ (5.53)
Pro forma................................................. (5.53)
</TABLE>
(G) 2000 EMPLOYEE STOCK PURCHASE PLAN
In March 2000, the Board of Directors approved, subject to stockholder
approval, the 2000 Employee Stock Purchase Plan. A total of 1,200,000 shares of
common stock have been reserved for issuance under this plan. Eligible employees
may purchase common stock at a price equal to 85% of the lower of the fair
market value of the common stock at the beginning or end of each offering
period. Participation is limited to 20% of an employee's eligible compensation
not to exceed amounts allowed by the Internal Revenue Code. On January 1 of each
year, commencing with January 2001, the aggregate number of shares of common
stock available for purchase under the Employee Stock Purchase Plan shall
increase by the lesser of (i) 2% of the outstanding shares on December 31 of the
preceding year or (ii) an amount determined by the Board of Directors.
(H) COMMON STOCK RESERVED
Common stock reserved for future issuance at March 31, 2000 consist of the
following:
<TABLE>
<S> <C>
Conversion of preferred stock:
Series A.................................................. 17,950,000
Series B.................................................. 8,010,718
Series C.................................................. 4,849,202
Series D.................................................. 1,509,154
----------
Total preferred stock................................... 32,319,074
Stock incentive plan........................................ 12,608,810
Employee stock purchase plan................................ 1,200,000
----------
46,127,884
==========
</TABLE>
F-19
<PAGE>
SONUS NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR MARCH 31, 1999 AND 2000 IS UNAUDITED)
(10) EMPLOYEE BENEFIT PLAN
In 1998, Sonus adopted a savings plan for its employees, which has been
qualified under Section 401(k) of the Internal Revenue Code. Eligible employees
are permitted to contribute to the 401(k) plan through payroll deductions within
statutory and plan limits. Contributions from Sonus are made at the discretion
of the Board of Directors. Sonus has made no contributions to the 401(k) plan to
date.
F-20
<PAGE>
[Inside back cover: Diagram titled "The Sonus Open Services Architecture"
showing GSX9000 Open Services Switch connecting "Packet Network" to "IP
Appliances," "Third Party Application Servers" and "SGX2000 Signaling
Gateway," with text beneath.]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson, or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 4
Special Note Regarding Forward-
Looking Statements.................. 13
Use of Proceeds....................... 13
Dividend Policy....................... 13
Capitalization........................ 14
Dilution.............................. 15
Selected Consolidated Financial
Data................................ 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 25
Management............................ 37
Certain Transactions.................. 44
Principal Stockholders................ 47
Description of Capital Stock.......... 50
Shares Eligible for Future Sale....... 54
Legal Matters......................... 55
Experts............................... 56
Additional Information................ 56
Underwriting.......................... 57
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------------
Through and including , 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to an unsold allotment or subscription.
5,000,000 Shares
SONUS NETWORKS, INC.
Common Stock
------------------
[LOGO]
------------------
GOLDMAN, SACHS & CO.
J.P. MORGAN & CO.
LEHMAN BROTHERS
ROBERTSON STEPHENS
Representatives of the Underwriters
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Expenses of the Registrant in connection with the issuance and distribution
of the securities being registered, other than the underwriting discounts, are
estimated as follows:
<TABLE>
<CAPTION>
TOTAL
----------
<S> <C>
SEC Registration Fee........................................ $ 31,878
NASD Fees................................................... 12,575
NASDAQ Listing Fees......................................... 95,000
Printing and Engraving Expenses............................. 200,000
Legal Fees and Expenses..................................... 350,000
Accountants' Fees and Expenses.............................. 230,000
Blue Sky Fees and Expenses (including legal fees)........... 15,000
Transfer Agent and Registrar's Fees......................... 9,000
Miscellaneous Costs......................................... 306,547
----------
Total................................................... $1,250,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES
Section 145 of the Delaware General Corporation law empowers a Delaware
corporation to indemnify its officers and directors and certain other persons to
the extent under the circumstances set forth therein.
The form of the Fourth Amended and Restated Certificate of Incorporation of
the Registrant and the Amended and Restated By-laws of the Registrant, copies of
the forms of which are filed as Exhibits 3.1 and 3.2, provide for
indemnification of officers and directors of the Registrant and certain other
persons against liabilities and expenses incurred by any of them in certain
stated proceedings and under certain stated conditions.
The above discussion of the Registrant's Fourth Amended and Restated
Certificate of Incorporation, Amended and Restated By-Laws and Section 145 of
the Delaware General Corporation Law is not intended to be exhaustive and is
qualified in its entirety by the forms of such Fourth Amended and Restated
Certificate of Incorporation, Amended and Restated By-Laws and statute.
The Registrant will agree to indemnify the Underwriters and their
controlling persons, and the Underwriters will agree to indemnify the Registrant
and its controlling persons, including directors and executive officers of the
Registrant, against certain liabilities, including liabilities under the
Securities Act. Reference is made to the form of the Underwriting Agreement that
will be filed as part of the Exhibits hereto.
In addition, the Registrant intends to purchase a directors and officers
liability insurance policy.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On November 18, 1997, the Registrant issued and sold 7,100,000 shares of
Series A Convertible Preferred Stock to 18 investors for an aggregate purchase
price of $7,100,000. On July 7, 1998, the Registrant issued and sold 80,000
shares of Series A Convertible Preferred Stock to two investors for an aggregate
purchase price of $80,000. Upon completion of this offering, the Series A
Convertible Preferred Stock will convert into 17,950,000 shares of common stock,
$0.001
II-1
<PAGE>
par value (the "Common Stock"), which reflects a 1.5-for-1 split of the Common
Stock in October 1999, and a 5-for-3 split of the Common Stock in
December 1999. These sales were made in reliance upon Rule 506 of Regulation D,
promulgated under the Securities Act and Section 4(2) of the Securities Act, as
transactions to accredited investors by an issuer not involving a public
offering.
On September 23, 1998, the Registrant issued and sold an aggregate of
3,144,287 shares of Series B Convertible Preferred Stock to a total of 20
investors for an aggregate purchase price of $15,721,435. On December 10, 1998,
the Registrant issued and sold an aggregate of 10,000 shares of Series B
Convertible Preferred Stock to one investor for a purchase price of $50,000. On
May 24, 1999, the Registrant issued and sold 50,000 shares of Series B
Convertible Preferred Stock to one investor for a purchase price of $250,000.
Upon completion of this offering, the Series B Convertible Preferred Stock will
convert into 8,010,718 shares of Common Stock, which reflects a 1.5-for-1 split
of the Common Stock in October 1999, and a 5-for-3 split of the Common Stock in
December 1999. These sales were made in reliance upon Rule 506 of Regulation D,
promulgated under the Securities Act and Section 4(2) of the Securities Act, as
transactions to accredited investors by an issuer not involving a public
offering.
On September 10, 1999, the Registrant issued and sold 1,727,993 shares of
Series C Convertible Preferred Stock to a total of 47 investors for an aggregate
purchase price of $20,407,597. On November 15, 1999, November 30, 1999 and
December 9, 1999, the Registrant issued and sold an aggregate of 211,688 shares
of Series C Convertible Preferred Stock to a total of three investors for an
aggregate purchase price of $2,500,035. Upon completion of this offering, the
Series C Convertible Preferred Stock will convert into 4,849,202 shares of
Common Stock, which reflects a 1.5-for-1 split of the Common Stock in
October 1999, and a 5-for-3 split of the Common Stock in December 1999. These
transactions were made in reliance upon Rule 506 of Regulation D, promulgated
under the Securities Act and Section 4(2) of the Securities Act, as transactions
to accredited investors by an issuer not involving a public offering.
On March 9, 2000, the Registrant issued and sold 1,509,154 shares of
Series D Convertible Preferred Stock to a total of 20 investors for an aggregate
purchase price of $24,750,126. Upon completion of this offering, the Series D
Convertible Preferred Stock will convert into 1,509,154 shares of Common Stock.
This transaction was made in reliance upon Rule 506 of Regulation D, promulgated
under the Securities Act and Section 4(2) of the Securities Act, as transactions
to accredited investors by an issuer not involving a public offering.
As of March 31, 2000, the Registrant has outstanding options to certain
employees, officers and consultants of the Registrant, to purchase an aggregate
of 3,127,032 shares of Common Stock under the Registrant's Amended and Restated
1997 Stock Incentive Plan. The purchase price under the options ranges from
$0.02 to $10.00 per share based on the fair market value of the stock on the
date of grant. As of March 31, 2000, the Registrant has issued grants of
restricted stock to certain employees, officers and consultants of the
Registrant, and as of March 31, 2000 there were 14,113,693 shares of restricted
stock outstanding under the Registrant's Amended and Restated 1997 Stock
Incentive Plan. The purchase price of the restricted stock ranged from $0.02 to
$10.00 per share based on the fair market value of the stock on the date of
issuance. These grants of options, and sales of restricted stock were made in
reliance upon Rule 701 promulgated under the Securities Act and are deemed to be
exempt transactions as sales of an issuer's securities pursuant to a written
plan or contract relating to the compensation of such individuals and upon
Section 4(2) of the Securities Act as transactions not involving any public
offering.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The following is a list of exhibits filed as a part of this registration
statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1* Form of Fourth Amended and Restated Certificate of
Incorporation of the Registrant.
3.2* Form of Amended and Restated By-Laws of the Registrant.
4.1* Specimen Certificate for shares of the Registrant's common
stock.
5.1* Opinion of Bingham Dana LLP, counsel to the Registrant,
regarding the legality of the shares of common stock
registered hereunder.
10.1** Lease, dated January 21, 1999, as amended, between the
Registrant and Glenborough Fund V, Limited Partnership with
respect to property located at 5 Carlisle Road, Westford,
Massachusetts.
10.2* Amended and Restated 1997 Stock Incentive Plan of the
Registrant.
10.3* 2000 Employee Stock Purchase Plan.
10.4** Series A Preferred Stock Purchase Agreement, dated as of
November 18, 1997, by and among the Registrant and the
"Purchaser" parties thereto.
10.5** Series B Preferred Stock Purchase Agreement, dated as of
September 23, 1998, by and among the Registrant and the
"Purchaser" parties thereto.
10.6** Series C Preferred Stock Purchase Agreement, dated as of
September 10, 1999, by and among the Registrant and the
"Purchaser" parties thereto.
10.7** Series D Preferred Stock Purchase Agreement, dated as of
March 9, 2000, by and among the Registrant and the
"Purchaser" parties thereto.
10.8** Third Amended and Restated Investor Rights Agreement, dated
as of March 9, 2000 by and among the Registrant and the
"Purchaser" parties thereto.
10.9** Third Amended and Restated Right of First Refusal and
Co-Sale Agreement, dated as of March 9, 2000, among the
Registrant and the persons and entities listed on the
signature pages thereto.
10.10** Loan and Security Agreement, dated as of March 6, 1998, by
and between the Registrant and Silicon Valley Bank.
10.11** Modification Agreement, dated as of November 31, 1998, by
and between the Registrant and Silicon Valley Bank.
10.12** Modification Agreement, dated as of November 29, 1999, by
and between the Registrant and Silicon Valley Bank.
10.13 Agreement of Sublease, dated April 14, 2000, between the
Registrant and Unisphere Solutions, Inc. with respect to
property located at 25 Porter Road, Littleton,
Massachusetts.
10.14 Promissory Note, dated November 4, 1998, of Hassan M. Ahmed
to the Registrant and associated Pledge Agreement.
10.15 Promissory Note, dated September 1, 1999, of Stephen J. Nill
to the Registrant and associated Pledge Agreement.
21.1 Subsidiary of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2* Consent of Bingham Dana LLP, counsel to the Registrant
(included in Exhibit 5.1).
24.1** Power of Attorney (included in signature page to
Registration Statement).
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
II-3
<PAGE>
All schedules have been omitted because either they are not required, are
not applicable or the information is otherwise set forth in the Consolidated
Financial Statements and notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14 hereof, 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 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, 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 Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To provide 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.
(2) That for purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(3) That for the purpose of determining any liability under the Securities
Act of 1933, 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 this offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and has duly caused this Amendment
No. 1 to this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Westford, Commonwealth of
Massachusetts, on this 5(th) day of May, 2000.
<TABLE>
<S> <C> <C>
SONUS NETWORKS, INC.
BY: /S/ STEPHEN J. NILL
-----------------------------------------
Stephen J. Nill
VICE PRESIDENT OF FINANCE AND
ADMINISTRATION AND CHIEF FINANCIAL OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to this Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ HASSAN M. AHMED* President, Chief Executive May 5, 2000
-------------------------------------- Officer and Director
Hassan M. Ahmed (Principal Executive Officer)
Vice President of Finance May 5, 2000
/s/ STEPHEN J. NILL and Administration and
-------------------------------------- Chief Financial Officer
Stephen J. Nill (Principal Financial and
Accounting Officer)
/s/ RUBIN GRUBER* Chairman of the Board of Directors May 5, 2000
-------------------------------------- and Director
Rubin Gruber
/s/ EDWARD T. ANDERSON* Director May 5, 2000
--------------------------------------
Edward T. Anderson
/s/ PAUL J. FERRI* Director May 5, 2000
--------------------------------------
Paul J. Ferri
/s/ PAUL J. SEVERINO* Director May 5, 2000
--------------------------------------
Paul J. Severino
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ STEPHEN J. NILL
---------------------------------
Stephen J. Nill
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1* Form of Fourth Amended and Restated Certificate of
Incorporation of the Registrant.
3.2* Form of Amended and Restated By-Laws of the Registrant.
4.1* Specimen Certificate for shares of the Registrant's common
stock.
5.1* Opinion of Bingham Dana LLP, counsel to the Registrant,
regarding the legality of the shares of common stock
registered hereunder.
10.1** Lease, dated January 21, 1999, as amended, between the
Registrant and Glenborough Fund V, Limited Partnership with
respect to property located at 5 Carlisle Road, Westford,
Massachusetts.
10.2* Amended and Restated 1997 Stock Incentive Plan of the
Registrant.
10.3* 2000 Employee Stock Purchase Plan.
10.4** Series A Preferred Stock Purchase Agreement, dated as of
November 18, 1997, by and among the Registrant and the
"Purchaser" parties thereto.
10.5** Series B Preferred Stock Purchase Agreement, dated as of
September 23, 1998, by and among the Registrant and the
"Purchaser" parties thereto.
10.6** Series C Preferred Stock Purchase Agreement, dated as of
September 10, 1999, by and among the Registrant and the
"Purchaser" parties thereto.
10.7** Series D Preferred Stock Purchase Agreement, dated as of
March 9, 2000, by and among the Registrant and the
"Purchaser" parties thereto.
10.8** Third Amended and Restated Investor Rights Agreement, dated
as of March 9, 2000 by and among the Registrant and the
"Purchaser" parties thereto.
10.9** Third Amended and Restated Right of First Refusal and
Co-Sale Agreement, dated as of March 9, 2000, among the
Registrant and the persons and entities listed on the
signature pages thereto.
10.10** Loan and Security Agreement, dated as of March 6, 1998, by
and between the Registrant and Silicon Valley Bank.
10.11** Modification Agreement, dated as of November 31, 1998, by
and between the Registrant and Silicon Valley Bank.
10.12** Modification Agreement, dated as of November 29, 1999, by
and between the Registrant and Silicon Valley Bank.
10.13 Agreement of Sublease, dated April 14, 2000, between the
Registrant and Unisphere Solutions, Inc. with respect to
property located at 25 Porter Road, Littleton,
Massachusetts.
10.14 Promissory Note, dated November 4, 1998, of Hassan M. Ahmed
to the Registrant and associated Pledge Agreement.
10.15 Promissory Note, dated September 1, 1999, of Stephen J. Nill
to the Registrant and associated Pledge Agreement.
21.1 Subsidiary of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2* Consent of Bingham Dana LLP, counsel to the Registrant
(included in Exhibit 5.1).
24.1** Power of Attorney (included in signature page to
Registration Statement).
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
<PAGE>
Exhibit 1.1
SONUS NETWORKS, INC.
COMMON STOCK
($0.001 PAR VALUE PER SHARE)
-------------
UNDERWRITING AGREEMENT
----------------------
_______, 2000
Goldman, Sachs & Co.,
FleetBoston Robertson Stephens Inc.
J.P. Morgan Securities Inc.
Lehman Brothers Inc.
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004
Ladies and Gentlemen:
Sonus Networks, Inc., a Delaware corporation (the "COMPANY"), proposes,
subject to the terms and conditions stated herein, to issue and sell to the
Underwriters named in Schedule I hereto (the "UNDERWRITERS") an aggregate of
5,000,000 shares (the "FIRM SHARES") and, at the election of the Underwriters,
up to 750,000 additional shares (the "OPTIONAL SHARES") of Common Stock, $0.001
par value per share (the "STOCK"), of the Company (the Firm Shares and the
Optional Shares that the Underwriters elect to purchase pursuant to Section 2
hereof being collectively called the "SHARES").
1. The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-32206) (the "INITIAL
REGISTRATION STATEMENT") in respect of the Shares has been filed with the
Securities and Exchange Commission (the "COMMISSION"); the Initial Registration
Statement and any post-effective amendment thereto, each in the form heretofore
delivered to you, and, excluding exhibits thereto, to you for each of the other
Underwriters, have been declared effective by the Commission in such form; other
than a registration statement, if any, increasing the size of the offering (a
"RULE 462(b) REGISTRATION STATEMENT"), filed pursuant to Rule 462(b) under the
Securities Act of 1933, as amended (the "ACT"), which became effective upon
filing, no other document with respect to the Initial Registration Statement has
heretofore been filed with the Commission; and no stop order suspending the
effectiveness of the Initial Registration Statement, any post-effective
amendment thereto or the Rule 462(b) Registration Statement, if any, has been
issued and no proceeding for that purpose has been initiated or threatened by
the Commission (any preliminary prospectus included in the Initial Registration
Statement or filed with the Commission pursuant to Rule 424(a) of the rules and
regulations of the Commission
<PAGE>
under the Act is hereinafter called a "PRELIMINARY PROSPECTUS"; the various
parts of the Initial Registration Statement and the Rule 462(b) Registration
Statement, if any, including all exhibits thereto and including the information
contained in the form of final prospectus filed with the Commission pursuant to
Rule 424(b) under the Act in accordance with Section 5(a) hereof and deemed by
virtue of Rule 430A under the Act to be part of the Initial Registration
Statement at the time it was declared effective, each as amended at the time
such part of the Initial Registration Statement became effective or such part of
the Rule 462(b) Registration Statement, if any, became or hereafter becomes
effective, are hereinafter collectively called the "REGISTRATION STATEMENT"; and
such final prospectus, in the form first filed pursuant to Rule 424(b) under the
Act, is hereinafter called the "PROSPECTUS";
(b) No order preventing or suspending the use of any Preliminary Prospectus
has been issued by the Commission, and each Preliminary Prospectus, at the time
of filing thereof, conformed in all material respects to the requirements of the
Act and the rules and regulations of the Commission thereunder, and did not
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
PROVIDED, HOWEVER, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with information
furnished in writing to the Company by an Underwriter through Goldman, Sachs &
Co. expressly for use therein;
(c) The Registration Statement conforms, and the Prospectus and any further
amendments or supplements to the Registration Statement or the Prospectus will
conform, in all material respects to the requirements of the Act and the rules
and regulations of the Commission thereunder and do not and will not, as of the
applicable effective date as to the Registration Statement and any amendment
thereto, and as of the applicable filing date as to the Prospectus and any
amendment or supplement thereto, contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading; PROVIDED, HOWEVER, that this
representation and warranty shall not apply to any statements or omissions made
in reliance upon and in conformity with information furnished in writing to the
Company by an Underwriter through Goldman, Sachs & Co. expressly for use
therein;
(d) There are no contracts or other documents required to be described in
the Registration Statement or to be filed as exhibits to the Registration
Statement by the Act or by the rules and regulations thereunder which have not
been described or filed as required; the contracts so described in the
Prospectus to which the Company or any of its subsidiaries is a party have been
duly authorized, executed and delivered by the Company and its subsidiaries, as
are party thereto, constitute valid and binding agreements of the Company and
its subsidiaries, as are party thereto, are enforceable against the Company and
its subsidiaries, as are party thereto, in accordance with their respective
terms and are in full force and effect on the date hereof; to the best of the
Company's knowledge, the contracts so described in the Prospectus to which the
Company or any of its subsidiaries is a party are enforceable by the Company and
its subsidiaries, as are party thereto, against the other parties thereto in
accordance with their respective terms; and neither the Company nor any of its
subsidiaries, nor, to the best of the Company's knowledge, any other party is in
breach of or default under any of such contracts, except for such breaches or
defaults that, singly or in the aggregate, would not result in a material
adverse change in or affecting the business, assets, management, financial
condition or
<PAGE>
results of operations of the Company and its subsidiaries taken as a whole;
(e) Neither the Company nor any of its subsidiaries has sustained since the
date of the latest audited financial statements included in the Prospectus any
material loss or interference with its business from fire, explosion, flood or
other calamity, whether or not covered by insurance, or from any labor dispute
or court or governmental action, order or decree, otherwise than as set forth in
the Prospectus; and, since the respective dates as of which information is given
in the Registration Statement and the Prospectus, there has not been any change
in the capital stock (other than issuances of Stock pursuant to Company stock
option, stock incentive or stock purchase plans described in the Registration
Statement and Prospectus) or long-term debt of the Company or any of its
subsidiaries or any material adverse change, or any development involving a
prospective material adverse change, in or affecting the business, assets,
management, financial position or results of operations of the Company and its
subsidiaries taken as a whole;
(f) None of the Company and its subsidiaries owns any real property; each
of the Company and its subsidiaries has good and marketable title to all
personal property owned by it, free and clear of all liens, encumbrances and
defects except such as are described in the Prospectus or such as do not
materially affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by the
Company or any of its subsidiaries are held under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings by the
Company and its subsidiaries; the Company and its subsidiaries own or lease all
such properties as are necessary to their operations as now conducted, except
where the failure to so own or lease would not, singly or in the aggregate,
result in a material adverse change in or affecting the business, assets,
management, financial condition or results of operations of the Company and its
subsidiaries taken as a whole;
(g) Each of the Company and its subsidiaries has been duly incorporated and
is validly existing as a corporation in good standing under the laws of its
respective jurisdiction of organization, each with full power and authority
(corporate and other) to own its properties and conduct its business as
described in the Prospectus, and has been duly qualified as a foreign
corporation for the transaction of business and is in good standing under the
laws of each other jurisdiction in which it owns or leases properties or
conducts any business so as to require such qualification, or is subject to no
material liability or disability by reason of the failure to be so qualified in
any such jurisdiction;
(h) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company have
been duly authorized and validly issued, are fully paid and non-assessable and
conform to the description of the Stock contained in the Prospectus; all of the
issued shares of capital stock of each subsidiary of the Company have been duly
authorized and validly issued, are fully paid and non-assessable and (except for
directors' qualifying shares) are owned directly or indirectly by the Company,
free and clear of all liens, encumbrances, equities or claims except such as are
described in the Prospectus; except as disclosed in or contemplated by the
Prospectus and the consolidated financial statements of the Company, and the
related notes thereto, included in the Prospectus, neither the Company nor any
subsidiary has outstanding any options to purchase, or any preemptive rights or
other rights to subscribe for or to purchase any securities or obligations
convertible into, or any contracts or commitments to issue or sell, shares of
its capital stock or any such options, rights, convertible securities or
obligations; and the description of the Company's stock option and
<PAGE>
stock purchase plans and the options or other rights granted and exercised
thereunder set forth in the Prospectus accurately and fairly presents the
information required to be shown with respect to such plans, options and rights;
(i) The unissued Shares to be issued and sold by the Company to the
Underwriters hereunder have been duly authorized and, when issued and delivered
against payment therefor as provided herein, will be validly issued and fully
paid and non-assessable and will conform to the description of the Stock
contained in the Prospectus; no preemptive rights or other rights to subscribe
for or purchase exist with respect to the issuance and sale of the Shares by the
Company pursuant to this Agreement; no stockholder of the Company has any right,
which has not been waived, to require the Company to register the sale of any
shares of capital stock owned by such stockholder under the Act in the public
offering contemplated by this Agreement; no stockholder of the Company has any
right to require the Company to register the sale of any shares of capital stock
owned by such stockholder under the Act in the 180-day period after the date of
the Prospectus other than as described in the Prospectus; and no further
approval or authority of the stockholders or the Board of Directors of the
Company will be required for the issuance and sale of the Shares to be sold by
the Company as contemplated herein;
(j) The Company has full corporate power and authority to enter into this
Agreement; this Agreement has been duly authorized, executed and delivered by
the Company, constitutes a valid and binding obligation of the Company and is
enforceable against the Company in accordance with its terms;
(k) The issue and sale of the Shares by the Company and the compliance by
the Company with all of the provisions of this Agreement and the consummation of
the transactions herein contemplated will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, any material indenture, mortgage, deed of trust, loan agreement
or other agreement or instrument to which the Company or any of its subsidiaries
is a party or by which the Company or any of its subsidiaries is bound or to
which any of the property or assets of the Company or any of its subsidiaries is
subject, nor will such action result in any violation of the provisions of the
Certificate of Incorporation or By-laws of the Company or any statute or any
order, rule or regulation of any court or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or any of their
properties; and no consent, approval, authorization, order, filing, registration
or qualification of or with any such court or governmental agency or body is
required for the issue and sale of the Shares or the consummation by the Company
of the transactions contemplated by this Agreement, except the registration
under the Act of the Shares and such consents, approvals, authorizations,
filings, registrations or qualifications as may be required under state
securities or Blue Sky laws in connection with the purchase and distribution of
the Shares by the Underwriters;
(l) Except as disclosed in the Prospectus, there are no legal or
governmental actions, suits or proceedings pending or, to the best of the
Company's knowledge, threatened to which the Company or any of its subsidiaries
is or may be a party or of which property owned or leased by the Company or any
of its subsidiaries is or may be the subject, which actions, suits or
proceedings are required to be described in the Registration Statement by the
Act or the rules and regulations thereunder or which might, singly or in the
aggregate, prevent or adversely affect the transactions contemplated by this
Agreement or result in a material adverse change in or affecting the business,
assets, management, financial position (after giving effect to the offering of
the Shares) or results of operations of the Company and its subsidiaries taken
as a whole; and, to the best of the Company's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or others; no labor
disturbance by the employees of
<PAGE>
the Company or any of its subsidiaries exists or, to the knowledge of the
Company, is imminent which might be expected to affect adversely the business,
assets, management, financial position or results of operations of the Company
and its subsidiaries taken as a whole; and neither the Company nor any of its
subsidiaries is a party or subject to the provisions of any injunction,
judgment, decree or order of any court, regulatory body, administrative agency
or other governmental body;
(m) Neither the Company nor any of its subsidiaries is in violation of its
Certificate of Incorporation or By-laws or any similar organizational documents
or in default in the performance or observance of any obligation, agreement,
covenant or condition contained in any indenture, mortgage, deed of trust, loan
agreement, lease or other agreement or instrument to which it is a party or by
which it or any of its properties may be bound except for such violations or
defaults that would not, singly or in the aggregate, result in a material
adverse change in or affecting the business, assets, management, financial
position or results of operations of the Company and its subsidiaries taken as a
whole;
(n) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a summary
of the terms of the Stock and under the caption "Underwriting", insofar as they
purport to describe the provisions of the laws and documents referred to
therein, are accurate, complete and fair;
(o) The Company is not and, after giving effect to the offering and sale of
the Shares, will not be an "investment company", as such term is defined in the
Investment Company Act of 1940, as amended (the "INVESTMENT COMPANY ACT");
(p) Neither the Company nor any of its affiliates does business with the
government of Cuba or with any person or affiliate located in Cuba within the
meaning of Section 517.075, Florida Statutes;
(q) The Company and its subsidiaries possess all licenses, certificates,
authorizations or permits issued by the appropriate governmental or regulatory
agencies or authorities that are necessary to enable them to own, lease and
operate their respective properties and to carry on their respective businesses
as currently conducted and which are material to the Company and its
subsidiaries, and neither the Company nor any of its subsidiaries has received
any notice of proceedings relating to the revocation or modification of any such
license, certificate, authorization or permit which, singly or in the aggregate,
would be expected to materially and adversely affect the business, assets,
management, financial position or results of operations of the Company and its
subsidiaries taken as a whole;
(r) The consolidated financial statements and schedules of the Company, and
the related notes thereto, included in the Registration Statement and the
Prospectus present fairly in all material respects the financial position of the
Company as of the respective dates of such financial statements and schedules,
and the results of operations and cash flows of the Company for the respective
periods covered thereby; such statements, schedules and related notes have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis as certified by the independent public accountants named in
paragraph (s) below; no other financial statements or schedules are required to
be included in the Registration Statement; and the selected financial data set
forth in the Prospectus under the captions "Summary Financial Information,"
"Capitalization" and "Selected Financial Data" fairly present the information
set forth therein on the basis stated in the Registration Statement;
(s) Arthur Andersen LLP, who have certified certain financial statements of
the Company
<PAGE>
and its subsidiaries, are independent public accountants as required by the Act
and the rules and regulations of the Commission thereunder;
(t) The Company has reviewed its operations and that of its subsidiaries
and any third parties with which the Company or any of its subsidiaries has a
material relationship to evaluate the extent to which the business or operations
of the Company or any of its subsidiaries has been or will be affected by the
Year 2000 Problem. As a result of such review, the Company has no reason to
believe, and does not believe, that the Year 2000 Problem has had or will have a
material adverse effect on the business, assets, management, financial position
or results of operations of the Company and its subsidiaries taken as a whole or
has resulted in or will result in any material loss or interference with the
Company's business or operations. The "Year 2000 Problem" as used herein means
any significant risk that computer hardware or software used in the receipt,
transmission, processing, manipulation, storage, retrieval, retransmission or
other utilization of data or in the operation of mechanical or electrical
systems of any kind is not functioning or will not function, in the case of
dates or time periods occurring after December 31, 1999, at least as effectively
as in the case of dates or time periods occurring prior to January 1, 2000;
(u) The Company and its subsidiaries are in compliance with any and all
applicable foreign, federal, state and local laws and regulations relating to
the protection of human health and safety, including without limitation those
relating to occupational safety and health, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants, including without
limitation those relating to the storage, handling or transportation of
hazardous or toxic materials (collectively, "ENVIRONMENTAL LAWS"), except where
such noncompliance with Environmental Laws would not, singly or in the
aggregate, be expected to have a material adverse effect on the business,
assets, management, financial position or results of operations of the Company
and its subsidiaries taken as a whole. The Company, in its reasonable judgment,
has concluded that, based upon facts and circumstances existing as of the date
hereof, any costs or liabilities associated with Environmental Laws (including,
without limitation, any capital or operating expenditures required for clean-up,
closure of properties or compliance with Environmental Laws or any permit,
license or approval, any related constraints on operating activities and any
potential liabilities to third parties) would not, singly or in the aggregate,
reasonably be expected to have a material adverse effect on the business,
assets, management, financial position or results of operation of the Company
and its subsidiaries taken as a whole;
(v) Except as disclosed in the Prospectus, the Company and its subsidiaries
own or have the right to use all trademarks, trade names, patent rights,
copyrights, licenses, trade secrets, know-how, intellectual property and other
similar rights necessary to conduct their business as now conducted; the Company
has no knowledge of any infringement by the Company or any of its subsidiaries
of any trademark, trade name, patent, copyright, license, trade secret,
know-how, intellectual property or other similar rights of others; and there are
no claims of infringement being made against the Company or any of its
subsidiaries regarding trademark, trade name, patent, copyright, license, trade
secret, know-how, intellectual property or other similar rights which could,
singly or in the aggregate, have a material adverse effect on the business,
assets, management, financial position or results of operations of the Company
and its subsidiaries taken as a whole; the Company has no knowledge of any
infringement by any third party of the trademark, trade name, patent, copyright,
license, trade secret, know-how, intellectual property or other similar rights
of the Company or any of its subsidiaries; none of the technology employed by
the Company or any of its subsidiaries has been obtained or is being
<PAGE>
used by the Company or any of its subsidiaries in violation of any contractual
or fiduciary obligation binding on the Company, its subsidiaries or any of their
respective directors or executive officers or, to the best of the Company's
knowledge, any of their respective employees or consultants or otherwise in
violation of the rights of any person; none of the Company, its subsidiaries
and, to the best of the Company's knowledge, any of its employees has received
any written or, to the Company's knowledge, oral communications alleging that
the Company or any of its subsidiaries has violated or, by conducting its
business as proposed, would violate any of the intellectual property or
proprietary rights of any other person except for such violations as would not,
singly or in the aggregate, have a material adverse effect on the business,
assets, management, financial position or results of operations of the Company
and its subsidiaries taken as a whole; neither the execution nor delivery of
this Agreement, nor the operation of the business of the Company and its
subsidiaries by the employees of the Company or its subsidiaries, nor the
conduct of the business of the Company and its subsidiaries as proposed, will,
to the Company's knowledge, result in a breach or violation of the terms,
conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which any of such employees is now obligated except
for such breaches, violations or defaults as would not, singly or in the
aggregate, have a material adverse effect on the business, assets, management,
financial position or results of operations of the Company and its subsidiaries
taken as a whole; and the Company and its subsidiaries have taken and will
maintain reasonable measures to prevent the unauthorized dissemination or
publication of its confidential information or the confidential information of
third parties in its possession;
(w) The Company and each of its subsidiaries have filed all necessary
federal, state, local and foreign income and franchise tax returns and have paid
all taxes shown as due thereon; and the Company has no knowledge of any tax
deficiencies which has been or might be asserted or threatened against the
Company or any of its subsidiaries which could, singly or in the aggregate,
materially and adversely affect the business, assets, management, financial
position or results of operations of the Company and its subsidiaries taken as a
whole;
(x) Each of the Company and its subsidiaries maintains insurance of the
types and in the amounts which it reasonably deems adequate for its business,
including, but not limited to, insurance covering real and personal property
owned or leased by the Company and its subsidiaries against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which insurance is in full force and effect;
(y) Neither the Company nor any of its subsidiaries has at any time during
the last five years (i) made any unlawful contribution to any candidate for
foreign office, or failed to disclose fully any contribution in violation of
law, or (ii) made any payment to any foreign, federal or state governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the United
States or any jurisdiction thereof;
(a) The Company has not taken and will not take, directly or indirectly
through any of its directors, officers or controlling persons, any action which
is designed to or which has constituted or which might reasonably be expected to
cause or result in stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Shares; and
<PAGE>
(aa) The Company has filed a registration statement pursuant to Section
12(g) of the Securities Exchange Act of 1934, as amended, to register the Common
Stock, has filed an application to list the Common Stock on the National
Association of Securities Dealers Automated Quotations National Market System
("NASDAQ") and has received notification that the listing has been approved,
subject to notice of issuance of the Shares.
2. Subject to the terms and conditions herein set forth, (a) the Company agrees
to issue and sell to each of the Underwriters, and each of the Underwriters
agrees, severally and not jointly, to purchase from the Company, at a purchase
price per share of $________, the number of Firm Shares set forth opposite the
name of such Underwriter in Schedule I hereto and (b) in the event and to the
extent that the Underwriters shall exercise the election to purchase Optional
Shares as provided below, the Company agrees to issue and sell to each of the
Underwriters, and each of the Underwriters agrees, severally and not jointly, to
purchase from the Company, at the purchase price per share set forth in clause
(a) of this Section 2, that portion of the number of Optional Shares as to which
such election shall have been exercised (to be adjusted by you so as to
eliminate fractional shares) determined by multiplying such number of Optional
Shares by a fraction, the numerator of which is the maximum number of Optional
Shares which such Underwriter is entitled to purchase as set forth opposite the
name of such Underwriter in Schedule I hereto and the denominator of which is
the maximum number of Optional Shares that all of the Underwriters are entitled
to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to 750,000 Optional Shares, at the purchase price per share
set forth in the paragraph above, for the sole purpose of covering sales of
shares in excess of the number of Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the Company,
given within a period of 30 calendar days after the date of this Agreement,
setting forth the aggregate number of Optional Shares to be purchased and the
date on which such Optional Shares are to be delivered, as determined by you but
in no event earlier than the First Time of Delivery (as defined in Section 4
hereof) or, unless you and the Company otherwise agree in writing, earlier than
two or later than ten business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares, the several
Underwriters propose to offer the Firm Shares for sale upon the terms and
conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in definitive
form, and in such authorized denominations and registered in such names as
Goldman, Sachs & Co. may request upon at least forty-eight hours' prior notice
to the Company shall be delivered by or on behalf of the Company to Goldman,
Sachs & Co., through the facilities of the Depository Trust Company ("DTC"), for
the account of such Underwriter, against payment by or on behalf of such
Underwriter of the purchase price therefor by wire transfer of Federal
(same-day) funds to the account specified by the Company to Goldman, Sachs & Co.
at least forty-eight hours in advance. The Company will cause the certificates
representing the Shares to be made available for checking and packaging at least
twenty-four hours prior to the Time of Delivery (as defined below) with respect
thereto at the office of DTC or its designated custodian (the "DESIGNATED
OFFICE"). The time and date of such delivery and payment shall be, with respect
to the Firm Shares, 9:30 a.m., New York City time, on ________, 2000 or such
other time and date as Goldman, Sachs & Co. and the Company may agree upon in
writing, and, with respect to the Optional Shares, 9:30 a.m., New York time, on
the date specified by Goldman, Sachs & Co. in the written notice given by
Goldman, Sachs & Co. of the Underwriters' election to purchase such
<PAGE>
Optional Shares, or such other time and date as Goldman, Sachs & Co. and the
Company may agree upon in writing. Such time and date for delivery of the Firm
Shares is herein called the "FIRST TIME OF DELIVERY", such time and date for
delivery of the Optional Shares, if not the First Time of Delivery, is herein
called the "SECOND TIME OF DELIVERY", and each such time and date for delivery
is herein called a "TIME OF DELIVERY".
(b) The documents to be delivered at each Time of Delivery by or on behalf
of the parties hereto pursuant to Section 7 hereof, including the cross receipt
for the Shares and any additional documents requested by the Underwriters
pursuant to Section 7 hereof, will be delivered at the offices of Bingham Dana
LLP, Boston, Massachusetts 02110 (the "CLOSING LOCATION"), and the Shares will
be delivered at the Designated Office, all at such Time of Delivery. A meeting
will be held at the Closing Location at 6:00 p.m., New York City time, on the
New York Business Day next preceding such Time of Delivery, at which meeting the
final drafts of the documents to be delivered pursuant to the preceding sentence
will be available for review by the parties hereto. For the purposes of this
Section 4, "NEW YORK BUSINESS DAY" shall mean each Monday, Tuesday, Wednesday,
Thursday and Friday which is not a day on which banking institutions in New York
are generally authorized or obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file such
Prospectus pursuant to Rule 424(b) under the Act not later than the Commission's
close of business on the second business day following the execution and
delivery of this Agreement, or, if applicable, such earlier time as may be
required by Rule 430A(a)(3) under the Act; to make no further amendment or any
supplement to the Registration Statement or Prospectus which shall be
disapproved by you promptly after reasonable notice thereof; to advise you,
promptly after it receives notice thereof, of the time when any amendment to the
Registration Statement has been filed or becomes effective or any supplement to
the Prospectus or any amended Prospectus has been filed and to furnish you with
copies thereof; to advise you, promptly after it receives notice thereof, of the
issuance by the Commission of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or the Prospectus, of the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding for any such
purpose, or of any request by the Commission for the amending or supplementing
of the Registration Statement or Prospectus or for additional information; and,
in the event of the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or the Prospectus or suspending
any such qualification, promptly to use its best efforts to obtain the
withdrawal of such order;
(b) Promptly from time to time to take such action as you may reasonably
request to qualify the Shares for offering and sale under the securities laws of
such jurisdictions as you may reasonably request and to comply with such laws so
as to permit the continuance of sales and dealings therein in such jurisdictions
for as long as may be necessary to complete the distribution of the Shares,
provided that in connection therewith the Company shall not be required to
qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction;
(c) Prior to 10:00 A.M., New York City time, on the New York Business Day
next succeeding the date of this Agreement and from time to time, to furnish the
Underwriters with copies of the Prospectus in New York City in such quantities
as you may reasonably request, and, if the delivery of a prospectus is required
under the Act at any time prior to the expiration of nine
<PAGE>
months after the time of issue of the Prospectus in connection with the offering
or sale of the Shares and if at such time any event shall have occurred as a
result of which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made when such Prospectus is delivered, not misleading, or, if
for any other reason it shall be necessary during such period to amend or
supplement the Prospectus in order to comply with the Act, to notify you and
upon your request to prepare and furnish without charge to each Underwriter and
to any dealer in securities as many copies as you may from time to time
reasonably request of an amended Prospectus or a supplement to the Prospectus
which will correct such statement or omission or effect such compliance, and in
case any Underwriter is required under the Act to deliver a prospectus in
connection with sales of any of the Shares at any time nine months or more after
the time of issue of the Prospectus, upon your request but at the expense of
such Underwriter, to prepare and deliver to such Underwriter as many copies as
you may request of an amended or supplemented Prospectus complying with Section
10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the effective
date of the Registration Statement (as defined in Rule 158(c) under the Act), an
earnings statement of the Company and its subsidiaries (which need not be
audited) complying with Section 11(a) of the Act and the rules and regulations
thereunder (including, at the option of the Company, Rule 158);
(e) During the period beginning from the date hereof and continuing to and
including the date 180 days after the date of the Prospectus, not to offer,
sell, contract to sell or otherwise dispose of, except as provided hereunder any
securities of the Company that are substantially similar to the Shares,
including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Stock or any such
substantially similar securities (other than pursuant to employee stock option,
stock incentive or stock purchase plans existing on, upon the exercise of
securities that represent the right to receive Stock outstanding as of, or upon
the conversion or exchange of convertible or exchangeable securities outstanding
as of, the date of this Agreement), without your prior written consent;
(f) To furnish to its stockholders within the time period prescribed by the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and the rules
and regulations thereunder, an annual report (including a balance sheet and
statements of income, stockholders' equity and cash flows of the Company and its
consolidated subsidiaries certified by independent public accountants) and,
within the time periods prescribed by the Exchange Act and the rules and
regulations thereunder (beginning with the fiscal quarter ending after the
effective date of the Registration Statement), to make available to its
stockholders consolidated summary financial information of the Company and its
subsidiaries for such quarter in reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you upon request copies of all reports or
other communications (financial or other) furnished to stockholders, and to
deliver to you (i) as soon as they are available, copies of any reports and
financial statements furnished to or filed with the Commission or any national
securities exchange on which any class of securities of the Company is listed;
and (ii) subject to your obligations under applicable law, such additional
information concerning the business and financial condition of the Company as
you may from time to time reasonably request (such financial statements to be on
a consolidated basis to the extent the accounts of the Company
<PAGE>
and its subsidiaries are consolidated in reports furnished to its stockholders
generally or to the Commission);
(h) To use the net proceeds received by it from the sale of the Shares
pursuant to this Agreement in the manner specified in the Prospectus under the
caption "Use of Proceeds" and in a manner such that the Company will not become
an "investment company" as that term is defined in the Investment Company Act;
(i) To file with the Commission such information on Form 10-Q or Form 10-K
as may be required by Rule 463 under the Act;
(j) If the Company elects to rely upon Rule 462(b), the Company shall file
a Rule 462(b) Registration Statement with the Commission in compliance with Rule
462(b) by 10:00 P.M., Washington, D.C. time, on the date of this Agreement, and
the Company shall at the time of filing either pay to the Commission the filing
fee for the Rule 462(b) Registration Statement or give irrevocable instructions
for the payment of such fee pursuant to Rule 111(b) under the Act; and
(k) Not to grant options, warrants or other rights to purchase shares of
Stock that would become exercisable during the period beginning on the date
hereof and continuing to and including the date 180 days after the date of the
Prospectus, other than options under the Company's 2000 Employee Stock Purchase
Plan and such options, warrants or other rights granted to persons who, prior to
such grant, execute agreements substantially to the effect set forth in
Subsection 5(e) hereof in form and substance satisfactory to you.
6. The Company covenants and agrees with the several Underwriters that the
Company will pay or cause to be paid the following: (i) the fees, disbursements
and expenses of the Company's counsel and accountants in connection with the
registration of the Shares under the Act and all other expenses in connection
with the preparation, printing and filing of the Registration Statement, any
Preliminary Prospectus and the Prospectus and amendments and supplements thereto
and the mailing and delivering of copies thereof to the Underwriters and
dealers; (ii) the cost of printing or producing any Agreement among
Underwriters, this Agreement, the Blue Sky Memorandum, closing documents
(including any compilations thereof) and any other documents in connection with
the offering, purchase, sale and delivery of the Shares, and the fees and
disbursements of counsel for the Underwriters in connection with securing any
required review by the National Association of Securities Dealers, Inc. of the
terms of the sale of the Shares; (iii) all expenses in connection with the
qualification of the Shares for offering and sale under state securities laws as
provided in Section 5(b) hereof, including the fees and disbursements of counsel
for the Underwriters in connection with such qualification and in connection
with the Blue Sky survey; (iv) all fees and expenses in connection with listing
the Shares on the NASDAQ; (v) the filing fees incident to securing any required
review by the National Association of Securities Dealers, Inc. of the terms of
the sale of the Shares; (vi) the cost of preparing stock certificates; (vii) the
cost and charges of any transfer agent or registrar; and (viii) all other costs
and expenses incident to the performance of its obligations hereunder which are
not otherwise specifically provided for in this Section. It is understood,
however, that, (x) except as provided in this Section, and Sections 8 and 11
hereof, the Underwriters will pay all of their own costs and expenses, including
the fees of their counsel, stock transfer taxes on resale of any of the Shares
by them, and any advertising expenses connected with any offers they may make,
and (y) other than with respect to filing or similar fees, the maximum liability
of the Company under clauses (ii) and (iii) above shall be $20,000.
<PAGE>
7. The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company herein are, at and as of such Time of Delivery, true and correct,
the condition that the Company shall have performed all of its obligations
hereunder theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant to
Rule 424(b) within the applicable time period prescribed for such filing by the
rules and regulations under the Act and in accordance with Section 5(a) hereof;
if the Company has elected to rely upon Rule 462(b), the Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., Washington,
D.C. time, on the date of this Agreement; no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been
issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional information on the
part of the Commission shall have been complied with to your reasonable
satisfaction;
(b) Ropes & Gray, counsel for the Underwriters, shall have furnished to you
such written opinion or opinions (a draft of each such opinion is attached as
Annex II(a) hereto), dated such Time of Delivery, with respect to the matters
covered in paragraphs (i), (ii), (vi), (ix) and (xi) of subsection (c) below as
well as such other related matters as you may reasonably request, and such
counsel shall have received such papers and information as they may reasonably
request to enable them to pass upon such matters;
(c) Bingham Dana LLP, counsel for the Company, shall have furnished to you
their written opinion (a draft of such opinion is attached as Annex II(b)
hereto), dated such Time of Delivery, in form and substance satisfactory to you,
to the effect that:
(i) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware,
with corporate power and authority to own its properties and conduct its
business as described in the Prospectus;
(ii) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company
(including the Shares being delivered at such Time of Delivery) have been
duly authorized and validly issued and are fully paid and non-assessable;
and the Shares conform to the description of the Stock contained in the
Prospectus;
(iii) The Company is duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws of [LIST
STATES];
(iv) Each subsidiary of the Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation; and all of the issued shares of capital
stock of each such subsidiary have been duly authorized and validly issued,
are fully paid and non-assessable, and (except for directors' qualifying
shares) are owned directly or indirectly by the Company, free and clear of
all liens, encumbrances, equities or claims to the knowledge of such
counsel;
(v) To the best of such counsel's knowledge and other than as set
forth in the Prospectus, there are no legal or governmental proceedings
pending to which the Company or any of its subsidiaries is a party or of
which any property of the Company or any of its subsidiaries is the subject
which, if determined adversely to the Company or any of its subsidiaries,
would individually or in the aggregate be reasonably expected to have a
material adverse effect on the business, assets, management, financial
position
<PAGE>
or results of operations of the Company and its subsidiaries; and, to the
best of such counsel's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
(vi) The Company has full corporate power and authority to enter into
this Agreement and this Agreement has been duly authorized, executed and
delivered by the Company;
(vii) The issue and sale of the Shares being delivered at such Time of
Delivery by the Company and the compliance by the Company with all of the
provisions of this Agreement and the consummation of the transactions
herein contemplated will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument known to such counsel to which the Company or any
of its subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of the
Company or any of its subsidiaries is subject, nor will such action result
in any violation of the provisions of the Certificate of Incorporation or
By-laws of the Company or any statute or any order, rule or regulation
known to such counsel of any federal or Massachusetts court or governmental
agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their properties;
(viii) No consent, approval, authorization, order, filing,
registration or qualification of or with any such federal or Massachusetts
court or governmental agency or body is required for the issue and sale of
the Shares or the consummation by the Company of the transactions
contemplated by this Agreement, except the registration under the Act of
the Shares, and such consents, approvals, authorizations, filings,
registrations or qualifications as may be required under state securities
or Blue Sky laws in connection with the purchase and distribution of the
Shares by the Underwriters;
(ix) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a
summary of the terms of the Stock and under the captions "Shares Eligible
for Future Sale" and "Underwriting", insofar as they purport to describe
the provisions of the laws and documents referred to therein, are accurate,
complete and fair in all material respects;
(x) The Company is not an "investment company", as such term is
defined in the Investment Company Act;
(xi) The Registration Statement and the Prospectus and any further
amendments and supplements thereto made by the Company prior to such Time
of Delivery (other than the financial statements and related schedules and
other financial and accounting data therein, as to which such counsel need
express no opinion) comply as to form in all material respects with the
requirements of the Act and the rules and regulations thereunder; although
they do not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement or the
Prospectus, except for those referred to in the opinion in subsection
(viii) of this section 7(c), they have no reason to believe that, as of its
effective date, the Registration Statement or any further amendment thereto
made by the Company prior to such Time of Delivery (other than the
financial statements and related schedules and other financial and
accounting data therein, as to which such counsel need express no opinion)
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading
<PAGE>
or that, as of its date, the Prospectus or any further amendment or
supplement thereto made by the Company prior to such Time of Delivery
(other than the financial statements and related schedules and other
financial and accounting data therein, as to which such counsel need
express no opinion) contained an untrue statement of a material fact or
omitted to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading or that, as of such Time of Delivery, either the Registration
Statement or the Prospectus or any further amendment or supplement thereto
made by the Company prior to such Time of Delivery (other than the
financial statements and related schedules and other financial and
accounting data therein, as to which such counsel need express no opinion)
contains an untrue statement of a material fact or omits to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and they do not
know of any amendment to the Registration Statement required to be filed or
of any contracts or other documents of a character required to be filed as
an exhibit to the Registration Statement or required to be described in the
Registration Statement or the Prospectus which are not filed or described
as required; and
(xii) The Registration Statement has become effective under the Act.
To the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued by the
Commission nor has any proceeding been instituted for that purpose under
the Act. The Prospectus has been filed with the Commission pursuant to Rule
424(b) of the rules and regulations under the Act within the time period
required thereby.
(d) On the date of the Prospectus at a time prior to the execution of this
Agreement, at 9:30 a.m., New York City time, on the effective date of any
post-effective amendment to the Registration Statement filed subsequent to the
date of this Agreement and also at each Time of Delivery, Arthur Andersen LLP
shall have furnished to you a letter or letters, dated the respective dates of
delivery thereof, in form and substance satisfactory to you, to the effect set
forth in Annex I hereto (the executed copy of the letter delivered prior to the
execution of this Agreement is attached as Annex I(a) hereto and a draft of the
form of letter to be delivered on the effective date of any post-effective
amendment to the Registration Statement and as of each Time of Delivery is
attached as Annex I(b) hereto);
(e) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements included in
the Prospectus any loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Prospectus, and (ii) since the respective dates as
of which information is given in the Prospectus there shall not have been any
change in the capital stock or long-term debt of the Company or any of its
subsidiaries or any change, or any development involving a prospective change,
in or affecting the business, assets, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries taken as a whole, otherwise than as set forth or contemplated in
the Prospectus, the effect of which, in any such case described in clause (i) or
(ii), is in the judgment of the Representatives so material and adverse as to
make it impracticable or inadvisable to proceed with the public
<PAGE>
offering or the delivery of the Shares being delivered at such Time of Delivery
on the terms and in the manner contemplated in the Prospectus;
(f) On or after the date hereof there shall not have occurred any of the
following: (i) a suspension or material limitation in trading in securities
generally on the New York Stock Exchange or on NASDAQ; (ii) a suspension or
material limitation in trading in the Company's securities on NASDAQ; (iii) a
general moratorium on commercial banking activities declared by either Federal
or New York or Massachusetts state authorities; or (iv) the outbreak or
escalation of hostilities involving the United States or the declaration by the
United States of a national emergency or war, if the effect of any such event
specified in this clause (iv) in the judgment of the Representatives makes it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Shares being delivered at such Time of Delivery on the terms and in the
manner contemplated in the Prospectus;
(g) The Shares to be sold at such Time of Delivery shall have been duly
listed for quotation on NASDAQ;
(h) The Company has obtained and delivered to the Underwriters executed
copies of an agreement from the stockholders of the Company listed on Schedule
II hereto, substantially to the effect set forth in Subsection 5(e) hereof in
form and substance satisfactory to you;
(i) The Company shall have complied with the provisions of Section 5(c)
hereof with respect to the furnishing of prospectuses on the New York Business
Day next succeeding the date of this Agreement;
(j) , local counsel for Sonus Networks Limited, a United
Kingdom corporation (the "FOREIGN SUBSIDIARY"), shall have furnished to you
their written opinion (a draft of such opinion is attached as Annex II(c)
hereto), dated such Time of Delivery, in form and substance satisfactory to you,
to the effect that:
(i) The Foreign Subsidiary has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
United Kingdom; and
(ii) All of the issued shares of capital stock of the Foregin
Subsidiary have been duly authorized and validly issued, are fully paid and
nonassessable, and are owned directly or indirectly by the Company, free
and clear of all liens, encumbrances, equities or claims to the knowledge
of such counsel;
(k) The Company shall have furnished or caused to be furnished to you at
such Time OF Delivery certificates of officers of the Company satisfactory to
you as to the accuracy of the representations and warranties of the Company
herein at and as of such Time of Delivery, as to the performance by the Company
of all of its obligations hereunder to be performed at or prior to such Time of
Delivery, as to the matters set forth in subsections (a) and (e) of this Section
and as to such other matters as you may reasonably request.
8. (a) The Company will indemnify and hold harmless each Underwriter against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
<PAGE>
investigating or defending any such action or claim as such expenses are
incurred; PROVIDED, HOWEVER, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through Goldman, Sachs & Co. expressly for use therein.
(b) Each Underwriter will indemnify and hold harmless the Company against
any losses, claims, damages or liabilities to which the Company may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through Goldman, Sachs & Co.
expressly for use therein; and will reimburse the Company for any legal or other
expenses reasonably incurred by the Company in connection with investigating or
defending any such action or claim as such expenses are incurred.
(c) Promptly after receipt by an indemnified party under subsection (a) or
(b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and,
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal expenses of
other counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without the written consent
of the indemnified party, effect the settlement or compromise of, or consent to
the entry of any judgment with respect to, any pending or threatened action or
claim in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified party is an actual or potential party
to such action or claim) unless such settlement, compromise or judgment (i)
includes an unconditional release of the indemnified party from all liability
arising out of such action or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act, by or on behalf of
any indemnified party.
(d) If the indemnification provided for in this Section 8 is unavailable to
or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above in respect of any losses,
<PAGE>
claims, damages or liabilities (or actions in respect thereof) referred to
therein, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages or
liabilities (or actions in respect thereof) in such proportion as is appropriate
to reflect the relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the indemnified party failed to give the notice required
under subsection (c) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other shall be deemed to be
in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company on the one hand
or the Underwriters on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this subsection (d) were determined by
PRO RATA allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this subsection (d). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to above
in this subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (d), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages which such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (d) to contribute are several in proportion to
their respective underwriting obligations and not joint.
(e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company (including any
person who, with his
<PAGE>
or her consent, is named in the Registration Statement as about to become a
director of the Company) and to each person, if any, who controls the Company
within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase the Shares
which it has agreed to purchase hereunder at a Time of Delivery, you may in your
discretion arrange for you or another party or other parties to purchase such
Shares on the terms contained herein. If within thirty-six hours after such
default by any Underwriter you do not arrange for the purchase of such Shares,
then the Company shall be entitled to a further period of thirty-six hours
within which to procure another party or other parties satisfactory to you to
purchase such Shares on such terms. In the event that, within the respective
prescribed periods, you notify the Company that you have so arranged for the
purchase of such Shares, or the Company notifies you that it has so arranged for
the purchase of such Shares, you or the Company shall have the right to postpone
such Time of Delivery for a period of not more than seven days, in order to
effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus, or in any other documents or arrangements, and the
Company agrees to file promptly any amendments to the Registration Statement or
the Prospectus which in your opinion may thereby be made necessary. The term
"Underwriter" as used in this Agreement shall include any person substituted
under this Section with like effect as if such person had originally been a
party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased does not exceed one-eleventh of the aggregate number of all
the Shares to be purchased at such Time of Delivery, then the Company shall have
the right to require each non-defaulting Underwriter to purchase the number of
shares which such Underwriter agreed to purchase hereunder at such Time of
Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased exceeds one-eleventh of the aggregate number of all the
Shares to be purchased at such Time of Delivery, or if the Company shall not
exercise the right described in subsection (b) above to require non-defaulting
Underwriters to purchase Shares of a defaulting Underwriter or Underwriters,
then this Agreement (or, with respect to the Second Time of Delivery, the
obligations of the Underwriters to purchase and of the Company to sell the
Optional Shares) shall thereupon terminate, without liability on the part of any
non-defaulting Underwriter or the Company, except for the expenses to be borne
by the Company and the Underwriters as provided in Section 6 hereof and the
indemnity and contribution agreements in Section 8 hereof; but nothing herein
shall relieve a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties and
other statements of the Company and the several Underwriters, as set forth in
this Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any controlling person of any Underwriter, or the Company,
or any officer or director or controlling person of the Company, and shall
survive delivery of and payment for the Shares.
<PAGE>
11. If this Agreement shall be terminated pursuant to Section 9 hereof, the
Company shall not then be under any liability to any Underwriter except as
provided in Sections 6 and 8 hereof; but, if for any other reason, any Shares
are not delivered by or on behalf of the Company as provided herein, the Company
will reimburse the Underwriters through you for all out-of-pocket expenses
approved in writing by you, including fees and disbursements of counsel, in each
case reasonably incurred by the Underwriters in making preparations for the
purchase, sale and delivery of the Shares not so delivered, but the Company
shall then be under no further liability to any Underwriter except as provided
in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 32 Old Slip, 21st Floor, New York, New York 10005, Attention: Registration
Department; and if to the Company shall be delivered or sent by mail to the
address of the Company set forth in the Registration Statement, Attention:
Secretary; provided, however, that any notice to an Underwriter pursuant to
Section 8(c) hereof shall be delivered or sent by mail, telex or facsimile
transmission to such Underwriter at its address set forth in its Underwriters'
Questionnaire, or telex constituting such Questionnaire, which address will be
supplied to the Company by you upon request. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the benefit of,
the Underwriters, the Company and, to the extent provided in Sections 8 and 10
hereof, the officers and directors of the Company and each person who controls
the Company or any Underwriter, and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. No purchaser of any of the
Shares from any Underwriter shall be deemed a successor or assign by reason
merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein, the term
"business day" shall mean any day when the Commission's office in Washington,
D.C. is open for business.
15. This Agreement shall be governed by and construed in accordance with the
laws of the State of New York.
16. This Agreement may be executed by any one or more of the parties hereto in
any number of counterparts, each of which shall be deemed to be an original, but
all such counterparts shall together constitute one and the same instrument.
<PAGE>
If the foregoing is in accordance with your understanding, please sign
and return to us one for the Company and each of the Representatives plus one
for each counsel counterparts hereof, and upon the acceptance hereof by you, on
behalf of each of the Underwriters, this letter and such acceptance hereof shall
constitute a binding agreement between each of the Underwriters and the Company.
It is understood that your acceptance of this letter on behalf of each of the
Underwriters is pursuant to the authority set forth in a form of Agreement among
Underwriters, the form of which shall be submitted to the Company for
examination upon request, but without warranty on your part as to the authority
of the signers thereof.
Very truly yours,
Sonus Networks, Inc.
By:
------------------------
Name:
Title:
Accepted as of the date hereof:
Goldman, Sachs & Co.
FleetBoston Robertson Stephens Inc.
J.P. Morgan Securities Inc.
Lehman Brothers Inc.
By:
----------------------------------------
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
<PAGE>
Exhibit 10.13
AGREEMENT OF SUBLEASE
THIS AGREEMENT OF SUBLEASE is made as of the 14th day of April,
2000, by and between Unisphere Solutions, Inc., formerly known as Argon
Networks, Inc., a Delaware corporation ("Landlord"), having an office at 200
Wheeler Road, Burlington, MA 01803 and Sonus Networks, Inc. ("Tenant"), a
Delaware corporation, having an office at 5 Carlisle Road, Westford, MA 01886.
WITNESS
WHEREAS, by Lease dated as of May 16, 1997, as amended by that certain
First Amendment to Lease dated as of June 22, 1998 (the "First Amendment")
(collectively hereinafter the "Prime Lease") by and between MGI 25 Porter Road,
Inc. ("MGI") and Landlord, MGI leased to Landlord the premises (as hereinafter
defined) (the "Premises") which is located within the building known by the
street address of 25 Porter Road, Littleton, MA 01460 (the "Building"), which
Premises are more particularly described in the Prime Lease and include 22,581
rentable square feet on the second floor (2nd) floor of the Building as
indicated by crosshatching on the floor plan attached to the Prime Lease as
Exhibit A (a copy of such Prime Lease is attached hereto as Exhibit A and made a
part hereof);
WHEREAS, BCIA New England Holdings, LLC ("Prime Landlord") is the
successor in interest to MGI; and
WHEREAS, Landlord desires to sublease to Tenant and Tenant desires to
sublease from Landlord the Premises, and Landlord is willing to sublease the
Premises on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and for other good and valuable consideration, the parties agree as
follows:
1. SUBLEASING OF PREMISES. Subject to the written consent of the Prime
Landlord, Landlord hereby subleases to Tenant and Tenant hereby subleases from
Landlord the Premises, upon and subject to all of the terms, covenants, recitals
and conditions hereinafter set forth.
2. TERM The term (the "Term") of this Sublease shall commence on May 1,
2000 (the "Commencement Date"), with said Term to expire at midnight on May 30,
2003, (the "Expiration Date"), unless sooner terminated as hereinafter provided.
3. BASE RENT. During the Term, Tenant shall pay to Landlord, in lawful
money of the United States which at the time shall be legal tender in payment of
all debts and dues, public and private, an annual fixed rent (the "Base Rent")
as follows: for the period commencing on the Commencement Date through
May 31, 2002, Tenant shall pay a Base
<PAGE>
- 2 -
Rent of $237,100.50, payable in equal monthly installments of $19,758.38; and
for the period commencing on June 1, 2002 through May 30, 2003, Tenant shall pay
a Base Rent of $258,552.45, payable in equal monthly installments of $21,546.04.
All such monthly installments shall be paid in advance, on the first (lst) day
of each month during the Term, at the office of the Landlord, or such other
place as Landlord may designate, without any setoff or deduction of any kind
whatsoever.
4. ADDITIONAL RENT.
(a) Beginning on the Commencement Date, Tenant shall pay , as
Additional Rent, without notice or demand, Tenant's Proportionate Share of Taxes
and Operating Expenses (as such terms are defined in the Prime Lease) in
accordance with Section 2.4.6 of the Prime Lease. Rental and any other sums due
hereunder not paid by the due date shall bear interest and be subject to late
payment fees, all in accordance with the provisions of Section 17.7 of the Prime
Lease. All payments shall be made to Landlord at its address set forth in
Section 24 below, or at such other address or addresses as Landlord may from
time to time designate by written notice to Tenant.
Tenant shall also pay, as Additional Rent, the cost of all
utilities furnished to Tenant on the Premises, including, but not limited to,
electricity, gas, oil, water and sewer. Tenant agrees to pay any and all such
charges for the Premises to Landlord in the event any such utilities are not
separately metered to Tenant or directly to the utility company if such
utilities are separately metered. Electricity usage within the Premises shall be
measured by the use of a check-meter, and Tenant shall pay to Landlord monthly
the amount invoiced by Landlord for electricity used in the Premises as
indicated by such check-meter, at the rate then being charged by the local
electrical utility company.
(b) Tenant's obligation to pay Additional Rent hereunder shall
be on account of the period from and after the Rent Commencement Date and shall
survive the Expiration Date or sooner termination of the Term.
(c) All amounts payable by Tenant to Landlord pursuant to this
Sublease, including, without limitation, Base Rent and Additional Rent, shall be
deemed and constitute rent and, in the event of any non-payment thereof,
Landlord shall have all of the rights and remedies provided herein, in the Prime
Lease or in law or at equity for non-payment of rent.
(d) Tenant agrees to pay to Landlord Tenant's pro rata share
of any real estate taxes attributable to leasehold improvements within the
Premises which are payable by Landlord under the Prime Lease.
5. CARE, SURRENDER AND RESTORATION OF THE PREMISES.
(a) Without limiting any other provision of this Sublease or
the Prime Lease, Tenant shall take good care of the Premises, suffer no waste or
injury thereto and shall comply with all those laws, orders and regulations
applicable to the Premises, the Building and Tenant's use or manner of use
thereof, which are imposed on Landlord, as
<PAGE>
- 3 -
tenant under the Prime Lease, in connection with the Premises and the Building,
including without limitation the Rules and Regulations which are attached to the
Prime Lease as Exhibit G.
(b) At the expiration or other termination of the Term, Tenant
shall surrender the Premises and all alterations and additions thereto
(including any fixtures, panelling, railings and like installation installed at
the Premises at any time by Tenant, by Prime Landlord or by Landlord) in good
order, repair and condition, ordinary wear and tear and damage by casualty only
excepted, first removing all goods and effects of Tenant and, to the extent
specified by Landlord by notice to Tenant given at least thirty (30) days before
such expiration or termination, all alterations and additions made by or on
behalf of Tenant. Tenant shall repair any damage caused by such removal and
restore the Premises and leave them clean and neat in compliance with the
requirements of Section 5 of this Sublease and Section 6.1 of the Prime Lease.
All property permitted or required to be removed by Tenant upon the Expiration
Date or sooner termination of the Term remaining in the Premises shall be deemed
abandoned and may, at the election of Landlord, either be retained as Landlord's
property or may be removed from the Premises by Landlord, at Tenant's expense.
Any such reasonable expenses shall be paid by Tenant to Landlord upon demand
therefor and shall be deemed Additional Rent, collectible by Landlord in the
same manner and with the same remedies as though said sums were Base Rent
reserved hereunder.
(c) Upon the Expiration Date or sooner termination of the Term, Tenant
shall quit and surrender the Premises to Landlord, broom clean, in good order
and condition, ordinary wear and tear and damage by fire and other casualty
excepted, and Tenant shall remove all of its property. If the Expiration Date or
sooner termination of the Term of this Sublease falls on a Sunday, this Sublease
shall expire at noon on the preceding Saturday unless it be a legal holiday, in
which case it shall expire at noon on the preceding business day. Tenant shall
observe and perform the covenants herein stated and Tenant's obligations
hereunder shall survive the Expiration Date or sooner termination of the Term.
6. USE. Tenant shall use and occupy the Premises for the purposes
permitted under Section 4.1 of the Prime Lease including light assembly of
networking gear, that is, installation of components into a case/chassis,
including testing, and for no other purpose.
7. SUBORDINATION TO AND INCORPORATION OF TERMS OF PRIME LEASE.
(a) This Sublease is in all respects subject and subordinate
to the terms and conditions of the Prime Lease and to the matters to which the
Prime Lease is or shall be subordinate. Except as otherwise expressly provided
in this Sublease, the terms, provisions, covenants, stipulations, conditions,
rights, obligations, remedies and agreements of the Prime Lease are incorporated
in this Sublease by reference and made a part hereof as if herein set forth at
length, and shall, as between Landlord and Tenant (as if they were the Landlord
and Tenant, respectively, under the Prime Lease and as if the Premises being
sublet hereby were the Prime Lease Premises demised under the Prime Lease),
constitute the terms of this Sublease, except to the extent that they do not
relate to the Premises or are inapplicable to, inconsistent with, or modified or
eliminated by, the terms of this Sublease.
<PAGE>
- 4 -
In particular, it is intended that Tenant shall not be subject to duplicate
monetary obligations to Landlord and Prime Landlord. To the extent that Tenant
is required by this Sublease to make monetary payments to Landlord (such as for
rent, additional rent or upon default) Tenant shall not be obligated to the
Prime Landlord for any such monetary obligations nor to Landlord for its
monetary obligations to the Prime Landlord. Landlord and Tenant acknowledge and
agree that Tenant has reviewed and is familiar with the Prime Lease and Landlord
hereby represents that the copy delivered to Tenant for such purpose and
attached hereto as Exhibit A is a true, correct and complete copy of such Prime
Lease.
(b) In the event of a default by Landlord, as tenant under the
Prime Lease, resulting in the termination, reentry or dispossession thereunder,
Prime Landlord shall take over all of the right, title and interest of Landlord
under this Sublease and Tenant hereunder shall, at the option of the Prime
Landlord, attorn to and recognize Prime Landlord as Landlord hereunder except
that Prime Landlord shall not (i) be liable for any previous act or omission of
Landlord under this Sublease, (ii) be subject to any offset, not expressly
provided for in this Sublease, which theretofore accrued to Tenant against
Landlord, or (iii) be bound by any previous modification of this Sublease or by
any previous prepayment of more than one month's rent, and shall, promptly upon
Prime Landlord's request, execute and deliver all instruments necessary or
appropriate to confirm such attornment and recognition. Tenant hereby waives all
rights under any present or future law to elect, by reason of the termination of
such Prime Lease, to terminate this Sublease or surrender possession of the
Premises.
8. TENANT'S OBLIGATIONS. Except as otherwise specifically
provided herein, during the term of this Sublease all acts to be performed and
all of the terms, provisions, covenants, stipulations, conditions, rights,
obligations, remedies and agreements to be observed by and inuring to the
benefit of, Landlord, as tenant under the Prime Lease of the Premises and
arising from and after the Commencement Date, shall be performed, and observed
by, and shall inure to the benefit of, Tenant, and Tenant's obligations shall
run to Landlord or the Prime Landlord as Landlord may determine to be
appropriate or required by the respective interests of Landlord and Prime
Landlord. Tenant shall indemnify Landlord against, and hold Landlord harmless
from and against, all costs, damages, claims, liabilities, liens and expenses
(including, but not limited to, reasonable attorneys' fees and disbursements,
court costs and other expenses of litigation or arbitration) paid, suffered,
incurred by or claimed against Landlord as a result of the nonperformance or
non-observance by Tenant, Tenant's agents, contractors, employees, invitees or
licensees of any such terms, provisions, covenants, stipulations, conditions,
obligations and agreements contained in the Prime Lease. In furtherance of the
foregoing, Tenant shall not (i) do or permit to be done anything prohibited to
Landlord, as tenant under the Prime Lease, or (ii) take any action or do or
permit anything which would result in any additional cost or other liability to
Landlord under the Prime Lease and/or this Sublease. In the event of any
inconsistency between the Prime Lease and this Sublease, such inconsistency (i)
if it relates to obligations of, or restrictions on, Tenant, shall be resolved
in favor of that obligation which is more onerous to Tenant or that restriction
which is more restrictive of Tenant, as the case may be, or (ii) if it relates
to the rights of, or benefits to be conferred upon, Tenant, shall be resolved in
favor of this Sublease.
<PAGE>
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9. LANDLORD'S OBLIGATIONS. Anything contained in this Sublease or
in the Prime Lease to the contrary notwithstanding, Landlord shall have no
responsibility to Tenant for, and shall not be required to provide, any of the
services or make any of the repairs or restorations that Prime Landlord has
agreed to make or provide, or cause to be made or provided, under the Prime
Lease (including, without limitation, those set forth in Sections 3.1
[Landlord's Work], 19.3 [Landlord's Services], 4 of the First Amendment
[Preparation of Premises] thereof), and Tenant shall rely upon, and look solely
to, Prime Landlord for the provision or making thereof. If Prime Landlord shall
default in the performance of any of its obligations under the Prime Lease, or
if Tenant wishes to file a protest or to dispute any matter or thing, Landlord
has the right to protest or dispute as tenant under the Prime Lease, then Tenant
shall advise Landlord of such protest or dispute (together with all material
facts and circumstances pertaining thereto) and Landlord shall make demand on
Prime Landlord and shall employ all reasonable efforts to cause Prime Landlord
to cure such default or resolve such dispute. Except as may result from a
default of Landlord from its obligations specified in the preceding sentence,
Tenant shall not make any claim against Landlord for any damage which may arise,
nor shall Tenant's obligations hereunder be impaired or abated by reason of (i)
the failure of Prime Landlord to keep, observe or perform its obligations
pursuant to the Prime Lease, or (ii) the acts or omissions of Prime Landlord and
each of its agents, contractors, servants, employees, invitees or licensees.
10. COVENANTS WITH RESPECT TO THE PRIME LEASE. Tenant covenants
and agrees that Tenant shall not do anything that would constitute a default
under the Prime Lease or omit to do anything that Tenant is obligated to do
under the terms of this Sublease so as to cause there to be a default under the
Prime Lease.
11. BROKER. Tenant represents and warrants to Landlord that Tenant
has not dealt with any broker in connection with this Sublease. Tenant shall
indemnify Landlord against, and hold Landlord harmless from, any claim on, or
liability to, any broker or any other party with whom Tenant shall have dealt in
connection with this transaction and Sublease.
12. INDEMNIFICATION.
12.1 RECIPROCAL INDEMNIFICATION OF LANDLORD AND TENANT.
(a) Tenant shall indemnify, defend with competent and
experienced counsel and hold harmless Landlord from and against any and all
damages, liabilities, actions, causes of action, suits, claims, demands, losses,
costs and expenses (including without limitation reasonable attorneys' fees and
disbursements and court costs) to the extent arising from or in connection with
the negligence or willful misconduct of Tenant, its agents, employees,
representatives or contractors.
(b) Landlord shall indemnify, defend with competent
and experienced counsel and hold harmless Tenant, its subsidiaries and
affiliates and their respective officers, directors, shareholders and employees,
from and against any and all
<PAGE>
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damages, liabilities, actions, causes of action, suits, claims, demands, losses,
costs and expenses (including without limitation reasonable attorneys' fees and
disbursements and court costs) to the extent arising from or in connection with
the negligence or willful misconduct of Landlord, its agents, employees,
representatives or contractors.
(c) The party seeking indemnification under this
Section (the "Indemnified party") shall provide prompt written notice of any
third party claim to the party from whom indemnification is sought (the
"Indemnifying Party"). The Indemnifying Party shall have the right to assume
exclusive control of the defense of such claim or at the option of the
Indemnifying Party, to settle the same. The Indemnified Party agrees to
cooperate reasonably with the Indemnifying Party in connection with the
performance of the Indemnifying Party's obligations under this Section.
(d) Notwithstanding anything to the contrary
contained in this Sublease, neither party hereto shall be liable to the other
for any indirect, special, consequential or incidental damages (including
without limitation loss of profits, loss of use or loss of goodwill) regardless
of (i) the negligence (either sole or concurrent) of either party or (ii)
whether either party has been informed of the possibility of such damages. It is
expressly understood and agreed that damages payable by either party to Prime
Landlord shall be deemed to constitute direct damages of such party.
12.2 INDEMNIFICATION BY TENANT OF PRIME LANDLORD. Tenant
agrees to defend, save harmless and indemnify Prime Landlord to the same extent
as Landlord is required to do so under the provisions of Section 13.2 of the
Prime Lease.
12.3 SURVIVAL. The provisions of this Section shall survive
the expiration or earlier termination of this Sublease.
13. QUIET ENJOYMENT. Subject to the terms and conditions hereof
and as long as Tenant pays all of the Base Rent and Additional Rent due
hereunder and otherwise performs and observes all of the obligations, terms and
conditions contained herein and in the Prime Lease as herein incorporated,
Tenant shall peaceably and quietly have, hold and enjoy the Premises.
14. TERMINATION OF PRIME LEASE. If for any reason the term of the
Prime Lease is terminated prior to the Expiration Date of this Sublease, this
Sublease shall thereupon terminate, and Landlord shall not be liable to Tenant
by reason thereof unless such termination is due solely to an event of default
on behalf of Landlord. Notwithstanding the foregoing, if the termination of the
Prime Lease does not result in the termination of this Sublease by reason of
Tenant's attornment to, and recognition of, Prime Landlord as landlord hereunder
in accordance with the provisions of Section 7(b) hereof, Landlord shall not be
liable to Tenant hereunder for damages or otherwise, and Landlord's obligation
to Tenant shall be limited to returning to Tenant a portion of any rent paid in
advance by Tenant, if any, prorated as of the date of such termination.
<PAGE>
- 7 -
15. MODIFICATION OF PRIME LEASE. For the purposes hereof, the
terms of the Prime Lease are subject to the following modifications:
(a) In all provisions of the Prime Lease requiring the
approval or consent of Prime Landlord, Tenant shall be required to obtain the
approval or consent of both Prime Landlord and Landlord. In all provisions of
the Prime Lease requiring that notice be given to Prime Landlord, Tenant shall
be required to give notice to both the Prime Landlord and Landlord.
(b) The following provisions of the Prime Lease do not apply
to Tenant and are hereby deleted in respect of this Sublease: Sections 2.2.1,
2.5, 2.5.1, 3.1(b), 3.2, 5.1.1, 5.2, and Article XXII.
16. CONSENTS. Landlord's refusal to consent to or approve any
matter or thing, whenever Landlord's consent or approval is required under this
Sublease or under the Prime Lease, as incorporated herein, shall be deemed
reasonable if Prime Landlord has refused or failed to give its consent or
approval to such matter or thing.
17. CONDITION OF THE PREMISES; TENANT'S CHANGES.
(a) Tenant represents it has made a thorough examination of
the Premises and it is familiar with the condition thereof. Tenant acknowledges
that it enters into this Sublease without any representation or warranties by
Landlord except as set forth in this Lease, or anyone acting or purporting to
act on behalf of Landlord, as to the present or future conditions of the
Premises or the appurtenances thereto or any improvements therein or of the
Building. It is further agreed that Tenant does and will accept the Premises "as
is" in their present condition and Landlord has no obligation to perform any
work therein.
(b) Notwithstanding anything to the contrary contained in the
Prime Lease, Tenant shall not make any changes to the Premises whatsoever,
including, without limitation, structural or non-structural changes, without the
prior written consent of Landlord which consent shall not be unreasonably
withheld, conditioned or delayed but subject to prior consent of Prime Landlord
in accordance with the Prime Lease.
18. ASSIGNMENT AND SUBLETTING.
(a) Tenant, for itself, its successors and assigns, expressly
covenants that it shall not assign, whether by operation of law or otherwise,
mortgage or pledge or otherwise transfer or encumber this Sublease, or sublet
all or any part of the Premises without obtaining the prior written consent of
Landlord, which consent shall not be unreasonably withheld with respect to
assignments or transfers to Affiliated Entities (as that term is used in the
Prime Lease), but in any other event such consent may be given or withheld in
Landlord's sole discretion. In the event that Tenant desires to vacate the
Premises during the term of this Sublease, if Tenant delivers to Landlord a
qualified alternate tenant, Landlord shall agree to consider in good faith an
arrangement to lease the Premises to the alternate tenant subject to Tenant
reimbursing Landlord for the reasonable
<PAGE>
- 8 -
cost of arranging the new lease, it being specifically understood and agreed
that Landlord has no obligation to consent to such an alternate tenant.
Notwithstanding the immediately preceding sentence, any steps taken by Landlord
or Tenant in this regard shall be subject to all terms and conditions of the
Prime Lease. The parties acknowledge that Tenant may become a public company
during the Term hereof and further acknowledge that the same will not constitute
an assignment, transfer or encumbrance of this Sublease. Landlord reserves the
right to transfer and assign its interest in and to this Sublease to any entity
or person who shall succeed to Landlord's interest in and to the Prime Lease.
(b) Consent by Landlord to any assignment, transfer or
subletting to any party shall not be construed as a waiver or release of Tenant
from the terms of any covenant or its primary responsibility under this
Sublease, nor shall consent to one assignment, transfer or sublease to any
person, partnership, firm or corporation be deemed to be a consent to any
subsequent assignment, transfer or subletting to another person, partnership,
firm or corporation.
19. INSURANCE.
(a) Tenant agrees to maintain all insurance coverages
specified in Section 11.2 of the Prime Lease (including without limitation
commercial general liability and property damage insurance, casualty insurance
and workers' compensation insurance) in accordance with Sections 11.2 and 1.1 of
the Prime Lease). All such insurance shall be underwritten by a company or
companies licensed to do insurance business in the Commonwealth of Massachusetts
by the Department of Insurance and in good standing, and shall be written on an
"occurrence basis." All such insurance policies shall name Landlord and Prime
Landlord as additional insureds thereunder and, in addition, shall name as
additional insureds the holders of any Mortgage of the Property of which Tenant
is notified in writing, as their respective interests may appear. Tenant shall
furnish Landlord receipts evidencing payment of the premiums for such insurance
(if requested by Landlord) and shall deposit with Landlord certificates for such
insurance no later than the Commencement Date and at least fifteen (15) days
before each insurance renewal date thereof, bearing the endorsement that the
polices will not be canceled nor will coverages be reduced until after ten (10)
days' prior written notice to both Landlord and Prime Landlord of such proposed
action. Tenant shall pay all premiums and charges for such insurance, and if
Tenant shall fail to obtain such insurance, Landlord may, but shall not be
obligated to, obtain the same, in which event the amount of the premium paid
shall be paid by Tenant to Landlord upon Landlord's demand therefor, shall be
deemed Additional Rent and shall be collectible by Landlord in the same manner
and with the same remedies as though said sums were Additional Rent reserved
hereunder.
(b) Tenant acknowledges that Landlord will not carry any
insurance in favor of Tenant, and that neither Prime Landlord nor Landlord will
carry insurance on Tenant's furniture and/or furnishings or any fixtures or
equipment, improvements or appurtenances of Tenant in or about the Premises.
<PAGE>
- 9 -
20. WAIVER OF SUBROGATION.
(a) Any casualty insurance carried by the Tenant with respect
to the Premises, the Building or the Property, or property therein or
occurrences thereon shall include a clause or endorsement denying to the insurer
rights of subrogation against the other party to the extent rights have been
waived by the insured prior to occurrence of injury or loss, provided that such
clause or endorsement is obtainable without payment of an additional premium. If
such clause or endorsement is obtainable upon payment of an additional premium,
notice thereof shall be given to the Landlord and the Landlord may request the
Tenant to obtain it and shall reimburse the Tenant for the cost of such
additional premium.
(b) Each party, notwithstanding any provisions of this
Sublease to the contrary, hereby waives any rights of recovery against the other
for injury or loss due to hazards covered by such insurance to the extent such
party's policy permits such waivers of subrogation and then only with respect to
sums which are collectible thereunder. Landlord shall be afforded the protection
of this provision notwithstanding any right which Tenant may have to self
insure.
21. END OF TERM. If Tenant shall remain in possession of the
Premises or any part thereof after the expiration or prior termination of the
Term hereof, as the same may be extended, the parties agree that no such holding
over by Tenant shall operate to extend or renew this Sublease, and that any such
holding over shall cause Tenant to become a month-to-month tenant and Tenant
shall be obligated to pay monthly installment of Base Rent and Additional Rent
in an amount equal to one hundred fifty percent (150%) times the sum of the
installment of Base Rent and Estimated Additional Rent Payments payable during
the last full calendar month of the Lease Term, and such tenancy shall otherwise
be subject to all the terms, conditions, covenants and agreements of this
Sublease. Tenant further agrees to pay to Landlord any additional amounts
payable by Landlord to Prime Landlord under the Prime Lease by reason of any
such holding over by Tenant.
22. DEFAULT.
(a) In the event that Tenant shall default in the payment of
Base Rent, Additional Rent or any other charge payable hereunder within five (5)
days after written notice, or shall default in the performance or observance of
any of the terms, conditions and covenants of this Sublease within twenty (20)
days after written notice, or, if not curable within said twenty day period,
Tenant does not commence to cure said default within said twenty day period and
diligently prosecute the same to completion, and provided that there exists no
event of default under the Prime Lease, Landlord, in addition to and not in
limitation of any rights otherwise available to it, shall have the same rights
and remedies with respect to such default as are provided to Prime Landlord
under the Prime Lease with respect to defaults by Landlord as tenant thereunder,
with the same force and effect as though all such provisions relating to any
such default or defaults were set forth herein in their entirety, and Tenant
shall have all of the obligations of the tenant under the Prime Lease with
respect to such default or defaults.
<PAGE>
- 10 -
(b) In the event of a default by Tenant in the performance of
any of its non-monetary obligations hereunder, including those under the Prime
Lease, Landlord may, at its option, and without waiving any other remedies for
such default herein or at law or by incorporation by reference of the Prime
Lease provided, at any time thereafter, give written notice to Tenant that if
such default is not cured, or the cure not commenced, within ten (10) days after
notice, and if so commenced is not thereafter pursued diligently to completion,
Landlord may cure such default for the account of Tenant, and any amount paid or
incurred by Landlord in so doing shall be deemed paid or incurred for the
account of Tenant and Tenant agrees promptly to reimburse Landlord therefor and
save Landlord harmless therefrom; provided, however, that Landlord may cure any
such default as aforesaid prior to the expiration of any waiting period if
reasonably necessary to protect Landlord's interest under the Prime Lease or to
prevent injury or damage to persons or property.
23. DESTRUCTION, FIRE AND OTHER CASUALTY. If the whole or any part
of the Premises or the Building shall be damaged by fire or other casualty and
the Prime Lease is not terminated on account thereof by either Landlord or Prime
Landlord in accordance with the terms thereof or if this Sublease is not
terminated by Tenant as if the termination provisions of the Prime Lease were
set forth herein as between Tenant and Landlord, this Sublease shall remain in
full force and effect and Base Rent and Additional Rent shall not abate except
to the extent Base Rent and Additional Rent for the Premises shall abate under
the terms of the Prime Lease.
24. NOTICES.
(a) Whenever, by the terms of this Sublease, notice, demand or
other communication shall or may be given to either party, the same shall be in
writing and addressed as follows:
If to Landlord: Unisphere Solutions, Inc.
200 Wheeler Road
Burlington, MA 01803
Attn: Suzanne M. Zabitchuck
General Counsel
with a copy to:
Gadsby & Hannah LLP
225 Franklin Street
Boston, MA 02110
Attn: Cynthia B. Keliher, Esq.
If to Tenant: Sonus Networks, Inc.
5 Carlisle Road
Westford, MA 01886
Attn: Stephen J. Nill, Vice President of
Finance and CFO
<PAGE>
- 11 -
or to such other address or addresses as shall from time to time be designated
by written notice by either party to the other as herein provided. All notices
shall be sent by registered or certified mail, postage prepaid and return
receipt requested, or by Federal Express or other comparable courier providing
proof of delivery, and shall be deemed duly given and received (i) if mailed, on
the third business day following the mailing thereof, or (ii) if sent by
courier, the date of its receipt (or, if such day is not a business day, the
next succeeding business day). Landlord and Tenant each promptly shall deliver
to the other copies of all notices, requests, demands or other communications
which relate to the Premises or the use or occupancy thereof after receipt of
the same from Prime Landlord or others.
(b) Each party hereunder shall promptly furnish the other with
copies of all notices under the Prime Lease or this Sublease with respect to the
Premises which such party shall receive from Prime Landlord under the Prime
Lease.
25. SUBLEASE CONDITIONAL UPON CERTAIN CONSENTS. Landlord and
Tenant each acknowledge and agree that this Sublease is subject to Landlord's
obtaining the unconditional consent of Prime Landlord in accordance with the
terms of the Prime Lease, and that if such consent shall not be obtained within
fifteen (15) days of the date hereof, then this Sublease shall be deemed
cancelled and terminated and neither of the parties hereto shall have any
liability to the other.
26. SECURITY DEPOSIT. Tenant concurrently with the execution of
this Sublease has deposited with Landlord a deposit (the "Security Deposit") in
the amount of NINETEEN THOUSAND SEVEN HUNDRED FIFTY-EIGHT and 38/100 DOLLARS
($19,758.38) to be held by Landlord without interest as security for the
faithful performance and observance by Tenant of the terms, conditions and
provisions of this Sublease, including without limitation the surrender of
possession of the Premises to Landlord as herein provided. Landlord shall not be
required to maintain the Security Deposit in a separate account. It is agreed
that in the event Tenant defaults in respect of any of the terms, provisions and
conditions of this Sublease, including. but not limited to, the payment of Base
Rent and Additional Rent, Landlord may apply or retain the whole or any part of
the Security Deposit to the extent required for the payment of any Base Rent and
Additional Rent or any other sum as to which Tenant is in default or for any sum
which Landlord may expend or may be required to expend by reason of Tenant's
default in respect of any of the terms, covenants and conditions of this
Sublease, including but not limited to, any damages or deficiency in the
reletting of the Premises, whether such damages or deficiency accrue or accrues
before or after summary proceedings or other reentry by Landlord. The Security
Deposit is not to be used or applied by Tenant as a substitute for rent due any
month, but may be so applied by Landlord at any time at Landlord's option. The
use, application or retention of the Security Deposit, or any portion thereof,
by Landlord shall not prevent Landlord from exercising any other right or remedy
provided by this Sublease or by law and shall not operate as a limitation on any
recovery to which Landlord may otherwise be entitled. If Landlord applies or
retains any part of the Security Deposit, Tenant, upon written demand therefor
by Landlord, shall deposit cash with Landlord in such amount so that Landlord
shall have the full deposit on hand at all times during the Term. If Tenant
shall fully and
<PAGE>
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faithfully comply with all of the terms, provisions, covenants and conditions of
this Sublease, the balance of the Security Deposit, if any, shall be returned to
Tenant within thirty (30) days after the Expiration Date and after the delivery
of the entire possession of the Premises to Landlord.
27. PAYMENT OF THE FIRST MONTH'S BASE RENT. Tenant shall pay to
Landlord the first monthly installment of the applicable Base Rent ($19,758.38)
upon execution of this Sublease.
28. SIGNAGE. Any signage contemplated by the Tenant shall be
subject to and in accordance with the requirements set forth in the Prime Lease
(at Section 8.1). Landlord shall have no obligation or responsibility to remove
any signage which exists at the Premises as of the Commencement Date.
29. LANDLORD'S REPRESENTATIONS. Landlord hereby represents and
warrants that (i) the Prime Lease is in full force and effect, (ii) the Prime
Lease attached hereto as Exhibit A is the complete Prime Lease and that, except
for the First Amendment to Lease dated June 22, 1998, the Prime Lease has not
been amended or modified; (iii) to the best of Landlord's knowledge, there are
no existing setoffs, defenses or counterclaims against the Prime Landlord with
respect to the payment of rent reserved under the Prime Lease or any performance
of other terms, conditions or covenants of the Prime Lease on the part of the
Tenant under the Prime Lease to be performed; and (iv) there exists no defaults
or breaches of Prime Landlord's or Tenant's obligations under the Prime Lease
nor, to the best of Landlord's knowledge, any event which with the giving of
notice or passage of time, or both, would constitute a default under the Prime
Lease.
30. MISCELLANEOUS.
(a) This Sublease may not be extended, renewed, terminated, or
otherwise modified except by an instrument in writing signed by the party
against whom enforcement of any such modification is sought.
(b) It is understood and agreed that all understandings and
agreements heretofore had between the parties hereto are merged in this
Sublease, which alone fully and completely expresses their agreement, and that
the same is entered into after full investigation, neither party relying upon
any statement, representation or warranty made by the other not embodied in this
Sublease.
(c) The paragraph headings appearing herein are for purposes
of convenience only and are not deemed to be a part of this Sublease.
(d) The provisions of this Sublease shall be governed by and
construed in accordance with the laws of the Commonwealth of Massachusetts
without regard to principles of conflicts of laws. Landlord and Tenant agree to
submit to jurisdiction in the Commonwealth of Massachusetts with respect to any
dispute under or arising out of this Sublease and agree that any such dispute
shall be brought either in the courts of the
<PAGE>
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Commonwealth of Massachusetts or in the applicable federal district court
located in Massachusetts.
(e) If any provision of this Sublease or the application
thereof to any person or circumstance shall to any extent be invalid or
unenforceable, the remainder of this Sublease, or the application of such
provision to persons or circumstance other than those as to which it is invalid
or unenforceable, shall not be affected thereby, and each provision of this
Sublease shall be valid and enforced to the fullest extent permitted by law.
(f) This Sublease may be executed in counterparts each of
which shall be deemed an original and all of which together shall constitute one
and the same document.
(g) This Sublease (or any notice hereof) shall not be
recorded.
(h) Landlord and Tenant hereby each waive trail by jury in any
action, proceeding or counterclaim brought by either against the other, on or in
respect of any matter whatsoever arising out of or in any way connected with
this Sublease, the relationship of Landlord and Tenant or Tenant's use or
occupancy of the Premises.
(i) This Sublease includes and incorporates all Exhibits
referred to hereby and attached hereto.
<PAGE>
- 14 -
IN WITNESS WHEREOF, this Agreement of Sublease has been duly executed
as of the day and year first above written.
LANDLORD:
UNISPHERE SOLUTIONS, INC.
By: /s/ Robert T. Curtin
-----------------------------------
Name: Robert T. Curtin
---------------------------------
Title: Director of Real Estate
---------------------------------
TENANT:
SONUS NETWORKS, INC.
By: /s/ S.J. Nill
-----------------------------------
Name: S.J. Nill
---------------------------------
Title: VP & CFO
---------------------------------
<PAGE>
Exhibit 10.14
SECURED PROMISSORY NOTE
$257,000.00 Westford,
Massachusetts
November 4, 1998
FOR VALUE RECEIVED, Hassan Ahmed (the "Maker"), promises to pay to Sonus
Networks, Inc. (the "Company"), or order, at the offices of the Company or at
such other place as the holder of this Note may designate, on or before the
Maturity Date (as defined below), the principal sum of $257,000.00. Interest
shall accrue on the outstanding principal amount from the date hereof through
and including the date on which such principal amount is paid in full, computed
on the basis of a year of 365 or 366 days, as the case may be, at a simple rate
per annum of 8%, and payable on the maturity hereof.
The "Maturity Date" shall be the earlier of (a) five (5) years from the
date hereof, and (b) 180 days after the date on which a portion of the
Collateral (as defined below) is eligible for sale to the public under the
Securities Act of 1933, as amended, free of any restrictions on transfer under
securities laws or agreements between the Maker and the Company or any of the
Company's underwriters.
Payment of this Note is secured by a security interest in certain property
of the Maker (the "Collateral") pursuant to a pledge agreement of even date
herewith between the Maker and the Company (the "Pledge Agreement").
This Note shall become immediately due and payable upon demand by the
Company to the Maker upon the occurrence at any time of any Event of Default
under and as defined in the Pledge Agreement.
Upon the occurrence of an Event of Default, the holder shall have then, or
at any time thereafter, all of the rights and remedies afforded under the Pledge
Agreement and by the Uniform Commercial Code as from time to time in effect in
the Commonwealth of Massachusetts or afforded by other applicable law.
Notwithstanding anything herein to the contrary, in the event the Company
exercises its repurchase rights with respect to the Collateral pursuant to the
terms of that certain Stock Repurchase Agreement, dated as of the date hereof
between the Company and the Maker, then the Company shall set off any amounts
due from Maker to the Company hereunder against any amounts payable by the
Company to the Maker as a result of the repurchase of the Collateral.
<PAGE>
-2-
In no event shall any interest charged, collected or reserved under this
Note exceed the maximum rate then permitted by applicable law and if any such
payment is paid by the Maker, then such excess sum shall be credited by the
holder as a payment of principal.
All payments by the Maker under this Note shall be made without set-off or
counterclaim and be free and clear and without any deduction or withholding for
any taxes or fees of any nature whatever, unless the obligation to make such
deduction or withholding is imposed by law.
Whenever any amount is paid under this Note, all or part of the amount
paid may be applied to principal, premium or interest in such order and manner
as shall be determined by the holder in its discretion.
Recourse with respect to principal amounts owing hereunder shall be
limited to the Collateral as described in the Pledge Agreement. Notwithstanding
the forgoing, no reference to the Pledge Agreement or to any guaranty shall
impair the obligation of Maker to make payments of interest hereunder when due,
such obligations to be absolute, unconditional and not limited in recourse with
respect to such payments.
This Note may be prepaid in whole or in part at any time or from time to
time in the sole discretion of the Maker. Any such prepayment shall be without
premium or penalty. In the event the Company exercises its repurchase option
pursuant to a Stock Repurchase Agreement with the Maker, the repurchased price
for such shares is payable first by set off of all or a portion of the Note.
None of the terms or provisions of this Note may be excluded, modified or
amended except by a written instrument duly executed on behalf of the holder
expressly referring to this Note and setting forth the provision so excluded,
modified or amended.
All rights and obligations hereunder shall be governed by the laws of the
Commonwealth of Massachusetts and this Note is executed as an instrument under
seal.
/s/ Hassan Ahmed
-------------------
Hassan Ahmed
IN THE PRESENCE OF:
/s/ [ILLEGIBLE]
- -----------------------
<PAGE>
PLEDGE AGREEMENT
This is a pledge agreement made as of the 4th day of November, 1998, between
Hassan Ahmed ("Pledgor"), and Sonus Networks, Inc., a Delaware corporation with
its principal office at 5 Carlisle Road, Westford, MA 01886 ("Pledgee").
1. Pledge of Collateral. In order to secure the due and punctual payment
and performance of the Obligations (as defined below), Pledgor hereby pledges,
assigns and grants to Pledgee a continuing security interest and lien on
1,028,000 shares of Common Stock of the Pledgee ("Common Stock") held by the
Pledgor and all income therefrom, increases therein and proceeds thereof, the
certificates for which Pledgor has delivered to Pledgee together with a stock
transfer power executed in blank (the "Collateral").
2. Obligations Secured. The security interest in the Collateral granted
hereby secures payment and performance of those obligations described in that
certain promissory note from Pledgor to Pledgee of even date herewith in the
principal amount of $257,000.00 (the "Note"), together with all interest and
other amounts from time to time payable thereunder, with respect to such debt
(the "Obligations").
3. Pledgee's Rights and Duties with Respect to the Collateral. Pledgee's
only duty with respect to the Collateral shall be to exercise reasonable care to
secure the safe custody thereof. Pledgee shall have the right but not the
obligation to (a) demand, sue for, receive and collect all money or money
damages payable on account of any Collateral, (b) protect, preserve or assert
any other rights of Pledgor or take any other action with respect to the
Collateral, and (c) pay any taxes, liens, assessments, insurance premiums or
other charges pertaining to the Collateral. Pledgee shall be relieved of all
responsibility for the Collateral upon surrendering it to Pledgor.
4. Pledgor's Warranties and Indemnity. Pledgor represents, warrants and
covenants (a) that it is and will be the lawful owner of the Collateral, (b)
that the Collateral is and will remain free and clear of all liens, encumbrances
and security interests other than the security interest granted by Pledgor
hereunder, and (c) that Pledgor has the sole right and lawful authority to
pledge the Collateral and otherwise to comply with the provisions hereof.
5. Covenants of Pledgor. The Pledgor shall not sell, assign or otherwise
transfer any of his right, title or interest in or to any of the Collateral
without the prior written consent of the Company, except for (a) the pledge of
the Collateral to the Company pursuant hereto, (b) transfers of the Collateral
to the Company pursuant to the Stock Repurchase Agreement, dated as of the date
hereof (the "Stock Repurchase Agreement"), between the Pledgor and the Pledgee,
and (c) transfers of the Collateral pursuant to Section 5 of the Stock
Repurchase Agreement, provided that (i) any transfer of Collateral pursuant to
clause (c) above shall be subject to the Company's continuing security interest
and lien on such Collateral hereunder and (ii) any transferee of Collateral
transferred pursuant to clause (c) above shall have executed and delivered to
the Company a written acknowledgement in form and substance reasonably
satisfactory to the Company to the effect that the transfer of such Collateral
is subject to the Company's continuing security interest in and lien on such
Collateral hereunder.
<PAGE>
6. Voting of Collateral. While Pledgor is not in default hereunder,
Pledgee shall have none of the rights conferred upon stockholders of the Common
Stock of the Pledgor, except as otherwise provided herein.
7. Dividends and Other Distributions. While Pledgor is not in default
hereunder, Pledgor may receive cash dividends and other distributions payable
with respect to the Collateral. While Pledgor is in default hereunder, the
Pledgee shall be entitled to receive cash dividends and other distributions with
respect to the Collateral, to be held by Pledgee as additional Collateral
hereunder.
8. Pledgor's Default. Pledgor shall be in default hereunder upon the
occurrence of any of the following events (each, an "Event of Default"):
(a) If Pledgor fails to pay or perform any of the Obligations when
such payment or performance is due;
(b) If any lien, encumbrance or adverse claim of any nature
whatsoever is asserted with respect to any Collateral or if Pledgor attempts to
transfer the Collateral in contravention of the terms hereof; provided, however,
that the occurrence of an event described in this Section 8(b) shall not
constitute an Event of Default if it relates to the Pledgor's sale of the
Collateral on margin for the purpose of satisfying outstanding Obligations;
(c) If the liquidation, termination of existence, dissolution,
insolvency or business failure of the Pledgor occurs, or if a receiver or
custodian for the Pledgor or any part of its property is appointed if such
appointment is not terminated or dismissed within thirty (30) days;
(d) If any proceedings under the United States Bankruptcy Code or
any other federal or state bankruptcy, reorganization, receivership, insolvency
or other similar law affecting the rights of creditors generally, which
proceeding is not dismissed within thirty (30) days of filing, are instituted
against the Pledgor; or
(e) If any proceedings under the United States Bankruptcy Code or
any other federal or state bankruptcy, reorganization, receivership, insolvency
or other similar law affecting the rights of creditors generally are instituted
by the Pledgor or if the Pledgor makes a composition or an assignment or trust
mortgage for the benefit of creditors.
9. Pledgee's Rights upon Default. Upon the occurrence and during the
continuance of an Event of Default, the Pledgee shall thereafter have the
following rights and remedies (to the extent permitted by applicable law) in
addition to the rights and remedies of a secured party under the Uniform
Commercial Code of Massachusetts, all such rights and remedies being cumulative,
not exclusive, and enforceable alternatively, successively or concurrently:
(i) If the Pledgee so elects and gives written notice of such
election to the Pledgor, the Pledgee may vote any or all of the Collateral
possessing voting rights (whether or not the same shall have been transferred
into its name or the name of its nominee or
<PAGE>
nominees) and give all consents, waivers and ratifications in respect of the
Collateral and otherwise act with respect thereto as though it were the outright
owner thereof, the Pledgor hereby irrevocably constituting and appointing the
Pledgee the proxy and attorney-in-fact of the Pledgor, with full power of
substitution, to do so;
(ii) The Pledgee may demand, sue for, collect or make any compromise
or settlement in respect of any Collateral held by it hereunder that it deems
suitable;
(iii) Other than an Event of Default under Sections 8 (c) (d) and
(e), in which case 30 days written notice shall apply, in all other cases of
default, after one hundred eighty (180) days' written notice to the Pledgor, the
Pledgee may sell, resell, assign and deliver, or otherwise dispose of any or all
of the Collateral, for cash and/or credit and upon such terms at such place or
places and at such time or times and to such persons, firms, companies or
corporations as the Pledgee shall approve, all without demand for performance by
the Pledgor or advertisement or any further notice whatsoever except such as may
be required by law; and
(iv) Other than an Event of Default under Sections 8 (c) (d) and
(e), in which case 30 days written notice shall apply, in all other cases of
default, after one hundred eighty (180) days' written notice to the Pledgor, the
Pledgee may at any time, at its option, cause all or any part of the Collateral
held by it to be transferred into its name or the name of its nominee or
nominees, receive any income thereon and hold such income as additional
collateral or apply it to the obligations hereunder.
Notwithstanding anything herein to the contrary, if an Event of
Default (other than an Event of Default under Sections 8 (c) (d) and (e), in
which case no notice shall apply), shall occur, then after one hundred eighty
(180) days' written notice to the Pledgor (the "Notice Period") the Pledgee may
declare all of the unpaid principal and interest under the Note to be
immediately due and payable, all in accordance with the terms of the Note.
During the Notice Period, the Pledgor may cure any such default.
10. Application of Collateral. In the event of a sale of the Collateral,
the proceeds of the sale shall first be applied to satisfy outstanding
Obligations, in the order in which Pledgor elects in its sole discretion; and,
second, the surplus (if any) shall be paid to Pledgor. In the event the Pledgee
takes title to the Collateral in accordance with the terms hereof, the Pledgee
shall issue the Pledgor a certificate representing shares of Common Stock equal
in value to the excess of (a) the fair market value of the Collateral (as
determined by the Board of Directors of the Pledgee) over (b) the amount of
outstanding Obligations as of the date Pledgee takes title.
11. Termination. This Agreement shall terminate in its entirety upon full
payment of the Obligations to Pledgee, and Pledgee shall return any remaining
Collateral to Pledgor within three (3) business days after such termination.
12. Notices. All notices made or required to be made hereunder shall be
sent by United States certified or registered mail, with postage prepaid, or
delivered by telecopy or by hand to Pledgee or to Pledgor at the addresses first
above written. Notice by mail shall be deemed to have been made on the date when
the Notice is deposited in the mail.
<PAGE>
13. Heirs, Successors. Etc. This Pledge Agreement and all of its terms and
provisions shall benefit and bind the heirs, successors, assigns, transferees,
executors and administrators of each of the parties hereto.
14. Pledgee's Forbearance. Any forbearance, failure to delay by Pledgee in
exercising any right, power or remedy hereunder shall not be deemed a waiver of
such right, power or remedy.
EXECUTED under seal as of the date first above written.
PLEDGOR: PLEDGEE:
SONUS NETWORKS, INC.
/s/ Hassan Ahmed By: /s/ [ILLEGIBLE]
- -------------------- ----------------------
Hassan Ahmed Title: CFO
<PAGE>
Exhibit 10.15
SECURED PROMISSORY NOTE
$110,250.00 Westford, Massachusetts
As of September 1, 1999
FOR VALUE RECEIVED, Stephen Nill (the "Maker"), promises to pay to Sonus
Networks, Inc. (the "Company"), or order, at the offices of the Company or at
such other place as the holder of this Note may designate, on or before the Due
Date (as defined below), the principal sum of $110,250.00. Interest shall accrue
on the outstanding principal amount from the date hereof through and including
the date on which such principal amount is paid in full, computed on the basis
of a year of 365 or 366 days, as the case may be, at a rate per annum of 8%,
compounded annually and payable on the maturity hereof.
The "Due Date" shall be the earlier of (a) five (5) years from the date
hereof, and (b) 180 days after the date on which a portion of the Collateral (as
defined below) is eligible for sale to the public under the Securities Act of
1933, as amended, free of any restrictions on transfer under securities laws or
agreements between the Maker and the Company or any of the Company's
underwriters.
Payment of this Note is secured by a security interest in certain property
of the Maker (the "Collateral") pursuant to a pledge agreement of even date
herewith between the Maker and the Company (the "Pledge Agreement").
This Note shall become immediately due and payable upon demand by the
Company to the Maker upon the occurrence at any time of any Event of Default
under and as defined in the Pledge Agreement.
Upon the occurrence of an Event of Default, the holder shall have then, or
at any time thereafter, all of the rights and remedies afforded under the Pledge
Agreement and by the Uniform Commercial Code as from time to time in effect in
the Commonwealth of Massachusetts or afforded by other applicable law.
Notwithstanding anything herein to the contrary, in the event the Company
exercises its repurchase rights with respect to the Collateral pursuant to the
terms of that certain Stock Repurchase Agreement, dated as of the date hereof
between the Company and the Maker, then (a) all of the unpaid principal and
interest hereunder shall be immediately due and payable automatically and
without presentment, demand, protest or other notice of any kind, all of which
are hereby expressly waived by the Maker, and (b) the Company shall set off any
amounts due from Maker to the Company hereunder against any amounts payable by
the Company to the Maker as a result of the repurchase of the Collateral.
Every amount overdue under this Note shall bear interest from and after
the date on which such amount first became overdue at an annual rate which is
two (2) percentage points above the rate per year specified in the first
paragraph of this Note. Such interest on overdue amounts under this Note shall
be payable on demand and shall accrue and be compounded monthly until the
obligation of the Maker with respect to the payment of such interest has been
discharged (whether before or after judgment).
<PAGE>
In no event shall any interest charged, collected or reserved under this
Note exceed the maximum rate then permitted by applicable law and if any such
payment is paid by the Maker, then such excess sum shall be credited by the
holder as a payment of principal.
All payments by the Maker under this Note shall be made without set-off or
counterclaim and be free and clear and without any deduction or withholding for
any taxes or fees of any nature whatever, unless the obligation to make such
deduction or withholding is imposed by law.
Whenever any amount is paid under this Note, all or part of the amount
paid may be applied to principal, premium or interest in such order and manner
as shall be determined by the holder in its discretion.
No reference in this Note to the Pledge Agreement or any guaranty shall
impair the obligation of the Maker, which is absolute and unconditional to pay
all amounts under this Note strictly in accordance with the terms of this Note.
The Maker agrees to pay on demand all costs of collection, including
reasonable attorneys' fees, incurred by the holder in enforcing the obligations
of the Maker under this Note.
No delay or omission on the part of the holder in exercising any right
under this Note or the Pledge Agreement shall operate as a waiver of such right
or of any other right of such holder, nor shall any delay, omission or waiver on
any one occasion be deemed a bar to or waiver of the same or any other right on
any future occasion. The Maker and every indorser or guarantor of this Note
regardless of the time, order or place of signing waives presentment, demand,
protest and notices of every kind and assents to any extension or postponement
of the time of payment or any other indulgence, to any substitution, exchange or
release of collateral, and to the addition or release of any other party or
person primarily or secondarily liable.
This Note may be prepaid in whole or in part at any time or from time to
time in the sole discretion of the Maker. Any such prepayment shall be without
premium or penalty.
None of the terms or provisions of this Note may be excluded, modified or
amended except by a written instrument duly executed on behalf of the holder
expressly referring to this Note and setting forth the provision so excluded,
modified or amended.
[remainder of page intentionally left blank]
-2-
<PAGE>
All rights and obligations hereunder shall be governed by the laws of the
Commonwealth of Massachusetts and this Note is executed as an instrument under
seal.
/s/ Stephen Nill
----------------
Stephen Nill
IN THE PRESENCE OF:
/s/ Victoria B. Lankiewicz
- --------------------------
<PAGE>
PLEDGE AGREEMENT
This is a pledge agreement made as of the 1st day of September, 1999, between
Stephen Nill ("Pledgor"), and Sonus Networks, Inc., a Delaware corporation with
its principal office at 5 Carlisle Road, Westford, MA 01886 ("Pledgee").
1. Pledge of Collateral. In order to secure the due and punctual payment
and performance of the Obligations (as defined below), Pledgor hereby pledges,
assigns and grants to Pledgee a continuing security interest and lien on 225,000
shares of Common Stock of the Pledgee ("Common Stock") held by the Pledgor and
all income therefrom, increases therein and proceeds thereof, the certificates
for which Pledgor has delivered to Pledgee together with a stock transfer power
executed in blank (the "Collateral").
2. Obligations Secured. The security interest in the Collateral granted
hereby secures payment and performance of those obligations described in that
certain promissory note from Pledgor to Pledgee of even date herewith in the
principal amount of $110,250.00 (the "Note"), together with all interest and
other amounts from time to time payable thereunder, with respect to such debt
(the "Obligations").
3. Pledgee's Rights and Duties with Respect to the Collateral. Pledgee's
only duty with respect to the Collateral shall be to exercise reasonable care to
secure the safe custody thereof. Pledgee shall have the right but not the
obligation to (a) demand, sue for, receive and collect all money or money
damages payable on account of any Collateral, (b) protect, preserve or assert
any other rights of Pledgor or take any other action with respect to the
Collateral, and (c) pay any taxes, liens, assessments, insurance premiums or
other charges pertaining to the Collateral. Any expenses incurred by Pledgee
under the preceding sentence shall be paid by Pledgor upon demand, become part
of the Obligations secured by the Collateral and bear interest at the rate
provided in the Note until paid. Pledgee shall be relieved of all responsibility
for the Collateral upon surrendering it to Pledgor.
4. Pledgor's Warranties and Indemnity. Pledgor represents, warrants and
covenants (a) that it is and will be the lawful owner of the Collateral, (b)
that the Collateral is and will remain free and clear of all liens, encumbrances
and security interests other than the security interest granted by Pledgor
hereunder, and (c) that Pledgor has the sole right and lawful authority to
pledge the Collateral and otherwise to comply with the provisions hereof. In the
event that any adverse claim is asserted in respect of the Collateral or any
portion thereof, except such as may result from an act of Pledgee not authorized
hereunder, Pledgor promises and agrees to indemnify Pledgee and hold Pledgee
harmless from and against any losses, liabilities, damages, expenses, costs and
reasonable counsel fees incurred by Pledgee in exercising any right, power or
remedy of Pledgee hereunder or defending, protecting or enforcing the security
interests created hereunder. Any such loss, liability or expense so incurred
shall be paid by Pledgor upon demand, become part of the Obligations secured by
the Collateral and bear interest at the rate provided in the Note until paid.
<PAGE>
5. Covenants of Pledgor. The Pledgor shall not sell, assign or otherwise
transfer any of his right, title or interest in or to any of the Collateral
without the prior written consent of the Company, except for (a) the pledge of
the Collateral to the Company pursuant hereto, (b) transfers of the Collateral
to the Company pursuant to the Stock Repurchase Agreement, dated as of the date
hereof (the "Stock Repurchase Agreement"), between the Pledgor and the Pledgee,
and (c) transfers of the Collateral pursuant to Section 5 of the Stock
Repurchase Agreement, provided that (i) any transfer of Collateral pursuant to
clause (c) above shall be subject to the Company's continuing security interest
and lien on such Collateral hereunder and (ii) any transferee of Collateral
transferred pursuant to clause (c) above shall have executed and delivered to
the Company a written acknowledgement in form and substance reasonably
satisfactory to the Company to the effect that the transfer of such Collateral
is subject to the Company's continuing security interest in and lien on such
Collateral hereunder.
6. Voting of Collateral. While Pledgor is not in default hereunder,
Pledgee shall have none of the rights conferred upon stockholders of the Common
Stock of the Pledgor, except as otherwise provided herein.
7. Dividends and Other Distributions. While Pledgor is not in default
hereunder, Pledgor may receive cash dividends and other distributions payable
with respect to the Collateral. Pledgor shall cause all non-cash dividends and
distributions with respect to the Collateral to be distributed directly to
Pledgee, to be held by Pledgee as additional Collateral, and if any such
distribution is made to Pledgor he shall receive such distribution in trust for
Pledgee and shall immediately transfer it to Pledgee.
8. Pledgor's Default. Pledgor shall be in default hereunder upon the
occurrence of any of the following events (each, an "Event of Default"):
(a) If Pledgor fails to pay or perform any of the Obligations when
such payment or performance is due;
(b) If any lien, encumbrance or adverse claim of any nature
whatsoever is asserted with respect to any Collateral or if Pledgor attempts to
transfer the Collateral in contravention of the terms hereof; provided, however,
that the occurrence of an event described in this Section 7(b) shall not
constitute an Event of Default if it relates to the Maker's sale of the
Collateral on margin for the purpose of satisfying outstanding Obligations;
(c) If Pledgor fails to fulfill in any material respect any
obligation or covenant hereunder;
(d) If the liquidation, termination of existence, dissolution,
insolvency or business failure of the Pledgor occurs, or if a receiver or
custodian for the Pledgor or any part of its property is appointed if such
appointment is not terminated or dismissed within thirty (30) days;
-2-
<PAGE>
(e) If any proceedings under the United States Bankruptcy Code or
any other federal or state bankruptcy, reorganization, receivership, insolvency
or other similar law affecting the rights of creditors generally, which
proceeding is not dismissed within thirty (30) days of filing, are instituted
against the Pledgor; or
(f) If any proceedings under the United States Bankruptcy Code or
any other federal or state bankruptcy, reorganization, receivership, insolvency
or other similar law affecting the rights of creditors generally are instituted
by the Pledgor or if the Pledgor makes a composition or an assignment or trust
mortgage for the benefit of creditors.
9. Pledgee's Rights upon Default. Upon the occurrence and during the
continuance of an Event of Default, the Pledgee shall thereafter have the
following rights and remedies (to the extent permitted by applicable law) in
addition to the rights and remedies of a secured party under the Uniform
Commercial Code of Massachusetts, all such rights and remedies being cumulative,
not exclusive, and enforceable alternatively, successively or concurrently:
(i) If the Pledgee so elects and gives written notice of such
election to the Pledgor, the Pledgee may vote any or all of the Collateral
possessing voting rights (whether or not the same shall have been transferred
into its name or the name of its nominee or nominees) and give all consents,
waivers and ratifications in respect of the Collateral and otherwise act with
respect thereto as though it were the outright owner thereof, the Pledgor hereby
irrevocably constituting and appointing the Pledgee the proxy and
attorney-in-fact of the Pledgor, with full power of substitution, to do so;
(ii) The Pledgee may demand, sue for, collect or make any compromise
or settlement in respect of any Collateral held by it hereunder that it deems
suitable;
(iii) After ten (10) days' written notice to the Pledgor, the
Pledgee may sell, resell, assign and deliver, or otherwise dispose of any or all
of the Collateral, for cash and/or credit and upon such terms at such place or
places and at such time or times and to such persons, firms, companies or
corporations as the Pledgee shall approve, all without demand for performance by
the Pledgor or advertisement or any further notice whatsoever except such as may
be required by law; and
(iv) The Pledgee may at any time, at its option, cause all or any
part of the Collateral held by it to be transferred into its name or the name of
its nominee or nominees, receive any income thereon and hold such income as
additional collateral or apply it to the obligations hereunder.
Notwithstanding anything herein to the contrary, if an Event of
Default shall occur, then the Pledgee may declare all of the unpaid principal
and interest under the Note to be immediately due and payable, all in accordance
with the terms of the Note.
-3-
<PAGE>
10. Application of Collateral. In the event of a sale of the Collateral,
the proceeds of the sale shall first be applied to the payment of the expenses
of the sale, including broker's commissions, counsel fees, any taxes or other
charges imposed by law upon the Collateral or the transfer thereof and all other
charges paid or incurred by Pledgee pertaining to the sale; and, second, to
satisfy outstanding Obligations, in the order in which Pledgee elects in its
sole discretion; and, third, the surplus (if any) shall be paid to Pledgor. In
the event the Pledgee takes title to the Collateral in accordance with the terms
hereof, the Pledgee shall issue the Pledgor a certificate representing shares of
Common Stock equal in value to the excess of (a) the fair market value of the
Collateral (as determined by the Board of Directors of the Pledgee) over (b) the
amount of outstanding Obligations as of the date Pledgee takes title.
11. Termination. This Agreement shall terminate in its entirety upon full
payment of the Obligations to Pledgee, and Pledgee shall return any remaining
Collateral to Pledgor within three (3) business days after such termination.
12. Notices. All notices made or required to be made hereunder shall be
sent by United States certified or registered mail, with postage prepaid, or
delivered by telecopy or by hand to Pledgee or to Pledgor at the addresses first
above written. Notice by mail shall be deemed to have been made on the date when
the Notice is deposited in the mail.
13. Heirs. Successors. Etc. This Pledge Agreement and all of its terms and
provisions shall benefit and bind the heirs, successors, assigns, transferees,
executors and administrators of each of the parties hereto.
14. Pledgee's Forbearance. Any forbearance, failure to delay by Pledgee in
exercising any right, power or remedy hereunder shall not be deemed a waiver of
such right, power or remedy.
EXECUTED under seal as of the date first above written.
PLEDGOR: PLEDGEE:
SONUS NETWORKS, INC.
/s/ Stephen Nill By:
- --------------------- ------------------------
Stephen Nill Title:
-4-
<PAGE>
EXHIBIT 21.1
SUBSIDIARY OF THE REGISTRANT
Sonus Networks, Inc. has a wholly owned subsidiary, Sonus Networks Limited,
a United Kingdom corporation.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated March 10, 2000 (and to all references to our Firm) included in or
made a part of this Registration Statement.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
May 5, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SONUS
NETWORKS, INC. ("SONUS") CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
INCLUDED IN SONUS' REGISTRATION STATEMENT ON FORM S-1 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH REGISTRATION STATEMENT ON FORM S-1.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-2000
<PERIOD-START> JAN-01-1999 JAN-01-2000
<PERIOD-END> DEC-31-1999 MAR-31-2000
<CASH> 8,885 25,668
<SECURITIES> 14,681 16,111
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 2,210 3,680
<CURRENT-ASSETS> 26,074 46,026
<PP&E> 6,075 7,834
<DEPRECIATION> (1,806) (2,505)
<TOTAL-ASSETS> 30,782 52,361
<CURRENT-LIABILITIES> 6,470 10,904
<BONDS> 3,402 3,293
46,109 70,859
0 0
<COMMON> 22 23
<OTHER-SE> (25,221) (32,718)
<TOTAL-LIABILITY-AND-EQUITY> 30,782 52,361
<SALES> 0 1,093
<TOTAL-REVENUES> 0 1,093
<CGS> 0 1,462
<TOTAL-COSTS> 24,374 15,894
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 224 116
<INCOME-PRETAX> (23,887) (16,035)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (23,887) 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (26,387) (16,035)
<EPS-BASIC> (5.53) (2.07)
<EPS-DILUTED> (5.53) (2.07)
</TABLE>
