<PAGE>
As filed with the Securities and Exchange Commission on April 26, 2000
Registration No. 333-32104
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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AMENDMENT NO. 1
To
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
ONI SYSTEMS CORP.
(Exact name of Registrant as specified in its charter)
---------------
Delaware 3661 77046-9657
(State or other (Primary standard industrial (I.R.S. employer
jurisdiction of classification code number) identification no.)
incorporation or
organization) ---------------
ONI Systems Corp.
166 Baypointe Parkway
San Jose, California 95134-1621
(408) 965-2600
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
HUGH C. MARTIN
President, Chief Executive Officer and Chairman
ONI Systems Corp.
166 Baypointe Parkway
San Jose, California 95134-1621
(408) 965-2600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
HORACE L. NASH, ESQ. JOHN L. SAVVA, ESQ.
RICHARD L. DICKSON, ESQ. ALBERT Y. LIU, ESQ.
DAVID A. BELL, ESQ. HARRY H. DEMAS, ESQ.
STEVEN S. LEVINE, ESQ. Sullivan & Cromwell
Fenwick & West LLP 1888 Century Park East
Two Palo Alto Square Suite 2100
Palo Alto, California 94306 Los Angeles, California 90067-1725
(650) 494-0600 (310) 712-6600
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum
Title of Each Class of Amount Proposed Maximum Aggregate Amount of
Securities to be to be Offering Price Offering Registration
Registered Registered Per Share Price(1) Fee(2)
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<S> <C> <C> <C> <C>
Common Stock, $0.0001
par value.............. 9,200,000 $16.00 $147,200,000 $38,861
</TABLE>
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(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act of 1933.
(2) Of which $30,360 was paid with the initial filing on March 10, 2000.
Therefore, a fee of $8,501 accompanies this filing.
---------------
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.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion. Dated April 26, 2000.
[LOGO OF ONI SYSTEMS]
8,000,000 Shares
ONI Systems Corp.
Common Stock
-----------
This is an initial public offering of shares of common stock of ONI Systems
Corp. All of the 8,000,000 shares of common stock are being sold by ONI
Systems.
Prior to this offering, there has been no public market for our common stock.
ONI Systems estimates that the initial public offering price per share will be
between $14.00 and $16.00. We have applied for approval for quotation of our
common stock on the Nasdaq National Market under the symbol "ONIS".
See "Risk Factors" beginning on page 7 to read about factors you should
consider before buying shares of our 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 ONI Systems........................... $ $
</TABLE>
To the extent that the underwriters sell more than 8,000,000 shares, the
underwriters have the option to purchase up to an additional 1,200,000 shares
from ONI Systems at the initial public offering price, less the underwriting
discount.
-----------
The underwriters expect to deliver the shares in New York, New York on ,
2000.
Goldman, Sachs & Co.
Banc of America Securities LLC
Chase H&Q
Robertson Stephens
-----------
Prospectus dated , 2000.
<PAGE>
[INSIDE FRONT COVER ARTWORK]
At the top of the diagram the ONI Systems logo and the words "All-optical
networking equipment for metropolitan and regional service providers" appear.
Upper Half--An oval placed in the center of the diagram with figures inside
the oval.
Interior of the Oval--The oval is divided into three portions:
The right-hand portion of the oval is a schematic symbol used to represent
an optical cross- connect linking the metro network to the long haul network.
The words "To Long-haul Networks" appear below the schematic.
The center portion of the oval contains a multi-color ellipse or "ring"
with four ONLINE9000 boxes or "nodes" at approximately 12 o'clock, 3 o'clock,
6 o'clock and 9 o'clock on the ring The left-most node of the ring is shared
as the right-most node of the ring contained in the left portion of the oval.
The ring represents a ring-based fiber optic network. The words "Metro Core
Optical Fiber Ring" appear inside the ring. The ring is connected by two lines
(representing fiber links) to the optical cross-connect schematic in the
right-hand portion of the oval.
The left portion of the oval contains a multi-color ellipse or "ring" with
three ONLINE7000 boxes or "nodes" at approximately 12 o'clock, 6 o'clock and 9
o'clock on the ring, and a ONLINE7000 node at approximately 3 o'clock. The
right-most node of the ring is shared as the left-most node of the ring
contained in the center portion of the oval. The upper-most node of the ring
is connected to a diagram of a building representing the enterprises connected
to the communications network. The building is connected to a diagram of two
computer screens and one telephone representing the end users. The words
"Metro Access Optical Fiber Ring" appear inside the ring. The words "Typical
Metro Communications Network Using ONI Systems Equipment" appear below the
oval.
Lower Right Quadrant--A globe showing the North American continent and
portions of South America, Africa, Europe and Asia with a network of white
lines superimposed. The ovals in the upper half and lower half of the diagram
are each connected to one of the dots in the map-network (approximately in the
vicinity of San Francisco and New York, respectively) with trace lines
indicating that the ovals represent a representative node on the network.
Lower Half--A second smaller oval offset to the left of the diagram with
figures inside the oval.
Interior of the Oval--The oval is divided into the same three portions as
the oval contained in the upper half of the diagram, except that the three
portions of the oval are in reverse order of the three portions in the oval in
the upper half of the diagram and there are no interior labels.
At the bottom of the page is a legend showing the symbols that represent
the ONLINE9000, ONLINE7000, Enterprises, End Users, Long-haul Networks and
Optical Fiber Link.
<PAGE>
PROSPECTUS SUMMARY
You should read this summary together with the entire prospectus, including
the more detailed information in our financial statements and accompanying
notes appearing elsewhere in this prospectus. Unless otherwise indicated, all
information contained in this prospectus assumes no exercise of the
underwriters' option to purchase additional shares in this offering and gives
effect to the automatic conversion of each outstanding share of preferred stock
into one share of common stock upon the closing of this offering. The share and
per share numbers presented in this prospectus have been retroactively restated
to give effect to all stock splits. Information in this prospectus gives effect
to our reincorporation in Delaware.
ONI Systems Corp.
We develop, market and sell communications networking equipment, based
entirely on all-optical technology, for metropolitan area and regional
networks. Our equipment uses pulses of light rather than electric current in
the transmission and switching of telephone, Internet and other data
communications in these networks. Our customers are communication service
providers. Our products enable them to relieve traffic bottlenecks in their
metropolitan and regional networks and to deliver new data communication
services sought by their subscribers. Our products help our customers to
rapidly build high-capacity metro networks that are flexible, easy to expand
and capable of supporting multiple services for end-users.
Internet usage has increased in terms of both the number of users and the
quantity of information transmitted. In response, communication service
providers have deployed optical technology to increase the transmission
capacity in long-distance networks and in the local area networks used by
enterprises. However, similar improvements have not been made to the metro
networks that bridge the gap between enterprise networks and long-distance
networks. To date, optical products available to metro network service
providers have been based on technologies which were originally designed to
serve long distance or enterprise networks, and are costly, difficult to expand
and difficult to manage in the metro environment.
We believe that our product offerings represent the first commercially
available, all-optical solution specifically designed for metro networks. Our
first product, the ONLINE9000(TM), has been generally available since January
2000. We expect our next product, the ONLINE7000(TM), to be available by June
2000. These products incorporate our OPTX(TM) network operating system and our
OLMP(TM) inter-network communications protocols to manage and support a diverse
mix of service offerings by our customers.
The benefits of our solution include:
. Multi-service capability. Our products allow service providers to
introduce and support a changing mix of services without deploying
dedicated equipment for each service type. Our products are also
compatible with existing services based on the Synchronous Optical
Network standard, commonly referred to as SONET.
. Manageability and flexibility. Our products enable real time end-to-end
management, surveillance, service activation, network inventory
management and billing within our OPTX network operating system.
. Cost effectiveness and scalability. Our products eliminate costly
optical-to-electrical conversions, and the scalability of our products
allows service providers to build metro networks in a pay-as-you-grow
fashion.
3
<PAGE>
. Rapid and efficient service restoration. Our products provide for rapid
restoration of mission critical services without the need to dedicate
network capacity for this capability.
The following are key elements of our strategy:
. leverage our all-optical architecture to achieve early design wins in
metro networks;
. work closely with service providers to identify and enable new revenue-
generating services for their end-users;
. extend our technology leadership through continued investment in research
and development;
. leverage our optical manufacturing expertise and relationships to reduce
costs and increase flexibility to meet demand;
. expand our direct sales and service and support capabilities worldwide;
and
. establish strategic alliances and pursue acquisitions to broaden our
product, service and technology portfolios.
Since commencing operations in December 1997, our expenses have
significantly exceeded our revenue as we have developed our products and
strategy. Through March 31, 2000, we incurred cumulative losses of $86.5
million. We expect to have large fixed expenses and to incur increasing sales,
research, manufacturing and administrative expenses, and we expect to operate
at a loss for a period of time. We expect to continue to need to raise capital
to fund losses and expansion. Our first product has been generally available
only since January 2000, so the likelihood of success of this and future
products is impossible to predict.
Corporate Information
We were incorporated in California on October 20, 1997 as Optical Networks,
Incorporated. In connection with this offering, we intend to reincorporate in
Delaware and change our name to ONI Systems Corp. Our principal executive
offices are located at 166 Baypointe Parkway, San Jose, California 95134-1621.
Our telephone number is (408) 965-2600.
Recent Developments
In March 2000, we entered into an agreement with Internet Initiative Japan
Inc. to sell to it $4.0 million of common stock at the initial public offering
price in a private placement that will close concurrent with this offering.
Internet Initiative Japan will be granted the right to include these shares in
future registered offerings filed by us. In April 2000, we also entered into a
trial system purchase agreement with Internet Initiative Japan for our
ONLINE9000 product.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered............. 8,000,000 shares
Common stock to be outstanding
after this offering............. 122,405,442 shares
Use of proceeds.................. For general corporate purposes, including
working capital, capital expenditures and
potential acquisitions of, or investments in,
complementary technologies or businesses. See
"Use of Proceeds".
Proposed Nasdaq National Market
symbol.......................... "ONIS"
</TABLE>
At the request of ONI Systems, the underwriters are reserving up to 960,000
shares of common stock at the initial public offering price for sale to
individuals and entities designated by ONI Systems.
The number of shares of our common stock to be outstanding immediately after
this offering is based on the number of shares outstanding as of March 31,
2000. The number of shares outstanding after this offering includes 266,667
shares of common stock issuable to Internet Initiative Japan upon the closing
of a private placement concurrent with this offering at an assumed private
placement price of $15.00 per share. The number of shares to be outstanding
excludes, as of March 31, 2000:
. 19,343,345 shares of common stock subject to options outstanding under
our stock incentive plans, at a weighted average exercise price of $0.64
per share, and 1,377,819 shares of common stock available for future
grant under these plans; and
. 1,434,394 shares of common stock subject to outstanding warrants, at a
weighted average exercise price of $2.72 per share.
In addition, from April 1, 2000 through April 21, 2000, we granted or agreed
to grant options to purchase up to 1,882,050 shares of common stock, at a
weighted average exercise price of $10.00 per share. In April 2000, we adopted
our 2000 Equity Incentive Plan, under which 7,000,000 shares of common stock
will be available for future grant, and our 2000 Employee Stock Purchase Plan,
under which 1,000,000 shares of common stock will be available for future
grant.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Period From
October 20, 1997 Year Ended December Three Months Ended
(Inception) to 31, March 31,
December 31, ---------------------- -----------------------
1997 1998 1999 1999 2000
---------------- ---------- ---------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of operations
data:
Revenue................. $ -- $1,733 $ 3,034 $ 565 $ 3,633
Gross profit............ -- 525 2,002 140 783
Operating expenses...... 198 9,559 49,195 5,082 32,432
Operating loss.......... (198) (9,034) (47,193) (4,942) (31,649)
Net loss................ (199) (8,852) (46,572) (4,777) (30,847)
Basic and diluted net
loss per share......... (0.77) (0.74) (2.58) (0.35) (1.27)
Weighted average shares
outstanding used in
computing basic and
diluted net loss per
share.................. 257,017 11,918,628 18,043,188 13,541,715 24,218,985
Pro forma basic and
diluted net loss per
share.................. (0.60) (0.30)
Shares used in computing
pro forma basic and
diluted loss per share. 78,025,225 103,153,985
</TABLE>
Pro forma basic and diluted net loss per share has been calculated assuming
the conversion of all outstanding preferred stock into common stock, as if all
shares had converted at the beginning of the year or, if later, the date of
their issuance.
<TABLE>
<CAPTION>
As of March 31, 2000
---------------------------
Pro Pro Forma
Actual Forma As Adjusted
------- ------- -----------
<S> <C> <C> <C>
Balance sheet data:
Cash and cash equivalents........................... $50,307 $50,307 164,407
Working capital..................................... 59,101 59,101 173,201
Total assets........................................ 95,869 95,869 209,969
Capital lease obligations, less current portion..... 295 295 295
Total stockholders' equity.......................... 78,699 78,699 192,799
</TABLE>
The pro forma as adjusted balance sheet data as of March 31, 2000 gives
effect to the sale of 8,000,000 shares of common stock in this offering at an
assumed initial public offering price of $15.00 per share, after deducting an
assumed underwriting discount and estimated offering expenses, and the expected
sale of 266,667 shares of common stock to Internet Initiative Japan in a
private placement concurrent with the closing of this offering at an assumed
private placement price of $15.00 per share.
See note 1 of notes to our consolidated financial statements for a
description of the method that we used to compute our basic and diluted net
loss per share. See "Capitalization".
6
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should
carefully consider the risks and uncertainties described below and the other
information in this prospectus before deciding whether to invest in shares of
our common stock.
We have a history of losses, expect to continue to incur additional losses, and
may never achieve profitability.
Through March 31, 2000 we incurred cumulative losses of $86.5 million, and
we expect to continue to incur losses in the future. If we do not become
profitable, the value of our stock will decrease. We have large fixed expenses,
and we plan to incur significant and increasing sales and marketing, research
and development, manufacturing, and general and administrative expenses. In
February 2000, we began to ship our first product, the ONLINE9000, and our
revenue to date has been limited. In order for us to become profitable, we will
need to generate and sustain higher revenue while maintaining reasonable cost
and expense levels.
Our limited operating history makes forecasting our future revenue and
operating results difficult, which may impair our ability to manage our
business and your ability to assess our prospects.
We commenced business as an independent company in December 1997 and
introduced our ONLINE9000 product in January 2000. Consequently, we have a
limited history upon which we can rely in planning and making the critical
decisions that will affect our future operating results. Similarly, because of
the relatively immature state of our business, it will be difficult for
investors to evaluate our prospects. We will need to make decisions in the
immediate future regarding resource allocations for research and development
and marketing and sales. If our predictions about the best use of our resources
turn out to be inaccurate, we may not make the best use of our resources and we
may forego better opportunities. Our limited history makes it difficult for
investors to gauge our capability in making these decisions.
We expect our operating expenses to increase significantly as we increase
spending in order to fund more research and development, expand our sales and
marketing operations, broaden our customer support capabilities and develop new
distribution channels. We also plan to expand our general and administrative
functions to address the increased reporting and other administrative demands
that will result from being a public company and the expected growth of our
business. Our operating expenses are largely based on anticipated revenue
trends and a high percentage of our expenses are, and will continue to be,
fixed in the short term. As a result, a delay in generating or recognizing
revenue could cause significant variations in our operating results from
quarter to quarter and annually and could result in substantial operating
losses.
The ONLINE9000 is our only currently available product and, if it is not
commercially successful, our revenue will not grow and we may not achieve
profitability.
If our potential customers do not adopt, purchase and successfully deploy
our ONLINE9000 product in large numbers, our revenue may not grow and our
business, financial condition and results of operations will be seriously
harmed. Since the market for our products is relatively new, future demand for
our products is uncertain and will depend on the speed of adoption of optical
networking, in general, and optical equipment in metro networks, in particular.
No communications service provider has fully deployed the ONLINE9000 in large
network environments, and they may
7
<PAGE>
choose not to do so. Even if service providers do deploy our product fully, it
may not operate as expected, which could delay or prevent its adoption.
If we fail to enhance existing products or to develop and achieve market
acceptance for new products that meet customer requirements, our sales will
suffer.
The communications network equipment market is characterized by rapid
technological change, frequent new product introductions, changes in customer
requirements and evolving industry standards. The introduction of new
technologies could render our existing or future products obsolete. We may not
be able to develop new products or product enhancements in a timely manner, or
at all. Even if we are able to develop and commercially introduce new products
and product enhancements, they may not achieve widespread market acceptance.
Any failure of our future products to achieve market acceptance could harm our
business and financial results.
For example, we are developing a new product, the ONLINE7000, for metro
access applications. We have devoted and expect to continue to devote
significant engineering and financial resources to the development and
marketing of the ONLINE7000. Unexpected technical challenges could prevent us
from successfully developing the ONLINE7000 in a timely manner or at all. In
addition, the ONLINE7000 could be more costly to develop and test than we
anticipate. Even if we are able to develop and introduce the ONLINE7000, it may
not achieve market acceptance if it does not include features or performance
desired by customers or if competitors develop products perceived as more
attractive by customers.
We expect that substantially all of our revenue will be generated from a small
number of customers, and our revenue will not grow if we do not sell products
to them in large numbers and if we do not add customers.
We expect that substantially all of our revenue will depend on sales of our
products to a small number of customers and that our revenue will only grow if
these customers purchase substantial quantities of our products. We currently
have purchase agreements covering seven companies, four of which directly or
indirectly hold our equity securities. None of these companies is contractually
committed to purchase any minimum quantities of our products. If these
companies or future customers do not purchase large quantities of our products
for any reason, our ability to succeed would be harmed. The decision to
purchase substantial quantities of our products will depend, in part, on our
customers' and potential customers' desire and ability to introduce or expand
commercial services. We cannot be sure that any customer will introduce or
expand commercial services utilizing our products on a timely basis, if at all.
Any delay in introducing, or failure to introduce, these services would
seriously harm our revenue, results of operations and financial condition.
In addition, if we fail to attract new customers, our growth will be
limited. The growth of our customer base could be limited by:
. unwillingness of potential customers to adopt our optical networking
architecture;
. delays or difficulties in completing the development and introduction of
our planned products or product enhancements;
. failure of our products to perform as expected;
. difficulties in meeting customers' delivery requirements;
. introductions of new products by our competitors; and
. other competitive factors such as aggressive pricing or financing by our
competitors.
8
<PAGE>
We face intense competition that could prevent us from growing and could
prevent us from becoming profitable.
The market for communications equipment is rapidly evolving and is marked by
intense competition and technical innovations. We expect the pace of change to
accelerate in the future. We also expect many new competitors to emerge as the
market for optical networking equipment expands and evolves in response to
technical innovations and increasing demand for new broadband and wavelength-
based services. We currently compete with both public and private companies
providing solutions for network and bandwidth management in the metropolitan
market. Many of these companies have existing relationships with communication
service providers, making it more difficult for us to sell our products to
these potential customers.
Some of our current and potential competitors are large public companies
that have longer operating histories, significantly greater financial,
technical and marketing resources, wider customer relationships and a broader
product line than we do. Consequently, these competitors are able to devote
greater resources to the development, promotion, sale and support of their
products. These large public companies are better positioned than we are to
acquire companies and new technologies that may displace our products or make
them obsolete. Any of these acquisitions could give the acquiring competitor a
strategic advantage. Unlike these large public companies, we have limited
ability to provide vendor-sponsored financing, which may influence the
purchasing decisions of prospective customers. In addition, a number of start-
up companies are attracting large amounts of capital and rapidly developing
competing technologies in an attempt to market products to communication
service providers. These private companies can offer investment opportunities
to induce potential customers to purchase their products.
We expect the average selling prices of our products to decline, which may
reduce gross margins and revenue.
Our industry has experienced rapid erosion of average product selling
prices. We anticipate that the average selling prices of our products will
decline in response to competitive pressures, increased sales discounts, new
product introductions by our competitors or other factors. If we are unable to
achieve sufficient cost reductions and increases in sales volumes, this decline
in average selling prices will reduce our gross margins and revenue.
We face risks associated with our international operations that could limit our
sales and add to our cost of operations.
We market and sell our products in the United States and internationally. We
intend to expand our international operations substantially and to enter new
international markets. This expansion will require significant management
attention and financial resources. We may not be able to maintain or increase
international market demand for our products.
We have limited experience in marketing and distributing our products
internationally. International operations are subject to inherent risks,
including:
. tariffs, export controls and other trade barriers;
. longer accounts receivable payment cycles and difficulties in collecting
accounts receivable;
. difficulties and costs of staffing and managing foreign operations;
. certification requirements with which we may be unfamiliar; and
. reduced protection for intellectual property rights in some countries.
9
<PAGE>
If we do not expand our direct sales operations, we may be unable to increase
market awareness and sales of our products.
If we are unable to expand our direct sales force, we may not be able to
increase market awareness and sales of our products, which may prevent us from
achieving and maintaining profitability. Our products and services require a
technical sales effort targeted at several key people within each of our
prospective customers' organizations. Our sales efforts require the attention
of sales personnel and specialized system engineers with extensive experience
in networking technologies. Competition for these individuals is intense, and
we may not be able to hire sufficient numbers of qualified sales personnel and
specialized system engineers.
If we do not expand our customer service and support organization, we may be
unable to increase our sales.
We currently have a small customer service and support organization and will
need to increase our staff to support new and existing customers. Our products
are complex and require highly-trained customer service and support personnel.
Hiring customer service and support personnel is difficult in our industry due
to the limited number of people available with the necessary technical skills.
If we are unable to expand our customer service and support organization, we
may not be able to increase sales.
We depend on sole or limited source suppliers for several key components of our
products, and if we are unable to buy these components on a timely basis, we
will not be able to deliver products to our customers.
If we are unable to buy components on a timely basis, we will not be able to
deliver our products to customers, which would harm our sales and revenue. We
currently purchase several key components, including optical filters, optical
amplifiers, optical switches and electronic microprocessors, from limited
sources. In addition, we rely on a sole supplier of variable optical
attenuators. These and other optical components are complex, and we may not be
able to develop multiple or alternate sources of supply in a timely manner,
which could hurt our ability to deliver our products to customers.
We rely on contract manufacturers to produce our products, and our business
would be harmed if they were to stop meeting our manufacturing requirements.
We rely on contract manufacturers to complete most of the manufacturing of
optical assemblies for our products. If for any reason these manufacturers were
to stop satisfying our needs without providing us with sufficient warning to
procure an alternate source, our ability to sell our products would be harmed.
Except for E-TEK Dynamics, Inc., we have no long term contracts with our
manufacturers. As a result, our contract manufacturers are not obligated to
supply products to us for any specific period, in any specific quantity or at
any certain price, except as may be provided in a particular purchase order.
The process of qualifying a new contract manufacturer for complex products
such as our optical assemblies is lengthy and would consume a substantial
amount of the time of our technical personnel and management. If we sought to
change manufacturers in a short period of time, our business would be
disrupted. In addition, we may be unsuccessful in identifying a new
manufacturer capable of and willing to meet our needs on terms that we would
find acceptable.
If we fail to predict our manufacturing and component requirements accurately,
we could incur additional costs or experience manufacturing delays.
We provide forecasts of our demand to our contract manufacturers and
component vendors up to six months prior to scheduled delivery of products to
our customers. If we overestimate our
10
<PAGE>
requirements, we may have excess inventory, which could increase our costs and
harm our relationships with our contract manufacturers and component vendors
due to reduced future orders. If we underestimate our requirements, we may have
an inadequate inventory of components and optical assemblies. Inadequate
inventory could interrupt manufacturing of our products and result in delays in
shipments. In addition, lead times for materials and components that we order
are long and depend on factors such as the procedures of, or contract terms
with, a specific supplier and demand for each component at a given time. In the
case of some optical components in short supply, component suppliers have
imposed strict allocations that limit the number of these components they will
supply to a given customer in a specified time period. These suppliers may
choose to increase allocations to larger, more established companies, which
could reduce our allocations and harm our ability to manufacture our products.
We expect that our revenue and operating results will vary significantly from
quarter to quarter, which may cause our stock price to decline.
Our quarterly revenue and operating results are difficult to predict and may
fluctuate significantly from quarter to quarter. It is likely that in some
future quarters, our operating results may be below the expectations of market
analysts and investors, which could cause the trading price of our common stock
to fall.
In addition, we expect to experience seasonality in the sales of our
products. Historically, the communications equipment market has higher sales in
the first and fourth quarters of the year, due in part to purchasers' budgetary
cycles. In addition, we expect that sales may decline during summer months,
particularly in European markets, which we expect to represent a significant
portion of the market for our products for the foreseeable future. These
seasonal variations in our sales may lead to fluctuations in our quarterly
operating results.
Due to the long sales cycle for our products, the timing of revenue is
difficult to predict and may cause our operating results to fluctuate
unexpectedly.
The sales and deployment cycle for our products is lengthy; it may extend
for six months or more. The length of our sales cycle may cause our revenue and
operating results to vary unexpectedly from quarter to quarter. A customer's
decision to purchase our products involves a significant commitment of its
resources and a lengthy evaluation and product qualification process.
Consequently, we may incur substantial expenses and devote senior management
attention to potential relationships that never materialize, in which event our
investments will largely be lost and we may miss other opportunities. In
addition, our lengthy sales cycle makes it difficult to predict the quarter in
which we may recognize revenue from any sale.
If we do not manage growth, improve existing processes and implement new
systems, procedures and controls, we may make inefficient use of resources,
including your investment, and we may not achieve profitability.
Our ability to sell our products and implement our business plan requires an
effective planning and management process. Our processes may not be able to
support our growth if our products become widely accepted. We continue to
increase the scope of our operations domestically and internationally and have
increased the number of our employees substantially. At December 31, 1998, we
had 63 employees, at December 31, 1999, we had 202 employees and at March 31,
2000, we had 326 employees. In addition, we plan to continue to hire a
significant number of employees this year. This growth has placed, and our
anticipated growth in future operations will continue to place, a significant
strain on our management systems and resources. We expect that we will need to
continue to improve our financial and managerial controls, reporting systems
and procedures, and will need to continue to expand, train and manage our work
force worldwide.
11
<PAGE>
If we are unable to hire additional qualified personnel as necessary, or if we
lose key personnel, we may be unable to manage or grow our business.
If we are unable to identify, attract or retain qualified personnel or to
retain the services of key personnel, especially engineers and sales personnel,
it would be difficult for us to manage our business, make timely product
introductions and increase sales. We intend to continue to hire many
engineering, sales, marketing and support personnel. Competition for these
employees, particularly optical engineers, is intense, especially in the San
Francisco Bay area. We may not be successful in attracting and retaining
qualified personnel.
Our future success depends upon the continued services of our executive
officers and other key engineering, sales, marketing and support personnel,
including Hugh C. Martin, our President, Chief Executive Officer and Chairman
of our board of directors. None of our officers or key employees is bound by an
employment agreement for any specific term, and we do not have "key person"
life insurance policies covering any of our employees.
If we or our employees become subject to unfair hiring claims, we could be
precluded from hiring needed personnel, incur substantial costs in defending
ourselves and incur damages.
Companies in our industry frequently claim that their competitors have
engaged in unfair hiring practices. As a result of these types of claims, we
may incur damages, lose potential employees or encounter disruptions in the
operation of our business. We have received claims of this kind in the past and
we may receive claims of this kind in the future. In October 1999, Nortel
Networks filed suit against us seeking, among other things, an injunction
against us and several of our employees that were formerly employed by Nortel
Networks, to prevent us from hiring additional Nortel Networks employees. In
addition, the former employer of one of our employees sought an injunction and
obtained a temporary restraining order against him, and the employee was
prevented from continuing to work for us. We could incur substantial costs,
including management time and attention, in defending ourselves and our
employees against these types of claims, regardless of their merits.
Our potential customers operate in an intensely competitive business and our
success will depend on the success of our customers, which we have limited
ability to foresee.
The companies in our target market of communication service providers face
an extremely competitive environment. If the companies with whom we establish
business relations are not successful in building their systems, promoting
their products, including new revenue-generating data services, receiving
requisite approvals and accomplishing the many other requirements for the
success of their businesses, our growth will be limited. Many factors in
addition to the effectiveness of our products influence the ultimate success of
our customers, and we have no control over these factors. In addition, we have
limited ability to foresee the competitive success of our customers and to plan
accordingly.
If our products do not interoperate with other equipment in our customers'
networks, product installations could be delayed, orders cancelled or products
returned, and our reputation could be harmed.
Our products are designed to interface with our customers' existing
networks, each of which has its own specifications and is based on various
industry standards. Many of our customers' networks contain multiple
generations of products that were added as their networks grew and evolved. Our
products must interoperate with other existing and future products within these
networks. When interoperability problems occur, it may be difficult to identify
their source. Whether or not these problems are due to our products, they may
cause us to incur significant warranty, support and repair costs, divert the
attention of our engineering personnel from our product development efforts and
suffer significant customer relations problems.
12
<PAGE>
Our products may have defects that we find only after full deployment in
complex networks, which could seriously harm our business.
The ONLINE9000 is a technically advanced and highly complex device that has
been deployed on only a limited basis. It is common for complex hardware and
software to have defects, some of which are significant, that are not
discovered in limited trials. The ONLINE9000 can only be fully tested when
deployed for an extended period of time as part of networks that include
equipment from other vendors. Consequently, our customers may discover defects
in our hardware or software after deployment, and we could experience:
. loss of or delay in revenue and loss of market share;
. loss of customers;
. damage to our reputation;
. diversion of development resources;
. increased service and warranty costs;
. legal actions by customers exposing us to product liability claims and
significant legal expenses; and
. increased insurance costs.
Our products may become obsolete if we do not quickly meet industry standards
that may emerge.
Our success depends in part on both the adoption of industry standards for
new technologies in our market and our products' compliance with industry
standards. To date, no industry standard for our products has been adopted. The
absence of an industry standard may prevent market acceptance of our products
if potential customers delay purchases of new equipment until standards are
adopted. In addition, if our products cannot support an industry standard,
potential customers may not choose our products. As a result, we may incur
significant losses due to lack of customer demand, excess inventory and
diversion of our engineers from product development efforts.
If we are unable to protect and enforce our intellectual property rights, we
may be unable to compete effectively.
We regard substantial elements of our products and services as proprietary
and attempt to protect them by relying on patent, trademark, service mark,
copyright and trade secret laws. We also rely on confidentiality procedures and
contractual provisions with our employees, consultants and corporate partners.
Any steps we take to protect our intellectual property may be inadequate, time
consuming and expensive. Furthermore, despite our efforts, we may be unable to
prevent third parties from infringing upon or misappropriating our intellectual
property, which could harm our business.
It is possible that no patents will be issued from our currently pending or
future patent applications. Moreover, any issued patents may not provide us
with any competitive advantages over, or may be challenged by, third parties.
Because legal standards relating to the validity, enforceability and scope
of protection of intellectual property rights of software are uncertain and
still evolving, the future viability or value of our intellectual property
rights is uncertain. Effective patent, trademark, copyright and trade secret
protection may not be available in some countries in which our products are
distributed. Furthermore, our competitors may independently develop similar
technologies that limit the value of our intellectual property or design around
patents issued to us. See "Business--Intellectual Property".
13
<PAGE>
Necessary licenses for third-party software may not be available to us or may
be very expensive.
In the future, we may be required to license from third parties software
that is used in our products or is required to develop new products or product
enhancements. While we have been able to license third-party software to date,
in the future third-party licenses may not be available to us on commercially
reasonable terms or at all. Third parties who hold exclusive rights to software
technology that we seek to license may include our competitors. If we are
unable to obtain any necessary third-party licenses, we would be required to
redesign our product or obtain substitute technology, which may perform less
well, be of lower quality or be more costly.
We are involved in an intellectual property dispute and in the future we may
become involved in similar disputes, which could subject us to significant
liability, divert the time and attention of our management and prevent us from
selling our products.
In March 2000, Nortel Networks filed suit against us in the United States
District Court for the Northern District of California. The suit alleges that
our products infringe five patents held by Nortel Networks, and sets forth
allegations of misappropriation of trade secrets, unlawful business practices
and common law unfair competition. We are in the preliminary stages of
investigating these allegations. Nortel Networks is seeking preliminary and
permanent injunctions and damages against us in connection with these claims.
If Nortel Networks is able to obtain an injunction preventing us from selling
our products, we would suffer a substantial reduction in our revenues and
losses over an extended period of time. We expect to incur substantial legal
and other expenses as well as diversion of management and technical time and
attention in connection with this litigation. The expenses and diversion of
resources associated with this litigation could seriously harm our business and
financial condition and could affect our ability to raise capital in the
future. In the event of an adverse ruling, we may be unable to sell our
products or be required to pay substantial damages to Nortel Networks, and if
this litigation is resolved by settlement, we might need to make substantial
payments to Nortel Networks. See "Business--Legal Proceedings".
In the future, we may be a party to litigation to protect our intellectual
property or as a result of other alleged infringements of intellectual
property. These claims and any resulting lawsuit, if successful, could subject
us to significant liability for damages and invalidate our proprietary rights.
These lawsuits, regardless of their success, would be time-consuming and
expensive to resolve and would divert management time and attention. Any
potential intellectual property litigation also could force us to do one or
more of the following:
. stop selling, incorporating or using our products that use the challenged
intellectual property;
. obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all; or
. redesign those products that use the challenged technology.
If we are forced to take any of these actions, our business may be harmed.
Although we carry general liability insurance, our insurance may not cover
potential claims of this type or may not be adequate to indemnify us for all
liability that may be imposed. For more information concerning our intellectual
property rights, see "Business--Intellectual Property".
We may not be able to obtain additional financing to satisfy our future capital
needs.
We intend to expand our sales and marketing activities, manufacturing
activities and inventory significantly ahead of actual or forecasted revenue.
We may need to raise additional capital in order to fund our rapid expansion.
We may also need additional capital in order to develop new or enhance
14
<PAGE>
existing services or products, to respond to competitive pressures or to
acquire complementary services, businesses or technologies. In addition, we may
need to raise funds in the future to meet our working capital needs. Additional
financing may not be available on terms favorable to us, or at all. Future debt
financing may limit our financial and operating flexibility. If we issue
additional equity securities, stockholders may experience additional dilution
or the new equity securities may have rights, preferences or privileges senior
to those of the then-existing holders of common stock.
Any acquisitions we make could disrupt our business and harm our financial
condition.
We intend to acquire or invest in complementary businesses, products and
technologies. We may not successfully integrate any businesses, products,
technologies or personnel that we might acquire in the future, and, as a
result, our operating results could suffer. These acquisitions or investments
could lead to:
. stock issuances that would reduce our current stockholders' percentage
ownership;
. debt that will give rise to interest charges and may impose material
restrictions on the manner in which we operate our business;
. responsibility for unanticipated liabilities;
. amortization expenses related to goodwill and other intangible assets;
. large and immediate write-offs;
. problems combining the purchased operations, technologies or products
with ours;
. unanticipated costs;
. diversion of management's attention from our core business;
. adverse effects on existing relationships with suppliers and customers;
. risks associated with entering markets in which we have limited prior
experience; or
. potential loss of key employees, particularly those of the acquired
organizations.
The continuing control of ONI Systems by insiders after this offering could
delay or prevent a change in corporate control, which could prevent you from
realizing a premium over the market price of our common stock, or insiders
could engage in transactions to the detriment of stockholder value.
As of March 31, 2000, our executive officers, directors and entities
affiliated with them beneficially owned approximately 38.0% of our outstanding
common stock. We anticipate that the executive officers, directors and entities
affiliated with them will, in the aggregate, beneficially own approximately
35.4% of our outstanding common stock following the completion of this
offering. These stockholders, if acting together, would be able to influence
all matters requiring approval by our stockholders, including the election of
directors and the approval of mergers or other business combination
transactions. This ability to exercise influence over all matters requiring
stockholder approval could prevent or significantly delay another company or
person from acquiring or merging with us. As a result, offers to acquire ONI
Systems which represent a premium over the available market price of our common
stock may be withdrawn or otherwise fail to be realized. See "Principal
Stockholders".
In addition, we have engaged in transactions with related parties, including
loans to executive officers. The ability to exercise influence over all matters
requiring stockholder approval could enable insiders to approve transactions
involving each other that might otherwise not be approved and which could
reduce the market price of our common stock. See "Related Party Transactions".
15
<PAGE>
We expect to experience volatility in our share price which could negatively
affect your investment.
The market price of our common stock may fluctuate significantly in response
to a number of factors, some of which are beyond our control, including:
. changes in financial estimates by securities analysts;
. changes in market valuations of communications and Internet
infrastructure-related companies;
. announcements, by us or our competitors, of new products or of
significant acquisitions, strategic partnerships or joint ventures; and
. volume fluctuations, which are particularly common among highly volatile
securities of Internet related companies.
Further, the stock markets, particularly the Nasdaq National Market on which
we have applied to have our common stock listed, have experienced substantial
price and volume fluctuations. These fluctuations have particularly affected
the market prices of equity securities of many technology, networking and
Internet-related companies and have often been unrelated or disproportionate to
the operating performance of those companies. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against that company. Litigation,
if instituted, could result in substantial costs and a diversion of
management's attention and resources.
There may be sales of a substantial amount of our common stock after this
offering that could cause our stock price to fall.
Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. Sales of a
substantial number of shares of our common stock after this offering could
cause our stock price to fall. In addition, the future sale of shares by
existing stockholders could impair our ability to raise capital through the
sale of additional stock. See "Shares Eligible for Future Sale".
Provisions of Delaware law, our certificate of incorporation and our bylaws
could delay or prevent a takeover of us, which could prevent you from realizing
a premium over the market price of our common stock.
Provisions of Delaware law, our certificate of incorporation and bylaws
could have the effect of delaying or preventing a third party from acquiring
us, even if a change in control would be beneficial to our stockholders. These
provisions include:
. authorizing the issuance of preferred stock without stockholder approval;
. providing for a classified board of directors with staggered, three year
terms;
. prohibiting cumulative voting in the election of directors;
. prohibiting stockholders from calling stockholders meetings; and
. prohibiting stockholder actions by written consent.
These provisions and other provisions of Delaware law could make it more
difficult for a third party to acquire us, even if doing so would benefit our
stockholders. As a result, offers to acquire ONI Systems which represent a
premium over the available market price of our common stock may be withdrawn or
otherwise fail to be realized. For a further discussion of these provisions,
see "Description of Capital Stock--Anti-Takeover Provisions".
16
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve substantial
risks and uncertainties. These forward-looking statements are not historical
facts, but rather are based on current expectations, estimates and projections
about our industry, our beliefs and our assumptions. Words such as
"anticipates", "expects", "intends", "plans", "believes", "seeks" and
"estimates", and variations of these words and similar expressions, are
intended to identify forward-looking statements. These statements are not
guarantees of future performance and are subject to risks, uncertainties and
other factors, some of which are beyond our control and difficult to predict
and could cause actual results to differ materially from those expressed or
forecasted in the forward-looking statements. These risks and uncertainties
include those described in "Risk Factors" and elsewhere in this prospectus.
These forward-looking statements reflect our view only as of the date of this
prospectus.
17
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 8,000,000 shares of
common stock that we are offering will be approximately $110.1 million, based
on an assumed initial public offering price of $15.00 per share, after
deducting an assumed underwriting discount and estimated offering expenses. If
the underwriters' option to purchase additional shares in this offering is
exercised in full, we estimate that our net proceeds will be approximately
$126.8 million. In addition, we expect to receive $4.0 million net proceeds
from the sale of a total of 266,667 shares of common stock in a private
placement to Internet Initiative Japan at an assumed private placement price of
$15.00 per share.
The principal purposes of this offering are to obtain additional capital, to
create a public market for our common stock, to enhance our ability to acquire
other businesses, products or technologies and to facilitate future access to
public equity markets. We intend to use the net proceeds for working capital,
capital expenditures and other general corporate purposes. We may also use a
portion of the net proceeds from this offering to acquire or invest in
businesses, technologies or products that are complementary to our business. We
currently have no commitments or agreements with respect to any acquisitions or
investments. We have not determined the amounts we plan to spend on any of the
uses described above or the timing of these expenditures. Pending our use of
the net proceeds, we intend to invest them in short-term, interest-bearing,
investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying any cash dividends in the foreseeable future.
18
<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 automatic conversion of all
outstanding shares of preferred stock into common stock upon the closing
of this offering; and
. on a pro forma as adjusted basis to reflect the sale by us of 8,000,000
shares of common stock in this offering at an assumed initial public
offering price of $15.00 per share, after deducting an assumed
underwriting discount and our estimated offering expenses and our
expected sale of 266,667 shares of common stock to Internet Initiative
Japan in a private placement concurrent with the closing of this offering
at an assumed private placement price of $15.00 per share.
<TABLE>
<CAPTION>
As of March 31, 2000
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, except share
and
per share data)
<S> <C> <C> <C>
Capital-lease obligations...................... $ 466 $ 466 $ 466
Stockholders' equity:
Preferred Stock, $0.0001 par value per share,
80,309,408 shares authorized, 79,194,900
shares issued and outstanding, actual;
10,000,000 shares authorized and no shares
issued and outstanding, pro forma or pro
forma as adjusted........................... 8 -- --
Common stock, $0.0001 par value per share,
159,690,592 shares authorized, 34,943,875
shares issued and outstanding, actual;
159,690,592 shares authorized, 114,138,775
shares issued and outstanding, pro forma;
700,000,000 shares authorized, 122,405,442
shares issued and outstanding, pro forma as
adjusted.................................... 4 12 13
Additional paid-in capital................... 246,195 246,195 360,294
Notes receivable from stockholders........... (8,430) (8,430) (8,430)
Services receivable from stockholder......... (49) (49) (49)
Deferred stock compensation.................. (72,560) (72,560) (72,560)
Accumulated deficit.......................... (86,469) (86,469) (86,469)
-------- -------- --------
Total stockholders' equity................. 78,699 78,699 192,799
-------- -------- --------
Total capitalization..................... $ 79,165 $ 79,165 $193,265
======== ======== ========
</TABLE>
The outstanding share information in the table above excludes:
. 19,343,345 shares of common stock subject to options outstanding under
our stock incentive plans, at a weighted average exercise price of $0.64
per share, and 1,377,819 shares of common stock available for future
grant under these plans; and
. 1,434,394 shares of common stock issuable upon the exercise of
outstanding warrants, at a weighted average exercise price of $2.72 per
share.
19
<PAGE>
From April 1, 2000 through April 21, 2000, we granted or agreed to grant
options to purchase 1,882,050 shares of common stock at a weighted average
exercise price of $10.00 per share. In April 2000, we adopted our 2000 Equity
Incentive Plan, under which 7,000,000 shares of common stock will be available
for future grant, and our 2000 Employee Stock Purchase Plan, under which
1,000,000 shares of common stock will be available for future grant.
You should read this table together with "Management--Director
Compensation", "Management--Employee Benefit Plans", "Description of Capital
Stock", "Related Party Transactions" and notes 7, 9, 12 and 13 of the notes to
our consolidated financial statements.
20
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the initial public offering price per share of
our common stock and the pro forma as adjusted net tangible book value per
share of our common stock after this offering. Net tangible book value is equal
to total assets less intangible assets and total liabilities.
Our pro forma net tangible book value as of March 31, 2000 was $74.6
million, or approximately $0.65 per share, assuming the conversion of all
outstanding shares of preferred stock into shares of common stock. Pro forma
net tangible book value per share is determined by dividing the pro forma
number of outstanding shares of common stock into our net tangible book value.
After giving effect to the receipt of the estimated net proceeds from this
offering based upon an assumed initial public offering price of $15.00 per
share and after deducting an assumed underwriting discount and estimated
offering expenses, and giving effect to the receipt of net proceeds of
approximately $4.0 million we expect to receive from the sale of common stock
in a private placement to Internet Initiative Japan at an assumed private
placement price of $15.00 per share, our pro forma net tangible book value as
of March 31, 2000 would have been approximately $188.7 million, or $1.54 per
share. This represents an immediate increase in pro forma net tangible book
value of $0.89 per share to existing stockholders and an immediate dilution in
net tangible book value of $13.46 per share to new investors purchasing shares
at the initial public offering price. The following table illustrates the per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $15.00
Pro forma net tangible book value per share as of March 31,
2000.......................................................... $0.65
Increase in pro forma net tangible book value per share
attributable to new investors................................. 0.89
-----
Pro forma as adjusted net tangible book value per share after
offering...................................................... 1.54
------
Dilution per share to new investors............................ $13.46
======
</TABLE>
The following table summarizes as of March 31, 2000, on the pro forma basis
described above, the number of shares of common stock purchased from us, the
total consideration paid to us and the average price per share paid to us by
existing stockholders and by investors purchasing shares of our common stock in
this offering, before deducting the underwriting discount and our estimated
offering expenses:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------- -------------------- Average Price
Number Percent Amount Percent Per Share
----------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 114,138,775 93.2% $134,884,904 52.1% $ 1.18
New investors........... 8,266,667 6.8 124,000,000 47.9 15.00
----------- ----- ------------ -----
Total................. 122,405,442 100.0% $258,884,904 100.0%
=========== ===== ============ =====
</TABLE>
As of March 31, 2000, there were options outstanding to purchase a total of
19,343,345 shares of our common stock at a weighted average exercise price of
$0.64 per share and warrants outstanding to purchase a total of 1,434,394
shares of our common stock at a weighted average exercise price of 2.72 per
share. From April 1, 2000 through April 21, 2000, we granted or agreed to grant
options to purchase up to 1,882,050 shares of common stock at a weighted
average exercise price of $10.00 per share. To the extent that any options or
warrants are exercised, there will be further dilution to new public investors.
See "Capitalization", "Management--Employee Benefit Plans", "Description of
Capital Stock", "Related Party Transactions" and notes 7, 9, 12 and 13 of the
notes to our consolidated financial statements.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except share and per share data)
The following selected consolidated financial data should be read in
conjunction with, and are qualified by reference to, our consolidated financial
statements and related notes to our financial statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations. The
consolidated statement of operations data set forth below for the period from
October 20, 1997 (inception) to December 31, 1997, and for the fiscal years
ended December 31, 1998 and 1999, and the consolidated balance sheet data as of
December 31, 1998 and 1999 have been derived from our consolidated financial
statements, which have been audited by KPMG LLP, independent auditors, and are
included elsewhere in this prospectus. The Consolidated Statement of Operations
data for the periods ended March 31, 1999 and 2000, and the balance sheet data
as of March 31, 2000, are unaudited but include all adjustments, consisting
only of normal recurring adjustments, which are considered necessary for a fair
presentation of the data. The historical results are not necessarily indicative
of results to be expected for any future period. For an explanation of the
determination of the shares used to compute net loss per share and pro forma
net loss per share, see note 1(r) of our notes to consolidated financial
statements.
<TABLE>
<CAPTION>
Year Ended Three Months Ended
Period From December 31, March 31,
October 20, 1997 ---------------------- ------------------------
Statements of Operations (Inception) to
Data December 31, 1997 1998 1999 1999 2000
- ------------------------ ----------------- ---------- ---------- ---------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue................. $ -- $ 1,733 $ 3,034 $ 565 $ 3,633
Cost of revenue........ -- 1,208 1,032 424 2,850
------- ---------- ---------- ---------- ------------
Gross profit............ -- 525 2,002 140 783
------- ---------- ---------- ---------- ------------
Operating expenses:
Research and
development,
excluding deferred
stock compensation
amortization amounts
...................... 39 4,009 25,400 2,850 12,037
Sales and marketing,
excluding deferred
stock compensation
amortization amounts.. 21 649 4,557 426 3,002
General and
administrative,
excluding deferred
stock compensation
amortization amounts
...................... 49 1,591 4,756 510 2,556
Amortization of
deferred stock
compensation.......... 89 3,310 11,422 1,296 11,281
Common stock warrant
expense .............. -- 2,891 -- 3,555
In-process research
and development....... -- -- 170 -- --
------- ---------- ---------- ---------- ------------
Total operating
expenses............ 198 9,559 49,195 5,082 32,432
------- ---------- ---------- ---------- ------------
Operating loss....... (198) (9,034) (47,193) (4,942) (31,649)
Interest income
(expense), net......... (1) 183 623 181 868
Other income (expense),
net.................... -- -- -- (14) (63)
------- ---------- ---------- ---------- ------------
Loss before income
taxes............... (199) (8,851) (46,570) (4,775) (30,844)
Income taxes............ -- 1 2 2 3
------- ---------- ---------- ---------- ------------
Net loss............. $ (199) $ (8,852) $ (46,572) $ (4,777) $ (30,847)
======= ========== ========== ========== ============
Basic and diluted net
loss per share......... $ (0.77) $ (0.74) $ (2.58) $ (0.35) $ (1.27)
Weighted-average shares
outstanding used in
computing basic and
diluted net loss per
share.................. 257,017 11,918,628 18,043,188 13,541,715 24,218,985
Pro forma basic and
diluted net loss per
share.................. $ (0.60) $ (0.30)
Shares used in computing
pro forma basic and
diluted net loss per
share ................. 78,025,225 103,153,985
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31, March 31,
Balance Sheet Data 1998 1999 2000
- ------------------ ------------ ------------ ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents......... $19,092 $ 80,023 $50,307
Working capital................... 19,627 81,758 59,101
Total assets...................... 21,312 100,942 95,869
Capital lease obligations, less
current portion.................. 79 367 295
Total stockholders' equity........ $20,565 $ 91,728 $78,699
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis together with the
"Selected Consolidated Financial Data" and our consolidated financial
statements and the related notes, which are included elsewhere in this
prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including those set forth under "Risk Factors" and elsewhere in this
prospectus.
Overview
We develop, market and sell all-optical networking equipment specifically
designed to address the bandwidth and service limitations of metropolitan and
regional networks. From our inception in October 1997 through November 1999,
our operating activities consisted primarily of research and development. We
also formed and expanded our administrative, marketing, sales, manufacturing
and customer service and support organizations and commenced sales and
marketing activities. In January 2000, we released our first product, the
ONLINE9000, which is a combined hardware and software product for optical
transmission and switching of voice, Internet and other data communication
services.
In October 1997, Optical Networks, Incorporated, our California predecessor,
was formed as a subsidiary of Optivision, Inc. In December 1997, we were spun
out of Optivision and Optivision distributed its holdings of our common stock
and half of its holdings of our preferred stock to Optivision shareholders.
Optivision also retained 4,000,000 shares of our Series A preferred stock. In
connection with the spin-out, we have reserved, and are obligated to issue,
233,468 shares of our common stock upon the exercise of warrants to purchase
capital stock of Optivision. We will not receive any proceeds from the exercise
of these warrants. In January 1998, all of the shares of our Series A preferred
stock were converted into Series B preferred stock on a one-to-one basis. In
January 1998, Optivision sold 2,666,667 shares of our preferred stock to our
initial venture investors. In March 1998, we repurchased all of our outstanding
stock owned by Optivision, consisting of 1,333,333 shares of our Series B
preferred stock, for an aggregate purchase price of $1.0 million. Optivision
does not currently own any shares of ONI Systems. See "Related Party
Transactions--Optivision Spin-out" and note 5 of notes to our consolidated
financial statements.
In June 1999, we acquired all of the outstanding common shares of Object-
Mart, Inc. in exchange for 4,569,276 shares of our common stock and
approximately $3.2 million in cash. Object- Mart was located in San Jose,
California, and provided software products and services to software equipment
manufacturers in the telecommunications industry. The combination was accounted
for using the purchase method and, accordingly, the results of operations of
Object-Mart have been included in our consolidated financial statements since
June 29, 1999. Upon consummation of this acquisition, we recorded goodwill of
$5.7 million that is to be amortized over a period of two years. As of March
31, 2000, the remaining unamortized goodwill is $3.5 million.
Since our inception, we have incurred significant losses, and as of March
31, 2000, we had an accumulated deficit of $86.5 million. We have not achieved
profitability on a quarterly or annual basis. We expect to incur significant
sales and marketing, research and development and general and administrative
expenses and, as a result, will need to generate significant revenue to achieve
and maintain profitability.
On January 31, 2000, we announced general availability of our first product,
the ONLINE9000 which we began to ship in February 2000. In March 2000, we
recognized revenue from sales of this product to four customers. For the three
months ended March 31, 2000, sales to Williams Communications Inc., COLT
Telecom plc, Marietta Fibernet and StorageNetworks, Inc. accounted for
23
<PAGE>
33%, 30%, 23% and 14% of revenue, respectively. Sales to COLT Telecom, which is
based in the United Kingdom, are denominated in United States Dollars. While we
will continue to seek to diversify and grow our customer base, we anticipate
that our operating results for any given period may depend on a small number of
customers. In April 2000, we entered into a limited trial system purchase
agreement with Internet Initiative Japan Inc. and an OEM relationship with
Lucent Technologies, Inc. We plan to introduce new products, including the
ONLINE7000, and product enhancements, although we may be unsuccessful in these
efforts.
We primarily market and sell our products through our direct sales force and
marketing organization. We are expanding our direct sales force to sell to
potential customers outside of North America and Europe. However, in those
markets where it is difficult to maintain a direct sales force, we may rely on
resellers for distribution of our product. For example, in April 2000, we
entered into an OEM relationship with Lucent Technologies that expires on
December 31, 2001. Under the terms of our agreement, Lucent Technologies has
the exclusive right to sell some of our products in China for a period of 12
months.
Our policy is to recognize revenue at the time of shipment unless we have
future obligations or customer acceptance is required, in which case all or a
portion of revenue is deferred until these obligations are met or the customer
accepts the product. Services revenue consists primarily of training and
installation services and associated revenue is recognized as the services are
performed. To date, we have not been obligated to provide installation services
to our customers. We provide a limited warranty on our products. Estimated
expenses for warranty obligations are recorded at the time revenue is
recognized.
Our cost of revenue consists of raw materials, direct labor, manufacturing
overhead and amounts paid to third-party manufacturers. Our manufacturing
operations are generally outsourced, and accordingly a significant portion of
our cost of revenue consists of payments to third-party contract manufacturers.
We conduct supply chain management, production engineering, documentation
control, quality assurance and final assembly at our assembly facility in San
Jose, California. We currently purchase many of our electronic and optical
components through purchase orders. In order to help us maintain our supply of
components, especially optical components, we intend to enter into long-term
supply agreements with vendors. For example, in March 2000, we entered into an
agreement with E-TEK Dynamics, Inc., under which E-TEK Dynamics will supply
optical components and module integration services to us at least through
December 31, 2001.
Research and development expenses consist primarily of salaries and related
expenses for research and development personnel, fees paid to outside
consultants, non-recurring engineering charges and prototype costs related to
design, development, testing and enhancement of our products. We expense all of
our research and development costs as they are incurred. We believe that
research and development is critical to our strategic objectives, and we devote
substantial resources to the development of new products and product features.
We also believe that to meet our customers' evolving needs we will need to fund
investments in several development projects simultaneously. As a result, we
expect our research and development expenses to increase in absolute dollars in
the future.
Sales and marketing expenses consist of salaries and related expenses for
personnel engaged in marketing, sales, and customer service and support
functions, as well as costs associated with trade shows, promotional activities
and public relations. We expect that sales and marketing expenses will increase
substantially in absolute dollars as we continue to build and expand our direct
sales, marketing, and customer service and support organizations in the United
States and internationally.
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<PAGE>
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, legal, facilities and human resources
personnel, recruiting expenses, professional fees and other corporate expenses.
We expect general and administrative expenses to increase in absolute dollars
as we add personnel, improve and expand our information system infrastructure
and incur additional expenses as we grow and operate as a public company.
In 1998, we recorded total deferred stock compensation of approximately $8.4
million in connection with stock sales and stock options granted during 1998 at
prices subsequently deemed to be below fair value on the date of sale or grant.
Options granted are typically subject to a four-year vesting period. We are
amortizing the deferred stock compensation over the vesting periods of the
applicable options and the repurchase periods for restricted stock purchases.
The period over which deferred stock compensation is amortized is determined
separately for each 25% portion of the total award, in accordance with
Financial Accounting Standards Board Interpretation No. 28. The result of this
accounting treatment is that approximately 59% of the unearned deferred
compensation will be amortized in the first year, 25% in the second year, 12%
in the third year and 4% in the fourth year following the date of the grant. We
amortized $3.3 million of deferred stock compensation in the year ended
December 31, 1998. For the year ended December 31, 1999 and for the quarter
ended March 31, 2000, we recorded approximately $41.7 million, and $46.2
million, respectively, in additional deferred stock compensation for stock
options granted at prices subsequently deemed to be below fair value on the
date of grant. We amortized a total of approximately $11.4 million and $11.3
million of deferred stock compensation in the year ended December 31, 1999 and
the quarter ended March 31, 2000, respectively. Approximately $35.5 million and
$72.6 million of deferred stock compensation related to all prior issuances
remained to be amortized over four years as of December 31, 1999 and March 31,
2000, respectively.
Results of Operations
We plan to increase our operating expenses significantly in order to fund
greater levels of research and development, expand our sales and marketing
operations, broaden our customer support capabilities and develop new
distribution channels. We also plan to expand our general and administrative
functions to address the increased reporting and other administrative demands
that will result from being a publicly traded company and the increasing size
of our business. Our operating expenses are largely based on anticipated
revenue trends and a high percentage of our expenses are, and will continue to
be, fixed in the short term. As a result, a delay in generating or recognizing
revenue could cause significant variations in our operating results from
quarter-to-quarter and could result in substantial operating losses.
In addition, we expect to experience seasonality in the sales of our
products. Historically, the telecommunications equipment market has experienced
increased sales in the first and fourth quarter of the year due in part to
purchasers' budgetary cycles. In addition, we expect that sales may decline
during summer months, particularly in European markets which we expect to
represent a substantial portion of the market for our products for the
foreseeable future. These seasonal variations in our sales may lead to
fluctuations in our quarterly operating results.
Comparison of Three Months Ended March 31, 1999 and 2000
Net Revenue
Net revenue increased by $3.1 million, or 543%, from $565,000 for the three
months ended March 31, 1999 to $3.6 million for the three months ended March
31, 2000. All of the net revenue for the three months ended March 31, 2000 was
from sales of our ONLINE9000 product. Net revenue recorded for the three months
ended March 31, 1999 was from government research and
25
<PAGE>
development contracts. The government research and development contracts were
completed in June 1999.
Cost of revenue
Cost of revenue increased by $2.4 million, or 572%, from $424,000 for the
three months ended March 31, 1999 to $2.8 million for the three months ended
March 31, 2000. As a percentage of net revenue, cost of revenue for the three
months ended March 31, 2000 was 78%, compared to 75% for the three months ended
March 31, 1999. We believe the comparison of these two periods is not
meaningful, because our revenue for the three months ended March 31, 1999, and
the related cost of revenue, were from governmental research and development
contracts. Cost of revenue as a percentage of revenue for the three months
ended March 31, 2000 are higher than they are anticipated to be in the future,
due to the high cost of initial start-up of production, including the increase
in personnel and the low volume of sales.
We expect to develop additional products in the future such that the product
mix of our sales may vary. Correspondingly, we expect the quarterly gross
profit percentages to fluctuate in accordance to the product mix of related
quarterly sales.
Research and development expense
Research and development expense was $2.8 million for the three months ended
March 31, 1999, and increased by 322% to $12.0 million for the three months
ended March 31, 2000, representing 56% and 37% of the total quarterly operating
expenses for the three months ended March 31, 1999 and 2000, respectively. The
increase in quarterly research and development expense is primarily due to the
significant expansion of our research and development department, particularly
attributable to the increase of engineering staff. As of March 31, 1999, we had
approximately 51 research and development employees and, as of March 31, 2000,
approximately 147.
Sales and marketing expense
Sales and marketing expense was $426,000 for the three months ended March
31, 1999, and increased by 605% to $3.0 million for the three months ended
March 31, 2000, representing 8% and 9% of total quarterly operating expenses
for the three months ended March 31, 1999 and 2000, respectively. This increase
in quarterly sales and marketing expense is primarily due to the higher number
of sales and marketing personnel in the quarter ended March 31, 2000 as
compared to that of March 31, 1999. As of March 31, 1999, we had approximately
four sales and marketing personnel, and 59 as of March 31, 2000.
General and administrative expense
General and administrative expense was $510,000 for the three months ended
March 31, 1999, and increased by 401% to $2.6 million for the three months
ended March 31, 2000, representing 10% and 8% of the total quarterly operating
expenses for the three months ended March 31, 1999 and 2000, respectively. This
increase in quarterly general and administrative expense primarily reflects
personnel increases. We had 12 general and administrative employees as of March
31, 1999, and 52 as of March 31, 2000.
Amortization of deferred stock compensation
Amortization of deferred stock compensation was $1.3 million for the three
months ended March 31, 1999, and increased by 770% to $11.3 million for the
three months ended March 31, 2000. This increase in quarterly amortization of
deferred stock compensation was primarily a result of
26
<PAGE>
higher deferred stock compensation expense, which increased from $5.2 million
as of December 31, 1998 to $35.5 million as of December 31, 1999.
Common stock warrant expense
We issued a warrant to purchase 223,000 shares of common stock to a
communication service provider, in connection with the signing of a purchase
and license agreement under which the service provider may, but is not
obligated to, purchase our products. The warrant issued in connection with this
purchase and license agreement reflects our strategic initiatives with this
customer. We believe that, given our early stage of development, the issuance
of this warrant is a cost of establishing a relationship with this potential
customer. The value of $2.3 million ascribed to the warrant was expensed in the
three months ended March 31, 2000. In addition, we also issued a warrant to
purchase 200,000 shares of common stock as consideration for professional
services rendered. The value of $1.3 million ascribed to the warrant was
expensed in the three months ended March 31, 2000.
Interest income (expense), net
Interest income (expense), net increased by $687,000, or 380%, from $181,000
for the three months ended March 31, 1999 to $868,000 for the three months
ended March 31, 2000. The increase was primarily due to the interest income
earned on proceeds from sales of preferred stock.
Comparison of Year Ended December 31, 1998 and 1999
Although we were incorporated on October 20, 1997, we did not effectively
commence operations until January 1998 when we completed our first preferred
stock financing. As a result, we believe that our results of operations prior
to 1998 are not meaningful.
Revenue
In connection with our spinout from Optivision, we inherited several
government research and development contracts. Prior to 1999, all of our
revenue resulted from these contracts. In 1999, we recognized approximately
$1.1 million in revenue from the licensing of our operating system software.
The remaining revenue of approximately $1.9 million was derived from government
research and development contracts and other consulting services. The
government research and development contracts were completed in June 1999. We
will not continue these activities, and they will not contribute to our revenue
in the future.
As of December 31, 1999, our ONLINE9000 product was undergoing field trial
testing and was not generally available for sale; accordingly, no product
revenue was recorded.
Cost of revenue
Cost of revenue for 1998 and 1999 consisted primarily of salaries,
contracted services and materials required in the fulfillment of obligations
under government contracts.
Research and development
Research and development expenses were $4.0 million in 1998 and increased by
534% to $25.4 million in 1999, representing 41.9% of total operating expenses
in 1998 and 51.6% of total operating expenses in 1999. The increase in research
and development expenses was primarily related to the increase in the number of
personnel and an increase in engineering and prototype expenses related to the
design, development and testing of our ONLINE9000 product. At December 31,
1998, we had a total of approximately 43 research and development employees
and, at December 31, 1999, we had approximately 110 research and development
employees.
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<PAGE>
Sales and marketing
Sales and marketing expenses were $649,000 in 1998 and increased by 602% to
$4.6 million in 1999, representing 6.8% of total operating expenses in 1998 and
9.3% of total operating expenses in 1999. The increase in sales and marketing
expenses was primarily related to the increase in the number of personnel,
including the establishment of a direct sales force and customer service and
support team, as well as costs associated with tradeshows, promotional
activities and public relations. At December 31, 1998, we had a total of three
sales and marketing employees, and at December 31, 1999, we had approximately
21 sales and marketing employees.
General and administrative
General and administrative expenses were $1.6 million in 1998 and increased
by 198.9% to $4.8 million in 1999, representing 16.6% of total operating
expenses in 1998 and 9.7% of total operating expenses in 1999. The increase in
general and administrative expenses was primarily related to the increase in
personnel and increased legal, information systems, facilities and consulting
services associated with our growing business activities. At December 31, 1998,
we had a total of approximately 12 general and administrative employees, and at
December 31, 1999, we had approximately 30 general and administrative
employees.
Amortization of deferred stock compensation
In connection with grants of stock options and sales of stock to employees
with exercise or sales prices subsequently determined to be below the deemed
fair value of our common stock on the dates of grant or sale, we recorded
amortization of deferred stock compensation of $3.3 million in 1998 and
$11.4 million in 1999, an increase of 245.0%. As of December 31, 1999, our
unamortized deferred stock compensation was $35.5 million, of which
approximately $21.6 million will be amortized in 2000. In addition, we have
granted additional stock options in 2000 that will result in a substantial
increase in deferred stock compensation and amortization expense.
Common stock warrant expense
In 1999, we expensed $2.9 million related to a warrant to purchase 500,000
shares of common stock issued to a communication service provider in connection
with entering into an agreement under which the service provider may, but is
not obligated to, purchase our products. The warrant issued in connection with
this purchase and license agreement reflects our strategic initiatives with
this customer. We believe that, given our early stage of development, the
issuance of this warrant is a cost of establishing a relationship with this
potential customer.
Interest income (expense), net
Interest income (expense), net, includes interest income from our cash
investments net of interest expense related to our lease financing obligations
and amortization of warrants issued in conjunction with our equipment lease and
credit facilities. We had interest income, net, of $183,000 in 1998 and
$623,000 in 1999, an increase of 241.0%. The increase was primarily due to the
interest income earned on proceeds from preferred stock issuances.
Income taxes
Income taxes for 1998 and 1999 consisted of minimum state taxes. As of
December 31, 1999, we had net operating loss carryforwards for federal and
California income tax purposes of $34.0 million and research credit
carryforwards of approximately $1.1 million. The federal carryforwards will
expire at various dates from 2012 through 2019. Utilization of the net
operating losses may be subject to a substantial annual limitation due to the
ownership change limitations
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<PAGE>
contained in Section 382 of the Internal Revenue Code. There is sufficient
uncertainty regarding the reliability of the deferred tax assets that we have
recorded a full valuation allowance.
Liquidity and Capital Resources
From inception through December 31, 1999, we financed our operations
primarily through private sales of convertible preferred stock, for net
proceeds of approximately $122.9 million, and common stock, for net proceeds of
approximately $329,000. We raised an additional $2.0 million from the sale of
preferred stock and $783,000 from the sale of common stock during the three
months ended March 31, 2000.
The following table describes the preferred stock issuances that have funded
our operations from inception through March 31, 2000:
<TABLE>
<CAPTION>
Date Consideration Price per Preferred
Closed Series ($ million) Share Shares Sold
------ ------ ------------- --------- -----------
<S> <C> <C> <C> <C>
12/97-3/98 B $ 4.3 $0.24 18,128,843
12/97-3/98 C $ 2.0 $0.75 2,733,332
4/98 D $ 4.4 $0.88 4,969,148
12/98-5/99 E $23.8 $0.91 26,284,024
9/99 F $15.0 $1.82 8,249,468
12/99-3/00 G $76.9 $6.32 12,163,418
</TABLE>
In 1997, we were spun-out from Optivision, Inc. In connection with this
spin-out, Optivision, Inc. retained, among other equity issuances, 8,000,000
shares of Series A preferred stock. All Series A preferred stock subsequently
converted into Series B preferred stock. In 1998, Optivision sold half of its
Series B holdings, and we repurchased the remaining half of its Series B
holdings. Optivision does not currently own any of our shares.
In connection with an equipment lease financing arrangement, we issued
warrants to purchase a total of 68,062 shares of Series B convertible preferred
stock at $0.88 per share. The warrants expire on the earlier of February 10,
2009, or five years from this offering. No warrants had been exercised as of
March 31, 2000.
We used $29.6 million in cash in operating activities in 1999, an increase
of $23.8 million, or 409%, from the $5.8 million used in 1998. The increase was
primarily due to the increase in our net loss of $37.7 million, an increase in
inventory of $9.6 million and other working capital of $9.5 million, offset by
increased amortization of deferred stock compensation and common stock warrants
of $11.0 million, and depreciation and amortization of $2.5 million. We used
$21.0 million in cash in operating activities in the three months ended March
31, 2000, an increase of $18.4 million, or 703%, from the $2.6 million used in
the three months ended March 31, 1999. The increase was primarily due to the
increase in our net loss of $26.1 million, an increase of inventory of $11.1
million and a decrease of other working capital of $3.3 million, offset by
increased amortization of deferred stock compensation of $10.0 million,
amortization of common stock warrants of $3.6 million and depreciation and
amortization of $1.7 million.
We used $6.6 million in cash in investing activities in 1999, an increase of
$5.6 million, or 550%, from the $1.0 million used in 1998. The increase was
primarily related to the purchase of property and equipment and the net cash
portion of our acquisition of Object-Mart of $1.7 million. We used $11.4
million in cash in investing activities in the three months ended March 31,
2000, an increase of $11.0 million from the $385,000 used in the three months
ended March 31, 1999. The increase was due to the purchase of property and
equipment, primarily engineering and test equipment.
We generated $97.1 million in cash from financing activities in 1999, an
increase of $71.2 million, or 275%, from the $25.9 million generated in 1998,
primarily from the private sales of convertible preferred stock and issuance of
common stock. We have used leases to partially finance
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<PAGE>
capital purchases of property and equipment. We had $119,000 in capital lease
obligations outstanding at December 31, 1998 and $533,000 at December 31, 1999.
We generated $2.7 million in cash from investing activities in the three months
ended March 31, 2000, a decrease of $4.6 million from the $7.3 million
generated in the three months ended March 31, 1999. The decrease was primarily
due to a reduction in proceeds from preferred stock financings of $5.3 million,
offset by an increase in proceeds from the issuance of common stock of
$744,000.
At December 31, 1999, cash and cash equivalents totaled $80.0 million, an
increase of $60.9 million, or 319%, from the balance of $19.1 million at
December 31, 1998. The increase was due to the receipt of $97.1 million,
primarily from the sale of convertible preferred stock, offset by $29.6 million
of cash used in operating activities and $6.6 million of cash used in investing
activities. At March 31, 2000, cash and cash equivalents totaled $50.3 million,
a decrease of $29.7 million from December 31, 1999. The decrease was due to the
use of $21.0 million in operating activities and $11.4 million in investing
activities offset by the receipt of $2.7 million, primarily from the sale of
preferred stock.
As of December 31, 1999, we had entered into a line of credit that allowed
us to borrow up to $2,000,000 and $1,000,000, respectively. We had not borrowed
any amounts under these agreements as of December 31, 1999, and they both
expired in February 2000, unutilized.
We have a lease financing facility for $1.5 million, of which $467,000 had
been drawn as of December 31, 1999. This facility with a 7.51% annual interest
charge expires in December 2002.
Our capital requirements depend on numerous factors, including:
. the resources we devote to developing, manufacturing, marketing, selling
and supporting our products;
. market acceptance of our products and the timing and extent of sales of
our products; and
. the timing and extent of capital expenditures required to establish our
international operations.
We expect to devote substantial capital resources to continue our research
and development activities, to expand our sales, marketing and customer service
and support organizations, to support our information systems requirements and
for other general corporate activities. We believe that our current cash
balances will be sufficient to fund our operations for at least the next 12
months. In addition, we believe that the net proceeds from this offering will
provide us with substantial working capital. However, we may require additional
financing within that time frame. If needed, additional financing may not be
available on terms acceptable to us or at all.
Effect of Year 2000
The year 2000 computer problem refers to the potential for system and
processing failures of date-related data as a result of computer controlled
systems using two digits rather than four to define the applicable year. For
example, software programs that have time-sensitive components may recognize a
date represented as "00" as the year 1900 rather than the year 2000. In
addition, programs may fail to recognize February 29, 2000, as a leap year date
as a result of an exception to the calculation of leap years that will occur in
the year 2000 and otherwise occurs only once every 400 years. This problem
could result in miscalculations, data corruption, system failures or
disruptions of operations.
As of March 31, 2000, we had not experienced any significant disruptions in
our business related to year 2000 issues, nor do we expect to experience any
year 2000 related disruption in the operation of our systems.
We are not aware of any of the companies to which we have shipped our
ONLINE9000 product experiencing any year 2000 related problems with our product
or their ability to deploy our product. In
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<PAGE>
addition, we have not received notice from any of our contract manufacturers or
our other suppliers that they have experienced any year 2000 problems with the
parts supplied by them or that would affect their ability to supply products
and services to us. Although most year 2000 problems should have become evident
on or shortly after January 1, 2000, additional year 2000 related problems may
become evident. We will continue to monitor our mission critical equipment and
computer applications and those of our suppliers and vendors throughout the
year, in an effort to ensure that any late year 2000 matters that may arise are
promptly addressed.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity
We do not currently use derivative financial instruments for speculative
trading or hedging purposes. In addition we maintain our cash equivalents in
money market funds. Accordingly, we are not a party to financial instruments or
contracts, and do not have investments, that expose us to material interest
rate risk.
Exchange Rate Sensitivity
Currently, all of our sales and expenses are denominated in United States
Dollars. Therefore, we have not engaged in any foreign exchange hedging
activities to date. We do expect to conduct transactions in foreign currencies
in the future, so we may engage in foreign exchange hedging activities at that
time.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The new standard establishes accounting
and reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. SFAS 133
will be effective for our fiscal year ending December 31, 2001. We do not
expect SFAS 133 to have a material effect on our financial position or results
of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB No. 101), which summarizes views of the
Commission staff in applying generally accepted accounting principles to
revenue recognition in financial statements. We believe that our current
revenue recognition principles comply with this bulletin.
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BUSINESS
The prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results may differ materially from those indicated in
forward-looking statements.
Overview
We develop, market and sell all-optical communications networking equipment
specifically designed to address the bandwidth and service limitations of
metropolitan area and regional networks, which we refer to as metro networks.
We believe that we offer the first commercially available products,
specifically designed for metro networks, that are based entirely on optical
rather than electronic technology. Communication service providers can cost-
effectively deploy our products to relieve the growing traffic bottleneck in
these networks and offer new revenue-generating data services. By installing
our equipment, service providers can rapidly build high-capacity metro networks
that are flexible, scalable, and able to support multiple services on a single
platform.
Industry Background
Increased Demand for Network Capacity
Rapid growth in the popularity of the Internet and in the number of
Internet-based applications and services has fueled dramatic growth in the
volume of data traffic. According to Ryan, Hankin & Kent, Internet traffic will
increase from 350,000 terabytes, or trillions of bytes, per month at the end of
1999 to over 15,000,000 terabytes per month during 2003. This growth will
increase demand for capacity in the public communications network. This
capacity is usually measured in bits of data per second and is commonly known
as bandwidth. Bandwidth improvements make it possible for communication service
providers to offer new revenue-generating services such as remote data storage
and local area network extensions to their customers. As these new bandwidth-
intensive services are introduced and gain commercial acceptance, additional
network bandwidth and optical infrastructure will be required.
Evolution of Optical Networking
The existing communications network infrastructure was designed and built to
carry voice calls, based on standards such as Synchronous Optical Network, or
SONET. The rapid adoption of the Internet and the resulting growth of data
traffic are driving service providers toward deploying equipment and networks
designed, built and optimized for both data and voice traffic. Given the scope
of existing and projected Internet traffic, many communication service
providers are designing and installing networks based on optical technology,
which generally enables greater capacity and higher transmission speed.
Optical networking technology transmits data using pulses of light over
optical fiber, rather than pulses of electricity over copper wires. Advances in
optical technology such as dense wavelength division multiplexing allow
transmission of multiple signals on a single strand of optical fiber, each
signal using a different wavelength of light. Dense wavelength division
multiplexing technology currently enables transmission of up to 160 different
wavelengths on a single fiber. This means that today a service provider using
dense wavelength division multiplexing can multiply the transmission capacity
of its existing fibers 160 times.
As shown below, the current communications network infrastructure can be
divided into four segments--long-haul, metro core, metro access and enterprise
networks. To satisfy the technical, pricing and performance needs of service
providers, we believe that optical networking equipment must be specifically
designed for each of these segments.
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[BEGIN DESCRIPTION OF GRAPHIC--DIAGRAM DEPICTING THE SEGMENTS OF THE
COMMUNICATIONS NETWORK]
Upper Right Quadrant--A map of the continental United States (showing state
boundaries) with a network superimposed. The network is formed from
approximately forty large dots indicating "nodes" on the network with lines
connecting the nodes in a web or dot-to-dot fashion. The words "LONG-HAUL
NETWORKS" appear above the map.
Lower Half--An oval offset to the left of the diagram with figures inside the
oval. The oval is connected to one of the dots in the map-network
(approximately in the vicinity of San Diego) with trace lines indicating that
the oval represents a representative node on the network. The words "METRO
NETWORK" appear above and to the left of the oval.
Interior of the Oval--The oval is divided into thirds:
The right-hand portion of the oval is a schematic symbol used to represent an
optical cross-connect linking the metro network to the long haul network. The
words "To Long-haul Networks" appear below the schematic.
The center portion of the oval contains two ellipses or "rings" (one directly
above the other) each with for boxes or "nodes" at approximately 12 o'clock, 3
o'clock, 6 o'clock and 9 o'clock on the ring. The bottom-most node of the top
ring is shared as the top-most node of the bottom ring. Each ring represents a
ring-based fiber optic network. The words "Metro Core Ring" appear inside each
ring. The right-most node of each ring is connected by two lines (representing
fiber links) to the optical cross-connect schematic in the right-hand portion
of the oval. The left-most node of each ring protrudes into the left section of
the oval. The words "Metro Core Networks" appear at the bottom of the center
portion with arrows on each side leading to the left and right edges of the
center portion.
The left portion of the oval contains diagrams of ten buildings representing
enterprises connected to the communications network. Seven of the buildings are
connected by a smaller ring (similar to the rings in the center portion of the
oval) to each other and to the left-most node of the lower ring in the center
portion of the oval. This ring represents a metro access fiber optic ring
connecting enterprises to the metro network. Above this ring are three
individual buildings, each of which is connected by lines to the left-most node
of the upper ring in the center portion of the oval. The lines represent direct
fiber links to the metro core. The words "Metro Access Networks" appear at the
bottom of this portion of the oval below all of the buildings. The words
"Enterprise Networks" appear to the left of the buildings.
[END DESCRIPTION OF GRAPHIC--DIAGRAM DEPICTING THE SEGMENTS OF THE
COMMUNICATIONS NETWORK]
Long-haul networks. Long-haul networks connect the communications networks
of metropolitan areas around the world. These networks move large amounts of
data and voice traffic point-to-point over long distances. The focus of
companies designing equipment for this segment has been to provide as much
bandwidth as possible between any two points.
Metro core networks. Metro core networks connect long-haul networks to metro
access networks over distances of a few miles in dense urban business corridors
or a few hundred miles in regional urban and suburban settings. These networks
aggregate metro access traffic and distribute it throughout the metropolitan
area and to and from long-haul networks. They face a heterogeneous networking
environment due to the number and variety of access providers that they serve
and the service types that they support.
Metro access networks. Metro access networks connect end-users such as
enterprises and individuals to the metro core network. These networks are the
points at which traffic enters and exits the public communications network.
Metro access networks are complex because they must manage a wide variety of
services to meet the needs of end-users.
Enterprise networks. Enterprise networks provide data and voice connections
among end-users within a building or group of buildings. These networks also
connect end-users to the public communications network infrastructure.
Metro Network Bottleneck
Optical technologies were first deployed in long-haul networks, where the
capacity constraints of the existing infrastructure were first encountered and
the simple architecture and homogeneous traffic made it technically feasible
and cost effective. Over time, enterprise networks have also benefited from the
deployment of new optical technology, including high-speed data communication
services such as Gigabit Ethernet and Fibre Channel.
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To date, optical solutions specifically designed to address the challenges
faced by metro core and access networks have not been available, which has
impeded the growth of bandwidth in metro networks.
We believe that the transmission speed in the metro portion of the network
over the last several years has grown at a small fraction of the growth rate
seen in long-haul and enterprise networks. This has created a bottleneck
impeding service delivery.
Challenges Facing Metro Core and Metro Access Network Service Providers
Communication service providers seeking to develop and introduce next
generation services to their customers face significant challenges that are not
adequately addressed by current metro solutions, including:
Enabling emerging service offerings and supporting existing
services. Communication service providers that serve regions and metropolitan
areas endeavor to offer business enterprises and consumers a variety of high-
speed connectivity services, such as:
. access to the public switched telephony network, for voice and fax
service;
. Internet access for data services, including high-speed digital
subscriber lines;
. access to offsite data facilities, for data backup and storage; and
. extension of the local area network to multiple locations within the
metro area.
In addition, service providers seek to offer next generation services to
create new revenue- generating opportunities. Most current solutions require
dedicated equipment and interfaces that are unique for each particular service
and transmission rate. Given the dominance of data traffic, next generation
equipment must be specifically designed for efficient transmission of data
traffic and delivery of emerging services, while accommodating voice traffic.
This equipment must also support an unpredictable and changing mix of service
offerings on a single platform.
Manageability and Flexibility. As the introduction of new services increases
network complexity, service providers will require software and systems that
allow for easy and effective end-to-end management of data and voice services.
Since the metro network must constantly adapt to changes in the number and
location of users, the equipment must be flexible enough to accommodate
bandwidth deployment, where needed and when needed.
Low cost and scalability. Service providers need solutions that are cost-
effective to deploy initially and easily scale to handle rapid growth. To
expand their existing networks, they must add new equipment to their previously
deployed infrastructure, which is costly, utilizes the limited space in metro
service providers' facilities inefficiently and increases the complexity of
network management. Service providers seek new systems that can replace
existing systems at a price point that will allow revenue from new services to
provide a return on deployment costs and can be deployed in a pay-as-you-grow
fashion.
Reliability. Because the applications carried over metro networks are
critical to enterprises and users, rapid restoration of service is a key
requirement for all metro networks. Communication service providers require
equipment that meets existing reliability standards, while improving
reliability for higher bandwidth applications.
To date, attempts to solve the problems faced by metro networks have focused
on increasing bandwidth. These attempts include using SONET, deploying
additional fiber, and adapting long-haul solutions such as existing point-to-
point implementations of wavelength division multiplexing to the
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metro network. When applied to metro networks, these efforts are costly, time-
consuming, difficult to scale or difficult to manage. For example, SONET
network architecture was originally designed for voice traffic, is not easily
scalable and therefore hinders introduction of today's emerging high-speed data
services. In addition, SONET requires that at least 50% of network capacity be
reserved to provide alternative routing for traffic in the event of a network
outage. Similarly, deploying additional fiber in metropolitan areas is
expensive and time-consuming because it requires permits, rights-of-way and
physical installation of fiber. Likewise, wavelength division multiplexing was
originally designed for long-haul point-to-point applications in a SONET
environment. Wavelength division multiplexing, as designed for long-haul
networks, is inefficient and expensive to deploy in metro networks. To be
applied in the metro network, currently available point-to-point
implementations of wavelength division multiplexing technologies require
additional electrical equipment such as SONET-based equipment to add and drop
traffic and to provide rapid service restoration.
In addition, today's networks are not all-optical. Transmitted signals in
these networks undergo multiple optical-to-electrical-to-optical conversions.
These conversions are costly because they require deployment of additional
equipment and are inefficient because they are limited by the bandwidth
constraints and inflexibility of existing electronics embedded in today's
networks.
The ONI Systems Solution
We develop, market and sell all-optical networking equipment that enables
communication service providers to offer new revenue-generating services while
fully supporting existing voice and data services. Our data-optimized, scalable
solution increases available bandwidth in metropolitan areas and delivers end-
to-end manageability and rapid restoration for all services. Our family of
products consists of the ONLINE9000 for metro core networks, the ONLINE7000,
which we expect to be available by June 2000 for metro access networks, our
OPTX network operating system and our OLMP inter-network communications
protocol.
Our product offerings provide the following benefits to communication
service providers:
Multi-service capability. Our equipment and interfaces support multiple
service offerings. As a result, a service provider using our solution can
provide a changing mix of services as customer needs evolve, without deploying
dedicated equipment for each service. Our solution is compatible with SONET,
providing service providers with an evolutionary upgrade path. Our products are
also designed for efficient transmission of high-speed data traffic and
delivery of emerging services, while supporting voice services. For example,
multiple services, including SONET, Gigabit Ethernet and Fibre Channel, are
supported on the same platform by our equipment and interfaces.
Manageability and flexibility. As network complexity increases, service
providers require software and systems that allow easy end-to-end service
management. Our products combine a network operating system, management
software and inter-network communications protocols to enable:
. real-time control of bandwidth allocation as needed, where needed and
when needed;
. real-time surveillance of network performance;
. interoperability with third-party management software and data routing
and switching equipment; and
. point-and-click activation of services.
Cost effectiveness and scalability. Our solution is designed to scale
efficiently as demand for bandwidth and new services increases. Our products
lower service providers' equipment acquisition and network operation costs by
reducing the amount of equipment required, and by allowing them to
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<PAGE>
install their equipment incrementally in a pay-as-you-grow fashion without
sacrificing their existing infrastructure investments. In addition, our
solution requires less space in service providers' facilities because our
products are designed to handle current networking standards and can readily be
upgraded to handle emerging services without the deployment of additional
equipment.
Rapid and efficient service restoration. Survivability is a key factor for
all metro networking services. Our products provide for restoration of service
within the SONET standard of 50 milliseconds, without the need to dedicate
bandwidth for restoration, as is required by typical SONET-based equipment.
Since our products do not require dedicated bandwidth, communications service
providers can utilize their existing fiber more efficiently by placing more
traffic on each fiber route.
The ONI Systems Strategy
Our objective is to be a leading provider of all-optical networking
solutions for communication service providers worldwide. The key elements of
our strategy are to:
Leverage our all-optical approach to achieve early design wins in metro core
and metro access networks.
We believe that the challenges facing metro service providers are most
efficiently addressed through our all-optical approach. Since service providers
are in the early stages of deployment of optical metro networks, we expect that
service providers will select vendors with the strongest technology positions.
We plan to take advantage of our position as a technology leader to achieve
design wins with these service providers, which will position us to grow
rapidly as these new networks are deployed.
Enable our customers to offer new revenue-generating services to their end-
users.
We intend to continue to develop and provide solutions that will enable our
customers to deliver emerging revenue-generating services to end-users. We
believe the demand for new services is a key driver of our customers' growth
and we intend to ensure that our hardware and software architectures continue
to offer the performance and flexibility to allow rapid introduction of new
services. We intend to work closely with our customers to help them identify
new services that they can deliver using our products.
Extend technology leadership.
Our all-optical architecture and dynamic network operating system are key
elements of our technology leadership. We believe that these elements can be
incorporated into future product offerings for other segments of the
communications network. We intend to extend our technology leadership and to
develop new product offerings and future product enhancements through continued
investment in research and development.
Leverage optical manufacturing expertise.
Our ability to manufacture complex optical networking products is a key to
our success. We believe we have developed a world-class manufacturing
capability through a combination of our own manufacturing systems and third-
party manufacturing relationships. We believe that this combination gives us a
competitive advantage and will enable us to reduce our manufacturing costs,
while providing us with manufacturing flexibility to meet changing demand.
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Expand direct sales, service and support organizations to address global
opportunities.
We intend to expand our direct sales capability into global markets. We
believe that sales efforts on a customer-by-customer basis are most effective
because deployment of communications equipment involves careful technical
evaluation, multiple levels of decision making and significant investments by
our customers. While we may consider indirect sales channels where appropriate,
we intend to continue to focus our sales and distribution efforts on direct
sales. We have developed a direct sales organization in North America and
Europe and are expanding that sales force as well as developing direct sales
forces for Asia and Latin America. In addition to our existing teams in the
United States, we are also establishing service and support teams
internationally to support our major customers.
Establish strategic alliances and pursue acquisitions to extend our leadership
in optical networking.
We intend to establish strategic alliances with complementary technology
suppliers in order to leverage our technology leadership in providing optical
networking solutions. We believe that alliances with companies that provide
complementary products to enable new services will bring our customers greater
value. In addition, we intend to pursue acquisitions that will enable us to
broaden our product, service and technology portfolios.
All-Optical Architecture
Rather than processing network signals by converting incoming optical
signals to electrical form, processing them and converting them back to optical
form, our product architecture performs the following functions in an all-
optical manner:
. combination and separation of
multiple optical channels;
. per channel and grouped
wavelength routing;
. real-time flexible adding or
dropping of optical channels;
. switching and routing around
optical fiber failure or
equipment failure;
. signal amplification; and
. supervisory channels for
performance monitoring.
[BEGIN DESCRIPTION OF GRAPHIC--DIAGRAM DEPICTING ONI SYSTEMS' ALL-OPTICAL
ARCHITECTURE]
Centered in the diagram are a stack of six long rectangles representing
functional layers within our ONLINE9000 or ONLINE7000 products. Superimposed
over the rectangles is a flow chart representing movement of the optical
signals through the functional layers.
From top to bottom:
The words "Interface to Client Equipment" appear above the top-most (or first)
rectangle in the stack. The portion of the flowchart shown in this rectangle
are squares representing interfaces to the client equipment.
The portion of the flowchart shown in each of the second and fourth rectangle
are trapezoids representing combination and separation of optical signals on
the signal. The words "Multiplexing, Demultiplexing" appear to the left of
these rectangles.
The portion of the flowchart shown in each of the third and fifth rectangle is
a smaller rectangle representing optical switching of the signal. The word
"Switching" appears in the flowchart rectangle. The word "Switching" appears to
the right of the third and fifth rectangle in the stack.
The portion of the flowchart shown in the sixth rectangle are triangles
representing amplification of signals to and from the network. The word
"Amplifiers" appears in the center of this rectangle. The words "To Fiber
Network" appear below the bottom-most rectangle of the stack.
[END DESCRIPTION OF GRAPHIC--DIAGRAM DEPICTING ONI SYSTEMS' ALL-OPTICAL
ARCHITECTURE]
Our OPTX operating system software architecture integrates network design
tools, operations management software and end-to-end service management and
activation systems, as shown in the diagram below. This integrated environment
enables automated transfer of data through open interfaces to craft and
management terminals as well as local administrative networks for the
communications service provider.
Built with software infrastructure based on the XML standard, OPTX also
provides standards-based CORBA interfaces to the service provider's operations
support systems and network wide service applications, including billing,
service ordering and activation, and inventory systems. Our OPTX architecture
enables information exchange with data switching and routing equipment through
our OLMP inter-network communications protocols. OPTX helps provide
comprehensive and integrated network
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design, operations and service management capabilities by managing networks
built with our ONLINE9000 product.
[BEGIN DESCRIPTION OF GRAPHIC--DIAGRAM DEPICTING ONI SYSTEMS' OPTX
ARCHITECTURE]
The center of the diagram is a large square. The name "OPTX" appears in the
upper right corner of the square. Below this word appear three upright
rectangles. The words "Network Design Application" appear in the left
rectangle. The words "Network Configuration Application" appear in the center
rectangle. The words "Network Operation Application" appear in the right
rectangle. Below these rectangles occupying the bottom quarter of the square is
a rectangle with the words "Embedded Software" inside.
Above the main square is an ellipse with the words "Operations Support Systems
(Network Management, Service Management)" inside. To the left of the main
square is an upright ellipse with the words "Graphical User Interface and
Users" inside. To the right of the main square is an upright ellipse with the
words "Client Equipment" inside. Each of these ellipses is connected to the
main square by a two-way arrow. The name OLMP appears directly above the two-
way arrow connecting the main square and the right-hand ellipse.
[END DESCRIPTION OF GRAPHIC--DIAGRAM DEPICTING ONI SYSTEMS' OPTX ARCHITECTURE]
Products
ONLINE9000
The ONLINE9000 is designed for metropolitan area and regional networks and
delivers cost-effective, scalable capacity for the metro communications service
provider. It features dynamic optical add-drop capabilities on all deployed
channels and provides restoration faster than the SONET standard of 50
milliseconds. To help service providers deploy large networks, the ONLINE9000
includes optical amplifiers to extend transmission distances. The ONLINE9000
can be used in conventional ring, ring-mesh and mesh network topologies. In its
base configuration, the ONLINE9000 includes the following key features:
. 33 protected or 66 unprotected channels;
. line-based or per-wavelength optical rerouting of channels in the event
of optical fiber failure;
. a universal optical interface supporting multiple bit rates and
protocols, including OC-3, OC-12, OC-48, Gigabit Ethernet and Fibre
Channel; and
. integrated optical amplifiers with sophisticated power management
capabilities.
ONLINE7000
We have recently introduced the ONLINE7000, which we anticipate will be
available by June 2000. The ONLINE7000 is designed to provide metro service
providers with a cost-effective solution for metro access applications.
Integrated monitoring and surveillance capabilities will ensure managed
operation from the operator's perspective across metro core and metro access
networks. The ONLINE7000 shares the same management and operating system as the
ONLINE9000 and can be deployed as an extension of the ONLINE9000.
The ONLINE7000 includes the functions of a typical SONET and data
multiplexer. This capability will allow the carrier to deploy multiple SONET or
native-format data services using a single
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wavelength. The ONLINE7000 is scalable up to 33 protected or 66 unprotected
channels. In its base configuration, key features of the ONLINE7000 will
include:
. the ability to add or drop multiple SONET or data channels to or from a
single wavelength;
. per-wavelength optical rerouting of channels in the event of optical
fiber failure; and
. a 199 shelf form factor suitable for metro access networks.
OPTX Operating System
Our optical network operating system, called OPTX, provides a unified
environment for metro core and metro access service providers to manage diverse
networking resources and hardware and software systems. Analogous to the
operating systems of personal computers, OPTX manages all resources in the
transmission network, including transmission systems, connections, protection
resources and terminals, and allocates resources to various users and
applications, based on user-selected policies. OPTX brings the ability to
manage, arbitrate and dynamically control network-wide resources to metro
network service providers. Multiple application programmer interfaces within
OPTX link to other management systems and applications. The OPTX architecture
and infrastructure makes extensive use of the XML standard to enable
interaction with other network management equipment without developing
dedicated interfaces. The key features of the OPTX operating system include:
. OPTXNET, an integrated optical network design tool that provides
automatic optical link analysis, link optimization and system
configuration for each node in the network;
. Network and service management interface and applications, including
surveillance, billing, service activation and ordering systems and
network inventory reports; and
. CORBA-based interfaces to the service provider's network operations
support systems.
OLMP (Optical Link Management Protocol)
Our inter-network communications protocol, OLMP, enables data routing and
switching equipment to exchange information with our optical transmission
equipment in metro networks. This information exchange allows data switching
and routing equipment to request and receive required resources from optical
transmission equipment. Utilizing our OLMP protocol, data equipment can
directly request the metro network to set up and drop optical channels when
required in real time. For example, OLMP enables Fibre Channel equipment to
exchange route-length, latency and bandwidth availability for end-to-end
management of storage area networks. We believe that our OLMP is the first
network-level internetworking protocol to link the data and switching equipment
to optical transmission equipment.
Customers
Our target customers include communication service providers such as
regional Bell operating companies, competitive local exchange carriers, long-
distance carriers with local operations, cable operators, Internet service
providers, and foreign telephone companies. We have entered into agreements
under which the following communication service and equipment providers may,
but are not obligated to, purchase our products: COLT Telecom plc, KVH
Industries Inc., Lucent Technologies, Inc., Marietta Fibernet, MetroRED
Telecommunicaciones S.A., StorageNetworks, Inc. and Williams Communications
Inc. We have also entered into a limited trial system purchase agreement with
Internet Initiative Japan Inc.
In addition, we have shipped the ONLINE9000 to Marietta Fibernet,
StorageNetworks and Williams Communications in the United States, COLT Telecom
in the United Kingdom, Internet Initiative Japan in Japan and Lucent
Technologies for deployment in China.
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Sales and Marketing
In North America and Europe, we have developed a direct sales force and in
some limited circumstances may join with other communications equipment
providers to bid on major proposals. Our direct sales force consists of sales
teams made up of an account manager, systems engineers and technical support
and training personnel. Each team is assigned responsibility for specific
geographic territories and specific customers within each territory. We are
continuing to expand our existing direct sales force and are developing a
direct sales force to sell to potential customers outside North America and
Europe.
In some international regions where it is difficult or expensive to maintain
a direct sales force, we may rely on resellers for distribution of our
products. For example, in April 2000, we entered into an OEM relationship with
Lucent Technologies that expires on December 31, 2001. Under the terms of our
agreement, Lucent Technologies has the exclusive right to sell some of our
products in China for a period of 12 months.
Our marketing programs are designed to inform existing and potential
customers about the capabilities and benefits of our products. We also use our
marketing programs to support the sale and distribution of our products through
our direct sales force. Our marketing efforts include public relations,
participation in industry trade shows and conferences.
Customer Service and Support
Our customer service and support organization provides maintenance services
and training in the use of our products after they are installed at a
customer's site. Installation services are provided by ONI Systems or third-
party providers of engineering, furnishing and installation services. Our
customer service centers, located at our facilities in San Jose, California and
London, England, include highly-qualified teams of systems engineers and
technical personnel who work closely with our direct sales force and provide
24-hour-a-day, 7-day-a-week support for our customers.
Research and Development
We believe that to be successful we must continue to enhance our existing
products and develop new products that maintain technological competitiveness.
We have assembled a team of approximately 165 highly skilled optical hardware
and software engineers, manufacturing and test engineers and system and network
architects. Research and development expenses were $4.0 million for the year
ended December 31, 1998 and $25.2 million for the year ended December 31, 1999.
We will continue to make substantial investments in research and development.
Our product development process is driven by market demand and a close
collaboration between our product marketing, sales and product development
organizations. Our product development process begins with a detailed set of
specifications prepared by our product management organization. We also
incorporate feedback from our customers in the product development process. In
addition, we participate in industry and standards organizations where
appropriate and incorporate information from these contacts throughout the
product development process.
Manufacturing and Supply
We conduct supply chain management, production engineering, documentation
control and quality assurance at our assembly facility in San Jose, California.
We outsource most of the manufacturing of optical modules used in our products,
and we complete the final assembly of these optical modules at our facilities.
The majority of our electronic manufacturing and assembly is
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outsourced. Currently, we use a number of manufacturing vendors for electronic
assemblies while E-TEK Dynamics, Inc. performs the majority of our outsourced
optical assembly.
This approach to manufacturing allows us to:
. reduce the capital equipment expenditures that would be required for a
turnkey manufacturing operation;
. reduce our facilities square footage requirements by limiting the amount
of space dedicated to manufacturing and operations;
. conserve working capital by limiting the amount of inventory we must
stock; and
. respond to market demand flexibly.
We currently purchase many of our electrical and optical components through
purchase orders. In order to help us maintain a supply of components, and
specifically optical components, we intend to use long term supply agreements
with vendors. For example, in March 2000, we entered into an agreement with E-
TEK Dynamics under which E-TEK Dynamics will supply optical components and
module integration services to us through at least December 31, 2001.
Competition
Competition in the metro communications networking equipment market is
intense. Our existing and potential competitors are numerous and include
established companies such as Alcatel, Ciena, Cisco Systems, Juniper Networks,
Lucent Technologies, Nortel Networks, Siemens, Sycamore Networks and Tellabs. A
number of private companies have recently announced plans for new products to
address the same problems that our products address and have attracted
substantial amounts of venture capital funding. Many of these companies,
particularly the large public companies, have substantially greater financial,
marketing and development resources than we have, which puts us at a
competitive disadvantage. Many of them have existing relationships with
communication service providers, which will make it more difficult for us to
sell our products to those customers. Some competitors may seek to use
intellectual property rights to limit our ability to compete. For example,
Nortel Networks claims that we infringe some of its patents.
We believe that the principal methods of competition in the market for metro
communications networking equipment are product performance, reliability and
expandability, and the ability of a product to deliver cost-effective results.
We believe that to be competitive in the communications networking equipment
market we must deliver products that:
. provide extremely high network reliability;
. provide high performance capabilities;
. scale easily and efficiently with minimum disruption to the network;
. interoperate with existing network designs and equipment vendors;
. reduce the complexity of the network by decreasing the need for multiple
layers of equipment; and
. provide a cost-effective solution for service providers.
While our first product has only been generally available since January
2000, we believe that positive factors pertaining to our competitive position
include our technology, the expertise of our research and development
personnel, our manufacturing expertise and our intellectual property rights. We
believe that negative factors pertaining to our competitive position include
our relative newness in the market and the fact that some of our competitors
have large financial resources available to promote sales of their products and
to develop products more directly competitive with
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ours. If we are unable to compete successfully against our current and future
competitors, we could experience price reductions, reduced gross margins and
loss of market share, any one of which could materially harm our business,
operating results and financial condition.
Intellectual Property
Our success and ability to compete depends on our ability to develop
technological expertise internally. We rely on a combination of patent,
copyright, trademark and trade secret laws and restrictions on disclosure to
protect our intellectual property rights. We have been issued six patents in
the United States. However, only two of these patents are currently significant
to our products. In addition, we currently have 16 patent applications pending
in the United States and internationally. These patents relate to optical
architecture, hardware, software and management systems. Issued patents may not
protect our intellectual property or may be challenged by third parties. In
addition, others may independently develop similar or competing technology or
design around our patents.
We enter into confidentiality or license agreements with our employees,
consultants and corporate partners and control access to and distribution of
our software, documentation and other proprietary information. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy or otherwise obtain and use our products or technology. These precautions
may not prevent misappropriation or infringement of our intellectual property.
ONI Systems(TM), ONI(TM), our logo, ONLINE9000(TM), ONLINE7000(TM),
OPTX(TM), OPTXNET(TM), OLMP(TM), Dynamic Transport System(TM) and DTS(TM) are
trademarks of ONI Systems. All other names or trademarks appearing in this
prospectus are the property of their holders.
Employees
As of March 31, 2000, we had a total of 326 employees:
. 147 in research and development;
. 41 in sales and marketing;
. 18 in customer service and support;
. 68 in manufacturing; and
. 52 in finance and administration.
Our future success will depend in part on our ability to attract and retain
highly qualified technical and management personnel. Competition for such
talent is intense. None of our employees are represented by any collective
bargaining unit, and we believe that our relations with our employees are good.
Facilities
Our headquarters are currently located in a leased facility in San Jose,
California, consisting of approximately 53,000 square feet under a lease that
expires in 2002. We also lease a facility of approximately 58,000 square feet
in San Jose, California, under a lease that expires in 2006. We expect to
require additional space within the next 12 months.
Legal Proceedings
In October 1999, Nortel Networks filed suit in the Superior Court for the
Province of Quebec, District of Montreal, Canada against us and several of our
employees who were former employees of
42
<PAGE>
Nortel Networks. The suit seeks an injunction to prevent us from hiring
additional Nortel Networks employees and to prohibit the use of Nortel
Networks' trade secrets by us. In December 1999, a temporary order was issued
prohibiting the former Nortel Networks employees from soliciting current Nortel
Networks' employees and from using specified Nortel Networks trade secrets. The
temporary order was renewed on several occasions, by court order following
agreement of the parties to such renewal, and remains effective through
September 5, 2000.
In March 2000, Nortel Networks filed an additional suit against us in the
Federal District Court for the Northern District of California, San Jose
Division. The suit involves allegations that our products infringe five patents
held by Nortel Networks, and sets forth allegations of misappropriation of
trade secrets, unlawful business practices and common law unfair competition.
Nortel Networks seeks preliminary and permanent injunctions and damages against
us in connection with these claims.
We are in the preliminary stages of investigating the claims asserted by
Nortel Networks. We believe that we have meritorious defenses against Nortel
Networks' allegations, and we intend to defend the Nortel Networks litigation
vigorously. Based on our investigation to date, we believe that our products do
not infringe the Nortel Networks patents and that we have not engaged in
misappropriation of trade secrets, unlawful business practices or common law
unfair competition.
In April 2000, we filed a motion to dismiss Nortel Networks' claims for
misappropriation of trade secrets, unlawful business practices and common law
unfair competition from the California suit. We also filed an answer and
counterclaims asserting unfair business practices, tortious interference,
breach of contract and declarations of invalidity, unenforceability and non-
infringement of the patents against Nortel Networks.
In the event that an injunction is granted that prevents us from selling our
products, we would have to either negotiate a license with Nortel Networks or
engage in a redesign of our products. We may not be able to obtain a license
from Nortel Networks on commercially reasonable terms, or at all. A redesign of
our products would result in an interruption in sales that could extend for
some time. Accordingly, a permanent injunction would result in a substantial
reduction in our revenue and result in losses over an extended period of time.
We expect to incur substantial legal and other expenses in connection with
the Nortel Networks litigation. In addition, we expect the Nortel Networks
litigation to continue to divert the efforts and attention of our management
and technical personnel. Patent litigation is highly complex and can extend for
a protracted period of time, which can substantially increase the cost of
litigation. Accordingly, the expenses and diversion of resources associated
with this litigation could seriously harm our business and financial condition
and could affect our ability to raise capital in the future. In the event of an
adverse ruling, we also could be required to pay damages to Nortel Networks,
and if this litigation is resolved by settlement, we might need to make
substantial payments to Nortel Networks, which could harm our business and
financial condition.
43
<PAGE>
MANAGEMENT
Executive Officers, Directors and Significant Employees
Our executive officers, directors and significant employees, and their ages
and positions as of March 31, 2000, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Executive Officers
and Directors:
Hugh C. Martin................ 46 President, Chief Executive Officer and
Chairman of the Board of Directors
Terrence J. Schmid............ 36 Chief Financial Officer and Vice President,
Finance and Administration
Chris A. Davis................ 49 Executive Vice President, Chief Financial
and Administrative Officer*
Hon Wah Chin.................. 45 Chief Technology Officer
William R. Cumpston........... 38 Senior Vice President, Engineering and
Operations
Michael A. Dillon............. 41 Vice President, General Counsel and
Secretary
Robert J. Jandro.............. 44 Executive Vice President, Worldwide Sales
and Marketing
Andrew W. Page................ 34 Vice President, Corporate Development
Matthew W. Bross.............. 39 Director
Kevin R. Compton.............. 41 Director
Jonathan D. Feiber............ 42 Director
James F. Jordan............... 60 Director
Gregory B. Maffei............. 39 Director
Significant Employees:
Kenneth H. Calhoun............ 34 Vice President, Product Marketing
Martin Desroches.............. 35 Vice President, Operations
William S. Jarvis............. 37 Vice President, Worldwide Sales
Rohit Sharma.................. 31 Vice President, Optical Hardware Development
</TABLE>
- --------
* Effective May 2000
Hugh C. Martin has served as President and Chief Executive Officer of ONI
Systems, and a member of the board of directors, since January 1998. He was
appointed Chairman of the Board of Directors in February 2000. From July 1997
to January 1998, he served as Entrepreneur-in-Residence at Kleiner Perkins
Caufield & Byers, a venture capital firm. Mr. Martin served as President of The
3DO Company, an entertainment software company, from 1992 to June 1997. He is a
member of the board of directors of The 3DO Company. He holds a B.S. in
Electrical Engineering from Rutgers University.
Terrence J. Schmid has served as Chief Financial Officer and Vice President,
Finance and Administration of ONI Systems since February 1998 and served as
Secretary of ONI Systems from February 1998 to March 2000. He has informed us
that he intends to resign as an employee and an officer of ONI Systems
effective April 28, 2000. From April 1996 to February 1998, Mr. Schmid was Vice
President, Finance and Chief Financial Officer of The 3DO Company. From 1993 to
April 1996, Mr. Schmid worked in the finance division of Electronic Arts, an
entertainment software company. He holds an M.B.A. from Duke University and a
B.A. in Economics from the University of San Francisco.
44
<PAGE>
Chris A. Davis will serve as Executive Vice President, Chief Financial and
Administrative Officer of ONI Systems beginning in May 2000. Ms. Davis served
as Executive Vice President, Chief Financial and Administrative Officer of
Gulfstream Aerospace Corporation from 1993 until April 2000 and as Vice
President of General Dynamics from July 1999, when it acquired Gulfstream
Aerospace, until April 2000. She is a member of the boards of directors of
Compaq Computer Corporation, Cytec Industries, Inc. and Wolverine Tube, Inc.
She holds an M.S. in Finance and Statistics and a B.S. in Finance from the
University of Florida.
Hon Wah Chin has served as Chief Technology Officer of ONI Systems since
June 1998. Mr. Chin served as Senior Systems Architect at Cisco Systems, Inc.,
a network equipment company, from 1994 to June 1998 and was a Cisco
Distinguished Engineer. He holds a S.B. in Electrical Engineering and Computer
Science from the Massachusetts Institute of Technology.
William R. Cumpston has served as Senior Vice President, Engineering and
Operations of ONI Systems since June 1999 and served as Vice President,
Engineering of ONI Systems from September 1998 to June 1999. Prior to joining
us, Mr. Cumpston served in various management positions at DSC Communications
Corp., a telecommunications company, from 1995 to August 1998. He holds a B.S.
in Math Science from the University of North Carolina at Chapel Hill.
Michael A. Dillon has served as Vice President and General Counsel of ONI
Systems since October 1999 and as Secretary since March 2000. From August 1995
to October 1999, Mr. Dillon served as Director and as Senior Director of Sun
Microsystems, Inc., a computer company, and from 1993 to August 1995, he served
as Senior Counsel for Sun Microsystems. He holds a J.D. from Santa Clara
University and a B.A. in Communications/Sociology from the University of
California, San Diego.
Robert J. Jandro has served as Executive Vice President, Worldwide Sales and
Marketing since March 2000. Mr. Jandro served as Group Vice President of Oracle
Corporation, a database software company, from May 1999 to March 2000. From
1994 to May 1999, he served as Oracle's Vice President, North America
Communications and Vice President, United States Central Region, Latin America
and Canada. He holds an M.B.A. from the Kellogg Graduate School of Management
at Northwestern University and a B.S. in Business from the University of
Missouri, St. Louis.
Andrew W. Page has served as Vice President, Corporate Development of ONI
Systems since February 2000. Mr. Page served as Managing Director and head of
the Global Communications Group of FleetBoston Robertson Stephens Inc., an
investment bank, from April 1997 to February 2000. He served as a Principal of
Volpe, Welty & Company from 1993 to March 1997. He holds an M.B.A. from Harvard
University Graduate School of Business and a B.A. in English Literature from
Princeton University.
Matthew W. Bross has served as a director of ONI Systems since November
1999. Since May 1999, he has served as Senior Vice President and Chief
Technology Officer of Williams Communications, Inc., a communications service
provider. From March 1997 to May 1999, he served in various management
capacities for Williams Communications. From 1991 to March 1997, he served as
the founder and Chief Executive Officer of Critical Technologies, Inc., a
telecommunications infrastructure company, which was acquired by Williams
Communications.
Kevin R. Compton has served as a director of ONI Systems since January 1998.
Mr. Compton has served as a general partner at Kleiner Perkins Caufield & Byers
since 1990. Mr. Compton serves on the boards of directors of Active Software,
Inc., Citrix Systems, Inc., Corsair Communications, Inc., Rhythms
NetConnections Inc. and VeriSign, Inc. He holds a B.S. in Business Management
from the University of Missouri.
45
<PAGE>
Jonathan D. Feiber has served as a director of ONI Systems since January
1998. Mr. Feiber has served as a general partner at Mohr Davidow Ventures, a
venture capital investment firm, since 1991. From 1983 to 1991, he served in
various capacities at Sun Microsystems, most recently as Vice President of
Networking. He is a director of several privately-held companies. He holds a
B.A. in Computer Science and Mathematics from the University of Colorado.
James F. Jordan has served as a director of ONI Systems since March 1998.
Mr. Jordan has privately managed his investment fund since 1994. He was one of
the founders of Ungermann-Bass Inc. and was President and Chief Executive
Officer of Kalpana, Inc. prior to the sale of the company to Cisco Systems in
1994. He holds a B.S. in Business and Marketing from the University of Utah.
Gregory B. Maffei has served as a director of ONI Systems since February
2000. Mr. Maffei has served as Chief Executive Officer and as a member of the
board of directors of 360networks Inc., a communications service provider,
since December 1999. From 1993 to December 1999, Mr. Maffei served in various
capacities with Microsoft Corporation, a software company, most recently as
Senior Vice President, Finance and Administration, and Chief Financial Officer.
He serves on the board of directors of Avenue A, Inc., Expedia, Inc. and
Starbucks Corporation. He holds an M.B.A. from Harvard University Graduate
School of Business and a B.A from Dartmouth College.
Kenneth H. Calhoun has served as Vice President, Product Marketing of ONI
Systems since February 1999 and served as Senior Director, Product Marketing of
ONI Systems from August 1998 to February 1999. He served as Senior Manager,
Account Marketing and Senior Manager, Product Marketing at Nortel Networks
Corporation, a telecommunications company, from March 1997 to August 1998. Mr.
Calhoun served as Senior Manager and Manager, Broadband Product Planning with
Fujitsu Network Communications, Inc. from September 1995 to March 1997. He
holds a Ph.D. in Electrical Engineering and a B.S. in Electrical Engineering
from the Georgia Institute of Technology.
Martin Desroches has served as Vice President, Operations of ONI Systems
since October 1999. Mr. Desroches served as Senior Manager, High Speed Optics
Operations for Nortel Optoelectronics, an optical components company, from
September 1998 to October 1999. He served as Senior Manager and Manager, OC-192
Manufacturing Engineering for Nortel Networks from June 1994 to September 1998.
He holds a B.S. in Electrical Engineering from the University of Sherbrooke.
William S. Jarvis has served as Vice President, Worldwide Sales of ONI
Systems since May 1999. Mr. Jarvis served as Sales Vice President for NEC
America, a telecommunications company, from October 1996 to May 1999 and
Director of Sales for NEC America from January 1995 to January 1996. He holds
an M.B.A. from Santa Clara University and a B.S. in Business Administration
from San Jose State University.
Rohit Sharma founded ONI Systems in our spin-out from Optivision, Inc. and
has served as Vice President, Optical Hardware Development since January 1999.
He served as Chief Architect from April 1998 to January 1999. Prior to the
spin-out, he served as a member of Optivision's technical staff from October
1996 to April 1998. He holds a Ph.D. and a M.Sc. in Electrical Engineering from
the University of Alberta, Canada and a B.Sc. in Electronics and Communications
Engineering from R.E.C. Kurukshetra, India.
Board Composition
Our board currently consists of six members. Each director is elected for a
period of one year at our annual meeting of stockholders and serves until the
next annual meeting or until his successor is duly elected and qualified.
46
<PAGE>
Our bylaws provide that, following this offering, our board of directors
will be divided into three classes as nearly equal in size as possible with
staggered three-year terms. The classification of our board of directors could
have the effect of making it more difficult for a third party to acquire, or
discouraging a third party from acquiring, control of ONI Systems.
Board Committees
Our board of directors has two committees:
Compensation Committee. The current members of our compensation committee
are Messrs. Compton and Feiber. The compensation committee reviews and makes
recommendations to our board concerning salaries and incentive compensation for
our officers. The compensation committee also administers our stock plans.
Audit Committee. The current members of our audit committee are Messrs.
Jordan, Feiber and Maffei. Our audit committee reviews and monitors our
financial statements and accounting practices, makes recommendations to our
board regarding the selection of independent auditors and reviews the results
and scope of the audit and other services provided by our independent auditors.
Members serve on these committees until their resignation or until otherwise
determined by our board.
Compensation Committee Interlocks and Insider Participation
None of the members of the compensation committee has at any time since our
formation been an officer or employee of ours. None of our executive officers
currently serves or in the past has served as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving on our board or compensation committee. Prior to the
creation of our compensation committee, all compensation decisions were made by
our full board.
Director Compensation
Our directors do not receive cash compensation for their services as
directors but are reimbursed for their reasonable expenses in attending board
and board committee meetings. The following directors have been granted options
to purchase our common shares. In March 1998 and November 1998, we granted
stock awards to purchase 360,000 shares and 180,000 shares of common stock to
Mr. Jordan for $0.08 and $0.09 per share, respectively, which he purchased in
full. In November 1999, we granted an option to purchase 180,000 shares of
common stock to Mr. Bross at an exercise price of $0.91 per share. In December
1999, we granted an option to purchase 1,215,834 shares of common stock to Mr.
Martin at an exercise price of $1.25 per share in connection with his services
as President and Chief Executive Officer. In March 2000, we granted an option
to purchase 120,000 shares of common stock to Mr. Maffei at an exercise price
of $3.20 per share.
Members of the board who are not employees of ONI Systems, or any parent,
subsidiary or affiliate of ONI Systems, will be eligible to participate in the
2000 Equity Incentive Plan. The option grants under the plan are automatic and
nondiscretionary, and the exercise price of the options is the fair market
value of the common stock on the date of grant.
Each non-employee director who becomes a member of the board on or after the
effective date of the registration statement of which this prospectus forms a
part will be granted an option to purchase 80,000 shares of common stock. Also,
each non-employee director who became a member of the board prior to the
effective date of the registration statement of which this prospectus forms a
part and who did not receive an option grant will receive an option to purchase
80,000 shares. Immediately
47
<PAGE>
following each annual meeting of stockholders, each eligible director will
automatically be granted an additional option to purchase 40,000 shares of
common stock if the director has served continuously as a member of the board
since the date of the prior annual meeting. The board of directors may make
discretionary supplemental grants to an eligible director who has served for
less that one year from the date of that director's initial grant. The options
have ten-year terms. They will terminate three months following the date the
director ceases to be a director or a consultant or 12 months following
termination due to death or disability. All options granted under the 2000
Equity Incentive Plan will become exercisable over a four year period at a rate
of 25% after one year and 2.083% per month thereafter so long as he or she
continues as a member of the board or as a consultant. In the event of our
dissolution or liquidation or a change in control transaction, options granted
to directors under the plan will become 100% vested and exercisable in full.
Executive Compensation
The following table presents compensation information for our fiscal year
ended December 31, 1999 paid to or accrued for our Chief Executive Officer and
each of our executive officers whose salary and bonus was more than $100,000.
The compensation table includes long-term awards granted in 1999. The
compensation table excludes other compensation in the form of perquisites and
other personal benefits that constituted less than 10% of the total annual
salary and bonus for the named executive officer in the fiscal year ended
December 31, 1999.
The table does not include compensation information for three executive
officers who commenced employment after December 31, 1999. These three officers
would have been among the five most highly compensated executive officers had
they been employees of ONI Systems in 1999. Chris A. Davis, our incoming
Executive Vice President, Chief Financial and Administrative Officer, will
commence employment with ONI Systems in May 2000. Ms. Davis' salary on an
annualized basis for 2000 is $400,000, which does not include a $300,000 bonus
to be received upon commencement of employment. Robert J. Jandro, our Executive
Vice President, Worldwide Sales and Marketing, commenced employment with ONI
Systems on March 1, 2000. Mr. Jandro's salary on an annualized basis for 2000
is $295,000, which does not include a $200,000 bonus payable upon the
satisfaction of established performance goals. Andrew W. Page, our Vice
President, Corporate Development, commenced employment with ONI Systems on
February 29, 2000. Mr. Page's salary on an annualized basis for 2000 is
$300,000, which does not include a $30,000 bonus received upon commencement of
employment.
Summary Compensation Table for 1999
<TABLE>
<CAPTION>
Long-Term
Compensation Awards
---------------------
Annual
Compensation Restricted Securities
--------------- Stock Underlying
Name and Principal Positions Salary Bonus Awards Options
---------------------------- -------- ------ ---------- ----------
<S> <C> <C> <C> <C>
Hugh C. Martin.......................... $270,001 $ -- -- 1,215,834
President and Chief Executive Officer
Terrence J. Schmid...................... 173,335 -- -- 320,000
Chief Financial Officer and Vice
President, Finance and Administration
Hon Wah Chin............................ 182,820 -- -- 200,000
Chief Technology Officer
William R. Cumpston..................... 191,666 85,000 -- 800,000
Senior Vice President, Engineering and
Operations
</TABLE>
48
<PAGE>
Option Grants in 1999
The following table sets forth grants of stock options in 1999 to the
executive officers named in the summary compensation table above.
All options granted generally vest over four years, either:
. at the rate of 25% of the shares subject to the option on the first
anniversary of the date of grant and 2.083% each month thereafter; or
. at the rate 2.083% of the shares subject to the option each month.
Options expire ten years from the date of grant. Options were granted at an
exercise price equal to the fair market value of our common stock, as
determined by the board as of the date of grant.
Estimated values are computed by (a) multiplying the number of shares of
common stock subject to a given option by the assumed initial public offering
price of $15.00 per share, and (b) subtracting from that result the aggregate
option exercise price. Potential realizable values are computed by (a)
multiplying the number of shares of common stock subject to a given option by
the assumed initial public offering price of $15.00 per share, (b) assuming
that the aggregate stock value derived from that calculation compounds at the
annual 5% or 10% rates shown in the table for the entire ten-year term of the
option and (c) subtracting from that result the aggregate option exercise
price. The 5% and 10% assumed annual rates of stock price appreciation are
mandated by the rules of the Securities and Exchange Commission and do not
represent our estimate or projection of future common stock prices.
The percentage of total options granted to employees in 1999 is based on
options to purchase a total of 19,269,988 shares of common stock of ONI Systems
granted during 1999.
<TABLE>
<CAPTION>
Potential Realizable Value
Number of Percentage of at Assumed Annual Rates
Securities Total Options of Stock Price Appreciation
Underlying Granted to Exercise for Option Term
Options Employees Price Expiration Estimated ----------------------------
Name Granted in 1999 Per Share Date Value 5% 10%
- ---- ---------- ------------- --------- ---------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Hugh C. Martin.......... 1,215,834 6.31% $1.25 12/21/09 $16,717,718 $ 28,187,190 $45,783,612
Terrence J. Schmid...... 120,000 0.62 0.09 3/4/09 1,789,200 2,921,210 4,657,936
200,000 1.04 1.25 12/21/09 2,750,000 4,636,684 7,531,227
Hon Wah Chin............ 100,000 0.52 0.09 7/15/09 1,491,000 2,434,342 3,881,614
100,000 0.52 1.25 12/21/09 1,375,000 2,318,342 3,765,614
William R. Cumpston..... 300,000 1.56 0.09 3/4/09 4,473,000 7,303,026 11,644,841
200,000 1.04 0.91 9/15/09 2,818,000 4,704,684 7,599,277
300,000 1.56 1.25 12/21/09 4,125,000 6,955,026 11,296,841
</TABLE>
49
<PAGE>
Option Grants in 2000
The following table sets forth grants of stock options to new executive
officers since December 31, 1999:
<TABLE>
<CAPTION>
Potential Realizable Value
Number of at Assumed Annual Rates
Securities Exercise of Stock Price Appreciation
Underlying Price for Option Term
Options Per Expiration Estimated ---------------------------
Name Granted Share Date Value 5% 10%
- ---- ---------- -------- ---------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Chris A. Davis (1)...... 1,100,000
Robert J. Jandro........ 900,000 $3.20 3/1/10 $10,620,000 $ 19,110,077 $ 32,135,523
Andrew W. Page.......... 300,000 3.20 3/1/10 3,540,000 6,370,025 10,711,841
</TABLE>
- --------
(1) We have agreed to grant to Ms. Davis an option to purchase up to 1,100,000
shares of common stock. However, Ms. Davis can elect alternative
compensation arrangements, as described on page 54.
Aggregated Option Exercises in the Fiscal Year Ended December 31, 1999
The following table presents the number of shares acquired and the value
realized upon exercise of stock options during the fiscal year ended December
31, 1999.
The value realized equals the fair market value of the purchased shares on
the option exercise date, less the exercise price paid for those shares. None
of the individuals named in the table below held any options at December 31,
1999. The shares acquired upon exercise of those options will be subject to
repurchase by ONI Systems, at the original exercise price paid per share, if
the optionee ceases service with ONI Systems before those shares have vested.
In March 2000, Mr. Jandro acquired 900,000 shares of common stock on the
exercise of an option and Mr. Page acquired 300,000 shares of common stock on
the exercise of an option. Neither Mr. Jandro or Mr. Page had any value
realized on their respective option grants. Since Ms. Davis has not commenced
employment with ONI Systems, she did not acquire or exercise any options during
1999.
<TABLE>
<CAPTION>
Number of
Shares
Acquired on Value
Name Exercise Realized
---- ----------- --------
<S> <C> <C>
Hugh C. Martin........................................ 1,215,834 $ --
Terrence J. Schmid.................................... 320,000 98,400
Hon Wah Chin.......................................... 200,000 82,000
William R. Cumpston................................... 1,300,000 656,000
</TABLE>
Employee Benefit Plans
1997 Stock Option Plan. As of March 31, 2000, options to purchase 318,088
shares of common stock were outstanding under our 1997 Stock Option Plan. The
options outstanding as of March 31, 2000 had a weighted average exercise price
of $0.03 per share. The board of directors terminated this plan in April 1998,
and no options have been granted under it since that time. Termination did not
affect any outstanding options, all of which will remain outstanding and
subject to the terms of our 1997 Stock Option Plan and stock option agreement
until exercise or until they terminate or expire by their terms. Options
granted under our 1997 Stock Option Plan are subject to terms substantially
similar to those described below with respect to options granted under our 2000
Equity Incentive Plan.
50
<PAGE>
1998 Equity Incentive Plan. As of March 31, 2000, options to purchase
18,039,257 shares of common stock were outstanding under our 1998 Equity
Incentive Plan and 1,029,653 shares of common stock remained available for
issuance upon the exercise of options that may be granted in the future. The
options outstanding as of March 31, 2000 had a weighted average exercise price
of $0.63 per share. Our 1998 Equity Incentive Plan will terminate upon this
offering, at which time our 2000 Equity Incentive Plan will become effective.
As a result, no options will be granted under our 1998 Equity Incentive Plan
after this offering. However, termination will not affect any outstanding
options under our 1998 Equity Incentive Plan, all of which will remain
outstanding and subject to the terms of our 1998 Equity Incentive Plan and
stock option agreement until exercise or until they terminate or expire by
their terms. Options granted under our 1998 Equity Incentive Plan are subject
to terms substantially similar to those described below with respect to options
granted under our 2000 Equity Incentive Plan.
1999 Equity Incentive Plan. As of March 31, 2000, options to purchase
986,000 shares of common stock were outstanding under our 1999 Equity Incentive
Plan and 348,166 shares of common stock remained available for issuance upon
the exercise of options that may be granted in the future. The options
outstanding as of March 31, 2000 had a weighted average exercise price of $0.96
per share. Our 1999 Equity Incentive Plan will terminate upon this offering, at
which time our 2000 Equity Incentive Plan will become effective. As a result,
no options will be granted under our 1999 Equity Incentive Plan after this
offering. However, termination will not affect any outstanding options under
our 1999 Equity Incentive Plan, all of which will remain outstanding and
subject to the terms of our 1999 Equity Incentive Plan and stock option
agreement until exercise or until they terminate or expire by their terms.
Options granted under our 1999 Equity Incentive Plan are subject to terms
substantially similar to those described below with respect to options granted
under our 2000 Equity Incentive Plan.
2000 Equity Incentive Plan. Our 2000 Equity Incentive Plan will become
effective on the date of this prospectus and will serve as the successor to our
1998 Equity Incentive Plan and our 1999 Equity Incentive Plan. We have reserved
7,000,000 shares of common stock to be issued under this plan. In addition,
shares under our 1997 Stock Option Plan, 1998 Equity Incentive Plan and 1999
Equity Incentive Plan not issued or subject to outstanding grants on the date
of this prospectus and any shares issued under these plans that are forfeited
or repurchased by us or that are issuable upon exercise of options that become
unexercisable for any reason without having been exercised in full will be
available for grant and issuance under our 2000 Equity Incentive Plan. Shares
will again be available for grant and issuance under our 2000 Equity Incentive
Plan that:
. are subject to issuance upon exercise of an option granted under our 2000
Equity Incentive Plan that cease to be subject to the option for any
reason other than exercise of the option;
. have been issued upon the exercise of an option granted under our 2000
Equity Incentive Plan that are subsequently forfeited or repurchased by
us at the original purchase price;
. are subject to an award granted under a restricted stock purchase
agreement under our 2000 Equity Incentive Plan that are subsequently
forfeited or repurchased by us at the original issue price; or
. are subject to a stock bonus granted under our 2000 Equity Incentive Plan
that terminates without shares being issued.
On each January 1, the aggregate number of shares reserved for issuance
under our 2000 Equity Incentive Plan will increase automatically by a number of
shares equal to 5% of our outstanding shares on December 31 of the preceding
year. Our board of directors or compensation committee may reduce the amount of
the increase in any particular year.
51
<PAGE>
Our 2000 Equity Incentive Plan will terminate after ten years from the date
our board of directors approved the plan, unless it is terminated earlier by
our board of directors. The plan authorizes the award of options, restricted
stock awards and stock bonuses. No person is eligible to receive more than
1,000,000 shares in any calendar year under the plan other than a new employee
of ONI Systems, who will be eligible to receive no more than 2,000,000 shares
in the calendar year in which the employee commences employment.
Our 2000 Equity Incentive Plan will be administered by our compensation
committee, all of the members of which are non-employee directors under
applicable federal securities laws and outside directors as defined under
applicable federal tax laws. The compensation committee will have the authority
to construe and interpret the plan, grant awards and make all other
determinations necessary or advisable for the administration of the plan. Also,
our non-employee directors are entitled to receive automatic annual grants of
options to purchase shares of our common stock, as described under
"Management--Director Compensation".
Our 2000 Equity Incentive Plan will provide for the grant of both incentive
stock options that qualify under Section 422 of the Internal Revenue Code and
nonqualified stock options. Incentive stock options may be granted only to
employees of ONI Systems or of a parent or subsidiary of ONI Systems. All other
awards other than incentive stock options may be granted to employees,
officers, directors and consultants of ONI Systems or any parent or subsidiary
of ONI Systems, provided the consultants render bona fide services not in
connection with the offer and sale of securities in a capital-raising
transaction. The exercise price of incentive stock options must be at least
equal to the fair market value of our common stock on the date of grant. The
exercise price of incentive stock options granted to 10% stockholders must be
at least equal to 110% of that value. The exercise price of nonqualified stock
options must be at least equal to 85% of the fair market value of our common
stock on the date of grant.
Options may be exercised only as they vest or may be immediately exercisable
with the shares issued subject to our right of repurchase that lapses as the
shares vest. In general, options will vest over a four-year period. The maximum
term of options granted under our 2000 Equity Incentive Plan is ten years.
Awards granted under our 2000 Equity Incentive Plan may not be transferred
in any manner other than by will or by the laws of descent and distribution.
They may be exercised during the lifetime of the optionee only by the optionee.
The compensation committee may determine otherwise and provide for these
provisions in the award agreement, but only with respect to awards that are not
incentive stock options. Options granted under our 2000 Equity Incentive Plan
generally may be exercised for a period of three months after the termination
of the optionee's service to ONI Systems or a parent or subsidiary of ONI
Systems. Options will generally terminate immediately upon termination of
employment for cause.
The purchase price for restricted stock will be determined by our
compensation committee. Stock bonuses may be issued for past services or may be
awarded upon the completion of stated services or performance goals.
2000 Employee Stock Purchase Plan. Our 2000 Employee Stock Purchase Plan
will become effective on the first day on which price quotations are available
for our common stock on the Nasdaq National Market. We have initially reserved
1,000,000 shares of common stock under this plan. On each January 1, the
aggregate number of shares reserved for issuance under our 2000 Employee Stock
Purchase Plan will increase automatically by a number of shares equal to 1% of
our outstanding shares on December 31 of the preceding year. Our board of
directors or compensation committee may reduce the amount of the increase in
any particular year. The aggregate number of shares reserved for issuance under
our 2000 Employee Stock Purchase Plan may not exceed 10,000,000 shares.
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Our 2000 Employee Stock Purchase Plan will be administered by our
compensation committee. Our compensation committee will have the authority to
construe and interpret the plan, and its decisions will be final and binding.
Employees generally will be eligible to participate in our 2000 Employee
Stock Purchase Plan if they are employed before the beginning of the applicable
offering period and they are customarily employed by us, or our parent or any
subsidiaries that we designate, for more than 20 hours per week and more than
five months in a calendar year and are not, and would not become as a result of
being granted an option under the plan, 5% stockholders of us or our designated
parent or subsidiaries. Participation in our 2000 Employee Stock Purchase Plan
will end automatically upon termination of employment for any reason.
Under our 2000 Employee Stock Purchase Plan, eligible employees will be
permitted to acquire shares of our common stock through payroll deductions.
Eligible employees may select a rate of payroll deduction between 1% and 15% of
their compensation and are subject to maximum purchase limitations.
Except for the first offering period, each offering period under our 2000
Employee Stock Purchase Plan will be for two years and consist of four six-
month purchase periods. Offering periods and purchase periods will begin on
February 1 and August 1 of each year. The first offering period is expected to
begin on the first business day on which price quotations for common stock are
available on the Nasdaq National Market. However, because the first day on
which price quotations for our common stock will be available on the Nasdaq
National Market may not be February 1 or August 1, the length of the first
offering period may be more or less than two years, and the length of the first
purchase period may be more or less than six months.
Our 2000 Employee Stock Purchase Plan provides that, in the event of our
proposed dissolution or liquidation, each offering period that commenced prior
to the closing of the proposed event will continue for the duration of the
offering period, provided that the compensation committee may fix a different
date for termination of the plan. The purchase price for common stock purchased
under the plan will be 85% of the lesser of the fair market value of our common
stock on the first day of the applicable offering period or the last day of the
applicable purchase period. The compensation committee will have the power to
change the offering dates, purchase dates and duration of offering periods
without stockholder approval, if the change is announced prior to the beginning
of the affected date or offering period.
Our 2000 Employee Stock Purchase Plan is intended to qualify as an employee
stock purchase plan under Section 423 of the Internal Revenue Code. The plan
will terminate ten years from the date the plan was adopted by our board of
directors, unless it is terminated earlier under the terms of the plan. The
board of directors will have the authority to amend, terminate or extend the
term of the plan, except that no action may adversely affect any outstanding
options previously granted under the plan.
Except for the automatic annual increase of shares described above,
stockholder approval will be required to increase the number of shares that may
be issued or to change the terms of eligibility under our 2000 Employee Stock
Purchase Plan. The board of directors will be able to make amendments to the
plan as it determines to be advisable if the financial accounting treatment for
the plan is different from the financial accounting treatment in effect on the
date the plan was adopted by the board of directors.
401(k) Plan. We sponsor a defined contribution plan intended to qualify
under Section 401 of the Internal Revenue Code, or a 401(k) plan. Employees who
are at least 21 years old are generally eligible to participate. Participants
may make pre-tax contributions to the plan of up to 15% of their
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eligible earnings, subject to a statutorily prescribed annual limit. Each
participant is fully vested in his or her contributions and the investment
earnings. There are no matching contributions under the plan. Contributions by
the participants to the plan, and the income earned on these contributions, are
generally not taxable to the participants until withdrawn. Participant
contributions are held in trust as required by law. Individual participants may
direct the trustee to invest their accounts in authorized investment
alternatives.
Employment-Related Agreements
Hugh C. Martin. In January 1998, we entered into an at-will employment
agreement with Mr. Martin. Mr. Martin initially received a base salary of
$200,000 per year. Mr. Martin's current salary is $280,000 per year. He is also
eligible to receive an annual performance bonus of up to 25% of his salary,
which was guaranteed at $50,000 in 1998. In addition, we granted Mr. Martin a
stock award to purchase 8.5% of our total capital stock, subject to vesting
requirements. We also granted Mr. Martin a stock award to purchase 1.5% of our
total capital stock, which vested according to attainment of 1998 and 1999
milestones. In the event of a change in control of ONI Systems, 50% of the
then-unvested shares subject to Mr. Martin's stock award will become fully
vested.
Terrence J. Schmid. In February 1998, we entered into an at-will employment
agreement with Mr. Schmid. Mr. Schmid initially received a base salary of
$140,000 per year. Mr. Schmid's current salary is $180,000 per year. He is also
eligible to receive an annual performance bonus of up to 15% of his base
salary, which was guaranteed at $20,000 in 1998. In addition, we granted Mr.
Schmid a stock award to purchase 533,332 shares of common stock, subject to
vesting requirements. In the event of a change in control of ONI Systems, 50%
of the then-unvested shares subject to Mr. Schmid's stock award will become
fully vested.
In March 2000, we entered into a separation agreement with Mr. Schmid in
connection with his resignation as Chief Financial Officer and Vice President,
Finance and Administration effective April 28, 2000. Under the terms of this
agreement, we agreed to make a severance payment of $90,000 which is equal to
six months of Mr. Schmid's current salary. We also agreed to waive our
repurchase rights with respect to up to 106,662 shares of common stock.
Chris A. Davis. In April 2000, we entered into an at-will employment
agreement with Ms. Davis. Ms. Davis' initial and current salary is $400,000 per
year. She will receive a signing bonus of $300,000. We also agreed to allow Ms.
Davis to choose any one of these three alternatives:
. an option to purchase 1,100,000 shares of common stock at an exercise
price per share equal to the fair market value of common stock on the
date of grant;
. an option to purchase 1,000,000 shares of common stock at an exercise
price per share of $4.00; or
. an option to purchase 1,000,000 shares of common stock at an exercise
price per share equal to the fair market value of common stock on the
date of grant together with loan forgiveness in an amount up to
$2,125,000 per year for four years if Ms. Davis chooses to exercise such
option immediately with a promissory note.
Any option granted to Ms. Davis will be subject to vesting. Ms. Davis will be
permitted to pay for the exercise of these options with a promissory note. In
the event of a change of control of ONI Systems and an involuntary or
constructive termination without cause of Ms. Davis' employment with us or our
successor, 50% of the then-unvested shares subject to Ms. Davis' stock option
will become fully vested.
If we terminate Ms. Davis' employment without cause, she will be entitled to
receive six months of her then-current salary, benefits and vesting of options.
She will receive at least six months vesting if her employment is terminated
within the first year of her employment.
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Hon Wah Chin. In June 1998, we entered into an at-will employment agreement
with Mr. Chin. Mr. Chin initially received a base salary of $160,000 per year.
Mr. Chin's current salary is $200,000 per year. He is also eligible to receive
an annual performance bonus, which was guaranteed at $40,000 in 1998. In
addition, we granted Mr. Chin a stock award to purchase 674,000 shares of
common stock, subject to vesting requirements. In the event of a change in
control of ONI Systems, 50% of the then-unvested shares subject to Mr. Chin's
stock award and 50% of any other then unvested securities granted to Mr. Chin
by us will become fully vested.
If we terminate Mr. Chin's employment without cause, he will be entitled to
receive six months of his then-current salary, benefits and vesting of options.
William R. Cumpston. In August 1998, we entered into an at-will employment
agreement with Mr. Cumpston. Mr. Cumpston initially received a base salary of
$175,000 per year. Mr. Cumpston's current salary is $225,000 per year. He also
received a signing bonus of $45,000 and is eligible to receive an annual
performance bonus of at least $40,000. In addition, we granted Mr. Cumpston an
option to purchase 500,000 shares of common stock, subject to vesting
requirements.
Michael A. Dillon. In October 1999, we entered into an at-will employment
agreement with Mr. Dillon. Mr. Dillon's initial and current salary is $200,000
per year. In addition, Mr. Dillon received a signing bonus of $50,000 and we
granted Mr. Dillon an option to purchase 300,000 shares of our common stock,
subject to vesting requirements. We also granted Mr. Dillon an option to
purchase an additional 20,000 shares of common stock, which is not subject to
any vesting requirements. In the event of a change in control of ONI Systems,
25% of the then-unvested shares subject to Mr. Dillon's stock option and 25% of
the then-unvested shares of any other securities granted to Mr. Dillon by us
will become fully vested.
If we terminate Mr. Dillon's employment without cause during his first 12
months of employment, then he will be entitled to receive six months of his
then-current salary, benefits and vesting of options.
Robert J. Jandro. In February 2000, we entered into an at-will employment
agreement with Mr. Jandro. Mr. Jandro's initial and current salary is $295,000
per year. He is also eligible to receive an incentive bonus of up to $200,000.
We also granted Mr. Jandro an option to purchase 900,000 shares of common
stock, subject to vesting requirements. In the event of a change in control of
ONI Systems, 25% of the then-unvested shares subject to Mr. Jandro's stock
option and 25% of the then-unvested shares of any other securities granted to
Mr. Jandro by us will become fully vested.
If we terminate Mr. Jandro's employment without cause during his first 12
months of employment, then he will be entitled to receive six months of his
base salary.
Andrew W. Page. In February 2000, we entered into an at-will employment
agreement with Mr. Page. Mr. Page's initial and current salary is $300,000 per
year. He also received a signing bonus of $30,000 and we granted him an option
to purchase 300,000 shares of common stock, subject to vesting requirements. In
the event of a change in control of ONI Systems, 50% of the then-unvested
shares subject to Mr. Page's stock option and 50% of the then-unvested shares
of any other securities granted to Mr. Page by us will become fully vested.
Indemnification of Directors and Executive Officers and Limitation of Liability
Our certificate of incorporation and bylaws provide that a director shall
not be personally liable for monetary damages resulting from breach of his
fiduciary duty as a director, except for liability:
. for any breach of the director's duty of loyalty to us or our
stockholders;
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. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. under section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or
. for any transaction from which the director derived an improper personal
benefit.
Our bylaws provide that:
. we are required to indemnify our directors and officers to the fullest
extent permitted by the Delaware General Corporation Law;
. we may indemnify our employees and agents as set forth in the Delaware
General Corporation Law, subject to very limited exceptions;
. we are required to advance expenses, as incurred, to our directors and
executive officers in connection with a legal proceeding;
. we may advance expenses, as incurred, to our employees and agents in
connection with a legal proceeding; and
. the rights conferred in the bylaws are not exclusive.
In addition to the indemnification required in our certificate of
incorporation and bylaws, before the completion of this offering, we entered
into indemnity agreements with each of our current directors and executive
officers. These agreements provide for the indemnification of our officers and
directors for all expenses and liabilities incurred in connection with any
action or proceeding brought against them by reason of the fact that they are
or were our agents. We also intend to obtain directors' and officers' insurance
to cover our directors, officers and some of our employees for liabilities,
including liabilities under securities laws. We believe that these
indemnification provisions and agreements and this insurance are necessary to
attract and retain qualified directors and officers.
The limitation of liability and indemnification provisions in our
certificate of incorporation and bylaws may discourage stockholders from
bringing a lawsuit against directors for breach of their fiduciary duty. They
may also reduce the likelihood of derivative litigation against directors and
officers, even though an action, if successful, might benefit us and other
stockholders. Furthermore, a stockholder's investment may be adversely affected
to the extent we pay the costs of settlement and damage awards against
directors and officers as required by these indemnification provisions. At
present, there is no pending litigation or proceeding involving any of our
directors, officers or employees regarding which indemnification by us is
sought, nor are we aware of any threatened litigation that may result in claims
for indemnification.
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RELATED PARTY TRANSACTIONS
Other than compensation agreements and other arrangements, which are
described as required in "Management", and the transactions described below,
since we were formed, there has not been, nor is there currently proposed, any
transaction or series of similar transactions to which we were or will be a
party:
. in which the amount involved exceeded or will exceed $60,000; and
. in which any director, executive officer, holder of more than 5% of our
common stock on an as-converted basis or any member of their immediate
family had or will have a direct or indirect material interest.
Optivision Spin-Out
In October 1997, Optical Networks, Incorporated, our California predecessor,
was formed as a subsidiary of Optivision, Inc. In exchange for assets related
to the optical development business and related liabilities, Optivision
received 11,565,752 shares of our common stock and 8,000,000 shares of our
Series A preferred stock. In addition to the shares of capital stock delivered
to Optivision, we executed and delivered a $90,000 promissory note in favor of
Optivision that was subsequently cancelled by Optivision upon payment.
In December 1997, we were spun out of Optivision and Optivision distributed
some of its holdings of our common stock and preferred stock to Optivision
shareholders. Holders of Optivision common stock and Series A preferred stock
received one share of our common stock for every share of Optivision common
stock or Series A preferred stock held, for an aggregate of 11,565,752 shares.
Holders of Optivision Series B preferred stock received one share of our Series
A preferred stock for every share of Optivision Series B preferred stock held,
for an aggregate of 4,000,000 shares. Optivision also retained 4,000,000 shares
of our Series A preferred stock. In January 1998, all of the shares of our
Series A preferred stock were converted into Series B preferred stock on a one-
for-one basis.
In connection with the spin-out, we have reserved, and are obligated to
issue for no additional consideration, shares of our common stock upon the
exercise of the warrants to purchase capital stock of Optivision. In October
1997, ADC Telecommunications, Inc., a holder of Optivision Series B preferred
stock, entered into an agreement with Optivision that granted ADC registration,
information and other rights related to the Series A preferred stock
distributed to ADC as part of the spin-out. These rights were amended upon
conversion of its Series A preferred stock to Series B preferred stock.
In January 1998, as a condition to the closing of our Series B and C
financings, we entered into agreements with Optivision granting us certain
additional assets, related liabilities and a license to technology and
assigning technology to us. In July 1998, we completed an agreement with
Optivision, under which it transferred contracts between the United States
government and Optivision to us.
In January 1998, Optivision sold 2,666,667 shares of our Series B preferred
stock to Kleiner Perkins Caufield & Byers and its affiliates and Mohr, Davidow
Ventures and its affiliates, for an aggregate purchase price of $2 million. In
March 1998, we repurchased the remaining shares of our stock owned by
Optivision, consisting of 1,333,333 shares of our Series B preferred stock, for
an aggregate purchase price of $1 million. Optivision does not currently own
any shares of ONI Systems.
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Preferred Stock Financings
Since our inception, we have issued shares of preferred stock in private
placement transactions as follows:
. from December 1997 to March 1998, we sold 18,128,843 shares of Series B
preferred stock for approximately $0.24 per share, issued 8,000,000
shares of Series B preferred stock upon conversion of all outstanding
shares of Series A preferred stock and repurchased 1,333,333 shares of
Series B preferred stock;
. from December 1997 to March 1998, we sold 2,733,332 shares of Series C
preferred stock for approximately $0.75 per share;
. in April 1998, we sold 4,969,148 shares of Series D preferred stock for
approximately $0.88 per share;
. from December 1998 to May 1999, we sold 26,284,024 shares of Series E
preferred stock for approximately $0.91 per share;
. in September 1999, we sold 8,249,468 shares of Series F preferred stock
for approximately $1.82 per share; and
. from December 1999 to March 2000, we sold 12,163,418 shares of Series G
preferred stock for approximately $6.32 per share.
Purchasers of our preferred stock include, among others, the following
executive officers, directors and holders of more than 5% of our outstanding
stock or entities affiliated with them. The following table presents the number
of shares and price per share for each of these purchasers. The number of total
shares on an as-converted basis reflects a one-to-one conversion to common
stock ratio for each share of Series B, Series C, Series D, Series E, Series F
and Series G preferred stock. Mr. Compton, a director of ONI Systems, is also a
general partner of Kleiner Perkins Caufield & Byers. Mr. Compton disclaims
beneficial ownership of shares held by Kleiner Perkins and affiliates except to
the extent of his interest in Kleiner Perkins and affiliates. Mr. Feiber, a
director of ONI Systems, is also a general partner of Mohr, Davidow Ventures.
Mr. Feiber disclaims beneficial ownership of shares held by Mohr, Davidow
Ventures and affiliates except to the extent of his interest in Mohr, Davidow
Ventures and affiliates. The shares held by Williams Communications, Inc.
include 142,460 shares of Series G preferred stock held by Mr. Bross. Mr. Bross
is a director of ONI Systems and serves as Senior Vice President and Chief
Technology Officer of Williams Communications. Mr. Bross disclaims beneficial
ownership of shares held by Williams Communications and Williams Communications
disclaims benefical ownership of the shares held by Mr. Bross.
<TABLE>
<CAPTION>
Total Shares
Stock on an
Series B Series C Series E Series F Series G As-Converted
Purchaser Preferred Preferred Preferred Preferred Preferred Basis
--------- --------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kleiner Perkins Caufield
& Byers and affiliates
(Kevin R. Compton)..... 9,824,680 666,666 1,917,808 1,256,668 -- 13,665,822
Mohr, Davidow Ventures
and affiliates
(Jonathan D. Feiber)... 9,824,680 666,666 1,917,808 1,256,668 1,266,322 14,932,144
Hon Wah Chin............ -- -- 44,000 33,000 8,000 85,000
Michael A. Dillon....... -- -- -- -- 4,000 4,000
Andrew W. Page.......... 150,000 150,000
Williams Communications
(Mathew W. Bross)...... -- -- -- -- 1,725,364 1,725,364
James F. Jordan......... -- 1,333,334 -- -- -- 1,333,334
Gregory B. Maffei....... 160,000 160,000
Price per share......... $ 0.24 $ 0.75 $ 0.91 $ 1.82 $ 6.32
</TABLE>
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Registration Rights
We have entered into an investors' rights agreement with each of the
purchasers of preferred stock set forth above. Under this agreement, these and
other stockholders are entitled to registration rights with respect to their
shares of common stock issuable upon conversion of their preferred stock upon
the closing of this offering. Following this offering, holders of 79,355,863
shares of our common stock are entitled to registration rights with respect to
the shares of common stock that they will hold following this offering, based
on an assumed private placement price of $15.00 per share. See "Description of
Capital Stock--Registration Rights".
Loans to Executive Officers and Directors in Connection with Exercise of
Options
In connection with the option exercises described under Management--Director
Compensation and Management--Executive Compensation, the following executive
officers and directors delivered promissory notes, each with a five-year term,
in the amounts and bearing interest as indicated below:
In December 1999, we made a loan to Hugh C. Martin, our Chairman, President
and Chief Executive Officer, in connection with his exercise of an option to
acquire 1,215,834 shares of common stock, for an aggregate purchase price of
$1,519,793. The loan is evidenced by a promissory note in the principal amount
of $1,519,793, with interest compounded annually on the unpaid balance at a
rate of 6.20% per year.
In November and December 1999, we made two loans to Terrence J. Schmid, our
Chief Financial Officer and Vice President, Finance and Administration, in
connection with his exercise of options to acquire 120,000 shares and 200,000
shares, respectively, of common stock, for an aggregate purchase price of
$260,800. The loans are evidenced by a promissory note in the principal amount
of $10,800, with interest compounded annually on the unpaid balance at a rate
of 6.08% per year, and a promissory note in the principal amount of $250,000,
with interest compounded annually on the unpaid balance at a rate of 6.20% per
year.
In November 1999, we made three loans to William R. Cumpston, our Senior
Vice President, Engineering and Operations, in connection with his exercise of
options to acquire 1,000,000 shares of common stock, for an aggregate purchase
of $254,000. The loans are evidenced by a promissory note in the principal
amount of $45,000, with interest compounded annually on the unpaid balance at a
rate of 6.08% per year, a promissory note in the principal amount of $182,000,
with interest compounded annually on the unpaid balance at a rate of 6.08% per
year and a promissory note in the principal amount of $27,000, with interest
compounded annually on the unpaid balance at a rate of 6.08% per year. In
December 1999, we made another loan to Mr. Cumpston, in connection with his
exercise of an option to acquire 300,000 shares of common stock, for an
aggregate purchase price of $375,000. The loan is evidenced by a promissory
note in the principal amount of $375,000, with interest compounded annually on
the unpaid balance at a rate of 6.20% per year.
In November 1999, we made a loan to Hon Wah Chin, our Chief Technical
Officer, in connection with his exercise of options to acquire 100,000 shares
of common stock, for an aggregate purchase price of $9,000. The loan is
evidenced by a promissory note in the principal amount of $9,000, with interest
compounded annually on the unpaid balance at a rate of 6.08% per year. In
December 1999, we made another loan to Mr. Chin in connection with his exercise
of an option to acquire 100,000 shares of common stock, for an aggregate
purchase price of $125,000. The loan is evidenced by a promissory note in the
principal amount of $125,000, with interest compounded annually on the unpaid
balance at a rate of 6.20% per year.
In November 1999, we made a loan to Michael A. Dillon, our Vice President
and General Counsel, in connection with his exercise of an option to acquire
300,000 shares of common stock, for a purchase price of $273,000. The loan is
evidenced by a promissory note in the principal amount of $273,000, with
interest compounded annually on the unpaid balance at a rate of 6.08% per year.
In
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February 2000, we made another loan to Mr. Dillon in connection with his
exercise of an option to acquire 70,000 shares of common stock. The loan is
evidenced by a promissory note in the principal amount of $87,500, with
interest compounded annually at a rate of 6.56% per year.
In March 2000, we made a loan to Robert J. Jandro, our Executive Vice
President, Worldwide Sales and Marketing, in connection with his exercise of an
option to acquire 900,000 shares of common stock, for a purchase price of
$2,880,000. The loan is evidenced by a promissory note in the principal amount
of $2,880,000, with interest compounded annually on the unpaid balance at a
rate of 6.80% per year.
In March 2000, we made a loan to Andrew W. Page, our Vice President,
Corporate Development, in connection with his exercise of an option to acquire
300,000 shares of common stock for a purchase price of $960,000. The loan is
evidenced by a promissory note in the principal amount of $960,000, with
interest compounded annually on the unpaid balance at a rate of 6.80% per year.
Sales of Restricted Common Stock and Any Related Loans to Executive Officers
and Directors
We made the following additional sales of securities to executive officers
and directors. Unless otherwise noted:
. shares vest over a four-year period and we have a repurchase option for
unvested shares;
. in the event of a change of control of ONI Systems, our repurchase
option will lapse as to 50% of the then-unvested shares; and
. the associated promissory notes have five-year terms.
In January 1998, Hugh C. Martin, our Chairman, President and Chief Executive
Officer, purchased 4,066,540 shares of common stock for $0.005 per share. Mr.
Martin paid for the shares with a promissory note in the principal amount of
$19,696 with interest compounded annually on the unpaid balance at a rate of
6.13% per year due on the earlier of ten years from issuance or 180 days
following termination of employment.
In January 1998, Hugh C. Martin purchased 717,624 shares of common stock for
$0.005 per share. Mr. Martin paid for the shares with a promissory note in the
principal amount of $3,476 with interest compounded annually on the unpaid
balance at a rate of 6.13% per year due on the earlier of ten years from
issuance or 180 days following termination of employment. The shares under the
agreement vest based on achievement of 1998 milestones and 1999 milestones. The
milestones were achieved and our repurchase option has lapsed.
In February 1998, Terrence J. Schmid, our Chief Financial Officer and Vice
President, Finance and Administration, purchased 533,332 shares of our common
stock for $0.08 per share. Mr. Schmid paid for the shares with a promissory
note in the principal amount of $40,000 with interest compounded annually on
the unpaid balance at a rate of 5.93% per year due on the earlier of ten years
from issuance or 210 days following this offering.
In November 1998, Hon Wah Chin, our Chief Technical Officer, purchased
674,000 shares for $0.09 per share. Mr. Chin paid for the shares with a
promissory note in the principal amount of $59,413 with interest compounded
semi-annually on the unpaid balance at a rate of 4.46% per year.
In December 1999, Michael A. Dillon, our Vice President, General Counsel and
Secretary, purchased 20,000 shares for $0.91 per share. Mr. Dillon paid for the
shares with a promissory note in the principal amount of $18,200 with interest
compounded annually on the unpaid balance at a rate of 6.20% per year. We have
no repurchase right for these shares.
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Persons or Entities Related to Our Officers and Directors
In addition to the sales of securities previously described, we have entered
into agreements with affiliates of our officers and directors.
Williams Communications, Inc. is a stockholder of ONI Systems. Mathew W.
Bross, one of our directors, serves as Senior Vice President and Chief
Technology Officer of Williams Communications, Inc. In March 2000, we entered
into a purchase and license agreement with Williams Communications. In December
1999, we also executed a redemption and repurchase agreement with Williams
Communications, which provides us with the right to repurchase at $6.32 per
share the shares of Series G preferred stock owned by Williams Communications,
which are convertible into 1,582,904 shares of common stock, and provided
Williams Communications with the right to require us to redeem the shares held
by it at $8.50 per share, which right lapsed upon completion of lab trials for
our ONLINE9000 product in March 2000.
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PRINCIPAL STOCKHOLDERS
The following table presents information as to the beneficial ownership of
common stock as of March 31, 2000 and as adjusted to reflect the sale of common
stock in this offering by:
. each stockholder known by us to be the beneficial owner of more than 5%
of our common stock;
. each of our directors;
. each of our named executive officers; and
. all of our directors and executive officers as a group.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Unless indicated below, to our knowledge, the persons
and entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property laws
where applicable. Shares of common stock subject to options that are currently
exercisable or exercisable within 60 days of March 31, 2000 are deemed to be
outstanding and to be beneficially owned by the person holding the options for
the purpose of computing the percentage ownership of that person but are not
treated as outstanding for the purpose of computing the percentage ownership of
any other person. Unless indicated below, the address for each listed
stockholder is c/o ONI Systems Corp., 166 Baypointe Parkway, San Jose,
California 95134-1621.
The percentage of common stock outstanding as of March 31, 2000 is based on
114,138,775 shares of common stock outstanding on that date, assuming that all
outstanding preferred stock has been converted into common stock. The
percentage of common stock outstanding following this offering is based on
122,405,442 shares of common stock outstanding assuming an initial public
offering price of $15.00 per share.
<TABLE>
<CAPTION>
Percentage of
Outstanding Shares
Beneficially Owned
---------------------
Number of Shares Before After
Name of Beneficial Owner Beneficially Owned Offering Offering
- ------------------------ ------------------ --------- ---------
<S> <C> <C> <C>
Jonathan D. Feiber (1)............ 14,932,144 13.1 12.2
Mohr, Davidow Ventures and
affiliates
Kevin R. Compton (2).............. 13,665,822 12.0 11.2
Kleiner Perkins Caufield & Byers
and affiliates
Hugh C. Martin (3)................ 5,999,998 5.3 4.9
Matthew W. Bross (4).............. 1,905,364 1.7 1.6
Williams Communications, Inc.
James F. Jordan (5)............... 1,873,334 1.6 1.5
William R. Cumpston (6)........... 1,252,000 1.1 1.0
Hon Wah Chin (7).................. 954,000 * *
Terrence J. Schmid (8)............ 707,332 * *
Gregory B. Maffei (9)............. 280,000 * *
All executive officers and
directors
as a group (12 persons) (10)..... 43,313,994 38.0 35.4
</TABLE>
- --------
* Represents beneficial ownership of less than 1%
(1) Represents 12,709,218 shares held by held by Mohr, Davidow Ventures V,
L.P., 1,266,322 shares held by Mohr, Davidow Ventures V-L, L.P. and
956,604 shares held by Mohr, Davidow Ventures V, L.P. as nominee for MDV
Entrepreneurs' Network Fund II (A), L.P. and MDV Entrepreneurs' Network
Fund II (B), L.P. and the shares represented exclude 346,348 shares held
by the Mohr Family Trust UTA dated 8/5/1985, 10,000 shares held by the
Sarah H. Mohr Trust UTA dated 9/19/97, and 10,000 shares held by the Hope
A. Mohr Trust
62
<PAGE>
UTA dated 9/19/97. Mohr, Davidow Ventures disclaims beneficial ownership
of the shares held by the Mohr Family Trust, the Sarah H. Mohr Trust and
the Hope A. Mohr Trust and these trusts disclaim beneficial ownership of
the shares held by the Mohr, Davidow Ventures entities. Jonathan
D. Feiber, a director of ONI Systems, is also a general partner of Mohr,
Davidow Ventures. Mr. Feiber disclaims beneficial ownership of shares held
by Mohr, Davidow Ventures and affiliates except to the extent of his
interest in Mohr, Davidow Ventures and affiliates. The address of Mohr,
Davidow Ventures and Mr. Feiber is 2775 Sand Hill Road, Suite 240,
Menlo Park, California 94025.
(2) Represents 12,709,828 shares held by Kleiner Perkins Caufield & Byers
VIII, L.P., 614,350 shares held by KPCB VIII Founders Fund and 341,644
shares held by KPCB Information Sciences Zaibatsu Fund II. Kevin R.
Compton, a director of ONI Systems, is also a general partner of Kleiner
Perkins Caufield & Byers. Mr. Compton disclaims beneficial ownership of
shares held by KPCB and affiliates except to the extent of his interest
in KPCB and affiliates. The address of Kleiner Perkins Caulfield & Byers
and Mr. Compton is 2750 Sand Hill Road, Menlo Park, California 94025.
(3) Represents 5,886,998 shares held by Mr. Martin, 45,000 shares held by the
Hugh C. Martin 2000 Grantor Retained Annuity Trust under agreement dated
March 23, 2000, 45,000 shares held by the Moira C. Martin 2000 Grantor
Retained Annuity Trust under agreement dated March 23, 2000 and 3,000
shares held by The Martin Family 2000 Irrevocable Trust under agreement
dated March 23, 2000. Includes 1,863,831 shares subject to a repurchase
right that lapses at a rate of 84,719 shares per month until January
2002. Includes 1,139,844 shares subject to a repurchase right that lapses
at a rate of 25,329 shares per month until December 2003.
(4) Represents 142,460 shares held by Matthew W. Bross Revocable Trust and
1,582,904 shares held by Williams Communications Inc. Mr. Bross serves as
Senior Vice President and Chief Technology Officer of Williams
Communications and disclaims beneficial ownership of shares held by it.
Includes 180,000 shares subject to a repurchase right that lapses as to
45,000 shares in November 2000 and lapses at a rate of 3,750 shares per
month thereafter until November 2003.
(5) Includes 180,000 shares held by Mr. Jordan subject to a repurchase right
that lapses at a rate of 7,500 shares per month until March 2002.
Includes 90,000 shares subject to a repurchase right that lapses at a
rate of 5,000 shares per month until October 2001.
(6) Represents 1,190,000 shares held by Mr. Cumpston, 30,000 shares held by
the William R. Cumpston 2000 Grantor Annuity Trust under agreement dated
February 21, 2000, 30,000 shares held by Christine S. Cumpston 2000
Grantor Annuity Trust under agreement dated February 21, 2000 and 2,000
shares held by The Cumpston Children's 2000 Trust under agreement dated
February 21, 2000. Includes 312,500 shares subject to a repurchase right
that lapses at a rate of 10,416 shares per month until September 2002.
Includes 212,500 shares subject to a repurchase right that lapses at a
rate of 6,250 shares per month until January 2003. Includes 200,000
shares subject to a repurchase right that lapses as to 50,000 shares in
September 2000 and lapses at a rate of 4,166 shares per month until
September 2003. Includes 281,250 shares subject to a repurchase right
that lapses at a rate of 6,250 shares per month until December 2003.
(7) Includes 379,125 shares held by Mr. Chin subject to a repurchase right
that lapses at a rate of 14,041 shares per month until June 2002.
Includes 100,000 shares subject to a repurchase right that lapses as to
25,000 shares in July 2000 and lapses at a rate of 2,083 shares per month
thereafter until July 2003. Includes 93,750 shares subject to a
repurchase right that lapses at a rate of 2,083 shares per month until
December 2003.
(8) Includes 255,554 shares held by Mr. Schmid subject to a repurchase right
that lapses at a rate of 11,111 shares per month until February 2002.
Includes 75,557 shares subject to a
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<PAGE>
repurchase right that lapses at a rate of 2,500 shares per month until
January 2003. Includes 187,500 shares subject to a repurchase right that
lapses at a rate of 4,166 shares per month until December 2003. See the
description of our severance agreement with Mr. Schmid on page 54.
(9) Includes 120,000 shares held by Mr. Maffei subject to a repurchase right
that lapses as to 40,000 shares in March 2001 and lapses at a rate of
3,333 shares per month thereafter until March 2003.
(10) Includes shares held by entities affiliated with directors as described
in notes 1, 2 and 4 and shares issuable upon exercise of options
exercisable within 60 days of March 31, 2000. Excludes up to 1,100,000
shares subject to an option which we have agreed to grant to Chris A.
Davis, our incoming Executive Vice President, Chief Financial and
Administrative Officer. See the description of our employment agreement
with her on page 54.
64
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of this offering, our authorized capital
stock will consist of:
. 700,000,000 shares of common stock, $0.0001 par value per share; and
. 10,000,000 shares of preferred stock, $0.0001 par value per share.
As of March 31, 2000, and assuming the conversion of all outstanding
preferred stock into common stock, there were outstanding:
. 114,138,775 shares of common stock held by approximately 480
stockholders, of which 10,096,968 shares were subject to our right of
repurchase;
. options to purchase 19,343,345 shares of common stock; and
. warrants to purchase 1,434,934 shares of common stock.
Common Stock
Dividend rights. Subject to preferences that may apply to shares of
preferred stock outstanding at the time, the holders of outstanding shares of
common stock are entitled to receive dividends out of assets legally available
at the times and in the amounts that our board of directors may determine.
Voting rights. Each holder of common stock is entitled to one vote for each
share of common stock held on all matters submitted to a vote of stockholders.
Cumulative voting for the election of directors is not provided for in our
certificate of incorporation. In addition, our certificate of incorporation and
bylaws require the approval of two-thirds, rather than a majority, of the
shares entitled to vote for certain matters. For a description of these
matters, see "--Anti-Takeover Provisions".
Cisco Systems, Inc., a holder of preferred stock that will convert into
4,969,148 shares of common stock upon the closing of this offering, is subject
to voting restrictions that provide that Cisco and its affiliates must vote, in
certain transactions, all shares owned by them in the same proportion as other
shares voted in the same class in a class vote, or in the same proportion as
all shares voted in a vote in which common stock and preferred stock vote
together as a single class. These transactions include mergers,
reorganizations, ONI Systems being acquired, or an underwritten public offering
of our securities. In addition, Cisco may not exercise any dissenter's or
appraisal rights. These restrictions have no termination date.
No preemptive or similar rights. Our common stock is not entitled to
preemptive rights and is not subject to conversion or redemption.
Right to receive liquidation distributions. Upon a liquidation, dissolution
or winding-up of ONI Systems, the holders of our common stock are entitled to
share ratably among themselves in all assets remaining after payment of all
liabilities and the liquidation preferences of any outstanding preferred stock.
Preferred Stock
Upon the closing of this offering, each outstanding share of our preferred
stock will be converted into shares of common stock. See note 7 of notes to our
consolidated financial statements for a description of preferred stock.
Following the offering, we will be authorized, subject to limitations
imposed by Delaware law, to issue preferred stock in one or more series, to
establish from time to time the number of shares to be included in each series,
and to fix the rights, preferences and privileges of the shares of each wholly
unissued series and any of its qualifications, limitations or restrictions. Our
board of directors can
65
<PAGE>
also increase or decrease the number of shares of any series, but not below the
number of shares of that series then outstanding, without any further vote or
action by the stockholders. Our board of directors may authorize the issuance
of preferred stock with voting or conversion rights that could adversely affect
the voting power or other rights of the holders of the common stock. The
issuance of preferred stock, while providing flexibility in connection with
possible acquisitions and other corporate purposes, could, among other things,
have the effect of delaying, deferring or preventing a change in control of ONI
Systems and might adversely affect the market price of our common stock and the
voting and other rights of the holders of common stock. We have no current plan
to issue any shares of preferred stock.
Warrants
Warrants to purchase 1,434,394 shares of common stock were outstanding as of
March 31, 2000. All warrants to purchase preferred stock will automatically
convert into warrants to purchase a like number of shares of common stock upon
the closing of this offering.
In December 1999, we issued to a customer a warrant to purchase 500,000
shares of common stock at an exercise price of $0.91 per share. If not sooner
exercised, this warrant will remain outstanding until six years from the date
of the warrant agreement.
In February 1999, we issued to an equipment finance company warrants to
purchase 277,926 shares of Series B preferred stock at an exercise price of
$0.88 per share. If not sooner exercised, these warrants will remain
outstanding for the lesser of five years after the completion of this offering
or ten years from the date of the warrant agreements.
In February 2000, we issued to a customer a warrant to purchase 223,000
shares of common stock at an exercise price of $0.91 per share. If not sooner
exercised, this warrant will remain outstanding until five years from the date
of the warrant agreement.
In March 2000, we issued to our outside counsel a warrant to purchase
200,000 shares of common stock at an exercise price of $15.00 per share. If not
sooner exercised, this warrant will remain outstanding until March 2004.
In connection with our spin-out from Optivision in December 1997, we are
obligated to issue 233,468 shares of common stock to an equipment finance
company upon the exercise by the finance company of its warrants to purchase
capital stock of Optivision. See "Related Party Transactions--Optivision Spin-
out". We will not receive any proceeds from the exercise of these warrants. If
not sooner exercised, 88,890 shares subject to the warrants will remain
outstanding until January 2002 and 144,578 shares subject to the warrants will
remain outstanding until September 2003.
Registration Rights
Following this offering, the holders of 79,355,863 shares of common stock,
based upon an assumed private placement price of $15.00 per share, will be
entitled to rights with respect to the registration of these shares under the
Securities Act, as described below.
Demand registration rights. At any time after six months following the
expiration of the lock-up agreements in connection with this offering, the
holders of at least 50% of the shares having registration rights can request
that we register all or a portion of their shares, so long as such registration
covers at least 33% of their shares or the total offering price of the shares
to the public is at least $5.0 million. See "Share Eligible for Future Sale--
Lock-up Agreements". We will only be required to file two registration
statements in response to their demand registration rights if both registration
statements have been declared effective. We may postpone the filing of a
registration statement for up to 120 days if we determine that the filing would
be seriously detrimental to us and our stockholders.
Piggyback registration rights. If we register any securities for public
sale, the stockholders with registration rights will have the right to include
their shares in the registration statement. The managing
66
<PAGE>
underwriter of any underwritten offering will have the right to limit the
number of shares registered by these holders to be included in the registration
statement due to marketing reasons.
Form S-3 registration rights. The holders of the shares having registration
rights can request that we register their shares if we are eligible to file a
registration statement on Form S-3 or any successor form and if the total price
of the shares offered to the public is at least $1.0 million. We may postpone
the filing of a Form S-3 registration statement for up to 120 days once in a 12
month period if we determine that the filing would be seriously detrimental to
us and our stockholders. We may also postpone the filing of a Form S-3
registration statement if within the preceding six months, we have already
effected a registration on Form S-3.
We will pay all expenses incurred in connection with the registrations
described above, except that we will not be required to pay for expenses
incurred under exercise of stockholders' demand registration rights if the
holders of these rights subsequently withdraw their request for registration.
Holders of these registration rights have waived the exercise of these
registration rights for 180 days following the date of this prospectus.
In addition to these registration rights, holders of warrants exercisable
for 1,156,468 shares of common stock will have registration rights for the
shares of common stock issuable upon the exercise of their warrants. See "--
Warrants".
Anti-Takeover Provisions
The provisions of Delaware law, our certificate of incorporation and our
bylaws may have the effect of delaying, deferring or preventing another person
from acquiring control of ONI Systems.
Delaware Law
We will be subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prevents some
Delaware corporations from engaging, under some circumstances, in a business
combination, which includes a merger or sale of more than 10% of the
corporation's assets with any interested stockholder, meaning a stockholder
who, together with affiliates and associates, owns or, within three years prior
to the determination of interested stockholder status, did own 15% or more of
the corporation's outstanding voting stock, unless:
. the transaction is approved by the board of directors prior to the date
the interested stockholder attained that status;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced; or
. on or subsequent to that date the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders by at least two-thirds of the outstanding voting stock that
is not owned by the interested stockholder.
This section may have an anti-takeover effect with respect to transactions
not approved in advance by the board of directors, including discouraging
attempts to acquire us that might result in a premium over the market price for
the shares of stock held by stockholders.
Charter and Bylaw Provisions
Our certificate of incorporation and bylaws provide that:
. following the completion of this offering, no action may be taken by
stockholders except at an annual or special meeting of the stockholders
called in accordance with our bylaws and stockholders may not act by
written consent;
67
<PAGE>
. following the completion of this offering, the approval of holders of
two-thirds of the shares entitled to vote at an election of directors
will be required to adopt, amend or repeal our bylaws or amend or repeal
the provisions of our certificate of incorporation regarding the election
and removal of directors and ability of stockholders to take action;
. stockholders may not fill vacancies on the board, unless the board of
directors determines by resolution that any of these vacancies will be
filled by the stockholders;
. following the completion of this offering, our board of directors will be
divided into three classes, each serving staggered three-year terms,
which means that only one class of directors will be elected at each
annual meeting of stockholders, with the other classes continuing for the
remainder of their respective terms. For more information on the
classification of our board, please see "Management--Board Composition";
and
. we will indemnify officers and directors against losses that they may
incur in investigations and legal proceedings resulting from their
services to us, which may include services in connection with takeover
defense measures.
California Foreign Corporation Law
Section 2115 of the California Corporations Code provides that under some
circumstances several provisions of the California Corporations Code may be
applied to foreign corporations qualified to do business in California
notwithstanding the law of the jurisdiction where the corporation is
incorporated. These corporations are referred to in this prospectus as quasi-
California corporations. Section 2115 applies to foreign corporations that
have more than half of their voting stock held by stockholders residing in
California and more than half of their business deriving from California,
measured on or after the 135th day of the corporation's fiscal year. If we
were determined to be a quasi-California corporation, we would have to comply
with California law with respect to, among other things, elections of
directors and distributions to stockholders. Under the California Corporations
Code, a corporation is prohibited from paying dividends unless:
. the retained earnings of the corporation immediately prior to the
distribution equal or exceed the amount of the proposed distribution; or
. the assets of the corporation, exclusive of specific non-tangible assets,
equal or exceed 1 1/4 times its liabilities, exclusive of specific
liabilities, and the current assets of the corporation at least equal its
current liabilities. If the average pre-tax net earnings of the
corporation before interest expense for the two years preceding the
distribution were less than the average interest expense of the
corporation for those year, however, the current assets of the
corporation must exceed 1 1/4 times its current liabilities.
Following this offering, we will be exempt from the application of Section
2115 if our voting stock is held by more than 800 stockholders of record.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C.
Listing
We have applied to list our common stock on the Nasdaq National Market
under the trading symbol "ONIS".
68
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock, and we cannot predict the effect, if any, that market sales of shares of
our common stock or the availability of shares of our common stock for sale
will have on the market price of our common stock prevailing from time to time.
Nevertheless, sales of substantial amounts of our common stock in the public
market could adversely affect the market price of our common stock and could
impair our future ability to raise capital through the sale of our equity
securities.
Upon the completion of this offering, we will have 122,405,442 shares of
common stock outstanding, assuming no exercise of the underwriters' over-
allotment option, no exercise of outstanding options or warrants and a public
offering price of $15.00 per share. Of the outstanding shares, all of the
shares sold in this offering will be freely tradable, except that any shares
held by our affiliates, as that term is defined in Rule 144 promulgated under
the Securities Act, may only be sold in compliance with the limitations
described below. The remaining 114,405,442 shares of common stock will be
deemed restricted securities as defined under Rule 144. Restricted shares may
be sold in the public market only if registered or if they qualify for an
exemption from registration under Rule 144, 144(k) or 701 promulgated under the
Securities Act, which rules are summarized below. Subject to the lock-up
agreements described below and the provisions of Rules 144, 144(k) and 701,
additional shares will be available for sale in the public market as follows:
<TABLE>
<CAPTION>
Number of
Shares Comment
--------- -------
<C> <S>
After the date of this prospectus, freely tradable shares sold in
this offering and shares saleable under Rule 144(k) that are not
subject to the 180-day lock-up.
After 180 days from the date of this prospectus, the 180-day lock-
up terminates and these shares are saleable under Rule 144
(subject in some cases to volume limitations), Rule 144(k) or Rule
701 (subject in some cases to a right of repurchase by ONI
Systems).
9,707,206 On December 22, 2000, these shares are saleable under Rule 144.
1,009,180 On December 24, 2000, these shares are saleable under Rule 144.
1,108,032 On December 30, 2000, these shares are saleable under Rule 144.
339,000 On March 9, 2001, these shares are saleable under Rule 144.
266,667 One year after the closing of this offering, these shares are
saleable under Rule 144.
</TABLE>
Some of the shares in the table above, including shares held by executive
officers and directors, listed as not being salable until 180 days after the
date of this prospectus may become salable at a sooner date, as described
further below.
Lock-up Agreements
ONI Systems, each of our officers and directors and holders of approximately
% of our securities holders have agreed, subject to specified exceptions, not
to, without the prior written consent of Goldman, Sachs & Co., offer, sell,
contract to sell, grant any option to purchase or otherwise dispose of any
shares of our common stock or options to acquire shares of our common stock
during the 180-day period following the date of this offering. Goldman, Sachs &
Co. may, in its sole discretion and at any time without notice, release all or
any portion of the securities subject to lock-up agreements. See
"Underwriting".
Except for shares held by executive officers, the 180-day restriction will
expire as to 10% of the shares subject to the restriction, or shares,
on the later of (i) September 6, 2000 or (ii) the 90th day after the date of
this prospectus, if the reported last sale price of our common stock on the
Nasdaq National Market for 20 of the 30 trading days ending on the last trading
day preceding that
69
<PAGE>
date is at least twice the initial public offering price per share. The 180-day
restriction will also expire as to an additional 25% of the shares subject to
the restriction, or shares, on the date that is two days after we have
made our financial statements for the fiscal quarter ending September 30, 2000
publicly available, if the reported last sale price of our common stock on the
Nasdaq National Market for 20 of the 30 trading days ending on the last trading
day preceding that date is at least twice the initial public offering price per
share. We intend to adopt an insider trading policy under which employees will
be prohibited from selling shares from the 30th day prior to the end of each
quarter until the second day following the release of financial results for the
quarter. As a result, the release of shares held by them under lock-up
agreements may be delayed until our insider trading policy permits such sales.
Rule 144
In general, under Rule 144 as currently in effect, a person, or group of
persons whose shares are required to be aggregated, who has beneficially owned
shares that are restricted securities as defined in Rule 144 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 one percent of the then outstanding shares of our common stock,
which will be approximately 12,240,544 shares immediately after this offering,
or the average weekly trading volume in our common stock during the four
calendar weeks preceding the date on which notice of the sale is filed. In
addition, a person who is not deemed to have been an affiliate at any time
during the three months preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years would be entitled to sell
these shares under Rule 144(k) without regard to the requirements described
above. To the extent that shares were acquired from one of our affiliates, a
person's holding period for the purpose of effecting a sale under Rule 144
would commence on the date of transfer from the affiliate.
Rule 701
In general, under Rule 701 of the Securities Act, any of our employees,
officers, directors, consultants or advisors who purchased shares from us in
connection with a compensatory stock or option plan or other written agreement
is eligible to resell those shares in reliance on Rule 144, but without
compliance with certain restrictions, including the holding period contained in
Rule 144. However, all shares issued under Rule 701 are subject to lock-up
agreements and will only become eligible for sale at the expiration of such
agreements.
Stock Options
As of March 31, 2000, options to purchase a total of 19,343,345 shares of
common stock were outstanding. We intend to file a Form S-8 registration
statement under the Securities Act to register all shares of common stock
subject to outstanding options, all shares of our common stock issued upon
exercise of stock options and all shares of our common stock issuable under our
stock option and employee stock purchase plans. Accordingly, shares of our
common stock issued under these plans will be eligible for sale in the public
markets, subject to vesting restrictions and the lock-up agreement described
above. See "Management--Employee Benefit Plans".
Registration Rights
Following this offering, subject to specified blackout periods, holders of
79,355,863 shares of outstanding common stock, based on an assumed private
placement price of $15.00 per share, will have two demand registration rights
with respect to their shares of our common stock, subject to the 180-day lock-
up arrangement described above, to require us to register their shares of our
common stock under the Securities Act, or rights to participate in any future
registration of securities by us. If the holders of these registrable
securities request that we register their shares, and if the registration is
effected, these shares will become freely tradable without restriction under
the Securities Act. Any sales of securities by these stockholders could have a
material adverse effect on the trading price of our common stock. See
"Description of Capital Stock--Registration Rights".
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<PAGE>
UNDERWRITING
ONI Systems and the underwriters named below (the "Underwriters") have
entered into an underwriting agreement with respect to the shares being
offered. Subject to some conditions, each Underwriter has severally agreed to
purchase the number of shares indicated in the following table. Goldman, Sachs
& Co., Banc of America Securities LLC, Chase Securities Inc. and FleetBoston
Robertson Stephens Inc. are the representatives of the Underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Goldman, Sachs & Co................................................
Banc of America Securities LLC.....................................
Chase Securities Inc...............................................
FleetBoston Robertson Stephens Inc.................................
---------
Total............................................................ 8,000,000
=========
</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
1,200,000 shares from ONI Systems to cover such sales. They may exercise that
option for 30 days. If any shares are purchased under 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 ONI Systems. Such amounts are
shown assuming both no exercise and full exercise of the Underwriters' option
to purchase additional shares.
<TABLE>
<CAPTION>
Paid by ONI Systems
-------------------------
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 such
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.
ONI Systems and its directors, officers, employees and other stockholders
have agreed with the Underwriters not to dispose of or hedge any of their
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 Goldman, Sachs & Co. and except as described in
"Shares Eligible for Future Sale". This restriction does not apply to any
issuances under ONI Systems' existing employee benefit plans. See "Shares
Eligible for Future Sale" for a discussion of transfer restrictions.
71
<PAGE>
Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among ONI Systems and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be ONI Systems' historical performance, estimates of the
business potential and earnings prospects of ONI Systems, an assessment of the
management of ONI Systems and the consideration of the above factors in
relation to market valuation of companies in related businesses.
ONI Systems has applied for approval for quotation of its common stock on
the Nasdaq National Market under the symbol "ONIS".
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 the offering.
Stabilizing transactions consist of bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The Underwriters may also impose a penalty bid. This occurs when a
particular Underwriter repays to the Underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of this Underwriter in stabilizing or short covering
transactions.
These activities by the Underwriters may stabilize, maintain or 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 otherwise.
At the request of ONI Systems, the Underwriters are reserving up to 960,000
shares of common stock for sale at the initial public offering price to
individuals designated by ONI Systems who have expressed an interest in
purchasing the shares of common stock in the offering through a directed share
program. The number of shares available for sale to the general public in the
pubic offering will be reduced to the extent these persons purchase these
reserved shares. Any shares not so purchased will be offered by the
Underwriters to the general public on the same basis as the other shares
offered hereby.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
ONI Systems estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately $1.5
million.
ONI Systems has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
Chase Venture Capital Associates, L.P., an entity affiliated with Chase
Securities Inc., beneficially owns 3,287,672 shares of Series E preferred stock
and 329,978 shares of Series F preferred stock. Paul Johnson, a managing
director of FleetBoston Robertson Stephens Inc., one of the Underwriters,
beneficially owns 54,796 shares of Series E preferred stock and 54,996 shares
of Series F preferred stock.
72
<PAGE>
VALIDITY OF COMMON STOCK
The validity of the issuance of the shares of common stock offered by this
prospectus will be passed upon for ONI Systems by Fenwick & West LLP, Palo
Alto, California. As of the date of this prospectus, Fenwick & West LLP and its
affiliates beneficially own or have the right to purchase an aggregate of
309,996 shares of our common stock. The validity of the issuance of the shares
of common stock offered by this prospectus will be passed upon for the
underwriters by Sullivan & Cromwell, Los Angeles, California.
EXPERTS
The consolidated financial statements and related financial statement
schedule of ONI Systems Corp. as of December 31, 1998 and 1999 and for the
period from October 20, 1997 (inception) to December 31, 1997, and for each of
the years in the two year period ended December 31, 1999 and the financial
statements of Object-Mart, Inc. as of, and for the year ended, December 31,
1998 and for the six month period ended June 29, 1999, have been included in
this registration statement in reliance upon the report of KPMG LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, a registration
statement on Form S-1 under the Securities Act with respect to the common
stock. For further information with respect to us and our common stock, we
refer you to the registration statement and the exhibits and schedules filed as
a part of the registration statement. Statements contained in this prospectus
concerning the contents of any contract or any other document are not
necessarily complete. If a contract or document has been filed as an exhibit to
the registration statement, we refer you to the copy of the contract or
document that has been filed. Each statement in this prospectus relating to a
contract or document filed as an exhibit is qualified in all respects by the
filed exhibit. The registration statement, including exhibits and schedules,
may be inspected without charge at the principal office of the Securities and
Exchange Commission in Washington, D.C., at the Public Reference Room, 450
Fifth Street, N.W. Washington, D.C. 20549 and copies of all or any part of it
may be obtained from that office after payment of fees prescribed by the
Securities and Exchange Commission. You may obtain information on the operation
of the Public Reference Room by calling 1-800-SEC-0330. The Securities and
Exchange Commission maintains a web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission at
http://www.sec.gov.
We intend to provide our stockholders with annual reports containing
financial statements audited by an independent public accounting firm and
quarterly reports containing unaudited financial data for the first three
quarters of each year.
73
<PAGE>
ONI SYSTEMS CORP.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
ONI Systems Corp. Consolidated Financial Statements
Independent Auditors' Report............................................ F-2
Consolidated Balance Sheets............................................. F-3
Consolidated Statements of Operations................................... F-4
Consolidated Statements of Cash Flows................................... F-5
Consolidated Statements of Stockholders' (Deficit) Equity............... F-6
Notes to Consolidated Financial Statements.............................. F-9
Object Mart, Inc. Financial Statements
Independent Auditors' Report............................................ F-25
Statements of Operations................................................ F-27
Statements of Cash Flows................................................ F-28
Statements of Shareholders' Equity...................................... F-29
Notes to Financial Statements........................................... F-30
Unaudited Pro Forma Combined Condensed Statement of Operations
Introduction to Unaudited Pro Forma Combined Condensed Statement of
Operations............................................................. F-35
Unaudited Pro Forma Combined Condensed Statement of Operations.......... F-36
Notes to Unaudited Pro Forma Combined Condensed Statement of
Operations............................................................. F-37
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors
ONI Systems Corp.:
We have audited the accompanying consolidated balance sheets of ONI Systems
Corp. as of December 31, 1998 and 1999, and the related consolidated statements
of operations, stockholders' equity (deficit), and cash flows for the period
from October 20, 1997 (inception) to December 31, 1997 and for each of the
years in the two-year period ended December 31, 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ONI Systems
Corp. as of December 31, 1998 and 1999, and the results of its operations and
its cash flows for the period from October 20, 1997 (inception) to December 31,
1997 and for each of the years in the two-year period ended December 31, 1999
in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Mountain View, California
March 9, 2000, except for Note 13(c)
which is as of April 25, 2000
F-2
<PAGE>
ONI SYSTEMS CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31, 2000
------------------------- --------------------------
1998 1999 Actual Pro Forma
----------- ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash
equivalents.......... $19,091,688 $ 80,022,591 $ 50,307,041 $ 50,307,041
Accounts receivable... 1,092,853 163,434 3,928,630 3,928,630
Inventory............. -- 9,648,856 20,783,774 20,783,774
Prepaid expenses and
other current
assets............... 110,503 770,979 956,609 956,609
----------- ------------ ------------ ------------
Total current
assets............. 20,295,044 90,605,860 75,976,054 75,976,054
Property and equipment. 1,016,698 5,314,990 15,796,067 15,796,067
Other assets........... 500 24,246 20,678 20,678
Intangibles............ -- 737,500 526,250 526,250
Goodwill............... -- 4,259,879 3,549,899 3,549,899
----------- ------------ ------------ ------------
Total assets........ $21,312,242 $100,942,475 $ 95,868,948 $ 95,868,948
=========== ============ ============ ============
LIABILITIES AND STOCK-
HOLDERS'
EQUITY
----------------------
Current liabilities:
Accounts payable...... $ 201,647 $ 2,594,555 $ 6,014,071 $ 6,014,071
Accrued liabilities... 426,365 6,086,784 10,570,313 10,570,313
Deferred revenue...... -- -- 119,490 119,490
Current portion of
capital lease
obligations.......... 40,002 166,612 170,905 170,905
----------- ------------ ------------ ------------
Total current
liabilities........ 668,014 8,847,951 16,874,779 16,874,779
Capital lease
obligations, less
current portion....... 79,322 366,704 295,378 295,378
----------- ------------ ------------ ------------
Total liabilities... 747,336 9,214,655 17,170,157 17,170,157
----------- ------------ ------------ ------------
Stockholders' equity:
Convertible preferred
stock, $0.0001 par
value per share;
61,786,664 shares
authorized at
December 31, 1998
and 80,309,408
shares authorized at
December 31, 1999
and March 31, 2000;
50,580,190,
78,855,900 and
79,194,900 shares
issued and
outstanding at
December 31, 1998
and 1999 and March
31, 2000,
respectively;
aggregate
liquidation
preference of
$28,770,616,
$125,955,511 and
$128,127,590 at
December 31, 1998
and 1999 and March
31, 2000,
respectively; pro
forma--no shares
issued and
outstanding.......... 5,058 7,885 7,919 --
Common stock, $0.0001
par value per share;
112,000,000 shares
authorized at
December 31, 1998
and
159,690,592 shares
authorized at
December 31, 1999
and March 31, 2000;
18,001,248,
31,279,590 and
34,943,875 shares
issued and
outstanding at
December 31, 1998
and 1999 and March
31, 2000,
respectively; pro
forma--700,000,000
shares authorized;
114,138,775 shares
issued and
outstanding.......... 1,800 3,128 3,494 11,413
Additional paid-in
capital.............. 34,955,432 186,781,010 246,194,924 246,194,924
Notes receivable from
stockholders......... (122,585) (3,824,079) (8,429,521) (8,429,521)
Services receivable
from stockholder..... -- (85,164) (48,663) (48,663)
Deferred stock com-
pensation............ (5,223,575) (35,532,165) (72,560,032) (72,560,032)
Accumulated deficit... (9,051,224) (55,622,795) (86,469,330) (86,469,330)
----------- ------------ ------------ ------------
Total stockholders'
equity............. 20,564,906 91,727,820 78,698,791 78,698,791
----------- ------------ ------------ ------------
Total liabilities
and stockholders'
equity........... $21,312,242 $100,942,475 $ 95,868,948 $ 95,868,948
=========== ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ONI SYSTEMS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
October 20,
1997
(inception) to Year ended December 31, Three months ended March 31
December 31, ------------------------- -----------------------------
1997 1998 1999 1999 2000
-------------- ----------- ------------ ------------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue................. $ -- $ 1,732,730 $ 3,033,995 $ 564,726 $ 3,632,636
Cost of revenue....... -- 1,207,897 1,032,144 424,327 2,849,902
--------- ----------- ------------ ------------- --------------
Gross profit........ -- 524,833 2,001,851 140,399 782,734
--------- ----------- ------------ ------------- --------------
Operating expenses:
Research and
development,
excluding deferred
stock compensation
amortization amounts. 38,865 4,008,489 25,399,728 2,849,849 12,037,295
Sales and marketing,
excluding deferred
stock compensation
amortization
amounts.............. 20,430 649,176 4,557,245 425,939 3,001,883
General and
administrative,
excluding deferred
stock compensation
amortization
amounts.............. 49,060 1,590,847 4,755,582 510,336 2,556,173
Amortization of
deferred stock
compensation*........ 89,249 3,310,368 11,421,739 1,296,281 11,281,366
Common stock warrant
expense.............. -- -- 2,890,500 -- 3,555,013
In-process research
and development...... -- -- 170,000 -- --
--------- ----------- ------------ ------------- --------------
Total operating
expenses........... 197,604 9,558,880 49,194,794 5,082,405 32,431,730
--------- ----------- ------------ ------------- --------------
Operating loss...... (197,604) (9,034,047) (47,192,943) (4,942,006) (31,648,996)
Interest income
(expense), net......... (1,452) 182,705 622,972 180,582 867,653
Other income (expense),
net.................... -- -- -- (13,998) (62,692)
--------- ----------- ------------ ------------- --------------
Loss before income
taxes.............. (199,056) (8,851,342) (46,569,971) (4,775,422) (30,844,035)
Income taxes............ -- 826 1,600 1,600 2,500
--------- ----------- ------------ ------------- --------------
Net loss............ $(199,056) $(8,852,168) $(46,571,571) $ (4,777,022) $ (30,846,535)
========= =========== ============ ============= ==============
Basic and diluted net
loss per share......... $ (0.77) $ (0.74) $ (2.58) $ (0.35) $ (1.27)
========= =========== ============ ============= ==============
Weighted-average shares
outstanding used in
computing basic and
diluted net loss per
share.................. 257,017 11,918,628 18,043,188 13,541,715 24,218,985
========= =========== ============ ============= ==============
- ------------
* Amortization of
deferred stock
compensation:
Cost of revenue....... $ -- $ -- $ -- $ -- $ 1,349,611
Research and
development.......... 32,012 2,509,473 8,142,230 986,721 6,090,553
Sales and marketing... 16,828 160,179 1,583,211 77,390 2,041,720
General and
administrative....... 40,409 640,716 1,696,298 232,170 1,799,482
--------- ----------- ------------ ------------- --------------
$ 89,249 $ 3,310,368 $ 11,421,739 $ 1,296,281 $ 11,281,366
========= =========== ============ ============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ONI SYSTEMS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
October 20,
1997 Three months ended March
(inception) to Year ended Year ended 31
December 31, December 31, December 31, -------------------------
1997 1998 1999 1999 2000
-------------- ------------ ------------ ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $(199,056) $(8,852,168) $(46,571,571) $(4,777,022) $(30,846,535)
Adjustments to
reconcile net loss
to net cash used in
operating
activities:
Depreciation and
amortization....... -- 289,265 2,806,047 116,502 1,788,101
Amortization of
deferred stock
compensation....... 89,249 3,310,368 11,421,739 1,296,281 11,281,366
Loss on disposal of
property and
equipment.......... -- -- 164,094 -- 33,508
Value of leased
facilities received
in exchange for
preferred stock.... -- -- 97,336 -- 36,501
Purchased in-process
research and
development........ -- -- 170,000 -- --
Amortization of debt
financing costs.... -- -- 54,572 13,997 29,181
Common stock warrant
expense............ -- -- 2,890,500 -- 3,555,013
Stock-based
compensation for
non-employees...... -- -- 73,065 -- 200,773
Changes in operating
assets and
liabilities:
Accounts receivable. (91,162) (1,001,691) 1,569,976 521,649 (3,765,196)
Inventory........... -- -- (9,648,856) -- (11,134,918)
Prepaid expenses and
other current
assets............. -- (111,003) (533,915) (207,681) (211,243)
Accounts payable.... 29,440 172,207 2,392,876 358,306 3,419,516
Other accrued
liabilities........ 43,760 382,605 5,527,511 61,192 4,483,529
Deferred revenue.... -- -- -- -- 119,490
--------- ----------- ------------ ----------- ------------
Net cash used in
operating
activities....... (127,769) (5,810,417) (29,586,626) (2,616,776) (21,010,914)
--------- ----------- ------------ ----------- ------------
Cash flows used in
investing activities:
Purchase of property
and equipment........ -- (1,016,205) (4,858,824) (384,581) (11,381,456)
Acquisition of
Object-Mart, net of
cash acquired........ -- -- (1,744,645) -- --
--------- ----------- ------------ ----------- ------------
Net cash used in
investing
activities....... -- (1,016,205) (6,603,469) (384,581) (11,381,456)
--------- ----------- ------------ ----------- ------------
Cash flows from
financing activities:
Repayment of short-
term borrowings...... -- (130,000) -- -- --
Proceeds from
issuance of notes.... 130,000 -- -- -- --
Payments under
capital lease
obligations.......... -- (13,651) (52,589) (9,520) (67,033)
Proceeds from
issuance of
preferred stock, net
of issuance costs.... -- 27,015,177 96,889,288 7,220,898 1,960,701
Repurchase of
preferred stock...... -- (1,000,000) -- -- --
Payment on
stockholder notes ... -- -- 12,000 -- --
Proceeds from
issuance of common
stock................ 10,000 34,553 272,299 39,292 783,152
--------- ----------- ------------ ----------- ------------
Net cash provided
by financing
activities....... 140,000 25,906,079 97,120,998 7,250,670 2,676,820
--------- ----------- ------------ ----------- ------------
Net increase in
cash and cash
equivalents...... 12,231 19,079,457 60,930,903 4,249,313 (29,715,550)
Cash and cash
equivalents at
beginning of
year/period........... -- 12,231 19,091,688 19,091,688 80,022,591
--------- ----------- ------------ ----------- ------------
Cash and cash
equivalents at end of
year/period........... $ 12,231 $19,091,688 $ 80,022,591 $23,341,001 $ 50,307,041
========= =========== ============ =========== ============
Supplemental
disclosures of cash
flow information:
Interest paid during
year/period.......... $ -- $ 4,065 $ 15,747 $ -- $ --
========= =========== ============ =========== ============
Noncash investing and
financing
activities:
Equipment recorded
under capital
leases............. $ -- $ 132,975 $ 466,581 $ -- $ --
========= =========== ============ =========== ============
Contribution of
property and
equipment by common
stockholder........ $ 14,716 $ 142,067 $ -- $ -- $ --
========= =========== ============ =========== ============
Issuance of common
stock upon exercise
of options in
exchange for notes
receivable......... $ -- $ 122,585 $ 3,713,494 $ -- $ 4,605,442
========= =========== ============ =========== ============
Issuance of
preferred stock in
exchange for leased
facilities......... $ -- $ -- $ 182,500 $ -- $ --
========= =========== ============ =========== ============
Issuance of common
stock in connection
with Object-Mart,
Inc. acquisition... $ -- $ -- $ 5,874,677 $ -- $ --
========= =========== ============ =========== ============
Issuance of warrants
in connection with
debt financing..... $ -- $ -- $ 203,581 $ 203,581 $ --
========= =========== ============ =========== ============
Issuance of common
stock for future
services........... $ 190,875 $ 8,432,317 $ 41,730,329 $ 2,324,092 $ 46,248,113
========= =========== ============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ONI SYSTEMS CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
Period from October 20, 1997 (inception) to December 31, 1997 and years ended
December 31, 1998, 1999 and
(unaudited) three month period ended March 31, 2000
<TABLE>
<CAPTION>
Convertible Notes
preferred stock Common stock Additional receivable Services Deferred
------------------- ----------------- paid-in from receivable stock Accumulated
Shares Amount Shares Amount capital stockholders from stockholder compensation deficit
----------- ------ ---------- ------ ----------- ------------ ---------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of
October 20, 1997
(inception)..... -- $ -- -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of
common stock.... -- -- 11,565,752 1,157 23,559 -- -- -- --
Deferred stock
compensation.... -- -- -- -- 190,875 -- -- (190,875) --
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- -- 89,249 --
Issuance of
Series A
preferred stock. 8,000,000 -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- (199,056)
----------- ------ ---------- ------ ----------- --------- ---------- ----------- -----------
Balances as of
December 31,
1997............ 8,000,000 -- 11,565,752 1,157 214,434 -- -- (101,626) (199,056)
Issuance of
common stock for
notes
receivable...... -- -- 5,991,496 599 121,986 (122,585) -- -- --
Exercise of
stock purchase
rights for cash. -- -- 440,000 44 27,343 -- -- -- --
Exercise of
options for
cash............ -- -- 4,000 -- 7,166 -- -- -- --
Contribution of
property and
equipment by
common
stockholder..... -- -- -- -- 142,067 -- -- -- --
Exchange of
Series A
preferred stock
for Series B
preferred stock. (8,000,000) -- -- -- -- -- -- -- --
Issuance of
Series B
preferred stock,
net of $50,058
in issuance
costs........... 26,128,843 2,613 -- -- 4,206,190 -- -- -- --
Repurchase and
cancellation of
Series B
preferred stock. (1,333,333) (133) -- -- (999,867) -- -- -- --
Issuance of
Series C
preferred stock,
net of $61,823
in issuance
costs........... 2,733,332 273 -- -- 1,987,904 -- -- -- --
Issuance of
Series D
preferred stock,
net of $45,632
in issuance
costs........... 4,969,148 497 -- -- 4,334,300 -- -- -- --
Issuance of
Series E
preferred stock,
net of $16,609
in issuance
costs........... 18,082,200 1,808 -- -- 16,481,592 -- -- -- --
Deferred stock
compensation.... -- -- -- -- 8,432,317 -- -- (8,432,317) --
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- -- 3,310,368 --
Net loss........ -- -- -- -- -- -- -- -- (8,852,168)
----------- ------ ---------- ------ ----------- --------- ---------- ----------- -----------
Balances as of
December 31,
1998............ 50,580,190 $5,058 18,001,248 $1,800 $34,955,432 $(122,585) $ -- $(5,223,575) $(9,051,224)
=========== ====== ========== ====== =========== ========= ========== =========== ===========
<CAPTION>
Total
stockholders'
(deficit)
equity
-------------
<S> <C>
Balances as of
October 20, 1997
(inception)..... $ --
Issuance of
common stock.... 24,716
Deferred stock
compensation.... --
Amortization of
deferred stock
compensation.... 89,249
Issuance of
Series A
preferred stock. --
Net loss........ (199,056)
-------------
Balances as of
December 31,
1997............ (85,091)
Issuance of
common stock for
notes
receivable...... --
Exercise of
stock purchase
rights for cash. 27,387
Exercise of
options for
cash............ 7,166
Contribution of
property and
equipment by
common
stockholder..... 142,067
Exchange of
Series A
preferred stock
for Series B
preferred stock. --
Issuance of
Series B
preferred stock,
net of $50,058
in issuance
costs........... 4,208,803
Repurchase and
cancellation of
Series B
preferred stock. (1,000,000)
Issuance of
Series C
preferred stock,
net of $61,823
in issuance
costs........... 1,988,177
Issuance of
Series D
preferred stock,
net of $45,632
in issuance
costs........... 4,334,797
Issuance of
Series E
preferred stock,
net of $16,609
in issuance
costs........... 16,483,400
Deferred stock
compensation.... --
Amortization of
deferred stock
compensation.... 3,310,368
Net loss........ (8,852,168)
-------------
Balances as of
December 31,
1998............ $20,564,906
=============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ONI SYSTEMS CORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY--(Continued)
Period from October 20, 1997 (inception) to December 31, 1997 and years ended
December 31, 1998 and 1999 and
(unaudited) three month period ended March 31, 2000
<TABLE>
<CAPTION>
Convertible Notes
preferred stock Common stock Additional receivable Services Deferred
------------------ ------------------ paid-in from receivable stock Accumulated
Shares Amount Shares Amount capital stockholders from stockholder compensation deficit
----------- ------ ----------- ------ ------------ ------------ ---------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise of
options for
cash............ -- $ -- 3,023,220 $ 302 $ 271,997 $ -- $ -- $ -- $ --
Issuance of
Series E
preferred stock,
net of $37,471
in issuance
costs........... 8,001,824 800 -- -- 7,263,393 -- -- -- --
Issuance of
Series E
preferred stock
in exchange for
services........ 200,000 20 -- -- 182,480 -- (182,500) -- --
Performance of
services........ -- -- -- -- -- -- 97,336 -- --
Issuance of
common stock for
acquisition of
Object-Mart..... -- -- 4,569,276 457 5,874,220 -- -- -- --
Issuance of
Series F
preferred stock,
net of $20,607
in issuance
costs........... 8,249,468 825 -- -- 14,968,576 -- -- -- --
Exercise of
options for
notes
receivable...... -- -- 5,685,846 569 3,712,925 (3,713,494) -- -- --
Payment on
stockholder
notes........... -- -- -- -- -- 12,000 -- -- --
Issuance of
warrants in
connection with
debt financing.. -- -- -- -- 203,581 -- -- -- --
Issuance of
Series G
preferred stock,
net of $44,668
in issuance
costs........... 11,824,418 1,182 -- -- 74,654,512 -- -- -- --
Issuance of
warrants in
connection with
purchase and
license
agreement....... -- -- -- -- 2,890,500 -- -- -- --
Stock-based
compensation to
non-employees... -- -- -- -- 73,065 -- -- -- --
Deferred stock
compensation.... -- -- -- -- 41,730,329 -- -- (41,730,329) --
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- -- 11,421,739 --
Net loss........ -- -- -- -- -- -- -- -- (46,571,571)
----------- ------ ----------- ------ ------------ ----------- --------- ------------- ------------
Balances as of
December 31,
1999............ 78,855,900 $7,885 31,279,590 $3,128 $186,781,010 $(3,824,079) $ (85,164) $ (35,532,165) $(55,622,795)
=========== ====== =========== ====== ============ =========== ========= ============= ============
<CAPTION>
Total
stockholders'
(deficit)
equity
--------------
<S> <C>
Exercise of
options for
cash............ $ 272,299
Issuance of
Series E
preferred stock,
net of $37,471
in issuance
costs........... 7,264,193
Issuance of
Series E
preferred stock
in exchange for
services........ --
Performance of
services........ 97,336
Issuance of
common stock for
acquisition of
Object-Mart..... 5,874,677
Issuance of
Series F
preferred stock,
net of $20,607
in issuance
costs........... 14,969,401
Exercise of
options for
notes
receivable...... --
Payment on
stockholder
notes........... 12,000
Issuance of
warrants in
connection with
debt financing.. 203,581
Issuance of
Series G
preferred stock,
net of $44,668
in issuance
costs........... 74,655,694
Issuance of
warrants in
connection with
purchase and
license
agreement....... 2,890,500
Stock-based
compensation to
non-employees... 73,065
Deferred stock
compensation.... --
Amortization of
deferred stock
compensation.... 11,421,739
Net loss........ (46,571,571)
--------------
Balances as of
December 31,
1999............ $ 91,727,820
==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
ONI SYSTEMS CORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY--(Continued)
Period from October 20, 1997 (inception) to December 31, 1997 and years ended
December 31, 1998 and 1999 and
(unaudited) three month period ended March 31, 2000
<TABLE>
<CAPTION>
Convertible Notes
preferred stock Common stock Additional receivable Services Deferred
----------------- ----------------- paid-in from receivable stock Accumulated
Shares Amount Shares Amount capital stockholders from stockholder compensation deficit
---------- ------ ---------- ------ ------------ ------------ ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise of
options for cash
(unaudited)..... -- $ -- 1,488,283 $ 149 $ 783,003 $ -- $ -- $ -- $ --
Exercise of
options for
notes receivable
(unaudited)..... -- -- 2,162,000 216 4,605,226 (4,605,442) -- -- --
Issuance of
common shares in
exchange for
services
(unaudited)..... -- -- 14,002 1 17,502 -- -- -- --
Issuance of
Series G shares,
net of $8,207 in
issuance costs
(unaudited)..... 310,000 31 -- -- 3,845,470 -- -- (1,884,800) --
Issuance of
Series G shares
in exchange for
services
(unaudited)..... 29,000 3 -- -- 359,587 -- -- (176,320) --
Amortization of
cost of
preferred stock
issued for
leased facility
(unaudited)..... -- -- -- -- -- -- 36,501 -- --
Issuance of
warrants in
connection with
purchase and
license
agreement
(unaudited)..... -- -- -- -- 2,259,213 -- -- -- --
Issuance of
warrants in
exchange for
services
(unaudited)..... -- -- -- -- 1,295,800 -- -- -- --
Deferred stock
compensation
(unaudited)..... -- -- -- -- 46,248,113 -- -- (46,248,113) --
Amortization of
deferred stock
compensation
(unaudited)..... -- -- -- -- -- -- -- 11,281,366 --
Net loss
(unaudited)..... -- -- -- -- -- -- -- -- (30,846,535)
---------- ------ ---------- ------ ------------ ----------- -------- ------------ ------------
Balance at March
31, 2000
(unaudited)..... 79,194,900 $7,919 34,943,875 $3,494 $246,194,924 $(8,429,521) $(48,663) $(72,560,032) $(86,469,330)
========== ====== ========== ====== ============ =========== ======== ============ ============
<CAPTION>
Total
stockholders'
(deficit)
equity
--------------
<S> <C>
Exercise of
options for cash
(unaudited)..... $ 783,152
Exercise of
options for
notes receivable
(unaudited)..... --
Issuance of
common shares in
exchange for
services
(unaudited)..... 17,503
Issuance of
Series G shares,
net of $8,207 in
issuance costs
(unaudited)..... 1,960,701
Issuance of
Series G shares
in exchange for
services
(unaudited)..... 183,270
Amortization of
cost of
preferred stock
issued for
leased facility
(unaudited)..... 36,501
Issuance of
warrants in
connection with
purchase and
license
agreement
(unaudited)..... 2,259,213
Issuance of
warrants in
exchange for
services
(unaudited)..... 1,295,800
Deferred stock
compensation
(unaudited)..... --
Amortization of
deferred stock
compensation
(unaudited)..... 11,281,366
Net loss
(unaudited)..... (30,846,535)
--------------
Balance at March
31, 2000
(unaudited)..... $ 78,698,791
==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Period from October 20, 1997 (inception) to December 31, 1997
and years ended December 31, 1998 and 1999
(1) Description of Business and Significant Accounting Policies
(a) Description of Business
ONI Systems Corp. (ONI) develops, markets and sells optical communications
equipment to networking and internet service providers in the regional and
metropolitan area markets.
ONI was incorporated in California, as Optical Networks, Incorporated, on
October 20, 1997, and through November 1999, was considered to be in the
development stage, principally engaged in research and development, raising
capital and building its management team. ONI recognized its first commercial
sale in the fourth quarter of 1999 with the licensing of its network operating
system. Historically, ONI also recognized revenue derived from contracts with
agencies of the United States government. These contracts were completed in
June 1999. ONI changed its name to ONI Systems Corp. in April 2000.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the financial
statements of ONI and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated on consolidation.
(c) Stock Splits
Share information for all periods has been retroactively adjusted to reflect
a one-for-three reverse split of common stock effected in March 1998, a two-
for-three reverse split of Series B and Series C preferred stock effected in
August 1999, a two-for-one split of common stock, Series D and Series E
preferred stock effected in August 1999 and a two-for-one common and preferred
stock split effected in February 2000.
(d) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires ONI to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue
and expenses, and to disclose contingent assets and liabilities at the date of
the consolidated financial statements and the reported results of operations
during the reporting period. Actual results could differ from those estimates.
(e) Cash and Cash Equivalents
ONI considers all highly liquid investments with remaining maturities of
three months or less at the date of purchase to be cash equivalents. As of
December 31, 1998 and 1999 and March 31, 2000, cash equivalents totaled
$19,091,688, $79,004,976 and $48,235,327, respectively. Cash equivalents
consisted primarily of money market funds.
(f) Inventory
Inventories are stated at the lower of average cost or market.
F-9
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(g) Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets,
ranging from one to five years. Leasehold improvements and assets recorded
under capital leases are amortized on a straight-line basis over the lesser of
the related asset's estimated useful life or the remaining lease term.
(h) Intangibles
ONI has capitalized the cost of identifiable intangibles associated with the
acquisition of Object-Mart, Inc. These intangibles are amortized over their
estimated useful lives, not exceeding two years.
(i) Research and Development Costs
ONI's products are technical in nature and require a significant and
continuing research and development effort. All research and development costs
are expensed as incurred. Statement of Financial Accounting Standards (SFAS)
No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed, requires the capitalization of certain software development
costs incurred subsequent to the date technological feasibility is established
and prior to the date the product is generally available for sale. The
capitalized cost is then amortized over the estimated life of the product. To
date, ONI has not capitalized any software development costs because
capitalizable costs meeting the requirements of SFAS No. 86 have not been
significant.
(j) Revenue Recognition
ONI recognizes revenue from product sales upon shipment, assuming
collectibility of the resulting receivable is probable. When the arrangement
with the customer includes future obligations or obtaining customer acceptance,
revenue is recognized when those obligations have been met or customer
acceptance has been received.
ONI sells licenses for embedded software and application software. Revenue
from transactions involving ONI's software products is accounted for in
accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition,
SOP 98-4, Deferral of Effective Date of SOP 97-2, and SOP 98-9, Software
Revenue Recognition with Respect to Certain Arrangements. Accordingly, ONI
recognizes revenue from licenses of software products provided that a purchase
order has been received, the software and related documentation have been
shipped, collection of the resulting receivable is deemed probable, and the fee
is fixed or determinable.
Services revenue consists primarily of training and installation services.
Revenues from training and installation services are recognized as the services
are performed. To date, ONI has not been obligated to provide installation
services to its customers and service revenue has not been significant.
Deferred revenue represents amounts billed in excess of revenue recognized.
In 1998 and 1999 ONI derived most of its revenue from contracts with
agencies of the United States government. These contracts include cost-plus and
fixed price contracts, and revenue is recorded as earned as defined within the
specific agreements. Revenue from cost-plus contracts is billed and recognized
at the time the costs are incurred. Revenue for fixed price contracts is
recognized when milestones are completed and product or reports, if any,
committed for the milestones are shipped, which approximates the percentage-of-
completion method. Amounts designated as withholdings are not recognized until
completion of the contract.
F-10
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(k) Warranty Reserves
ONI provides a limited warranty for its products. Estimated expenses for
warranty obligations are recorded at the time revenue is recognized.
(l) Income Taxes
ONI utilizes the asset and liability method of accounting for income taxes.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
(m) Fair Value of Financial Instruments
The fair value of ONI's cash and cash equivalents, accounts receivable,
prepaid expenses and other current assets, accounts payable and accrued
liabilities approximates their carrying values due to the short-term nature of
those instruments.
The fair value of short-term and long-term capital lease obligations is
estimated based on current interest rates available to ONI for debt instruments
with similar terms, degrees of risk and remaining maturities. The carrying
values of these obligations approximate their respective fair values.
(n) Concentration of Risk
Financial instruments, that potentially subject ONI to concentrations of
credit risk, consist primarily of cash and cash equivalents and accounts
receivable. ONI's cash and cash equivalents are maintained with a highly
accredited financial institution. In 1998, accounts receivable were due from
agencies of the United States government, resulting in minimal collection
risks. For the year ended December 31, 1999, there were two customers that
represented 46% and 26% of total revenue.
In 2000, ONI's revenue has primarily been derived from the sale of one
product, the ONLINE9000. For the three month period ended March 31, 2000, four
customers accounted for 33%, 30%, 23% and 14% of revenue and 32%, 32%, 22% and
14% of accounts receivable. For the three month period ended March 31, 2000,
export sales to Europe, which were denominated in United States Dollars,
accounted for 30% of total revenue.
(o) Stock-Based Compensation
ONI accounts for stock-based awards to employees using the intrinsic value
method. Expense associated with stock-based compensation is being amortized on
an accelerated basis over the vesting period of the individual award consistent
with the method described in Financial Accounting Standards Board (FASB)
Interpretation No. 28. Accordingly, approximately 59% of the unearned deferred
compensation is amortized in the first year, 25% in the second year, 12% in the
third year, and 4% in the fourth year following the date of the grant. Pursuant
to SFAS No. 123, Accounting for Stock-Based Compensation, ONI discloses the
pro-forma effect of using the fair value method of accounting for employee
stock-based compensation arrangements.
F-11
<PAGE>
ONI SYSTEMS, CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For non-employees, ONI computes the fair value of stock-based compensation
in accordance with SFAS No. 123 and Emerging Issues Task Force (EITF) 96-18,
Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services.
(p) Impairment of Long-Lived Assets
ONI evaluates its long-lived assets, including certain intangibles, for
impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows (undiscounted and without interest charges) expected
to be generated by the asset. If these assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
(q) Comprehensive Loss
Other comprehensive income refers to revenues, expenses, gains and losses
that are not included in net income, but rather are recorded directly in
stockholders' (deficit) equity. To date, ONI has no items of other
comprehensive loss and, accordingly, comprehensive loss is the same as net
loss.
(r) Initial Public Offering and Unaudited Pro Forma Balance Sheet
In February 2000, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission that would
permit ONI to sell shares of ONI's common stock in connection with a proposed
initial public offering (IPO). If the offering is consummated under the terms
presently anticipated, all of the outstanding shares of ONI's convertible
preferred stock will automatically convert into shares of common stock upon the
closing of the IPO. The conversion of the convertible preferred stock has been
reflected in the accompanying unaudited pro forma consolidated balance sheet.
Pro forma basic and diluted net loss per share data assuming conversion of
the shares of Series B, C, D, E, F and G preferred stock into shares of common
stock had occurred at the beginning of the period (or date of issuance if
later) are as follows:
<TABLE>
<CAPTION>
Three months
Year ended ended
December 31, March 31,
------------ ------------
1999 2000
------------ ------------
<S> <C> <C>
Pro forma net loss................................. $(46,571,571) $(30,846,535)
Pro forma basic and diluted net loss per share..... $ (0.60) $ (0.30)
Shares used in computing pro forma basic and
diluted net loss per share........................ 78,025,225 103,153,985
</TABLE>
(s) Net Loss Per Share
Basic net loss per share is computed using the weighted-average number of
common shares outstanding during the period. Diluted net loss per share is
computed using the weighted-average number of common shares and dilutive
potential common shares outstanding during the period, using the as-if-
converted method for convertible preferred shares and the treasury stock method
for options
F-12
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and warrants. All potential shares have been excluded from the computation of
diluted net loss per share for all periods presented because the effect would
be antidilutive. Pursuant to SEC Staff Accounting Bulletin No. 98, common
shares and convertible preferred shares issued for nominal consideration and
options and warrants granted for nominal consideration prior to the anticipated
effective date of the initial public offering are included in the calculation
of basic and diluted net loss per share as if they were outstanding for all
periods presented. To date, ONI has not had any issuances of stock, options or
warrants for nominal consideration. Diluted net loss per share does not include
the effects of the following potential common shares:
<TABLE>
<CAPTION>
Period from
October 20 Year ended December Three months ended
(inception) to 31, March 31,
December 31, --------------------- ---------------------
1997 1998 1999 1999 2000
-------------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Shares issuable under
stock options.......... 1,078,220 8,789,776 17,548,724 11,161,028 19,343,345
Shares of unvested stock
subject to repurchase.. -- 5,992,684 8,587,699 4,842,165 10,096,468
Shares issuable pursuant
to warrants to purchase
common stock........... 233,468 233,468 733,468 233,468 1,156,468
Shares issuable pursuant
to warrants to purchase
convertible preferred
stock.................. -- -- 277,926 277,926 277,926
Shares issuable related
to convertible
preferred stock on an
"as-if-converted"
basis.................. 8,000,000 50,580,190 78,855,900 58,582,014 79,194,900
</TABLE>
The weighted-average exercise price of stock options outstanding was $0.005,
$0.08, $0.29 and $0.64 as of December 31, 1997, 1998, 1999 and March 31, 2000
respectively. The weighted-average purchase price of shares of common stock
subject to the Company's right of repurchase was $0.02, $0.44 and $0.87 as of
December 31, 1998, 1999 and March 31, 2000, respectively. The exercise price of
warrants to purchase shares of convertible preferred stock remained $0.88 as of
December 31, 1999 and March 31, 2000. The weighted-average exercise price of
warrants to purchase shares of common stock was $0.62 and $3.16 as of December
31, 1999 and March 31, 2000, respectively. Each share of preferred stock is
convertible into one share of common stock.
(t) Segment Reporting
ONI adopted SFAS No. 131, DIsclosures About Segments of an Enterprise and
Related Information, for the year ended December 31, 1999. SFAS No. 131
establishes standards for the manner in which public companies report
information about operating segments in annual and interim financial
statements. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The method for
determining what information to
F-13
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
report is based on the way management organizes the operating segments within a
company for making operating decisions and assessing financial performances.
ONI's chief executive officer (CEO) is its chief operating decision-maker.
The financial information that the CEO reviews is identical to the information
presented in the accompanying statements of operations. ONI has determined that
it operates in a single operating segment: development and sale of optical
networking equipment to communications service providers in the regional and
metropolitan area markets.
Through December 31, 1999, ONI's revenue was primarily from government
research and development contracts. These contracts were completed in June
1999, and they will not contribute to ONI's revenue in the future as ONI will
not continue these activities.
Beginning January 1, 2000, ONI's revenue has been derived from sales of its
ONLINE9000 product. ONI expects to continue selling the ONLINE9000 in the
future, and also to develop other lines of products for sale.
(u) Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because ONI
does not currently hold any derivative instruments and does not engage in
hedging activities, ONI expects that the adoption of SFAS No. 133 will not have
a material impact on its financial position, results of operations or cash
flows. ONI will be required to adopt SFAS No. 133 for the year ended December
31, 2001 in accordance with SFAS No. 137, which delayed implementation of SFAS
No. 133.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB No. 101), which summarizes views of the
Commission staff in applying generally accepted accounting principles to
revenue recognition in financial statements. ONI believes that its current
revenue recognition principles comply with this bulletin.
(2) Business Combination
On June 29, 1999, ONI acquired all of the outstanding common shares of
Object-Mart, Inc. (Object-Mart) in exchange for 4,569,276 shares of ONI's
common stock and approximately $3,222,000 in cash for a total purchase price of
approximately $9,096,677. Object-Mart was located in San Jose, California, and
provided software products and services to software development companies,
software providers and equipment manufacturers in the telecommunications
industry. The combination was accounted for using the purchase method and,
accordingly, the results of operations of Object-Mart have been included in
ONI's consolidated financial statements only since June 29, 1999. The excess of
the purchase price over the fair value of the net identifiable assets acquired
of $5,679,839 has been recorded as goodwill and is being amortized on a
straight-line basis over two years. Identifiable intangibles are amortized on a
straight-line basis over periods not exceeding two years.
The amount of $170,000 allocated to purchased in-process research and
development was determined through established valuation techniques in the
high-technology communications industry and was expensed upon acquisition
because technological feasibility had not been established and no future
alternative uses existed.
F-14
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following unaudited pro forma financial information presents the
combined results of operations of ONI and Object-Mart as if the acquisition had
occurred as of the beginning of 1998 and 1999, after giving effect to certain
adjustments, including amortization of goodwill and other intangibles,
additional depreciation expense and related income tax effects. The pro forma
financial information does not necessarily reflect the results of operations
that would have occurred had ONI and Object-Mart constituted a single entity
during these periods.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1998 1999
------------ ------------
(unaudited)
<S> <C> <C>
Revenue......................................... $ 3,665,811 $ 4,625,795
Net loss........................................ $(11,172,005) $(47,779,504)
Basic and diluted net loss per share............ $ (0.94) $ (2.65)
</TABLE>
(3) Inventories
Inventories consist of:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ -----------
(unaudited)
<S> <C> <C>
Raw materials....................................... $8,914,321 $ 7,924,748
Work in progress.................................... -- 8,801,088
Finished goods...................................... 734,535 3,154,445
Consignment inventory............................... -- 903,493
---------- -----------
$9,648,856 $20,783,774
========== ===========
</TABLE>
(4) Property and Equipment
Property and equipment is as follows:
<TABLE>
<CAPTION>
December 31, March 31,
--------------------- -----------
1998 1999 2000
---------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Computers and equipment................... $1,050,541 $5,569,889 $16,424,038
Furniture and fixtures.................... 204,734 714,592 1,032,043
Leasehold improvements.................... 50,688 273,663 412,554
---------- ---------- -----------
1,305,963 6,558,144 17,868,635
Less accumulated depreciation and
amortization............................. 289,265 1,243,154 2,072,568
---------- ---------- -----------
$1,016,698 $5,314,990 $15,796,067
========== ========== ===========
</TABLE>
Equipment recorded under capital leases was $132,975, $541,580 and $439,571
as of December 31, 1998, 1999 and March 31, 2000, respectively, and the related
accumulated amortization was $13,651, $57,976 and $102,009 as of December 31,
1998, 1999 and March 31, 2000, respectively. There was no equipment recorded
under capital leases as of December 31, 1997.
F-15
<PAGE>
ONI SYSTEMS, CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) Intangibles
A summary of intangibles is as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ -----------
(unaudited)
<S> <C> <C>
Purchased technology and workforce.................. $ 530,000 $ 530,000
Assembled workforce and non-compete agreements...... 630,000 630,000
---------- ----------
1,160,000 1,160,000
Less accumulated amortization....................... 422,500 633,750
---------- ----------
$ 737,500 $ 526,250
========== ==========
</TABLE>
(6) Accrued Liabilities
Accrued liabilities are comprised of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ -----------
(unaudited)
<S> <C> <C>
Accrued Employee benefits.......................... $ 671,155 $ 1,364,760
Uninvoiced receipts................................ 4,307,740 7,443,179
Other.............................................. 1,107,889 1,762,374
---------- -----------
$6,086,784 $10,570,313
========== ===========
</TABLE>
(7) Related Party Transactions
On October 20, 1997, ONI was incorporated as a wholly-owned subsidiary of
Optivision, Inc. (Optivision) and in connection therewith issued 11,565,752
shares of common stock, 8,000,000 shares of Series A preferred stock and a
$90,000 promissory note to Optivision in exchange for cash of $100,000,
property and equipment of $14,716, and certain intellectual property and
technology rights. On December 22, 1997, ONI was spun-out from Optivision. In
conjunction with the spin-out, ONI reserved 233,468 shares of common stock
issuable to a third party holding warrants to purchase common shares of
Optivision. In January 1998, a further $142,067 of property and equipment was
provided by Optivision to ONI for no additional consideration.
In 1998, in conjunction with the issuance of the Series B and Series C
preferred stock, 8,000,000 shares of Series A preferred stock were converted to
Series B preferred stock, and the Company repurchased and canceled 1,333,333
shares of Series B preferred stock from Optivision, Inc. in exchange for
$1,000,000 in cash.
During 1998 and 1999, ONI received $122,585 and $3,713,494, respectively, in
promissory notes from certain officers in exchange for common stock. As of
December 31, 1999, $12,000 had been repaid by the stockholders. The notes are
repayable over a period of five to ten years and bear interest at rates ranging
from 4.46% to 6.20%. The notes are secured by the underlying common shares. In
the three month period ended March 31, 2000, ONI received an additional
$4,605,442 in promissory notes in exchange for common stock.
(8) Financing Arrangements
In February 1999, ONI entered into a Loan and Security Agreement with a
financing company that allowed ONI to borrow up to $2,000,000. The loan bears
interest at the prime rate, is repayable
F-16
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
in 36 equal monthly installments of principal and interest and is secured by
certain assets of ONI. ONI also entered into a Subordinated Loan and Security
Agreement with the same financing company, which allowed ONI to borrow up to
$1,000,000. The subordinated loan bears interest at 12% per annum, is repayable
in 36 equal monthly installments of principal and interest and is secured by
certain assets of ONI. As of December 31, 1999, ONI had not borrowed any
amounts under these agreements. These agreements expired unutilized on February
10, 2000.
In connection with the loan and security agreement and subordinated loan and
security agreement, ONI issued warrants to purchase 90,750 and 119,116 shares
of Series B convertible preferred stock, respectively, at $0.88 per share. The
warrants expire on the earlier of February 10, 2009, or five years from the
effectiveness of ONI's initial public offering. No warrants had been exercised
as of December 31, 1999. The fair value of the warrants was determined to be
$66,474 and $87,252, respectively, calculated using the Black-Scholes option
pricing model, using the following assumptions: no dividends; contractual term
of ten years; risk-free interest rate of 5.5%; and expected volatility of 70%.
The fair value of the warrants has been recorded as additional capital and was
amortized to interest expense over the term of the loan agreements.
(9) Stockholders' Equity
(a) Preferred Stock
As of December 31, 1999, ONI had 80,309,408 shares of preferred stock
authorized. ONI has designated and issued preferred stock as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------ March 31, 2000
1998 1999 (unaudited)
1999 ----------------------- ------------------------ ------------------------
Designated Shares Liquidation Shares Liquidation Shares Liquidation
shares outstanding preference outstanding preference outstanding preference
---------- ----------- ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Series B................ 25,073,436 24,795,510 $ 5,840,181 24,795,510 $ 5,840,181 24,795,510 $ 5,840,181
Series C................ 2,733,332 2,733,332 2,049,999 2,733,332 2,049,999 2,733,332 2,049,999
Series D................ 4,969,148 4,969,148 4,380,428 4,969,148 4,380,428 4,969,148 4,380,428
Series E................ 26,284,024 18,082,200 16,500,008 26,284,024 23,984,172 26,284,024 23,984,172
Series F................ 8,249,468 -- -- 8,249,468 15,000,008 8,249,468 15,000,008
Series G................ 13,000,000 -- -- 11,824,418 74,700,723 12,163,418 76,872,802
---------- ---------- ----------- ---------- ------------ ---------- ------------
80,309,408 50,580,190 $28,770,616 78,855,900 $125,955,511 79,194,900 $128,127,590
========== ========== =========== ========== ============ ========== ============
</TABLE>
In January 1998, ONI raised $4,208,803, net of issuance costs of $50,058,
through the sale of 18,128,843 shares of Series B preferred stock for cash of
$0.24 per share. In addition, ONI issued 8,000,000 shares of Series B preferred
stock in exchange for the redemption and cancellation of 8,000,000 shares of
Series A preferred stock and repurchased 1,333,333 shares of Series B preferred
stock for cash consideration of $1,000,000. Concurrently, ONI raised
$1,988,177, net of issuance costs of $61,823, from the sale of 2,733,332 shares
of Series C preferred stock for cash of $0.75 per share.
In April 1998, ONI raised $4,334,797, net of issuance costs of $45,632, from
the sale of 4,969,148 shares of Series D preferred stock for cash of $0.88 per
share.
In December 1998, ONI raised $16,483,400, net of issuance costs of $16,609,
from the sale of 18,082,200 shares of Series E preferred stock for cash of
$0.91 per share. In March 1999, ONI closed a second round of Series E preferred
financing, raising $7,264,193, net of issuance costs of
F-17
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$37,471, from the sale of 8,001,824 shares of Series E preferred stock. In
addition ONI issued 200,000 shares of Series E preferred stock in exchange for
additional lease space at its 166 Baypointe Parkway location. The value of
$182,500 ascribed to the Series E preferred stock was recorded as a reduction
of stockholders' equity and is being amortized to rent expense over the period
of the lease agreement.
In September 1999, ONI raised $14,969,401, net of issuance costs of $20,607,
from the sale of 8,249,468 shares of Series F preferred stock for cash of $1.82
per share.
In December 1999, ONI completed another round of private financing, raising
$74,655,694, net of issuance costs of $44,668, from the sale of 11,824,418
shares of Series G preferred stock for cash of $6.32 per share. In March 2000,
ONI raised an additional $1,960,701, net of issuance costs of $8,207, from the
sale of 310,000 shares of Series G preferred stock for cash of $6.32 per share.
In addition 29,000 shares of Series G preferred stock were issued in exchange
for services. The value of $183,270 ascribed to these services has been
expensed in the period ended March 31, 2000.
The rights, preferences and restrictions of the Series B, C, D, E, F and G
preferred stock are as follows:
. Each share of Series B, C, D, E, F and G preferred stock is convertible
at the option of the holder at any time after the date of issuance on a
one-for-one basis subject to certain antidilution provisions. Conversion
of all Series B, C, D, E, F and G preferred stock is automatic upon the
earlier of (1) the closing of a firm underwritten commitment with respect
to an initial public offering of shares of common stock of ONI, in which
ONI receives cash proceeds of at least $20,000,000 (net of underwriters'
commissions and expenses) or (2) the written consent of the holders of 66
-2/3% of the outstanding shares of preferred stock, voting together as a
single class.
. Holders of Series B, C, D, E, F and G preferred stock are entitled to
receive dividends equal to 10% of their respective liquidation preference
in preference to any dividend on common stock when, as and if declared by
the Board of Directors out of legally available funds. These preferential
dividends are noncumulative. In addition, the holders of Series B, C, D,
E, F and G preferred stock are entitled to receive dividends on a basis
equal to common stockholders out of funds legally available therefor,
when, as and if declared by the Board of Directors. No dividends have
been declared through December 31, 1999.
. Series B, C, D, E, F and G preferred stock have liquidation preferences
of $0.24, $0.75, $0.88, $0.91, $1.82 and $6.32, respectively, plus all
declared but unpaid dividends on such shares.
. Series B, C, D, E, F and G preferred stock have the same voting rights as
the number of shares of common stock issuable upon conversion of such
shares. Four directors are elected by the holders of record of the Series
B, C and E preferred stock voting as a separate class; one director is
elected by the holders of record of the common stock voting as a separate
class; and two directors are elected by the holders of record of the
Series B, C, D, E, F and G preferred stock and common stock voting
together as a single class.
(b) Common Stock
As of December 31, 1999, ONI had 159,690,592 shares of common stock
authorized.
In 1998, ONI issued 6,431,496 shares of restricted common stock at prices
ranging from $0.0016 to $0.0882 per share, 5,991,496 of which were issued in
exchange for notes receivable of
F-18
<PAGE>
ONI SYSTEMS, CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$122,585. In 1999, ONI issued an additional 513,332 shares of restricted common
stock at prices ranging from $0.09 to $0.91, 20,000 of which were issued in
exchange for notes receivable of $18,200. In the three month period ended March
31, 2000, ONI issued 2,162,000 shares of restricted common stock at prices
ranging from $0.09 to $3.20, all of which were issued in exchange for notes
receivable of $4,605,442. The restricted shares of common stock vest 25% within
12 months of issuance with the remainder vesting in 36 equal monthly amounts.
On the occurrence of a change in control event, as defined, 50% of the unvested
shares of common stock becomes vested. Upon termination of employment, ONI may
repurchase all unvested shares at an amount equal to the original purchase
price.
ONI maintains a right of first refusal with respect to restricted common
stock. A stockholder must notify ONI prior to selling these shares to a third
party. Upon notification, ONI may purchase the shares from the holder at the
price offered by the third party.
In December 1999, in connection with the signing of a Purchase and License
Agreement with a customer to provide certain ONI products in the future, ONI
issued a warrant to purchase 500,000 shares of common stock at an exercise
price of $0.91 per share. The value of $2,890,500 ascribed to the warrant was
estimated using the Black-Scholes option valuation model with the following
assumptions: no expected dividend yield; risk free interest rate of 5.50%;
expected volatility of 70%; and contractual term of six years. The customer is
not obligated to purchase any of ONI's products as a condition to exercising
the warrant. Accordingly, the warrant was expensed in 1999.
In February 2000, in connection with the signing of a Purchase and License
Agreement with a customer to provide certain ONI products in the future, ONI
issued a warrant to purchase 223,000 shares of common stock at an exercise
price of $0.91 per share. The value of $2,259,213 ascribed to the warrant was
estimated using the Black-Scholes option valuation model with the following
assumptions: no expected dividend yield; risk free interest rate of 5.50%;
expected volatility of 70%; and contractual term of seven years. The customer
is not obligated to purchase any of ONI's products as a condition to exercising
the warrant. Accordingly, the warrant was expensed in the three-month period
ended March 31, 2000.
In March, 2000, as consideration for professional services rendered, ONI
issued a warrant to purchase 200,000 shares of common stock at an exercise
price of $15 per share. The value of $1,295,800 ascribed to the warrant was
estimated using the Black-Scholes option valuation model with the following
assumptions: no expected dividend yield; risk free interest rate of 5.50%;
expected volatility of 70%; and a contractual term of four years. The warrant
was expensed in the three month period ended March 31, 2000.
(c) Stock Option Plans
1997 Stock Option Plan
On October 29, 1997, ONI's Board of Directors adopted the 1997 Stock Option
Plan (the 1997 Plan) and reserved a total of 7,638,508 shares of ONI's common
stock for issuance thereunder. ONI did not file a timely notice of Issuance of
Shares pursuant to California securities law and consequently any options to
purchase shares or restricted stock purchase offers issued under the 1997 Plan
did not qualify for an exemption from qualification under California securities
law. As a result, the Board of Directors terminated the 1997 Plan in April 1998
and approved a repurchase offer for any holder of options of shares under the
1997 Plan. The repurchase offer expired without any shares being repurchased.
F-19
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Options granted under the 1997 Plan may be designated as "Incentive Stock
Options" or "Nonstatutory Stock Options" at the discretion of ONI, with
exercise prices not less than the fair market value at the date of grant.
Options generally vest 25% on the first anniversary of the vesting start date
and then monthly over the next three years. Options expire ten years from the
date of grant.
1998 Equity Incentive Plan
In 1998, the Board of Directors of ONI adopted the 1998 Equity Incentive
Plan (the 1998 Plan) and reserved a total of 23,407,604 shares of ONI's common
stock for issuance thereunder.
Under the 1998 Plan, the Board of Directors may grant incentive stock
options, nonqualified stock options and restricted stock awards. Options
granted under the 1998 Plan generally vest 25% on the first anniversary of the
vesting start date and then monthly over the next three years. Options granted
under the 1998 Plan expire ten years from the date of grant.
1999 Equity Incentive Plan
In 1999, the Board of Directors of ONI adopted the 1999 Equity Incentive
Plan (the 1999 Plan) and reserved a total of 6,200,000 shares of ONI's common
stock for issuance thereunder. The terms of the 1999 Plan are substantially
similar to those of the 1998 Plan.
A summary of the status of ONI's option plans is as follows:
<TABLE>
<CAPTION>
Outstanding options
-------------------
Weighted Weighted
Shares average average
available Number of exercise grant date
for grant shares price fair value
----------- ----------- -------- ----------
<S> <C> <C> <C> <C>
Authorized........................ 29,751,768 --
Granted......................... (1,078,220) 1,078,220 $0.005 $0.19
Exercised....................... -- --
Cancelled....................... -- --
----------- -----------
Balance as of December 31, 1997... 28,673,548 1,078,220 0.005
Granted......................... (10,885,796) 10,885,796 0.08 $0.69
Exercised....................... -- (1,651,332) 0.08
Cancelled....................... 1,522,908 (1,522,908) 0.07
----------- -----------
Balance as of December 31, 1998... 19,310,660 8,789,776 0.08
Granted......................... (20,178,438) 20,178,438 0.42 $1.90
Exercised....................... -- (8,709,066) 0.46
Cancelled....................... 2,710,424 (2,710,424) 0.08
----------- ----------- ------
Balance as of December 31, 1999... 1,842,646 17,548,724 $ 0.29
=========== =========== ======
Authorized*..................... 4,994,079 -- --
Granted*........................ (5,630,827) 5,630,827 2.28 $2.95
Exercised*...................... -- (3,664,285) 1.48
Cancelled*...................... 171,921 (171,921) 1.10
----------- ----------- ------
Balance as of March 31, 2000*..... 1,377,819 19,343,345 $ 0.64
=========== =========== ======
</TABLE>
- --------
* Unaudited
F-20
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information with respect to stock options
outstanding as of March 31, 2000:
<TABLE>
<CAPTION>
Exercise Options Contractual Exercisable
price outstanding life (years) Options
-------- ----------- ------------ -----------
<S> <C> <C> <C>
$0.005 200,876 7.71 80,550
0.075 117,212 7.86 7,322
0.09 11,393,482 8.99 128,506
0.456 20,000 9.33 --
0.91 3,669,450 9.54 --
1.25 2,825,900 9.77 21,375
3.20 829,800 9.91 --
5.25 162,000 9.95 --
7.50 124,625 9.98 --
---------- -------
$ 0.64 19,343,345 9.24 237,753
========== =======
</TABLE>
Accounting for Stock-Based Compensation
ONI uses the intrinsic value method prescribed by APB No. 25 in accounting
for its stock-based compensation arrangements for employees whereby
compensation cost is recognized to the extent the fair value of the underlying
common stock exceeds the exercise price of the stock options at the date of
grant. Deferred stock compensation of $190,875 for the period from October 20,
1997 (inception) to December 31, 1997, and $8,432,317, and $41,730,329 for the
year ended December 31, 1998 and 1999, respectively, has been recorded for the
excess of the fair value of the common stock underlying the options at the
grant date over the exercise price of the options. An additional $46,248,113 of
deferred stock compensation was recorded for the three months ended March 31,
2000. These amounts are being amortized on an accelerated basis over the
vesting period, generally four years, consistent with the method described in
FASB Interpretation No. 28. Amortization of deferred compensation was $89,249
for the period from October 20, 1997 (inception) to December 31, 1997,
$3,310,368 in 1998 and $11,421,739 in 1999. Amortization of deferred
compensation for the three months ended March 31, 1999 and 2000 was $1,296,281
and $11,281,366, respectively.
In connection with the employment agreement with ONI's Chief Executive
Officer, the value of stock awards of $836,929 was re-measured and recorded as
deferred stock-based compensation in the year ended December 31, 1999, pursuant
to the treatment ascribed under EITF Issues 96-18. Milestones stipulated in the
employment agreement were met as of December 31, 1999. Thus, the entire
deferred stock-based compensation was amortized in the year ended December 31,
1999. Had compensation cost for ONI's stock-based compensation plan been
determined consistent with the fair value approach set forth in SFAS No. 123,
ONI's net losses would have been as follows:
<TABLE>
<CAPTION>
Period from Year ended December Three months ended
October 20, 1997 31, March 31,
(inception) to ----------------------- -----------------------
December 31, 1997 1998 1999 1999 2000
----------------- ---------- ----------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net loss--as reported... $199,056 $8,852,168 $46,571,571 $4,777,022 $30,846,535
Net loss--pro forma..... $199,056 $8,900,007 $46,917,722 $4,809,910 $31,615,232
Basic and diluted net
loss per share--as
reported............... $ (0.77) $ (0.74) $ (2.58) $ (0.35) $ (1.27)
Basic and diluted net
loss per share--pro
forma.................. $ (0.77) $ (0.75) $ (2.60) $ (0.36) $ (1.31)
</TABLE>
F-21
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of options granted is estimated on the date of grant using
the minimum value method with the following weighted-average assumptions: no
dividend yield; risk-free interest rates of 5.75% and 5.5% in 1998 and 1999,
respectively, and an expected life of five years.
(10) Commitments and Contingencies
(a) Leases
In February 1999, the Company entered into a leasing agreement with a
financing company which allows ONI to draw up to $1,050,000 for the lease of
certain equipment and $450,000 for the lease of software and tenant
improvements. The leases are accounted for as capital leases. The lease
obligations under this agreement are repayable in 42 equal monthly installments
of principal plus interest commencing on the individual lease inception dates
and are secured by the leased assets.
In connection with the equipment leasing agreement, ONI issued to the
financing company warrants to purchase 68,062 shares of Series B preferred
stock at a price of $0.88 per share. The warrants expire on February 10, 2009,
or five years from the effectiveness of the ONI's initial public offering, if
earlier. No warrants had been exercised as of December 31, 1999. The fair value
of the warrants was determined to be $49,855, calculated using the Black-
Scholes option pricing model, using the following assumptions: no dividends;
contractual term of ten years; risk-free interest rate of 5.5%; and expected
volatility of 70%. The fair value of the warrants has been recorded as
additional paid-in capital and is being amortized as interest expense over the
term of the lease agreement.
ONI leases its headquarters facility under a noncancelable operating lease,
and has acquired furniture and other equipment through capital leases. Future
minimum payments for both operating and capital leases as of March 31, 2000 are
as follows:
<TABLE>
<CAPTION>
Year ending
December Capital Operating
31, leases leases
----------- -------- -----------
<S> <C> <C>
9 months ended 2000.................................... $126,423 $ 3,454,229
2001................................................... 186,525 3,550,550
2002................................................... 151,060 2,339,673
2003................................................... 62,941 1,639,124
2004................................................... -- 1,709,660
Thereafter............................................. -- 3,630,925
-------- -----------
Future minimum lease payments.......................... 526,949 $16,324,159
===========
Less amount representing interest...................... 60,666
--------
Present value of future minimum lease payments......... 466,283
Less current portion................................... 170,905
--------
Long-term portion...................................... $295,378
========
</TABLE>
Total rent expense under the operating leases was $494,308, $908,115 and
$714,879 for the years ended December 31, 1998, 1999 and the quarter ended
March 31, 2000, respectively, and $0 for the period from October 20, 1997
(inception) to December 31, 1997.
(b) Contingencies
In March 2000, Nortel Networks (Nortel) filed suit against ONI in the United
States District Court for the Northern District of California. The suit alleges
that ONI's products infringe five patents held by Nortel, and sets forth
allegations of misappropriation of trade secrets, unlawful business practices
and common law unfair competition. Nortel is seeking preliminary and permanent
injunctions and
F-22
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
damages against ONI in connection with these claims. In April 2000, ONI filed a
motion to dismiss Nortel's claims, and ONI also filed an answer and
counterclaims asserting unfair business practices, tortious interference,
breach of contract and declarations of invalidity, unenforceability and non-
infringement of the patents against Nortel. ONI expects to incur substantial
legal and other expenses in connection with the Nortel Networks litigation. In
the event of an adverse ruling, ONI also could be required to pay damages to
Nortel Networks. The accompanying consolidated financial statements do not
include any costs, if any, that might result from this uncertainty.
From time-to-time ONI may be subject to other legal proceedings and claims
in the ordinary course of business. ONI is not aware of any legal proceedings
or claims, including the above matter that ONI believes will have, individually
or in the aggregate, a material adverse effect on ONI's business, financial
condition or results of operations.
(11) Income Taxes
Income tax expense is comprised of current state tax of $826 and $1,600 for
the years ended December 31, 1998 and 1999, respectively.
The reconciliation between the amount computed by applying the U.S. federal
statutory tax rate of 34% to loss before income tax and the actual provision
for income taxes is a follows:
<TABLE>
<CAPTION>
Period ended December 31,
-----------------------------------
1997 1998 1999
-------- ----------- ------------
<S> <C> <C> <C>
Income tax (benefit) at statutory rate. $(67,679) $(3,009,456) $(15,833,790)
State taxes net of federal income tax
benefit............................... -- 826 1,600
Permanent differences.................. 48 4,039 24,612
Stock Compensation..................... 53 417,762 3,161,650
Goodwill Amortization.................. -- -- 482,780
Current year net operating loss and
temporary differences for which no
benefit is recognized................. 67,578 2,587,655 12,164,748
-------- ----------- ------------
Total income tax expense............... $ -- $ 826 $ 1,600
======== =========== ============
</TABLE>
The effects of temporary differences that give rise to significant portions
of deferred tax assets as of December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1999
----------- ------------
<S> <C> <C>
Deferred tax assets:
Deferred state taxes........................... $ -- $ 1,000
Fixed assets................................... 39,000 141,000
Capitalized start-up and organizational
expense....................................... 343,000 236,000
Net operating loss carryforwards............... 2,011,000 14,707,000
Deferred stock compensation.................... 930,000 3,502,000
Research and other credit carryforwards........ 394,000 2,047,000
Accrual amounts................................ 12,000 293,000
----------- ------------
Total gross deferred tax assets............ 3,729,000 20,927,000
Valuation allowance.............................. (3,729,000) (20,682,000)
----------- ------------
Total deferred tax assets.................. $ -- $ 245,000
Deferred tax liabilities: Intangibles.......... -- (245,000)
----------- ------------
Net deferred tax assets, net of deferred tax
liabilities................................... -- --
=========== ============
</TABLE>
F-23
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Management has established a valuation allowance for the portion of deferred
tax assets for which realization is uncertain. The change in the valuation
allowance for deferred tax assets was an increase of $3,729,000 in 1998 and an
increase of $16,650,000 in 1999.
As of December 31, 1999, ONI has net operating loss carryforwards for
federal and California income tax purposes of approximately $34,000,000
available to reduce future income subject to incomes taxes. The net operating
loss carryforwards for federal income tax purposes expire in various years
beginning in 2012 through 2019. The net operating loss carryforwards for
California purposes expire in 2005.
ONI also has research credit carryforwards as of December 31, 1999 for
federal and California income tax return purposes of approximately $1,125,000
and $864,000, respectively, available to reduce future income taxes. The
federal research credit carryforward will expire in various years from 2012
through 2019. The California research credit carryforward carries forward
indefinitely until realized. ONI also has a California manufacturing investment
credit carryforward of $59,000 which will expire in various years beginning in
2007 through 2008.
ONI's ability to use net operating loss and credit carryforwards may be
subject to limitations pursuant to the ownership change rule of the Internal
Revenue Code, Section 382 and corresponding state tax law.
(12) Employee Benefit Plan
ONI has an Employee Savings and Retirement Plan (the Benefit Plan) under
Section 401(k) of the Internal Revenue Code for its eligible employees. The
Benefit Plan is available to all of ONI's employees who meet minimum age and
service requirements, and provides employees with tax deferred salary
deductions and alternative investment options. Employees may contribute up to
15% of their eligible earnings, subject to certain limitations. There are no
matching contributions under the Benefit Plan.
(13) Subsequent Events
(a) In April 2000, ONI adopted a 2000 Equity Incentive Plan, under which
7,000,000 shares of ONI's common stock were reserved exclusively for
issuance under the plan. In addition, ONI adopted a 2000 Employee Stock
Purchase Plan, to be effective on the first day on which price quotations
are available for ONI's common stock on the NASDAQ National Market, in
which 1,000,000 shares of common stock were reserved exclusively for
issuance under the plan.
(b) In March 2000, ONI entered into an agreement with Internet Initiative Japan
Inc. to sell to it $4.0 million of common stock, at the initial public
offering price per share, in a private placement that will close
concurrently with ONI's initial public offering.
(c) Effective April 25, 2000, ONI reincorporated as a Delaware corporation.
Share capital information for all periods has been retroactively adjusted
to reflect the par value of common and preferred stock and amounts of paid-
in capital.
F-24
<PAGE>
Independent Auditors' Report
The Board of Directors
Object-Mart, Inc.:
We have audited the accompanying balance sheet of Object-Mart, Inc. as of
December 31, 1998, and the related statements of operations, shareholders'
equity, and cash flows for the year ended December 31, 1998 and for the six
months ended June 29, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Object-Mart, Inc. as of
December 31, 1998, and the results of operations and cash flows of Object-Mart,
Inc. for the year ended December 31, 1998 and for the six months ended June 29,
1999, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Mountain View, California
April 10, 2000
F-25
<PAGE>
OBJECT-MART, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS December 31, 1998
------ -----------------
<S> <C>
Current assets:
Cash and cash equivalents................................... $ 54,568
Accounts receivable......................................... 383,907
Other current assets........................................ 12,623
---------
Total current assets...................................... 451,098
Property and equipment........................................ 62,428
Other assets.................................................. 1,298
---------
Total assets.............................................. $ 514,824
=========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C>
Current liabilities:
Accounts payable............................................ 15,869
Accrued expenses............................................ 9,127
Deferred income taxes....................................... 136,863
---------
Total current liabilities................................. 161,859
Shareholders' equity:
Common Stock, no par value; 10,000,000 shares authorized and
2,751,000 shares issued and outstanding at December 31, 1998. 146,060
Notes receivable from shareholder............................. (143,360)
Retained earnings............................................. 350,265
---------
Total shareholders' equity................................ 352,965
---------
Total liabilities and shareholders' equity.............. $ 514,824
=========
</TABLE>
See accompanying notes to financial statements
F-26
<PAGE>
OBJECT-MART, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended Six months
December 31, ended
1998 June 29, 1999
------------ -------------
<S> <C> <C>
Revenue.............................................. $1,933,081 $1,744,600
Cost of revenue.................................... 1,023,922 509,013
---------- ----------
Gross profit..................................... 909,159 1,235,587
---------- ----------
Operating expenses:
Research and development........................... 198,526 582,927
Sales and marketing................................ 129,451 52,888
General and administrative......................... 69,237 105,524
Stock compensation................................. -- 466,507
---------- ----------
Total operating expenses......................... 397,214 1,207,846
---------- ----------
Operating income................................. 511,945 27,741
Interest income, net................................. 8,138 14,286
---------- ----------
Income before income taxes......................... 520,083 42,027
Income taxes......................................... 207,140 109,023
---------- ----------
Net income/(loss)................................ $ 312,943 $ (66,996)
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
OBJECT-MART, INC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months
ended
Year ended June 29,
December 31, 1998 1999
----------------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income/(loss)............................... 312,943 $ (66,996)
Deferred tax expense............................ -- 28,543
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 46,521 20,811
Amortization of deferred stock compensation.... -- 466,507
Changes in operating assets and liabilities:
Accounts receivable............................ (349,750) (206,400)
Prepaid expenses and other current assets...... (12,208) (198,000)
Other assets................................... 410 --
Accounts payable............................... 9,536 (15,836)
Accrued liabilities............................ (7,475) 154,010
Deferred income taxes.......................... 136,863 --
Deferred revenue............................... -- 1,000,000
-------- ----------
Net cash provided by operating activities.... (136,840) 1,182,639
Cash flows used in investing activities:
Purchase of property and equipment.............. (108,948) (58,951)
-------- ----------
Net cash used in investing activities........ (108,948) (58,951)
-------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock.......... 2,700 255,638
-------- ----------
Net cash provided by financing activities.... 2,700 255,638
-------- ----------
Net increase in cash and cash equivalents.... 30,592 1,379,326
Cash and cash equivalents at beginning of period. 23,976 54,568
-------- ----------
Cash and cash equivalents at end of period....... 54,568 $1,433,894
======== ==========
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
OBJECT-MART, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
Year ended December 31, 1998 and six months ended June 29, 1999
<TABLE>
<CAPTION>
Notes
Common stock receivable Total
------------------ from Retained shareholders'
Shares Amount shareholders earnings equity
--------- -------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
Balance as of December
31, 1997............... 2,500,000 $ 65,500 $ (65,500) $ 37,322 $ 37,322
Issuance of Common
Stock.................. 251,000 80,560 (77,860) -- 2,700
Net income.............. -- -- -- 312,943 312,943
--------- -------- --------- -------- ----------
Balance as of December
31, 1998............... 2,751,000 $146,060 $(143,360) $350,265 $ 352,965
Exercise of options for
cash................... 877,500 255,638 -- -- 255,638
Stock Compensation...... -- 466,507 -- -- 466,507
Net Loss................ -- -- -- (66,996) (66,996)
--------- -------- --------- -------- ----------
3,628,500 $868,205 $(143,360) $283,269 $1,008,114
========= ======== ========= ======== ==========
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Year ended December 31, 1998 and six months ended June 29, 1999
(1) Description of Business and Significant Accounting Policies
(a) Description of Business
Object-Mart, Inc. (Object-Mart) was incorporated in California on February
27, 1997. The company provided telecommunications software products and
services to telecommunications software development companies, service
providers and equipment manufacturers.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires Object-Mart to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue
and expenses, and to disclose contingent assets and liabilities at the date of
the financial statements and the reported results of operations during the
reporting period. Actual results could differ from those estimates.
(c) Cash and Cash Equivalents
Object-Mart considers highly liquid investments with remaining maturities of
less than three months at the date of purchase to be cash equivalents. As of
December 31, 1998, cash equivalents consisted of a money market account in the
amount of $50,862.
(d) Accounts Receivable
Accounts receivable is comprised of unbilled trade accounts receivable. As
of December 31, 1998, there was no allowance for uncollectible accounts
receivable.
(e) Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets,
ranging from one to three years. Depreciation expense for the year ended
December 31, 1998 was $46,521 and for the six month period ended June 29, 1999
was $20,811.
(f) Software Development Costs
Statement of Financial Accounting Standards No. 86, Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed, requires the
capitalization of certain software development costs incurred subsequent to the
date technological feasibility is established and prior to the date the product
is generally available for sale. The capitalized cost is then amortized over
the estimated life of the product. To date, Object-Mart has not capitalized any
software development costs because capitalizable costs meeting the requirements
SFAS No. 86 have not been significant.
(g) Revenue Recognition
Object-Mart derives its revenue from software license agreements and
consulting services. Software license revenues are recognized upon execution of
the license agreement and delivery of the software. In all cases, however, no
significant post-contract obligations of Object-Mart shall be remaining.
Otherwise, software license fees are deferred until all of the requirements for
revenue recognition have been satisfied. Consulting services contracts include
both hourly service-based contracts and milestone based contracts. Hourly
service-based contracts are billed and recognized as the services are
performed. Milestone-based contracts are billed and recognized when the
milestones are completed and when product, if any, committed for the milestones
is shipped and accepted.
F-30
<PAGE>
OBJECT-MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Revenue from the sale of software was accounted for in accordance with
Statement of Position (SOP) 97-2, Software Revenue Recognition, SOP 98-4,
Deferral of Effective Date of SOP 97-2, and SOP 98-9, Software Revenue
Recognition with Respect to Certain Arrangements.
(h) Research and Development
All research and development costs are expensed as incurred.
(i) Fair Value of Financial Instruments
The fair value of Object-Mart's cash and cash equivalents, accounts
receivable, prepaid expenses and other current assets, accounts payable and
accrued liabilities approximates their carrying value due to the short-term
nature of those instruments.
(j) Stock-Based Compensation
Object-Mart accounts for stock-based awards to employees using the intrinsic
value method. Expense associated with stock-based compensation is being
amortized on an accelerated basis over the vesting period of the individual
award consistent with the method described in Financial Accounting Standards
Board (FASB) Interpretation No. 28. Consistent with the fair value approach
enumerated in SFAS No. 123, Object-Mart discloses the pro forma effects of
using the fair value method of accounting for stock-based compensation
arrangements.
(k) Comprehensive Income/Loss
Other comprehensive income/loss refers to revenue, expenses, gains and
losses that are not included in net income/loss, but rather are recorded
directly in stockholders' equity. To date, Object-Mart has no items of other
comprehensive income/loss and, accordingly, comprehensive loss is the same as
net loss.
(l) Income Taxes
Object-Mart utilizes the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
F-31
<PAGE>
OBJECT-MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Income tax expense for the year ended December 31, 1998 and the six months
ended June 29, 1999 consisted of:
<TABLE>
<CAPTION>
Year ended
December 31, Six months ended
1998 June 29, 1999
------------ ----------------
<S> <C> <C>
Current:
Federal...................................... $ 54,798 $ 63,363
State........................................ 15,479 17,117
-------- --------
Total current tax expense.................. $ 70,277 $ 80,480
-------- --------
Deferred:
Federal...................................... 106,414 18,370
State........................................ 30,449 10,173
-------- --------
Total deferred tax expense................. 136,863 28,543
-------- --------
Total tax expense.......................... $207,140 $109,023
======== ========
</TABLE>
The income tax expense differed from the amounts computed by applying the
U.S. federal income tax rate of 34% to pretax income as a result of the
following:
<TABLE>
<CAPTION>
December 31, 1998 June 29, 1999
----------------- -------------
<S> <C> <C>
Federal tax at statutory rate............... $176,828 $ 14,289
State taxes, net of federal income tax
benefit.................................... 30,312 18,011
Deferred stock compensation................. -- 79,362
Other....................................... -- (2,639)
-------- --------
Total tax expense....................... $207,140 $109,023
======== ========
</TABLE>
The types of temporary differences that give rise to significant portions of
Object-Mart's deferred tax assets and liabilities are set out below.
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Deferred tax assets:
State income taxes............................................. $ 15,616
Deferred Stock Compensation.................................... --
Other.......................................................... --
Net operating loss and credit carryforwards.................... --
--------
Gross deferred tax assets....................................... 15,616
Valuation allowance............................................. --
--------
Total deferred tax assets....................................... 15,616
Deferred tax liabilities:
Accruals and reserves.......................................... (153,758)
Plant and equipment............................................ 1,279
--------
Total deferred tax liabilities.................................. 152,479
Net deferred tax assets:........................................ 136,863
========
</TABLE>
F-32
<PAGE>
OBJECT-MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2) Property and Equipment
Property and equipment as of December 31, 1998 consisted of the following:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Computers...................................................... $ 85,488
Software....................................................... 18,985
Furniture...................................................... 4,476
--------
108,949
Less accumulated depreciation.................................. 46,521
--------
Total.......................................................... $ 62,428
========
</TABLE>
3) Concentrations of Credit Risk
Financial instruments, which potentially subject Object-Mart to
concentrations of credit risk, consist principally of cash equivalents and
accounts receivable. Cash equivalents are money market funds maintained with a
high quality financial institution. Object-Mart generally does not require
collateral for sales on credit. Object-Mart closely monitors extensions of
credit and has not experienced significant credit losses in the past.
A summary of sales to major customers that exceeded 10% of total sales
during the year ended December 31, 1998 and the six months ended June 29, 1999,
and the amount due from these customers as of December 31, 1998 follows:
<TABLE>
<CAPTION>
Sales
--------------------------- December 31,
Year ended Six months 1998
December 31, ended June 29, Accounts
1998 1999 receivable
------------ -------------- ------------
<S> <C> <C> <C>
Customer A......................... $725,810 $ -- $ 90,000
Customer B......................... $661,521 $ -- $ --
Customer C......................... $277,350 $279,900 $277,350
Customer D......................... $268,400 $788,800 $ 18,400
Customer E......................... $ -- $387,600 $ --
</TABLE>
4) Shareholders' Equity
(a) Common Stock
In June 1999, in connection with the acquisition by ONI Systems, Corp.
(ONI), all outstanding shares of common stock of Object-Mart were acquired by
ONI in exchange for ONI's common stock and cash consideration. Pursuant to the
acquisition agreement, all shares of Object-Mart's common stock and outstanding
options became vested upon acquisition were exchanged into ONI's common stock.
As a result, Object-Mart recorded $466,507 of stock compensation.
(b) Stock Option Plan
1998 Stock Option Plan
In July 1998, Object-Mart's Board of Directors adopted the 1998 Stock Option
Plan (1998 Plan) and reserved a total of 1,000,000 share of Object-Mart's
common stock for issuance thereunder. Options granted under the 1998 Plan may
be designated as "Incentive Stock Options" or "Nonstatutory Stock Options" at
the discretion of Object-Mart, with exercise prices not less than the
F-33
<PAGE>
OBJECT-MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
fair market value at the date of grant. Options generally vest 25% on the first
anniversary of the vesting start date and then monthly over the next three
years. Options expire ten years from the date of grant. All options were vested
upon Object-Mart's acquisition by ONI.
A summary of the status of Object-Mart's option plan is as follows:
<TABLE>
<CAPTION>
Outstanding options
------------------------------
Shares Number Weighted Weighted
available of average average grant
for grant shares exercise price date fair value
--------- -------- -------------- ---------------
<S> <C> <C> <C> <C>
Balance as of December
31, 1997............... -- --
Authorized in July,
1998................... 1,000,000
Granted................ (900,000) 900,000 $0.20 $0.20
Exercised.............. -- (75,000) 0.20
Cancelled.............. 200,000 (200,000) 0.20
--------- -------- -----
Balance as of 12/31/98.. 300,000 625,000 $0.20
Granted................ (295,500) 295,500 0.60 $0.60
Exercised.............. -- (917,500) 0.33
Cancelled.............. 3,000 (3,000) 0.20
--------- -------- -----
Balance as of June 29,
1999................... 7,500 -- $ --
--------- -------- -----
</TABLE>
(c) Accounting for Stock-Based Compensation
Object-Mart uses the intrinsic value method in accounting for its employee
stock-based compensation plan. Accordingly, no compensation cost has been
recognized for any of its stock options granted because the exercise price of
each option equaled or exceeded the fair value of the underlying common stock
as of the grant date for each stock option.
Had compensation cost for Object-Mart's stock-based compensation plan been
determined consistent with the fair value approach set forth in SFAS No. 123,
Object-Mart's net loss applicable to common stockholders for the year ended
December 31, 1998, and the six month ended June 29, 1999, would not have been
materially different from the reported net income/loss.
F-34
<PAGE>
ONI SYSTEMS CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
The following unaudited pro forma combined condensed statement of operations
is presented for illustrative purposes only and is not necessarily indicative
of the combined results of operations for future periods or the results of
operations that actually would have been realized had ONI Systems and Object-
Mart, Inc. been a combined company during the specified periods. The unaudited
pro forma combined condensed statement of operations, including the related
notes, is qualified in its entirety by reference to, and should be read in
conjunction with, the historical financial statements and related notes thereto
of ONI Systems and Object-Mart, Inc., included elsewhere in this prospectus.
The following unaudited pro forma combined condensed statement of operations
gives effect to the acquisition of Object-Mart, Inc. by ONI Systems using the
purchase method of accounting. The unaudited pro forma combined condensed
statement of operations is based on the respective historical audited financial
statements and related notes of ONI Systems and Object-Mart, Inc.
The unaudited pro forma combined condensed statement of operations assumes
that the acquisition took place on January 1, 1999 and combines ONI Systems,
audited consolidated statement of operations for the year ended December 31,
1999 which includes Object-Mart's results of operations subsequent to June 29,
1999, the date of acquisition, with Object-Mart's audited consolidated
statement of operations for the six months ended June 29, 1999.
F-35
<PAGE>
ONI SYSTEMS CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
Year ended December 31, 1999
<TABLE>
<CAPTION>
Historical Pro forma
------------------------ ----------------------------
Object-
ONI Systems Mart Adjustments Combined
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue................. $ 3,033,995 $1,744,600 $ (152,800)(a) $ 4,625,795
Cost of revenues....... 1,032,144 509,013 (64,384)(b) 1,476,773
------------ ---------- ----------- ------------
2,001,851 1,235,587 (88,416) 3,149,022
------------ ---------- ----------- ------------
Operating expenses:
Research and
development........... 25,399,728 582,927 (101,108)(c) 25,881,547
Sales and marketing.... 4,557,245 52,888 12,692 (d) 4,622,825
General and
administrative........ 4,755,582 105,524 1,419,960 (e) 6,281,066
Amortization of
deferred stock
compensation.......... 11,421,739 466,507 -- 11,888,246
Amortization of common
stock warrants........ 2,890,500 -- -- 2,890,500
In-process research and
development........... 170,000 -- (170,000)(f) --
------------ ---------- ----------- ------------
Total operating
expenses........... 49,194,794 1,207,846 1,161,544 51,564,184
------------ ---------- ----------- ------------
Operating loss...... (47,192,943) 27,741 (1,249,960) (48,415,162)
Interest income, net... 622,972 14,286 -- 637,258
------------ ---------- ----------- ------------
Income (loss) before
income taxes....... (46,569,971) 42,027 (1,249,960) (47,777,904)
Income taxes........... 1,600 109,023 (109,023)(g) 1,600
------------ ---------- ----------- ------------
Net income (loss)... $(46,571,571) $ (66,996) $(1,140,937) $(47,779,504)
============ ========== =========== ============
Basic and diluted net
loss per share........ $ (2.58) $ (2.65)
============ ============
Shares used to compute
basic and diluted net
loss per share........ 18,043,188 18,043,188
============ ============
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
F-36
<PAGE>
ONI SYSTEMS CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(1) Unaudited Pro Forma Combined Condensed Statements of Operations
The pro forma combined condensed statements of operations give effect to the
acquisition as if it had occurred on January 1,1999.
The following adjustments have been reflected in the unaudited pro forma
combined condensed statement of operations:
(a) Adjustment to eliminate intercompany revenue
(b) Adjustment to eliminate cost of revenue related to intercompany revenue
(c) Adjustment to eliminate intercompany expense of $152,800 netted against
reclassification of cost of revenue of $51,692
(d) Adjustment to reclassify cost of revenue
(e) The adjustment to record additional amortization of goodwill for the
six month period ended June 29, 1999 is calculated as the six-month
amortization of the $5,679,839 goodwill recorded in relation to the
Object-Mart acquisition, to be amortized over a two-year period.
(f) Adjustment to reverse the value of purchased in-process research and
development as this is a non-recurring charge.
(g) Adjustment to reverse income tax expense for the amount of the combined
company.
F-37
<PAGE>
[LOGO OF ONI SYSTEMS]
<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........................................................ 3
Risk Factors.............................................................. 7
Special Note Regarding Forward-Looking Statements......................... 17
Use of Proceeds........................................................... 18
Dividend Policy........................................................... 18
Capitalization............................................................ 19
Dilution.................................................................. 21
Selected Consolidated Financial Data...................................... 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 23
Business.................................................................. 32
Management................................................................ 44
Related Party Transactions................................................ 57
Principal Stockholders.................................................... 62
Description of Capital Stock.............................................. 65
Shares Eligible for Future Sale........................................... 69
Underwriting.............................................................. 71
Validity of Common Stock.................................................. 73
Experts................................................................... 73
Where You Can Find Additional Information................................. 73
Index to 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
8,000,000 Shares
ONI Systems Corp.
Common Stock
---------------
[ONI SYSTEMS LOGO]
---------------
Goldman, Sachs & Co.
Banc of America Securities LLC
Chase H&Q
Robertson Stephens
Representatives of the Underwriters
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses to be paid by the
Registrant in connection with the sale of the shares of common stock being
registered hereby. All amounts are estimates except for the Securities and
Exchange Commission registration fee, the NASD filing fee and the Nasdaq
National Market listing fees.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $ 38,861
NASD filing fee.................................................. 15,220
Nasdaq National Market initial filing fee........................ 95,000
Accounting fees and expenses..................................... 300,000
Legal fees and expenses.......................................... 550,000
Road show expenses............................................... 75,000
Printing and engraving expenses.................................. 350,000
Blue Sky qualification fees and expenses......................... 25,000
Transfer agent and registrar fees and expenses................... 30,000
Miscellaneous expenses........................................... 20,919
----------
Total.......................................................... $1,500,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the
"Securities Act").
As permitted by the Delaware General Corporation Law, the Registrant's
Certificate of Incorporation and Bylaws eliminate the personal liability of
its directors for monetary damages for breach of fiduciary duty as a director,
except for liability:
. for any breach of the director's duty of loyalty to the Registrant or its
stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. under section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or
. for any transaction from which the director derived an improper personal
benefit.
As permitted by the Delaware General Corporation Law, the Registrant's
Bylaws provide that:
. the Registrant is required to indemnify its directors and officers to the
fullest extent permitted by the Delaware General Corporation Law, subject
to certain very limited exceptions;
. the Registrant may indemnify its other employees and agents as set forth
in the Delaware General Corporation Law;
. the Registrant is required to advance expenses, as incurred, to its
directors and officers in connection with a legal proceeding to the
fullest extent permitted by the Delaware General Corporation Law, subject
to certain very limited exceptions;
. we may advance expenses, as incurred, to our employees and agents in
connection with legal proceedings; and
. the rights conferred in the Bylaws are not exclusive.
II-1
<PAGE>
The Registrant has entered into Indemnification Agreements with each of its
current directors and officers to give such directors and officers additional
contractual assurances regarding the scope of the indemnification set forth in
the Registrant's Certificate of Incorporation and to provide additional
procedural protections. At present, there is no pending litigation or
proceeding involving a director, officer or employee of the Registrant
regarding which indemnification is sought, nor is the Registrant aware of any
threatened litigation that may result in claims for indemnification.
Reference is also made to Section 8 of the Underwriting Agreement, which
provides for the indemnification of officers, directors and controlling persons
of the Registrant against certain liabilities. The indemnification provision in
the Registrant's Certificate of Incorporation, Bylaws and the Indemnification
Agreements entered into between the Registrant and each of its directors and
officers may be sufficiently broad to permit indemnification of the
Registrant's directors and officers for liabilities arising under the
Securities Act.
The Registrant maintains directors' and officers' liability insurance and
expects to obtain a rider to such coverage for securities matters.
See also the undertakings set out in response to Item 17.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
Exhibit Document Number
---------------- ------
<S> <C>
Form of Underwriting Agreement....................................... 1.01
Registrant's Certificate of Incorporation............................ 3.01
Registrant's Bylaws.................................................. 3.03
Form of Indemnification Agreement.................................... 10.01
</TABLE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the three years prior to the effective date of this Registration
Statement, the Registrant has issued and sold the following unregistered
securities:
1. In October 1997, in connection with Registrant's formation as a
subsidiary of Optivision, Inc., Optivision received 11,565,752 shares
of Registrant's common stock and 8,000,000 shares of Registrant's
Series A preferred stock. In December 1997, Registrant was spun out of
Optivision and Optivision distributed its holdings of Registrant's
common stock and 4,000,000 shares of Registrant's Series A preferred
stock to Optivision shareholders. Optivision retained 4,000,000 shares
of Registrant's Series A preferred stock. In January 1998, all of the
shares of Registrant's Series A preferred stock were converted into
Series B preferred stock on a one-for-one basis. In January 1998,
Optivision sold 2,666,666 shares of Registrant's Series B preferred
stock to a group of investors for an aggregate purchase price of $2
million. In March 1998, Registrant repurchased 1,333,333 shares of its
Series B preferred stock from Optivision, for an aggregate purchase
price of $1 million.
2. In connection with Registrant's spin-out from Optivision in December
1997, Registrant is obligated to issue 233,468 shares of common stock,
to Venture Lending & Leasing, Inc. upon the exercise by Venture
Lending & Leasing, Inc. of warrants to purchase capital stock of
Optivision. Registrant will not receive any proceeds from the exercise
of these warrants.
3. From December 1997 through March 1998, the Registrant offered, and in
January 1998 issued and sold, 18,128,843 shares of Series B preferred
stock to a group of founding investors for an aggregate consideration
of $4,269,955.83 in cash and services rendered.
4. From December 1997 to March 1998, the Registrant issued and sold
2,733,332 shares of Series C preferred stock to a group of founding
investors for an aggregate consideration of $2,049,999.00 in cash.
II-2
<PAGE>
5. In April 1998, the Registrant issued and sold 4,969,148 shares of
Series D preferred stock to an investor for aggregate consideration of
$4,380,428.20 in cash.
6. From December 1998 to May 1999, the Registrant issued and sold
26,284,024 shares of Series E preferred stock to a group of investors
for aggregate consideration of $23,984,171.90 in cash and other
consideration.
7. In February 1999, Registrant issued and sold warrants, in connection
with an equipment lease financing, to purchase 277,926 shares of Series
B preferred stock at an exercise price of $0.88 per share.
8. In May 1999, in consideration of its acquisition of Object-Mart, Inc.,
the Registrant issued 4,569,276 shares of common stock to a group of 25
former shareholders of Object-Mart.
9. In September 1999, the Registrant issued and sold 8,249,468 shares of
Series F preferred stock to a group of investors for an aggregate
consideration of $15,000,007.75 in cash.
10. From December 1999 to March 2000, the Registrant issued and sold
12,163,418 shares of Series G preferred stock to a group of investors
for an aggregate consideration of $76,842,393.21 in cash and services
rendered.
11. In December 1999, Registrant issued and sold a warrant to a potential
customer to purchase 500,000 shares of common stock at an exercise
price of $0.91 per share.
12. In February 2000, Registrant issued and sold a warrant to a potential
customer to purchase 223,000 shares of common stock at an exercise
price of $0.91 per share.
13. In March 2000, Registrant issued and sold a warrant to purchase
200,000 shares of common stock at an exercise price of $15.00 per
share to a service provider in exchange for services rendered.
14. From Registrant's inception on October 20, 1997 through March 31, 2000,
the Registrant issued 6,944,628 shares of common stock to its
employees, consultants and other service providers through restricted
stock purchases under its benefit plans or pursuant to stock purchase
agreements.
15. From Registrant's inception on October 20, 1997 through March 31, 2000,
Registrant issued 11,864,019 shares of common stock to its employees
upon exercise of options, and as of March 31, 2000, 19,343,345 shares
of common stock were issuable upon exercise of outstanding options.
16. In March 2000, Registrant entered into an agreement with a customer to
sell a total of 266,667 shares of common stock concurrent with the
closing of this offering, at an assumed private placement price of
$15.00 per share for a total purchase price of $4.0 million.
The sale of the above securities was determined to be exempt from
registration under the Securities Act in reliance upon Section 4(2) of the
Securities Act or Regulation D promulgated thereunder, or Rule 701 promulgated
under Section 3(b) of the Securities Act as transactions by an issuer not
involving any public offering or transactions under compensation benefit plans
and contracts relating to compensation as provided under Rule 701. The sale of
securities described in paragraph 15 above was determined to be exempt from
registration under the Securities Act in reliance upon Regulation S as a
transaction involving an offer and sale of securities outside the United
States. The recipients of securities in each transaction represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution and appropriate legends were
affixed to the share certificates issued in these transactions. All recipients
had adequate access, through their relationships with the Registrant, to
information about the Registrant.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Number Exhibit Title
------ -------------
<C> <S>
1.01 Form of Underwriting Agreement.
2.01* Agreement and Plan of Reorganization with Object-Mart, dated May 21,
1999.
3.01 Registrant's First Amended and Restated Certificate of Incorporation.
3.02 Form of Registrant's Second Amended and Restated Certificate of
Incorporation (to be filed immediately after the closing of this
offering).
3.03 Registrant's Amended and Restated Bylaws.
4.01+ Form of Specimen Certificate for Registrant's common stock.
4.02* Restated and Amended Investors' Rights Agreement, dated December 22,
1999, by and between the certain investors and Registrant.
4.03* Voting Agreement portion of Series D Preferred Stock Purchase
Agreement, dated April 1, 1998, by and between Cisco Systems, Inc. and
Registrant.
4.04* Warrant to Purchase Capital Stock held by Venture Lending & Leasing,
Inc.
4.05* Warrant to Purchase Capital Stock held by Venture Lending & Leasing,
Inc.
4.06* Warrant Agreement No. 1 to Purchase Shares of Series B Preferred Stock
held by Comdisco, Inc.
4.07* Warrant Agreement No. 2 to Purchase Shares of Series B Preferred Stock
held by Comdisco, Inc.
4.08* Warrant Agreement No. 3 to Purchase Shares of Series B Preferred Stock
held by Comdisco, Inc.
4.09* Warrant Agreement to Purchase Common Stock held by COLT
Telecommunications, Inc.
4.10* Warrant Agreement to Purchase Common Stock held by FMR Corp.
4.11* Redemption and Repurchase Agreement, dated December 22, 1999, by and
between Williams Communications, Inc. and Registrant.
4.12 Warrant to Purchase Common Stock held by Fenwick & West LLP.
4.13 Subscription Agreement, dated March 27, 2000, by and between Internet
Initiative Japan and Registrant and related Regulation S Investor
Representation Letter.
5.01 Opinion of Fenwick & West LLP regarding the legality of the securities
being registered.
10.01 Form of Indemnification Agreement entered into between Registrant and
each of its directors and executive officers.
10.02* 1997 Stock Option Plan, as amended.
10.03* 1998 Equity Incentive Plan, as amended.
10.04* 1999 Equity Incentive Plan, as amended.
10.05 2000 Equity Incentive Plan.
10.06 2000 Employee Stock Purchase Plan.
10.07* Assignment of Lease, dated June 23, 1998, by and between JTS
Corporation ("JTS") and Registrant.
10.08* Agreement, dated June 23, 1998, by and between JTS and Registrant.
10.09* Amendment to Lease, dated May 1, 1999, by and between Cilker Revocable
Trust of October 9, 1990 and Registrant.
10.10* Lease Agreement, dated September 29, 1999, by and between John
Arrillaga, Trustee, or his Successor Trustee, UTA dated 7/20/77 as
amended and Richard T. Peery, Trustee, or his Successor Trustee, UTA
dated 7/20/77 as amended, and Registrant.
10.12* Offer Letter, dated December 12, 1997, from Registrant to Hugh C.
Martin.
10.13* Offer Letter, dated February 4, 1998, from Registrant to Terrence J.
Schmid.
10.14* Offer Letter, dated June 1, 1998, from Registrant to Hon Wah Chin.
10.15* Offer Letter, dated August 17, 1998, from Registrant to William R.
Cumpston.
10.16* Offer Letter, dated September 10, 1999, from Registrant to Michael A.
Dillon.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Number Exhibit Title
- ------ -------------
<S> <C>
10.17* Offer Letter, dated February 29, 2000, from Registrant to Robert J. Jandro.
10.18* Offer Letter, dated February 9, 2000, from Registrant to Andrew W. Page.
10.19* Series E Preferred Stock Purchase Agreement dated as of December 23, 1998.
10.20* Series F Preferred Stock Purchase Agreement dated as of September 2, 1999.
10.21* Series G Preferred Stock Purchase Agreement dated as of December 22, 1999.
10.22 Offer Letter, dated April 14, 2000, from Registrant to Chris A. Davis.
10.23 Separation Agreement dated March 29, 2000 between Terrence J. Schmid and Registrant.
21.01 List of Registrant's Subsidiaries.
23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Report on Financial Statement Schedule and Consent of KPMG LLP, independent auditors.
23.03 Consent of KPMG LLP, independent auditors.
24.01* Power of Attorney (see signature page hereto).
27.01 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
+ To be filed by amendment.
(b) The following financial statement schedule is filed herewith:
Schedule II-- S-1, Valuation and Qualifying Accounts
Other financial statement schedules are omitted because the information
called for is not required or is shown either in the financial statements or
the notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14 above, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment to Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of San Jose, State of
California, on this 26th day of April, 2000.
ONI SYSTEMS CORP.
/s/ Hugh C. Martin
By: _________________________________
Hugh C. Martin
President, Chief Executive
Officer and
Chairman of the Board
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
date indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
Principal Executive Officer:
/s/ Hugh C. Martin President, Chief Executive April 26, 2000
______________________________________ Officer and Chairman of
Hugh C. Martin the Board
Principal Financial Officer and
Principal Accounting Officer:
/s/ Terrence J. Schmid Chief Financial Officer April 26, 2000
______________________________________ and Vice President,
Terrence J. Schmid Finance and
Administration
Additional Directors:
* Director April 26, 2000
______________________________________
Matthew W. Bross
* Director April 26, 2000
______________________________________
Kevin R. Compton
* Director April 26, 2000
______________________________________
Jonathan D. Feiber
* Director April 26, 2000
______________________________________
James F. Jordan
* Director April 26, 2000
______________________________________
Gregory B. Maffei
*By: /s/ Hugh C. Martin Attorney-in-fact April 26, 2000
______________________________________
</TABLE>
II-6
<PAGE>
ONI SYSTEMS CORP.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Period from October 20, 1997 (inception) to December 31, 1997 and the years
ended December 31, 1998 and 1999 and the (unaudited) three months ended March
31, 2000
<TABLE>
<CAPTION>
Period from October
20, Year Ended Year Ended Three months
1997 (inception) to December 31, December 31, ended
December 31, 1997 1998 1999 March 31, 2000
------------------- ------------ ------------ --------------
(unaudited)
<S> <C> <C> <C> <C>
Reserve for obsolete and
excess inventory:
Balance, beginning of
period................. -- -- $ -- $1,366,905
Additions charged to
expense................ -- -- 1,366,905 383,624
Reductions.............. -- -- -- 388,500
Balance, end of period.. -- -- $1,366,905 $1,362,029
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Exhibit Title
------ -------------
<C> <S>
1.01 Form of Underwriting Agreement.
3.01 Registrant's First Amended and Restated Certificate of Incorporation.
3.02 Form of Registrant's Second Amended and Restated Certificate of
Incorporation (to be filed immediately after the closing of this
offering).
3.03 Registrant's Amended and Restated Bylaws.
4.12 Warrant to Purchase Common Stock held by Fenwick & West LLP.
4.13 Subscription Agreement, dated March 27, 2000, by and between Internet
Initiative Japan and Registrant and related Regulation S Investor
Representation Letter.
5.01 Opinion of Fenwick & West LLP regarding the legality of the securities
being registered.
10.01 Form of Indemnification Agreement entered into between Registrant and
each of its directors and executive officers.
10.05 2000 Equity Incentive Plan.
10.06 2000 Employee Stock Purchase Plan.
10.22 Offer Letter, dated April 14, 2000, from Registrant to Chris A. Davis.
10.23 Separation Agreement dated March 29, 2000 between Terrence J. Schmid
and Registrant.
21.01 List of Registrant's Subsidiaries.
23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Report on Financial Statement Schedule and consent of KPMG LLP,
independent auditors.
23.03 Consent of KPMG LLP, independent auditors.
27.01 Financial Data Schedule.
</TABLE>
<PAGE>
EXHIBIT 1.01
ONI Systems Corp.
Common Stock
Underwriting Agreement
----------------------
..............., 2000
Goldman, Sachs & Co.,
Banc of America Securities LLC,
Chase Securities Inc.,
FleetBoston Robertson Stephens 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:
ONI Systems Corp., 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
........ shares (the "Firm Shares") and, at the election of the Underwriters, up
to ........ additional shares (the "Optional Shares") of Common Stock, $0.0001
par value, ("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-....) (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
<PAGE>
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 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) 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 or
contemplated 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 or long-term debt of the Company or
any of its subsidiaries or any material adverse change, or any development that
may cause a prospective material adverse change, in or affecting the general
affairs, management, financial position, stockholders' equity or results of
operations of the Company and its subsidiaries, otherwise than as set forth or
contemplated in the Prospectus;
(e) The Company and its subsidiaries own no real property and have good and
marketable title to all personal property owned by them, in each case free and
clear of all liens, encumbrances
2
<PAGE>
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 materially 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 and its subsidiaries are held by them 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;
(f) 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 corporate authority 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, except where
failure to be so qualified would not have a material adverse effect on the
general affairs, management, consolidated financial position, business
prospects, stockholders' equity or results of operations of the Company and its
subsidiaries, taken as a whole ("Material Adverse Effect");
(g) The Company has an authorized capitalization as set forth in the
Prospectus under the heading "Capitalization", and all of the issued shares of
capital stock of the Company have been duly and validly authorized and issued,
are fully paid and non-assessable and conform in all material respects to the
description of the Stock contained in the Prospectus; and all of the issued
shares of capital stock of each "significant subsidiary" of the Company (as
defined in Rule 1-02(w) of Regulation S-X under the Act) have been duly and
validly authorized and 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, equitable interests or claims;
(h) The unissued Shares to be issued and sold by the Company to the
Underwriters hereunder have been duly and validly authorized and, when issued
and delivered against payment therefor as provided herein, will be duly and
validly issued and fully paid and non-assessable and will conform in all
material respects to the description of the Stock contained in the Prospectus;
(i) 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 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, 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 (and the Exchange Act) of the Shares and such consents, approvals,
authorizations, 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;
3
<PAGE>
(j) Neither the Company nor any of its significant subsidiaries is (i) in
violation of its Certificate of Incorporation or By-laws or (ii) in default in
the performance or observance of any material 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, with respect to subclause (ii),
where such default would not have a Material Adverse Effect;
(k) 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 documents referred to therein, are
accurate and complete in all material respects;
(l) 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 have a Material Adverse
Effect; and, to the best of the Company's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or threatened by others;
(m) 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");
(n) KPMG LLP, who have certified certain financial statements of the
Company and its subsidiaries, are independent public accountants as required by
the Act and the rules and regulations of the Commission thereunder;
(o) The Company and its subsidiaries own or possess valid licenses or other
rights to use all patents, trademarks, service marks, trade names, copyrights,
know-how, trade secrets and other intellectual property necessary to conduct the
business of the Company and its significant subsidiaries in the manner in which
it has been and is being conducted, and except as set forth in the Prospectus
the Company and its subsidiaries have not received any notice of infringement or
of conflict with (and the Company knows of no such infringement or conflict
with) asserted rights of others with respect to any patents, trademarks, service
marks, trade names, copyrights, know-how, trade secrets or other intellectual
property which, if determined adversely to the Company or its subsidiaries,
would individually or in the aggregate have a Material Adverse Effect; and the
inventions, products or processes referred to in the Prospectus do not, to the
knowledge of the Company, infringe or conflict with any right or patent, or any
invention, product or process which is the subject of a patent application known
to the Company, which if determined adversely would have a Material Adverse
Effect; and
(p) The Company and its subsidiaries, taken as a whole, are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as are prudent and customary in the business in which they
are engaged; and neither the Company nor any of its subsidiaries has any reason
to believe that it will not be able to renew its existing insurance coverage as
and when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that would not
have a Material Adverse Effect.
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
4
<PAGE>
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 ................... 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 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".
5
<PAGE>
(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(l) hereof, will be delivered at the offices of Fenwick &
West LLP, Two Palo Alto Square, Palo Alto, California 94306 (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 1:00
p.m., California 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 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 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 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
at any time prior to the expiration of nine 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
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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 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
and employee stock purchase plans existing on, 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 as soon as practicable after the end of
each fiscal year 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, as soon as
practicable after the end of each of the first three quarters of each fiscal
year (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 three years from the effective date of the
Registration Statement, to furnish to you 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)
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 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";
(i) To use its best efforts to list for quotation the Shares on the Nasdaq
National Market; and
(j) 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; and
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(k) 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.
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; (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 National Market;
(v) the filing fees incident to, 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; (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, 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.
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) Sullivan & Cromwell, counsel for the Underwriters, shall have furnished
to you such written opinion or opinions, dated such Time of Delivery, with
respect to such 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;
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(c) Fenwick & West LLP, counsel for the Company, shall have furnished to
you their written opinion (a draft of such opinion is attached as Annex II(a)
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 corporate 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 under the heading "Capitalization", and all of the
issued shares of capital stock of the Company described therein have
been duly and validly authorized and issued and non-assessable, and to
our knowledge are fully paid; the Shares being delivered at the Time of
Delivery are duly and validly authorized and issued, fully paid and
nonassessable; and the Shares conform in all material respects to the
description of the Stock contained in the Prospectus;
(iii) The Company has been duly qualified within the United
States as a foreign corporation for the transaction of business and is
in good standing under the laws of each other jurisdiction within the
United States in which it owns or leases properties or conducts any
business so as to require such qualification, except where such failure
to be so qualified would not have a Material Adverse Effect;
(iv) Each "significant subsidiary" of the Company as defined in
Rule 1-02(w) of Regulation S-X under the Act 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 and validly
authorized and issued, are non-assessable and, to our knowledge, are
fully-paid, and (except for directors' qualifying shares) are owned
directly or indirectly by the Company, to our knowledge free and clear
of all liens, encumbrances, equities or claims;
(v) Any real property and buildings held under leases filed as
exhibits to the Registration Statement by the Company and its
subsidiaries are held by them under valid and enforceable leases with
such exceptions as are not material and, to our knowledge, do not
interfere with the use made of such property and buildings by the
Company and its subsidiaries;
(vi) To such counsel's knowledge and other than proceedings
disclosed in the Prospectus, there are no legal or governmental
proceedings pending to which the Company or any of its subsidiaries is
a party which, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a Material
Adverse Effect; and, to such counsel's knowledge, no such proceedings
are threatened or contemplated by governmental authorities or
threatened by others;
(vii) This Agreement has been duly authorized, executed and
delivered by the Company;
(viii) 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
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Agreement and the consummation of the transactions herein contemplated
do 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, identified to such counsel as material pursuant to a
certificate executed by an officer of the Company, to which the Company
or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries is bound, nor will such action result in any violation
of the provisions of the Certificate of Incorporation or By-laws of the
Company or any violation of any statute or any order, rule or
regulation known to such counsel of any court or governmental agency or
body having jurisdiction over the Company or any of its subsidiaries or
any of their properties;
(ix) No consent, approval, authorization, order, 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 of the Stock under the Exchange Act of the offer and
sale of the Shares under the Act, and such consents, approvals,
authorizations, registrations or qualifications as may be required
under the By-laws, rules and regulations of the NASD or foreign or
state securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters;
(x) Neither the Company nor any of its significant subsidiaries is
in violation of its Certificate of Incorporation or By-laws or in
default in the performance or observance of any material obligation,
agreement, covenant or condition contained in any indenture, mortgage,
deed of trust, loan agreement, lease or other agreement or instrument
filed as an exhibit to the Registration Statement, which such counsel
believes constitute the only such agreements or instruments required to
be filed as exhibits to the Registration Statement;
(xi) 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 and complete
in all material respects;
(xii) The Company is not an "investment company", as such term is
defined in the Investment Company Act; and
(xiii) The Registration Statement and the Prospectus and any
further amendments and supplements filed with respect thereto made by
the Company prior to such Time of Delivery (other than the financial
statements and related notes, related schedules and financial data
included 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; and they do not know of
any contracts or other agreements 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 so filed
or described;
In addition, such counsel shall state that although they are not
passing upon and do not assume any responsibility for, nor have they
independently verified, the accuracy,
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completeness or fairness of the statements contained in the
Registration Statement or the Prospectus, except for those referred to
in the opinion in subsection (xi) of this section 7(c), on the basis of
their participation in certain conferences with officers and other
employees of the Company, representatives of their independent
certified public accountants for the Company and representatives of the
Underwriters, at which conferences the contents of the Registration
Statement and the Prospectus and related matters were discussed, no
facts have come to their attention that have caused them to believe
that, as of its effective date, the Registration Statement or any
further amendment filed with respect thereto by the Company prior to
such Time of Delivery (other than the financial statements and related
notes, and related schedules and financial data included 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 or that, as of its date, the Prospectus or any
further amendment or supplement filed with respect thereto by the
Company prior to such Time of Delivery (other than the financial
statements and related notes and related schedules and financial data
included 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 filed with respect
thereto by the Company prior to such Time of Delivery (other than the
financial statements and related notes and related schedules and
financial data included 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;
(d) Townsend and Townsend, patent 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 a form and substance
satisfactory to you, to the effect that:
(i) To the best of such counsel's knowledge, neither the Company
nor any of its subsidiaries has received notice of any claim of
infringement of any patent, except as set forth in such opinion; and
(ii) Such counsel has reviewed the Registration Statement and
Prospectus, the amendments and supplements thereto, and insofar as they
concern patents, patent rights or patent licenses, such counsel has no
reason to believe that either the Registration Statement or the Prospectus
or any amendment or supplement thereto (including particularly the
information in the Prospectus under the caption "Risk Factors--If we are
unable to protect and enforce our intellectual property rights, we may be
unable to compete effectively" and "--We are involved in an intellectual
property dispute and in the future we may become involved in similar
disputes, we could be subject to significant liability, the time and
attention of our management could be diverted and we could be prevented
from selling our products") contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements
therein not misleading.
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In rendering such opinion, such counsel (i) shall state that they have
represented the Company as to patent matters, are knowledgeable about its
technologies and have discussed such technologies with scientists and
researchers for the Company and (ii) may state that insofar as such opinion
relates to factual matters, it is based upon certificates by officers of the
Company, provided that such counsel shall state that they believe that both you
and they are justified in relying upon such certificates.
(e) 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, KPMG 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);
(f) (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 general affairs, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries, 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 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) On or after the date hereof (i) no downgrading shall have occurred in
the rating accorded the Company's debt securities by any "nationally recognized
statistical rating organization", as that term is defined by the Commission for
purposes of Rule 436(g)(2) under the Act, and (ii) no such organization shall
have publicly announced that it has under surveillance or review, with possible
negative implications, its rating of any of the Company's debt securities;
(h) 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 the Nasdaq National Market; (ii)
a suspension or material limitation in trading in the Company's securities on
the Nasdaq National Market; (iii) a general moratorium on commercial banking
activities declared by either Federal or New York or California 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;
(i) The Shares to be sold at such Time of Delivery shall have been duly
listed for quotation on the Nasdaq National Market;
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(j) The Company has obtained and delivered to the Underwriters executed
copies of an agreement from (i) each officer and director of the Company and
(ii) each stockholder of 1% or more of the outstanding capital stock of the
Company, substantially to the effect set forth in Subsection 5(e) hereof in form
and substance satisfactory to you; provided, however, the restrictions in
Subsection 5(e) shall not be applicable (1) on the later of (a) September 6,
2000 or (b) the 90th day after the date of the final Prospectus, with respect to
10% of the outstanding capital stock of the Company held by each such
stockholder who is not an executive officer of the Company, if the reported last
sale price of the Common Stock on the Nasdaq National Market for 20 of the 30
trading days ending on the last trading day preceding such date is at least
twice the initial public offering price per Share and (2) on that date that is
two days after the Company has made publicly available its financial statements
for the fiscal quarter ended September 30, 2000, with respect to an additional
25% of the outstanding capital stock of the Company held by each such
stockholder (including executive officers), if the reported last sale price of
the Common Stock on the Nasdaq National Market for 20 of the 30 trading days
ending on the last trading day preceding such date is at least twice the initial
public offering price per Share.
(k) 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; and
(l) 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 (f) 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
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
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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, 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
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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 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
15
<PAGE>
"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.
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,
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.
16
<PAGE>
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.
17
<PAGE>
If the foregoing is in accordance with your understanding, please sign and
return to us seven 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,
ONI Systems Corp.
By: __________________________________
Name:
Title:
Accepted as of the date hereof:
Goldman, Sachs & Co.
Banc of America Securities LLC
Chase Securities Inc.
FleetBoston Robertson Stephens Inc.
By: _______________________________
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
18
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of Optional
Shares to be
Total Number of Purchased if
Firm Shares Maximum Option
Underwriter to be Purchased Exercised
- ---------------------------------------------------------------- ---------------------- ----------------------------
<S> <C> <C>
Goldman, Sachs & Co.............................................
Banc of America Securities LLC..................................
Chase Securities Inc............................................
FleetBoston Robertson Stephens Inc..............................
Total................................................ ---------------------- ----------------------------
====================== ============================
</TABLE>
19
<PAGE>
ANNEX I
FORM OF COMFORT LETTER
Pursuant to Section 7(e) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect to
the Company and its subsidiaries within the meaning of the Act and the
applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any supplementary
financial information and schedules (and, if applicable, financial
forecasts and/or pro forma financial information) examined by them and
included in the Prospectus or the Registration Statement comply as to form
in all material respects with the applicable accounting requirements of the
Act and the related published rules and regulations thereunder; and, if
applicable, they have made a review in accordance with standards
established by the American Institute of Certified Public Accountants of
the unaudited consolidated interim financial statements, selected financial
data, pro forma financial information, financial forecasts and/or condensed
financial statements derived from audited financial statements of the
Company for the periods specified in such letter, as indicated in their
reports thereon, copies of which have been separately furnished to the
representatives of the Underwriters (the "Representatives");
(iii) They have made a review in accordance with standards established
by the American Institute of Certified Public Accountants of the unaudited
condensed consolidated statements of income, consolidated balance sheets
and consolidated statements of cash flows included in the Prospectus as
indicated in their reports thereon copies of which have been separately
furnished to the Representatives and on the basis of specified procedures
including inquiries of officials of the Company who have responsibility for
financial and accounting matters regarding whether the unaudited condensed
consolidated financial statements referred to in paragraph (vi)(A)(i) below
comply as to form in all material respects with the applicable accounting
requirements of the Act and the related published rules and regulations,
nothing came to their attention that cause them to believe that the
unaudited condensed consolidated financial statements do not comply as to
form in all material respects with the applicable accounting requirements
of the Act and the related published rules and regulations;
(iv) The unaudited selected financial information with respect to the
consolidated results of operations and financial position of the Company
for the five most recent fiscal years included in the Prospectus agrees
with the corresponding amounts (after restatements where applicable) in the
audited consolidated financial statements for such five fiscal years which
were included or incorporated by reference in the Company's Annual Reports
on Form 10-K for such fiscal years;
(v) They have compared the information in the Prospectus under selected
captions with the disclosure requirements of Regulation S-K and on the
basis of limited procedures specified in such letter nothing came to their
attention as a result of the foregoing procedures that caused them to
believe that this information does not conform in all material respects
with the disclosure requirements of Items 301, 302, 402 and 503(d),
respectively, of Regulation S-K;
<PAGE>
(vi) On the basis of limited procedures, not constituting an examination
in accordance with generally accepted auditing standards, consisting of a
reading of the unaudited financial statements and other information
referred to below, a reading of the latest available interim financial
statements of the Company and its subsidiaries, inspection of the minute
books of the Company and its subsidiaries since the date of the latest
audited financial statements included in the Prospectus, inquiries of
officials of the Company and its subsidiaries responsible for financial and
accounting matters and such other inquiries and procedures as may be
specified in such letter, nothing came to their attention that caused them
to believe that:
(A) (i) the unaudited consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus do not comply as to form in all material
respects with the applicable accounting requirements of the Act and
the related published rules and regulations, or (ii) any material
modifications should be made to the unaudited condensed consolidated
statements of income, consolidated balance sheets and consolidated
statements of cash flows included in the Prospectus for them to be in
conformity with generally accepted accounting principles;
(B) any other unaudited income statement data and balance sheet
items included in the Prospectus do not agree with the corresponding
items in the unaudited consolidated financial statements from which
such data and items were derived, and any such unaudited data and
items were not determined on a basis substantially consistent with
the basis for the corresponding amounts in the audited consolidated
financial statements included in the Prospectus;
(C) the unaudited financial statements which were not included in
the Prospectus but from which were derived any unaudited condensed
financial statements referred to in clause (A) and any unaudited
income statement data and balance sheet items included in the
Prospectus and referred to in clause (B) were not determined on a
basis substantially consistent with the basis for the audited
consolidated financial statements included in the Prospectus;
(D) any unaudited pro forma consolidated condensed financial
statements included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the
Act and the published rules and regulations thereunder or the pro
forma adjustments have not been properly applied to the historical
amounts in the compilation of those statements;
(E) as of a specified date not more than five days prior to the
date of such letter, there have been any changes in the consolidated
capital stock (other than issuances of capital stock upon exercise of
options and stock appreciation rights, upon earn-outs of performance
shares and upon conversions of convertible securities, in each case
which were outstanding on the date of the latest financial statements
included in the Prospectus) or any increase in the consolidated long-
term debt of the Company and its subsidiaries, or any decreases in
consolidated net current assets or stockholders' equity or other
items specified by the Representatives, or any increases in any items
specified by the Representatives, in each case as compared with
amounts shown in the latest balance sheet included in
F-2
<PAGE>
the Prospectus, except in each case for changes, increases or
decreases which the Prospectus discloses have occurred or may occur
or which are described in such letter; and
(F) for the period from the date of the latest financial
statements included in the Prospectus to the specified date referred
to in clause (E) there were any decreases in consolidated net
revenues or operating profit or the total or per share amounts of
consolidated net income or other items specified by the
Representatives, or any increases in any items specified by the
Representatives, in each case as compared with the comparable period
of the preceding year and with any other period of corresponding
length specified by the Representatives, except in each case for
decreases or increases which the Prospectus discloses have occurred
or may occur or which are described in such letter; and
(vii) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of minute
books, inquiries and other procedures referred to in paragraphs (iii) and
(vi) above, they have carried out certain specified procedures, not
constituting an examination in accordance with generally accepted auditing
standards, with respect to certain amounts, percentages and financial
information specified by the Representatives, which are derived from the
general accounting records of the Company and its subsidiaries, which
appear in the Prospectus, or in Part II of, or in exhibits and schedules
to, the Registration Statement specified by the Representatives, and have
compared certain of such amounts, percentages and financial information
with the accounting records of the Company and its subsidiaries and have
found them to be in agreement.
F-3
<PAGE>
EXHIBIT 3.01
FIRST AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ONI SYSTEMS CORP.
ARTICLE I
The name of the corporation is ONI Systems Corp.
ARTICLE II
The address of the registered office of the corporation in the State of
Delaware is 15 East North Street, City of Dover, County of Kent. The name of
its registered agent at that address is Incorporating Services, Ltd.
ARTICLE III
The purpose of the corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.
ARTICLE IV
(A) Classes of Stock. The corporation is authorized to issue two classes
----------------
of shares to be designated respectively Common Stock ("Common Stock") and
Preferred Stock ("Preferred Stock"). The total number of shares of Common Stock
the corporation shall have authority to issue is 185,000,000 shares, $0.0001 par
value per share, and the total number of shares of Preferred Stock the
corporation shall have authority to issue is 80,309,408 shares, $0.0001 par
value per share.
(B) Series of Preferred Stock. The Preferred Stock authorized in Article
-------------------------
IV, Section A above shall be divided into five series as follows: Twenty-Five
Million Seventy-Three Thousand Four Hundred Thirty-Six (25,073,436) shares shall
be designated as "Series B Preferred Stock," Two Million Seven Hundred Thirty-
Three Thousand Three Hundred and Thirty-Two (2,733,332) shares shall be
designated as "Series C Preferred Stock," Four Million Nine Hundred Sixty-Nine
Thousand One Hundred Forty-Eight (4,969,148) shares shall be designated as
"Series D Preferred Stock," Twenty-Six Million Two Hundred Eighty-Four Thousand
Twenty-Four (26,284,024) shares shall be designated as "Series E Preferred
Stock," Eight Million Two Hundred Forty-Nine Thousand Four Hundred Sixty-Eight
(8,249,468) shares
-1-
<PAGE>
shall be designated as "Series F Preferred Stock," and Thirteen Million
(13,000,000) shares shall be designated as "Series G Preferred Stock." The
rights, preferences, privileges and restrictions granted to and imposed upon the
respective classes and series of the corporation's capital stock are set forth
under Article IV, Section C.
(C) Rights, Preferences and Privileges of Capital Stock. The rights,
---------------------------------------------------
preferences, privileges and restrictions granted to or imposed on the respective
classes of the shares of capital stock or the holders thereof are as follows:
i. Dividends. The holders of record of Common Stock (the "Common
---------
Holders") and the holders of record of Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock and Series G Preferred Stock (the "Preferred Holders") shall be
entitled to receive, on a pari passu and an as-converted to Common Stock basis,
dividends out of funds legally available therefor, when, as, and if declared by
the Board of Directors, provided that the Preferred Holders shall be entitled to
receive a non-cumulative, preferential dividend, the amount of which is equal to
ten percent (10%) of their respective Preferred Liquidation Preference (as
defined herein). Such preferential dividends shall be non-cumulative and no
rights shall accrue to the Preferred Holders by reason of the fact that such
dividends are not declared in any period.
ii. Liquidation Preferences.
-----------------------
(a) In the event of any Liquidation Event (as defined herein), the
holders of record of Series B Preferred Stock, Series C Preferred Stock, Series
D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and Series
G Preferred Stock will be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the Corporation to the
holders of Common Stock, $0.2355338295 per share of Series B Preferred Stock,
$0.75 per share of Series C Preferred Stock, $0.881525 per share of Series D
Preferred Stock, $0.9125 per share of Series E Preferred Stock, $1.8183 per
share of Series F Preferred Stock and $6.3175 per share of Series G Preferred
Stock, respectively, plus any declared but unpaid dividends (the "Preferred
Liquidation Preference"). If upon the occurrence of a Liquidation Event, the
assets and funds to be distributed among the Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock and Series G Preferred Stock shall be insufficient to permit the
payment of the full Preferred Liquidation Preference, then the entire assets and
funds of the Corporation legally available for distribution shall be distributed
ratably among the holders of Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and
Series G Preferred Stock in proportion to the full preferential amount each such
holder is entitled to receive pursuant to the Preferred Liquidation Preference.
(b) A "Liquidation Event" shall mean: (i) any liquidation,
dissolution or winding up of the Corporation, whether voluntarily or
involuntarily; (ii) the merger, consolidation or reorganization of the
Corporation with or into any other corporation or corporations, in a transaction
in which more than 50% of the voting power of the Corporation is transferred by
the existing shareholders of the Corporation; or (iii) a sale of all or
substantially all of the assets of the Corporation, provided that this Section
IV(C)(ii)(b) shall not apply to a
-2-
<PAGE>
merger effected exclusively for the purpose of changing the domicile of the
Corporation.
(c) Solely in the event of a Liquidation Event which occurs prior to
December 21, 2000 (a "Participating Liquidation Event"), then, after the full
Preferred Liquidation Preference has been paid on all outstanding shares of
Preferred Stock, any remaining funds and assets of the Corporation legally
available for distribution to shareholders shall be distributed ratably among
the holders of record of Common Stock, Series F Preferred Stock and Series G
Preferred Stock pro rata according to the number of shares of Common Stock held
by such holders, (where, for this purpose, holders of shares of Preferred Stock
will be deemed to hold (in lieu of their Preferred Stock) the greatest whole
number of shares of Common Stock then issuable upon conversion in full of such
shares of Preferred Stock pursuant to Section IV(C)(v)) until such time (with
respect to each series of Preferred Stock) as each holder of the shares of such
Series F Preferred Stock and Series G Preferred Stock shall have received, in
distributions made under this Section IV(C)(ii)(c), the Participation Amount (as
defined below) for each then outstanding share of such series of Preferred
Stock. The "Participation Amount" shall be equal to $1.8183 per share with
respect to Series F Preferred Stock and $6.3175 per share with respect to Series
G Preferred Stock.
(d) After the full Preferred Liquidation Preference has been paid on
all outstanding shares of Preferred Stock pursuant to Section IV(C)(ii)(a) and,
if applicable, the holders of Preferred Stock shall have received their full
Participation Amount pursuant to Section III(C)(ii)(c), any remaining funds and
assets of the Corporation legally available for distribution to shareholders
shall be distributed ratably among the holders of Common Stock.
(e) Notwithstanding anything in this Article IV to the contrary, as
authorized by Section 151 of the Delaware General Corporation Law, the
Corporation may make distributions in connection with repurchases by the
Corporation of shares of Common Stock issued to or held by employees, directors
or consultants of or to the Corporation or any of its subsidiaries upon
termination of their employment or services pursuant to agreements providing for
the right of such repurchase at cost between the Corporation and such persons.
iii. Voting Rights. Except as otherwise required by law, the holder of
-------------
each share of Preferred Stock shall be entitled to the number of votes equal to
the number of shares of Common Stock into which such share of Preferred Stock
could be converted on the record date for the determination of the shareholders
entitled to vote on such matters, or if no such record date is established, at
the date such vote is taken or written consent of shareholders is solicited and
shall have voting rights and powers corresponding to the voting rights and
powers of Common Stock. Except as otherwise required by law or as otherwise set
forth herein, the holder of each share of Preferred Stock shall vote together
with the holders of Common Stock as a single class on all matters and shall be
entitled to notice of any shareholders meeting in accordance with the Bylaws of
the Corporation. The holders of Common Stock shall be entitled to the number of
votes equal to the number of shares held. Fractional shares shall not, however,
be permitted any fractional voting rights resulting from the above formulas.
Such fractional shares shall be rounded to the nearest whole number (with one-
half being rounded down). The number of members of the Board of Directors shall
be six. Four directors shall be elected by the holders of record of the Series B
Preferred Stock, Series C Preferred Stock and Series E
-3-
<PAGE>
Preferred Stock voting as a separate class, one director shall be elected by the
holders of record of the Common Stock voting as a separate class, and one
director shall be elected by the holders of record of Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock,
Series F Preferred Stock, Series G Preferred Stock and Common Stock voting
together as a single class. A director may be removed only by the holders of the
class or classes of capital stock, as the case may be, who elected such
director, and a successor to fill any position on the Board of Directors shall
be filled exclusively by a vote of such class or classes of capital stock, as
the case may be, that elected the director that previously filled that position.
iv. Certain Taxes. The Corporation shall pay any and all issuance and
-------------
other taxes (excluding any federal or state income taxes) that may be payable in
respect of any issuance or delivery of shares of Common Stock on conversion of
the Preferred Stock. The Corporation shall not, however, be required to pay any
tax that may be payable in respect of any transfer involved in the issuance and
delivery of shares of Common Stock in a name other than that in which the shares
of Preferred Stock to which such issuance relates were registered, and no such
issuance or delivery shall be made unless and until the person requesting such
issuance has paid to the Corporation the amount of any such tax, or it is
established to the satisfaction of the Corporation that such tax has been paid.
v. Conversion. The Preferred Holders shall have conversion rights as
----------
follows (the "Conversion Rights"):
(a) Right to Convert; Automatic Conversion.
--------------------------------------
(i) Subject to Section IV(C)(v)(c), each share of Preferred Stock
shall be convertible, at the option of the holder thereof, at any time after the
date of issuance of such share, at the office of the Corporation or any transfer
agent for such shares, into such number of fully paid and nonassessable shares
of Common Stock determined as set forth below.
Each share of Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and
Series G Preferred Stock shall be convertible into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing their
respective Preferred Liquidation Preference by the applicable Conversion Price,
determined as hereafter provided, in effect at the time of conversion. The
initial "Conversion Price" for a series shall be the per share Preferred
Liquidation Preference for such series; provided, however, that such Conversion
Price shall be subject to other adjustments as set forth below.
(ii) Each share of Preferred Stock shall automatically be
converted into shares of Common Stock at the applicable Conversion Price
immediately upon the occurrence of the first of the following:
(A) Upon the closing of the sale of the Corporation's
Common Stock in an underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, covering
the offer and sale of Common Stock for the account of the Corporation to the
public in which the Corporation receives not less than
-4-
<PAGE>
$20,000,000 (net of underwriters commissions and expenses) (a "Qualified IPO").
(B) The approval of such conversion by the written consent of the
holders of 66-2/3% of the then-outstanding shares of Preferred Stock, voting
together as a single class.
(b) Mechanics of Conversion. Before any holder of shares of Preferred
-----------------------
Stock shall be entitled to convert the same into shares of Common Stock, such
holder shall surrender the certificate or certificates therefor, duly endorsed,
at the office of the Corporation or of any transfer agent for such shares, and
shall give written notice by mail, postage prepaid, to the Corporation at its
principal corporate office, of the election to convert the same and shall state
therein the name or names in which the certificate or certificates for shares of
Common Stock are to be issued. The Corporation shall, as soon as practicable
thereafter, issue and deliver at such office to such holder of shares of
Preferred Stock, or to the nominee or nominees of such holder, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled as provided above. Such conversion shall be deemed to have been
made immediately prior to the close of business on the date of such surrender of
the certificate or certificates representing the shares of Preferred Stock to be
converted, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock as of such date.
(c) Conversion Price Adjustments. The Conversion Price of each series
----------------------------
of the Preferred Stock shall be subject to adjustment from time to time as
follows:
(i) (A) If at any time after the date on which the Corporation
first issues each series of Preferred Stock, the Corporation shall issue any
Additional Stock (as defined herein) without consideration or for a
consideration per share less than the Conversion Price for a given series of
Preferred Stock in effect immediately prior to the issuance of such Additional
Stock, then such Conversion Price in effect immediately prior to each such
issuance shall (except as otherwise provided in this clause (i)) be adjusted to:
the Conversion Price determined by dividing (X) an amount equal to
the sum of (a) the product derived by multiplying the Conversion Price in effect
immediately prior to such issue times the number of shares of Common Stock
(including shares of Common Stock deemed to have been issued upon conversion of
the outstanding Preferred Stock or otherwise under Section IV(C)(v)(c)(i)(E)),
outstanding immediately prior to such issue, plus (b) the consideration, if any,
received by or deemed to have been received by the Corporation upon such issue,
by (Y) an amount equal to the sum of (c) the number of shares of Common Stock
(including shares of Common Stock deemed to have been issued upon conversion of
the outstanding Preferred Stock or otherwise under Section IV(C)(v)(c)(i)(E)),
outstanding immediately prior to such issue, plus (d) the number of shares of
Common Stock issued or deemed to have been issued in such issue.
(B) No adjustment of the Conversion Price for Preferred Stock
shall be made in an amount less than one cent per share, provided that any
adjustment that is not required to be made by reason of this sentence shall be
carried forward and taken into account in
-5-
<PAGE>
any subsequent adjustment (at such time as an adjustment otherwise required by
this Section IV(C)(v)(c), together with all prior carried forward adjustments,
would cause an adjustment to the Conversion Price that is greater than or equal
to one cent per share). Except to the limited extent provided for in Sections
IV(C)(v)(c)(i)(E)(3), IV(C)(v)(c)(i)(E)(4) and IV(C)(v)(c)(iv), no adjustment of
such Conversion Price shall have the effect of increasing the Conversion Price
above the Conversion Price in effect immediately prior to such adjustment.
(C) In the case of the issuance of Common Stock for cash, the
consideration shall be deemed to be the amount of cash paid therefor before
deducting any reasonable discounts, commissions or other expenses allowed, paid
or incurred by this Corporation for any underwriting or otherwise in connection
with the issuance and sale thereof.
(D) In the case of the issuance of Common Stock for a consideration in
whole or in part other than cash, the consideration other than cash shall be
deemed to be the fair value thereof as determined in good faith by the Board of
Directors.
(E) In the case of the issuance of options to purchase or rights to
subscribe for Common Stock, securities by their terms convertible into or
exchangeable for Common Stock or options to purchase or rights to subscribe for
such convertible or exchangeable securities (where the shares of Common Stock
issuable upon exercise of such options or rights or upon conversion or exchange
of such securities are not excluded from the definition of Additional Stock),
the following provisions shall apply:
(1) the aggregate maximum number of shares of Common Stock
deliverable upon exercise of such options to purchase or rights to subscribe for
Common Stock shall be deemed to have been issued at the time such options or
rights were issued and for a consideration equal to the consideration
(determined in the manner provided in Sections IV(C)(v)(c)(i)(C) and
IV(C)(v)(c)(i)(D)), if any, received by the Corporation upon the issuance of
such options or rights plus the minimum purchase price provided in such options
or rights for the Common Stock covered thereby;
(2) the aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange for any such convertible or
exchangeable securities or upon the exercise of options to purchase or rights to
subscribe for such convertible or exchangeable securities and subsequent
conversion or exchange thereof shall be deemed to have been issued at the time
such securities were issued or such options or rights were issued and for a
consideration equal to the consideration, if any, received by the Corporation
for any such securities and related options or rights (excluding any cash
received on account of accrued interest or accrued dividends), plus the
additional consideration, if any, to be received by the Corporation upon the
conversion or exchange of such securities or the exercise of any related options
or rights (the consideration in each case to be determined in the manner
provided in Sections IV(C)(v)(c)(i)(C) and IV(C)(v)(c)(i)(D));
(3) In the event of any change in the number of shares of Common
Stock deliverable upon exercise of such options or rights or upon conversion of
or in exchange for such convertible or exchangeable securities, including, but
not limited to, a change
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<PAGE>
resulting from the antidilution provisions thereof, the Conversion Price in
effect at the time for Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and
Series G Preferred Stock shall forthwith be readjusted to such Conversion Price
as would have obtained had the adjustment that was made upon the issuance of
such options, rights or securities not converted prior to such change or the
options or rights related to such securities not converted prior to such change
been made upon the basis of such change, but no further adjustment shall be made
for the actual issuance of Common Stock upon the exercise of any such options or
rights or the conversion or exchange of such securities;
(4) Upon the expiration of any such options or rights,
the termination of any such rights to convert or exchange or the expiration of
any options or rights related to such convertible or exchangeable securities,
the Conversion Price for Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and
Series G Preferred Stock shall forthwith be readjusted to such Conversion Price
as would have obtained had the adjustment which was made upon the issuance of
such options, rights or securities or options or rights related to such
securities been made upon the basis of the issuance of only the number of shares
of Common Stock actually issued upon the exercise of such options or rights,
upon the conversion or exchange of such securities or upon the exercise of the
options or rights related to such securities.
(ii) "Effective Date" means the date on which these Amended and
Restated Articles of Incorporation are effective.
"Additional Stock" shall mean any shares of Common Stock issued (or
deemed to have been issued pursuant to Section IV(C)(v)(c)(i)(E)) by the
Corporation after the Effective Date other than:
(A) Common Stock issued pursuant to a transaction described
in Section III(C)(v)(c)(iii);
(B) Common Stock issued or issuable to employees, officers,
or directors of, or consultants to, the Corporation, pursuant to an arrangement
approved by the Board of Directors;
(C) securities issued upon exercise of warrants issued to
parties providing the Corporation with equipment leases, real property leases,
loans, credit lines, or guarantees of indebtedness in connection with commercial
credit arrangements, equipment financings or other similar transactions, and
approved by the Board of Directors;
(D) securities issued pursuant to the acquisition of another
corporation by merger, purchase of all or substantially all of the assets, or
other reorganization by the Corporation;
(E) Common Stock issued or issuable upon conversion of the
shares of Preferred Stock; or
(F) securities issued to a customer, strategic corporate
partner or potential strategic corporate partner and approved by the Board of
Directors.
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<PAGE>
(iii) In the event the Corporation should at any time or from time
to time subsequent to the effective date of this amendment fix a record date for
the effectuation of a split or subdivision of the outstanding shares of Common
Stock or the determination of holders of Common Stock entitled to receive a
dividend or other distribution payable in additional shares of Common Stock or
other securities or rights convertible into, or entitling the holder thereof to
receive, directly or indirectly, additional shares of Common Stock (hereinafter
referred to as "Common Stock Equivalents") without payment of any consideration
by such holder for the additional shares of Common Stock or the Common Stock
Equivalents (including the additional shares of Common Stock issuable upon
conversion or exercise thereof), then, as of such record date (or the date of
such dividend distribution, split or subdivision if no record date is fixed),
the Conversion Price of the Preferred Stock shall be appropriately decreased so
that the number of shares of Common Stock issuable on conversion of each such
share shall be increased in proportion to such increase of outstanding shares
determined by taking Section III(C)(v)(c)(i)(E) into account.
(iv) If the number of shares of Common Stock outstanding at any
time after the Effective Date is decreased by a combination of the outstanding
shares of Common Stock, then, as of the record date of such combination, the
Conversion Price of the Preferred Stock shall be appropriately increased so that
the number of shares of Common Stock issuable on conversion of each such share
shall be decreased in proportion to such decrease in outstanding shares.
(d) Other Distributions. In the event the Corporation shall declare a
-------------------
distribution payable in securities of other persons, evidences of indebtedness
issued by the Corporation or other persons, assets (excluding cash dividends) or
options or rights not referred to in Section IV(C)(v)(c)(iii), then, in each
such case for the purpose of this Section (d), the holders of Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock, Series F Preferred Stock and Series G Preferred Stock shall be entitled
to a proportionate share of any such distribution as though they were the
holders of the number of shares of Common Stock of the Corporation into which
their shares of Preferred Stock are convertible as of the record date fixed for
the determination of the holders of Common Stock of the Corporation entitled to
receive such distribution.
(e) Recapitalizations. If at any time or from time to time there
-----------------
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section), provision shall be made (in form and substance satisfactory to
the holders of a majority of the Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred
Stock and Series G Preferred Stock then outstanding) so that the holders of
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock and Series G Preferred Stock
shall thereafter be entitled to receive, upon conversion of Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock, Series F Preferred Stock and Series G Preferred Stock such shares or
other securities or property of the Corporation or otherwise, to which a holder
of Common Stock deliverable upon conversion would have been entitled on such
recapitalization. In any such case, appropriate
-8-
<PAGE>
adjustment shall be made in the application of the provisions of this Section
with respect to the rights of the holders of Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock and Series G Preferred Stock after the recapitalization to the
end that the provisions of this Section (including adjustment of the Conversion
Prices then in effect and the number of shares purchasable upon conversion of
shares of Preferred Stock) shall be applicable after that event as nearly
equivalent as may be practicable.
(f) No Fractional Shares and Certificate as to Adjustments.
------------------------------------------------------
(i) No fractional shares shall be issued upon conversion of shares
of Preferred Stock. In lieu of fractional shares, the number of shares of Common
Stock to be issued to a Preferred Holder upon conversion of all of the shares
being converted of Preferred Stock held by such holder shall be rounded to the
nearest whole number.
(ii) Upon the occurrence of each adjustment of the Conversion
Price of any series of Preferred Stock, the Corporation, at its expense, shall
promptly compute such adjustment in accordance with the terms hereof and prepare
and furnish to each Preferred Holder with respect to which the Conversion Price
is being adjusted a certificate setting forth such adjustment and showing in
detail the facts upon which such adjustment is based.
(g) Notices of Record Date. In the event of any taking by the
----------------------
Corporation of a record of its shareholders for the purpose of determining
shareholders who are entitled to receive payment of any dividend (other than a
cash dividend) or other distribution, any right to subscribe for, purchase or
otherwise acquire any shares of any class or any other securities or property,
or to receive any other right, the Corporation shall mail to each holder of
shares of Preferred Stock, at least 20 days prior to the date specified therein,
a notice specifying the date on which any such record is to be taken for the
purpose of such dividend, distribution or right, and the amount and character of
such dividend, distribution, or right.
(h) Reservation of Shares Issuable Upon Conversion. The Corporation
----------------------------------------------
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of Preferred Stock, such number of its shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of Preferred Stock, the
Corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purposes.
(i) Notices. Any notice required by the provisions of this Section to
-------
be given to Preferred Holders shall be deemed to be delivered when deposited in
the United States mail, postage prepaid, registered or certified, and addressed
to each holder of record at his address appearing on the stock transfer books of
the Corporation.
vi. Protective Provisions. Until (i) the consummation of a Qualified IPO,
---------------------
or (ii) at least 35% of each of the Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred
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<PAGE>
Stock, Series E Preferred Stock, Series F Preferred Stock and Series G Preferred
Stock (appropriately adjusted for stock splits, stock dividends,
recapitalizations and similar events subsequent to the effective date of this
amendment) shall have been converted into Common Stock,
(a) the Corporation shall not without first obtaining the approval (by
vote or written consent, as provided by law) of the holders of at least a
majority of the then outstanding shares of Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock and Series G Preferred Stock, voting together as a class:
(1) amend or repeal any provision of or add any provision to the
Corporation's Articles of Incorporation;
(2) effect a transaction described in Section IV(C)(ii)(b) above;
(3) declare any dividends on or make any distribution on account
of the Common Stock;
(4) redeem, repurchase or otherwise acquire (or pay into or set
aside for a sinking fund for such purposes) any share or shares
of Preferred Stock or Common Stock, except for repurchases of
Common Stock issued to and held by employees, directors,
consultants or other persons performing services for the
Corporation or any of its subsidiaries pursuant to agreements
providing for the right of such repurchase at cost between the
Corporation and such persons upon the occurrence of certain
events, such as termination of their employment or services;
(5) amend any stock option or equity incentive plan to modify the
number of shares of the Corporation's stock issuable thereunder;
or
(6) sell or grant any exclusive license to the Corporation's
intellectual property without the unanimous approval of the Board
of Directors; and
(b) the Corporation shall not without first obtaining the approval (by
vote or written consent, as provided by law) of the holders of at least a
majority of the then outstanding shares of Series B Preferred Stock, voting
separately as a class, the holders of at least a majority of the then
outstanding shares of Series C Preferred Stock, voting separately as a class,
the holders of at least a majority of the then outstanding shares of Series D
Preferred Stock, voting separately as a class, the holders of at least a
majority of the then outstanding shares of Series E Preferred Stock, voting
separately as a class, the holders of at least a majority of the then
outstanding shares of Series F Preferred Stock, voting separately as a class,
and the holders of at least a majority of the then outstanding shares of Series
G Preferred Stock, voting separately as a class, authorize or issue, or obligate
itself to issue, any other equity security which is, or is convertible into or
exercisable for any equity security senior to the Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock,
Series F Preferred
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<PAGE>
Stock and Series G Preferred Stock, respectively with respect to voting,
dividends, conversion or upon liquidation.
D. For so long as the Corporation is not a reporting company under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), neither the
Common Stock or Preferred Stock of the Corporation (or any shares of Common
Stock or Preferred Stock issued as a result of any stock splits or the like) may
be transferred except for transfers:
(i) which would be exempt from the registration requirements of Section 5
of the Securities Act of 1933, as amended (the "Securities Act"); provided that
any shares of such stock in the hands of any such transferee remain subject to
the same restrictions on transfer as they were when held by the transferor;
(ii) pursuant to an effective registration statement under the Securities
Act simultaneously with a registration of such stock of the Corporation under
Section 12 of the Exchange Act;
(iii) to the Corporation;
(iv) to existing stockholders of the Corporation; provided that any shares
of such stock in the hands of any such transferee remain subject to the same
restrictions on transfer as they were when held by the transferor;
(v) by gift, bequest or operation of the laws of descent or distribution,
provided that any shares of such stock in the hands of the transferee remain
subject to the same restrictions on transfer as they were when held by the
transferor;
(vi) to an entity unaffiliated with the Corporation pursuant to the merger,
consolidation, stock for stock exchange, tender offer or similar transaction
involving the Corporation;
(vii) to a trust for employees of the Corporation established under a
qualified employee benefit plan
(viii) by a trust to such trust's beneficiaries; provided that any shares
of such stock in the hands of any such transferee remain subject to the same
restrictions on transfer as they were when held by the transferor; or
(ix) to an "affiliate" (as defined in the Securities Act) of such
stockholder, provided that such affiliate is an "accredited investor" (as
defined in Regulation D promulgated under the Securities Act).
ARTICLE V
The Board of Directors of the corporation shall have the power to adopt,
amend or repeal the Bylaws of the corporation.
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<PAGE>
ARTICLE VI
For the management of the business and for the conduct of the affairs of
the corporation, and in further definition, limitation and regulation of the
powers of the corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
(A) The conduct of the affairs of the corporation shall be managed under
the direction of the Board of Directors. The number of directors shall be fixed
from time to time exclusively by resolution of the Board of Directors.
(B) Notwithstanding the foregoing provision of this Article VI, each
director shall hold office until such director's successor is elected and
qualified, or until such director's earlier death, resignation or removal. No
decrease in the authorized number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
(C) Following the closing of the corporation's initial public offering
pursuant to an effective registration statement under the Securities Act of
1933, as amended, covering the offer and sale of Common Stock to the public (the
"Initial Public Offering"), no action shall be taken by the stockholders of the
corporation except at an annual or special meeting of stockholders called in
accordance with the Bylaws of the corporation, and no action shall be taken by
the stockholders by written consent.
(D) Advance notice of stockholder nominations for the election of directors
of the corporation and of business to be brought by stockholders before any
meeting of stockholders of the corporation shall be given in the manner provided
in the Bylaws of the corporation. Business transacted at special meetings of
stockholders shall be confined to the purpose or purposes stated in the notice
of meeting.
(E) Subject to Section 6.5 of the Bylaws of the corporation, following the
closing of the Initial Public Offering, stockholders of the corporation holding
at least sixty-six and two-thirds percent (66-2/3%) of the corporation's
outstanding voting stock then entitled to vote at an election of directors shall
have the power to adopt, amend or repeal Bylaws of the corporation.
Following the closing of the Initial Public Offering, the affirmative vote
of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the
corporation's outstanding voting stock then entitled to vote at an election of
directors, voting together as a single class, shall be required to alter,
change, amend, repeal or adopt any provision inconsistent with this Article VI.
ARTICLE VII
To the fullest extent permitted by law, no director of the corporation
shall be personally liable for monetary damages for breach of fiduciary duty as
a director. Without limiting the effect of the preceding sentence, if the
Delaware General Corporation Law is hereafter amended to authorize the further
elimination or limitation of the liability of a director, then the liability of
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<PAGE>
a director of the corporation shall be eliminated or limited to the fullest
extent permitted by the Delaware General Corporation Law, as so amended.
Neither any amendment nor repeal of this Article VII, nor the adoption of
any provision of this Certificate of Incorporation inconsistent with this
Article VII, shall eliminate, reduce or otherwise adversely affect any
limitation on the personal liability of a director of the corporation existing
at the time of such amendment, repeal or adoption of such an inconsistent
provision.
Following the closing of the Initial Public Offering, the affirmative vote
of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the
corporation's outstanding voting stock then entitled to vote at an election of
directors, voting together as a single class, shall be required to alter,
change, amend, repeal or adopt any provision inconsistent with this Article VII.
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<PAGE>
EXHIBIT 3.02
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ONI SYSTEMS CORP.
ARTICLE I
The name of the corporation is ONI Systems Corp.
ARTICLE II
The address of the registered office of the corporation in the State of
Delaware is 15 East North Street, City of Dover, County of Kent. The name of
its registered agent at that address is Incorporating Services, Ltd.
ARTICLE III
The purpose of the corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.
ARTICLE IV
The total number of shares of all classes of stock which the corporation
has authority to issue is 710,000,000 shares, consisting of two classes:
700,000,000 shares of Common Stock, $0.0001 par value per share, and 10,000,000
shares of Preferred Stock, $0.0001 par value per share.
The Board of Directors is authorized, subject to any limitations prescribed
by the law of the State of Delaware, to provide for the issuance of the shares
of Preferred Stock in one or more series, and, by filing a Certificate of
Designation pursuant to the applicable law of the State of Delaware, to
establish from time to time the number of shares to be included in each such
series, to fix the designation, powers, preferences and rights of the shares of
each such series and any qualifications, limitations or restrictions thereof,
and to increase or decrease the number of shares of any such series (but not
below the number of shares of such series then outstanding). The number of
authorized shares of Preferred Stock may also be increased or decreased (but not
below the number of shares thereof then outstanding) by the affirmative vote of
the holders of a majority of the stock of the corporation entitled to vote,
unless a vote of any other holders is required pursuant to a Certificate or
Certificates establishing a series of Preferred Stock.
Except as otherwise expressly provided in any Certificate of Designation
designating any series of Preferred Stock pursuant to the foregoing provisions
of this Article IV, any new series of Preferred Stock may be designated, fixed
and determined as provided herein by the Board of Directors without approval of
the holders of Common Stock or the holders of Preferred Stock, or
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<PAGE>
any series thereof, and any such new series may have powers, preferences and
rights, including, without limitation, voting rights, dividend rights,
liquidation rights, redemption rights and conversion rights, senior to, junior
to or pari passu with the rights of the Common Stock, the Preferred Stock, or
any future class or series of Preferred Stock or Common Stock.
ARTICLE V
The Board of Directors of the corporation shall have the power to adopt,
amend or repeal the Bylaws of the corporation.
ARTICLE VI
For the management of the business and for the conduct of the affairs of
the corporation, and in further definition, limitation and regulation of the
powers of the corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
(A) The conduct of the affairs of the corporation shall be managed under
the direction of the Board of Directors. The number of directors shall be fixed
from time to time exclusively by resolution of the Board of Directors.
(B) Notwithstanding the foregoing provision of this Article VI, each
director shall hold office until such director's successor is elected and
qualified, or until such director's earlier death, resignation or removal. No
decrease in the authorized number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
(C) Election of directors need not be by written ballot unless the Bylaws
of the corporation shall so provide.
(D) No action shall be taken by the stockholders of the corporation except
at an annual or special meeting of stockholders called in accordance with the
Bylaws of the corporation, and no action shall be taken by the stockholders by
written consent.
(E) Advance notice of stockholder nominations for the election of directors
of the corporation and of business to be brought by stockholders before any
meeting of stockholders of the corporation shall be given in the manner provided
in the Bylaws of the corporation. Business transacted at special meetings of
stockholders shall be confined to the purpose or purposes stated in the notice
of meeting.
(F) Subject to Section 6.5 of the Bylaws of the corporation, stockholders
of the corporation holding at least sixty-six and two-thirds percent (66-2/3%)
of the corporation's outstanding voting stock then entitled to vote at an
election of directors shall have the power to adopt, amend or repeal Bylaws of
the corporation.
The affirmative vote of the holders of at least sixty-six and two-thirds
percent (66-2/3%) of the corporation's outstanding voting stock then entitled to
vote at an election of directors,
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<PAGE>
voting together as a single class, shall be required to alter, change, amend,
repeal or adopt any provision inconsistent with this Article VI.
ARTICLE VII
To the fullest extent permitted by law, no director of the corporation
shall be personally liable for monetary damages for breach of fiduciary duty as
a director. Without limiting the effect of the preceding sentence, if the
Delaware General Corporation Law is hereafter amended to authorize the further
elimination or limitation of the liability of a director, then the liability of
a director of the corporation shall be eliminated or limited to the fullest
extent permitted by the Delaware General Corporation Law, as so amended.
Neither any amendment nor repeal of this Article VII, nor the adoption of
any provision of this Certificate of Incorporation inconsistent with this
Article VII, shall eliminate, reduce or otherwise adversely affect any
limitation on the personal liability of a director of the corporation existing
at the time of such amendment, repeal or adoption of such an inconsistent
provision.
The affirmative vote of the holders of at least sixty-six and two-thirds
percent (66-2/3%) of the corporation's outstanding voting stock then entitled to
vote at an election of directors, voting together as a single class, shall be
required to alter, change, amend, repeal or adopt any provision inconsistent
with this Article VII.
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<PAGE>
EXHIBIT 3.03
RESTATED BYLAWS
OF
ONI SYSTEMS CORP.
(a Delaware corporation)
as restated _________, 2000
ARTICLE I
STOCKHOLDERS
Section 1.1: Annual Meetings. An annual meeting of stockholders shall be
----------- ---------------
held for the election of directors at such date, time and place, either within
or without the State of Delaware, as the Board of Directors shall each year fix.
Any other proper business may be transacted at the annual meeting.
Section 1.2: Special Meetings. Special meetings of stockholders for any
----------- ----------------
purpose or purposes may be called at any time by the Chairman of the Board, the
Chief Executive Officer, the holders of shares of the Corporation that are
entitled to cast not less than a ten percent (10%) of the total number of votes
entitled to be cast by all stockholders at such meeting (the "Ten Percent
-----------
Stockholders"), or by a majority of the members of the Board of Directors.
- ------------
Special meetings may not be called by any other person or persons. If a special
meeting of stockholders is called by any person or persons other than by a
majority of the members of the Board of Directors, then such person or persons
shall call such meeting by delivering a written request to call such meeting to
each member of the Board of Directors, and the Board of Directors shall then
determine the time, date and place of such special meeting, which shall be held
not more than one hundred twenty (120) nor less than thirty-five (35) days after
the written request to call such special meeting was delivered to each member of
the Board of Directors. Following the closing of the corporation's initial
public offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, covering the offer and sale of Common Stock
to the public (the "Initial Public Offering"), Ten Percent Stockholders may no
-----------------------
longer call a Special Meeting of Stockholders.
Section 1.3: Notice of Meetings. Written notice of all meetings of
----------- ------------------
stockholders shall be given stating the place, date and time of the meeting and,
in the case of a special meeting, the purpose or purposes for which the meeting
is called. Unless otherwise required by applicable law or the Certificate of
Incorporation of the Corporation, such notice shall be given not less than ten
(10) nor more than sixty (60) days before the date of the meeting to each
stockholder entitled to vote at such meeting.
Section 1.4: Adjournments. Any meeting of stockholders may adjourn from
----------- ------------
time to time to reconvene at the same or another place, and notice need not be
given of any such
<PAGE>
adjourned meeting if the time, date and place thereof are announced at the
meeting at which the adjournment is taken; provided, however, that if the
-------- -------
adjournment is for more than thirty (30) days, or if after the adjournment, a
new record date is fixed for the adjourned meeting, then a notice of the
adjourned meeting shall be given to each stockholder of record entitled to vote
at the meeting. At the adjourned meeting, the Corporation may transact any
business that might have been transacted at the original meeting.
Section 1.5: Quorum. At each meeting of stockholders, the holders of
----------- ------
a majority of the shares of stock entitled to vote at the meeting, present in
person or represented by proxy, shall constitute a quorum for the transaction of
business, except if otherwise required by applicable law. If a quorum shall
------
fail to attend any meeting, the chairman of the meeting or the holders of a
majority of the shares entitled to vote who are present, in person or by proxy,
at the meeting may adjourn the meeting. Shares of the Corporation's stock
belonging to the Corporation (or to another corporation, if a majority of the
shares entitled to vote in the election of directors of such other corporation
are held, directly or indirectly, by the Corporation), shall neither be entitled
to vote nor be counted for quorum purposes; provided, however, that the
-------- -------
foregoing shall not limit the right of the Corporation or any other corporation
to vote any shares of the Corporation's stock held by it in a fiduciary
capacity.
Section 1.6: Organization. Meetings of stockholders shall be
----------- ------------
presided over by such person as the Board of Directors may designate, or, in the
absence of such a person, the Chairman of the Board, or, in the absence of such
person, the President of the Corporation, or, in the absence of such person,
such person as may be chosen by the holders of a majority of the shares entitled
to vote who are present, in person or by proxy, at the meeting. Such person
shall be chairman of the meeting and, subject to Section 1.12 hereof, shall
determine the order of business and the procedure at the meeting, including such
regulation of the manner of voting and the conduct of discussion as seems to him
or her to be in order. The Secretary of the Corporation shall act as secretary
of the meeting, but in his or her absence, the chairman of the meeting may
appoint any person to act as secretary of the meeting.
Section 1.7: Voting; Proxies. Unless otherwise provided by law or
----------- ---------------
the Certificate of Incorporation of the Corporation, and subject to the
provisions of Section 1.8 of these Bylaws, each stockholder shall be entitled to
one (1) vote for each share of stock held by such stockholder. Each stockholder
entitled to vote at a meeting of stockholders, or to express consent or dissent
to corporate action in writing without a meeting, may authorize another person
or persons to act for such stockholder by proxy. Such a proxy may be prepared,
transmitted and delivered in any manner permitted by applicable law. Voting at
meetings of stockholders need not be by written ballot unless such is demanded
at the meeting before voting begins by a stockholder or stockholders holding
shares representing at least one percent (1%) of the votes entitled to vote at
such meeting, or by such stockholder's or stockholders' proxy; provided,
--------
however, that an election of directors shall be by written ballot if demand is
- -------
so made by any stockholder at the meeting before voting begins. If a vote is to
be taken by written ballot, then each such ballot shall state the name of the
stockholder or proxy voting and such other information as the chairman of the
meeting deems appropriate. Directors shall be elected by a plurality of the
votes of the shares present in person or represented by proxy at the meeting and
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<PAGE>
entitled to vote on the election of directors. Unless otherwise provided by
applicable law, the Certificate of Incorporation of the Corporation or these
Bylaws, every matter other than the election of directors shall be decided by
the affirmative vote of the holders of a majority of the shares of stock
entitled to vote thereon that are present in person or represented by proxy at
the meeting and are voted for or against the matter.
Section 1.8: Fixing Date for Determination of Stockholders of Record.
----------- -------------------------------------------------------
(a) Generally. In order that the Corporation may determine the
---------
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not precede the date upon which the resolution fixing the record
date is adopted by the Board of Directors and which shall not be more than sixty
(60) nor less than ten (10) days before the date of such meeting, nor more than
sixty (60) days prior to any other action. If no record date is fixed by the
Board of Directors, then the record date shall be as provided by applicable law.
A determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
--------
however, that the Board of Directors may fix a new record date for the adjourned
- -------
meeting.
(b) Stockholder Request for Action by Written Consent. For such
-------------------------------------------------
period of time as stockholders are authorized to act by written consent pursuant
to the provisions of the Certificate of Incorporation of the Corporation and
Section 1.10 hereof, any stockholder of record seeking to have the stockholders
authorize or take corporate action by written consent without a meeting shall,
by written notice to the Secretary of the Corporation, request the Board of
Directors to fix a record date for such consent. Such request shall include a
brief description of the action proposed to be taken. The Board of Directors
shall, within ten (10) days after the date on which such a request is received,
adopt a resolution fixing the record date. Such record date shall not precede
the date upon which the resolution fixing the record date is adopted by the
Board of Directors, and shall not be more than ten (10) days after the date upon
which the resolution fixing the record date is adopted by the Board of
Directors. If no record date has been fixed by the Board of Directors within
ten (10) days after the date on which such a request is received, then the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting, when no prior action by the Board of Directors is
required by applicable law, shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken is delivered to
the Corporation by delivery to its registered office in the State of Delaware,
to its principal place of business or to any officer or agent of the Corporation
having custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery made to the Corporation's registered office shall be by hand
or by certified or registered mail, return receipt requested. If no record date
has been fixed by the Board of Directors and prior action by the Board of
Directors is required by applicable law, then the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting
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<PAGE>
shall be at the close of business on the date on which the Board of Directors
adopts the resolution taking such prior action.
Section 1.9: List of Stockholders Entitled to Vote. A complete list
----------- -------------------------------------
of stockholders entitled to vote at any meeting of stockholders, arranged in
alphabetical order and showing the address of each stockholder and the number of
shares registered in the name of each stockholder, shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof and may be inspected by any stockholder who is present at the meeting.
Section 1.10: Action by Written Consent of Stockholders.
------------ -----------------------------------------
(a) Procedure. Unless otherwise provided by the Certificate of
---------
Incorporation of the Corporation, and except as set forth in Section 1.8(b)
above, any action required or permitted to be taken at any annual or special
meeting of the stockholders may be taken without a meeting, without prior notice
and without a vote, if a consent or consents in writing, setting forth the
action so taken, shall be signed by the holders of outstanding stock having not
less than the number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted; provided, however, that effective immediately after the closing of an
-------- -------
underwritten public offering of shares of the Corporation's Common Stock
pursuant to a registration statement filed with and declared effective by the
Securities and Exchange Commission, any action required or permitted to be taken
by the Corporation's stockholders shall be taken only at a duly called annual or
special meeting of such stockholders, and the Corporation's stockholders shall
not be able to act by written consent. For such period of time as written
stockholder consents are permitted, such consents shall bear the date of
signature of each stockholder who signs the consent and shall be delivered to
the Corporation by delivery to its registered office in the State of Delaware,
to its principal place of business or to any officer or agent of the Corporation
having custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery made to the Corporation's registered office shall be by hand
or by certified or registered mail, return receipt requested. No written
consent shall be effective to take the action set forth therein unless, within
sixty (60) days of the earliest dated consent delivered to the Corporation in
the manner provided above, written consents signed by a sufficient number of
stockholders to take the action set forth therein are delivered to the
Corporation in the manner provided above.
(b) Notice of Consent. Prompt notice of the taking of corporate action by
-----------------
stockholders without a meeting by less than unanimous written consent of the
stockholders shall be given to those stockholders who have not consented thereto
in writing and, in the case of a Certificate Action (as defined below), if the
Delaware General Corporation Law so requires, such notice shall be given prior
to filing of the certificate in question. If the action which is consented to
requires the filing of a certificate under the Delaware General Corporation Law
(a "Certificate Action"), then if the Delaware General Corporation Law so
------------------
requires, the
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<PAGE>
certificate so filed shall state that written stockholder consent has been given
in accordance with Section 228 of the Delaware General Corporation Law and that
written notice of the taking of corporate action by stockholders without a
meeting as described herein has been given as provided in such section.
Section 1.11: Inspectors of Elections.
------------ -----------------------
(a) Applicability. Unless otherwise provided in the Corporation's
-------------
Certificate of Incorporation or required by the Delaware General Corporation
Law, the following provisions of this Section 1.11 shall apply only if and when
the Corporation has a class of voting stock that is: (i) listed on a national
securities exchange; (ii) authorized for quotation on an interdealer quotation
system of a registered national securities association; or (iii) held of record
by more than 2,000 stockholders; in all other cases, observance of the
provisions of this Section 1.11 shall be optional and at the discretion of the
Corporation.
(b) Appointment. The Corporation shall, in advance of any meeting of
-----------
stockholders, appoint one or more inspectors of election to act at the meeting
and make a written report thereof. The Corporation may designate one or more
persons as alternate inspectors to replace any inspector who fails to act. If
no inspector or alternate is able to act at a meeting of stockholders, the
person presiding at the meeting shall appoint one or more inspectors to act at
the meeting.
(c) Inspector's Oath. Each inspector of election, before entering
----------------
upon the discharge of his duties, shall take and sign an oath faithfully to
execute the duties of inspector with strict impartiality and according to the
best of his or her ability.
(d) Duties of Inspectors. At a meeting of stockholders, the
--------------------
inspectors of election shall (i) ascertain the number of shares outstanding and
the voting power of each share, (ii) determine the shares represented at a
meeting and the validity of proxies and ballots, (iii) count all votes and
ballots, (iv) determine and retain for a reasonable period of time a record of
the disposition of any challenges made to any determination by the inspectors
and (v) certify their determination of the number of shares represented at the
meeting and their count of all votes and ballots. The inspectors may appoint or
retain other persons or entities to assist the inspectors in the performance of
the duties of the inspectors.
(e) Opening and Closing of Polls. The date and time of the opening
----------------------------
and the closing of the polls for each matter upon which the stockholders will
vote at a meeting shall be announced by the inspectors at the meeting. No
ballot, proxies or votes, nor any revocations thereof or changes thereto, shall
be accepted by the inspectors after the closing of the polls unless the Court of
Chancery upon application by a stockholder shall determine otherwise.
(f) Determinations. In determining the validity and counting of
--------------
proxies and ballots, the inspectors shall be limited to an examination of the
proxies, any envelopes submitted with those proxies, any information provided in
connection with proxies in accordance with Section 212(c)(2) of the Delaware
General Corporation Law, the ballots and the regular books and
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<PAGE>
records of the Corporation, except that the inspectors may consider other
------
reliable information for the limited purpose of reconciling proxies and ballots
submitted by or on behalf of banks, brokers, their nominees or similar persons
that represent more votes than the holder of a proxy is authorized by the record
owner to cast or more votes than the stockholder holds of record. If the
inspectors consider other reliable information for the limited purpose permitted
herein, the inspectors at the time they make their certification of their
determinations pursuant to this Section 1.11 shall specify the precise
information considered by them, including the person or persons from whom they
obtained the information, when the information was obtained, the means by which
the information was obtained and the basis for the inspectors' belief that such
information is accurate and reliable.
Section 1.12: Notice of Stockholder Business; Nominations.
------------ -------------------------------------------
(a) Annual Meeting of Stockholders.
------------------------------
(i) Nominations of persons for election to the Board of Directors and
the proposal of business to be considered by the stockholders shall be made at
an annual meeting of stockholders (A) pursuant to the Corporation's notice of
such meeting, (B) by or at the direction of the Board of Directors or (C) by any
stockholder of the Corporation who was a stockholder of record at the time of
giving of the notice provided for in this Section 1.12, who is entitled to vote
at such meeting and who complies with the notice procedures set forth in this
Section 1.12.
(ii) For nominations or other business to be properly brought before
an annual meeting by a stockholder pursuant to clause (C) of subparagraph (a)(i)
of this Section 1.12, the stockholder must have given timely notice thereof in
writing to the Secretary of the Corporation and such other business must
otherwise be a proper matter for stockholder action. To be timely, a
stockholder's notice must be delivered to the Secretary at the principal
executive offices of the Corporation not later than the close of business on the
sixtieth (60th) day nor earlier than the close of business on the ninetieth
(90th) day prior to the first anniversary of the preceding year's annual
meeting; provided, however, that in the event that the date of the annual
-------- -------
meeting is more than thirty (30) days before or more than sixty (60) days after
such anniversary date, notice by the stockholder, to be timely, must be so
delivered not earlier than the close of business on the ninetieth (90th) day
prior to such annual meeting and not later than the close of business on the
later of the sixtieth (60th) day prior to such annual meeting or the close of
business on the tenth (10th) day following the day on which public announcement
of the date of such meeting is first made by the Corporation. Such
stockholder's notice shall set forth: (a) as to each person whom the stockholder
proposes to nominate for election or reelection as a director all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), including such person's written consent to being named in
------------
the proxy statement as a nominee and to serving as a director if elected; (b) as
to any other business that the stockholder proposes to bring before the meeting,
a brief description of the business desired to be brought before the meeting,
the reasons for conducting such business at the meeting and any material
interest in such business of such stockholder and the beneficial owner, if any,
on whose behalf the proposal is made; and (c) as to
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<PAGE>
the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made, (1) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner and (2) the class and number of shares of the Corporation that are owned
beneficially and held of record by such stockholder and such beneficial owner.
(iii) Notwithstanding anything in the second sentence of subparagraph
(a)(ii) of this Section 1.12 to the contrary, in the event that the number of
directors to be elected to the Board of Directors of the Corporation is
increased and there is no public announcement by the Corporation naming all of
the nominees for director or specifying the size of the increased board of
directors at least seventy (70) days prior to the first anniversary of the
preceding year's annual meeting (or, if the annual meeting is held more than
thirty (30) days before or sixty (60) days after such anniversary date, at least
seventy (70) days prior to such annual meeting), a stockholder's notice required
by this Section 1.12 shall also be considered timely, but only with respect to
nominees for any new positions created by such increase, if it shall be
delivered to the Secretary of the Corporation at the principal executive office
of the Corporation not later than the close of business on the tenth (10th) day
following the day on which such public announcement is first made by the
Corporation.
(b) Special Meetings of Stockholders. Only such business shall be
--------------------------------
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Corporation's notice of such meeting. Nominations
of persons for election to the Board of Directors may be made at a special
meeting of stockholders at which directors are to be elected pursuant to the
Corporation's notice of such meeting (i) by or at the direction of the Board of
Directors or (ii) provided that the Board of Directors has determined that
directors shall be elected at such meeting, by any stockholder of the
Corporation who is a stockholder of record at the time of giving of notice of
the special meeting, who shall be entitled to vote at the meeting and who
complies with the notice procedures set forth in this Section 1.12. In the
event the Corporation calls a special meeting of stockholders for the purpose of
electing one or more directors to the Board of Directors, any such stockholder
may nominate a person or persons (as the case may be), for election to such
position(s) as specified in the Corporation's notice of meeting, if the
stockholder's notice required by subparagraph (a)(ii) of this Section 1.12 shall
be delivered to the Secretary of the Corporation at the principal executive
offices of the Corporation not earlier than the ninetieth (90th) day prior to
such special meeting and not later than the close of business on the later of
the sixtieth (60th) day prior to such special meeting or the tenth (10th) day
following the day on which public announcement is first made of the date of the
special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting.
(c) General.
-------
(i) Only such persons who are nominated in accordance with the
procedures set forth in this Section 1.12 shall be eligible to serve as
directors and only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this Section 1.12. Except as otherwise provided by law or these
Bylaws, the chairman of the meeting shall have the power and duty to determine
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<PAGE>
whether a nomination or any business proposed to be brought before the meeting
was made or proposed, as the case may be, in accordance with the procedures set
forth in this Section 1.12 and, if any proposed nomination or business is not in
compliance herewith, to declare that such defective proposal or nomination shall
be disregarded.
(ii) For purposes of this Section 1.12, the term "public announcement"
-------------------
shall mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the Corporation with the Securities and Exchange Commission pursuant to
sections 13, 14 or 15(d) of the Exchange Act.
(iii) Notwithstanding the foregoing provisions of this Section 1.12,
a stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth herein. Nothing in this Section 1.12 shall be deemed to affect any rights
of stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
ARTICLE II
BOARD OF DIRECTORS
Section 2.1: Number; Qualifications. The Board of Directors shall
----------- ----------------------
consist of one or more members. The initial number of directors shall be six
(6), and thereafter shall be fixed from time to time by resolution of the Board
of Directors. No decrease in the authorized number of directors constituting
the Board of Directors shall shorten the term of any incumbent director.
Directors need not be stockholders of the Corporation.
Section 2.2: Election; Resignation; Removal; Vacancies. Effective
----------- -----------------------------------------
immediately on such date that the Corporation meets the requirements under
Section 2115(c) of the California Corporations Code, the directors shall be
divided, with respect to the time for which they severally hold office, into
three classes designated as Class I, Class II and Class III, respectively.
Directors shall be assigned to each class in accordance with a resolution or
resolutions adopted by the Board of Directors, with the number of directors in
each class to be divided as equally as reasonably possible. The term of Class I
will expire at the annual meeting of stockholders to be held in 2001, the term
of Class II will expire at the annual meeting of stockholders to be held in
2002, and the term of Class III will expire at the annual meeting of
stockholders to be held in 2003. At each annual meeting of stockholders
commencing with the first annual meeting of stockholders following the closing
of the Initial Public Offering, directors elected to succeed those directors of
the class whose terms then expire shall be elected for a term of office to
expire at the third succeeding annual meeting of stockholders after their
election. Prior to the closing of the Initial Public Offering, each director
shall hold office until the next annual meeting of stockholders and until such
director's successor is elected and qualified, or until such director's earlier
death, resignation or removal. Any director may resign at any time upon written
notice to the Corporation. Subject to the rights of the holders of any series
of Preferred Stock, any vacancy occurring in the Board of Directors for any
cause, and any newly created directorship
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<PAGE>
resulting from any increase in the authorized number of directors, shall, unless
(i) the Board of Directors determines by resolution that any such vacancies or
newly created directorships shall be filled by the stockholders, or (ii) as
otherwise provided by law, be filled only by the affirmative vote of a majority
of the directors then in office, although less than a quorum, or by a sole
remaining director, and not by the stockholders. Notwithstanding the preceding
sentence, in any election of directors, the stockholders of the corporation
shall have the rights set forth in subdivisions (a), (b) and (c) of Section 708
of the California Corporations Code; provided, however, that the rights set
-------- -------
forth in this sentence shall terminate to the extent permitted by applicable law
immediately on such date, if ever, that the Corporation becomes a listed
corporation within the meaning of Section 301.5 of the California Corporations
Code. Any director elected in accordance with the two preceding sentences shall
hold office for the remainder of the full term of the director for which the
vacancy was created or occurred. Subject to the rights of any holders of
Preferred Stock, any director or the entire Board of Directors may be removed,
with or without cause, by the holders of a majority of the shares then entitled
to vote at an election of directors; provided, however, that a director may not
-------- -------
be removed without cause if the votes cast against removal of the director, or
not consenting in writing to the removal, would be sufficient to elect the
director if voted cumulatively (without regard to whether shares may otherwise
be voted cumulatively) at an election at which the same total number of votes
were cast (or, if the action is taken by written consent, all shares entitled to
vote were voted) and either the number of directors elected at the most recent
annual meeting of stockholders, or if greater, the number of directors for whom
removal is being sought, were then being elected.
Section 2.3: Regular Meetings. Regular meetings of the Board of
----------- ----------------
Directors may be held at such places, within or without the State of Delaware,
and at such times as the Board of Directors may from time to time determine.
Notice of regular meetings need not be given if the date, times and places
thereof are fixed by resolution of the Board of Directors.
Section 2.4: Special Meetings. Special meetings of the Board of
----------- ----------------
Directors may be called by the Chairman of the Board, the President or a
majority of the members of the Board of Directors then in office and may be held
at any time, date or place, within or without the State of Delaware, as the
person or persons calling the meeting shall fix. Notice of the time, date and
place of such meeting shall be given, orally or in writing, by the person or
persons calling the meeting to all directors at least four (4) days before the
meeting if the notice is mailed, or at least twenty-four (24) hours before the
meeting if such notice is given by telephone, hand-delivery, telegram, telex,
mailgram, facsimile or similar communication method. Unless otherwise indicated
in the notice, any and all business may be transacted at a special meeting.
Section 2.5: Telephonic Meetings Permitted. Members of the Board of
----------- -----------------------------
Directors, or any committee of the Board of Directors, may participate in a
meeting of the Board or such committee by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and participation in a meeting pursuant to
conference telephone or similar communications equipment shall constitute
presence in person at such meeting.
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<PAGE>
Section 2.6: Quorum; Vote Required for Action. At all meetings of
----------- --------------------------------
the Board of Directors a majority of the total number of authorized directors
shall constitute a quorum for the transaction of business. Except as otherwise
provided herein or in the Certificate of Incorporation of the Corporation, or
required by law, the vote of a majority of the directors present at a meeting at
which a quorum is present shall be the act of the Board of Directors.
Section 2.7: Organization. Meetings of the Board of Directors shall
----------- ------------
be presided over by the Chairman of the Board, or in his or her absence by the
President, or in his or her absence by a chairman chosen at the meeting. The
Secretary shall act as secretary of the meeting, but in his or her absence, the
chairman of the meeting may appoint any person to act as secretary of the
meeting.
Section 2.8: Written Action by Directors. Any action required or
----------- ---------------------------
permitted to be taken at any meeting of the Board of Directors, or of any
committee thereof, may be taken without a meeting if all members of the Board of
Directors or such committee, as the case may be, consent thereto in writing and
the writing or writings are filed with the minutes of proceedings of the Board
or committee, respectively.
Section 2.9: Powers. The Board of Directors may, except as otherwise
------------ ------
required by law or the Certificate of Incorporation of the Corporation, exercise
all such powers and do all such acts and things as may be exercised or done by
the Corporation.
Section 2.10: Compensation of Directors. Directors, as such, may
------------ -------------------------
receive, pursuant to a resolution of the Board of Directors, fees and other
compensation for their services as directors, including without limitation their
services as members of committees of the Board of Directors.
ARTICLE III
COMMITTEES
Section 3.1: Committees. The Board of Directors may, by resolution
----------- ----------
passed by a majority of the whole Board of Directors, designate one or more
committees, each committee to consist of one or more of the directors of the
Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee who may replace any absent or disqualified
member at any meeting of the committee. In the absence or disqualification of a
member of the committee, the member or members thereof present at any meeting of
such committee who are not disqualified from voting, whether or not he, she or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in place of any such absent or disqualified
member. Any such committee, to the extent provided in a resolution of the Board
of Directors, shall have and may exercise all the powers and authority of the
Board of Directors in the management of the business and affairs of the
Corporation and may authorize the seal of the Corporation to be affixed to all
papers that may require it; but no such committee shall have the power or
authority in reference to amending the Certificate of Incorporation of the
Corporation, except that a committee may, to the extent
------
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<PAGE>
authorized in the resolution or resolutions providing for the issuance of shares
of stock adopted by the Board of Directors as provided in subsection (a) of
Section 151 of the Delaware General Corporation Law, fix the designations and
any of the preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of assets of the Corporation, or the
conversion into, or the exchange of such shares for, shares of any other class
or classes or any other series of the same or any other class or classes of
stock of the Corporation, or fix the number of shares of any series of stock or
authorize the increase or decrease of the shares of any series, adopting an
agreement of merger or consolidation under Sections 251 or 252 of the Delaware
General Corporation Law, recommending to the stockholders the sale, lease or
exchange of all or substantially all of the Corporation's property and assets,
recommending to the stockholders a dissolution of the Corporation or a
revocation of a dissolution, or amending these Bylaws; and unless the resolution
of the Board of Directors expressly so provides, no such committee shall have
the power or authority to declare a dividend, authorize the issuance of stock or
adopt a certificate of ownership and merger pursuant to section 253 of the
Delaware General Corporation Law.
Section 3.2: Committee Rules. Unless the Board of Directors
----------- ---------------
otherwise provides, each committee designated by the Board of Directors may
make, alter and repeal rules for the conduct of its business. In the absence of
such rules, each committee shall conduct its business in the same manner as the
Board of Directors conducts its business pursuant to Article II of these Bylaws.
ARTICLE IV
OFFICERS
Section 4.1: Generally. The officers of the Corporation shall
----------- ---------
consist of a Chief Executive Officer and/or a President, one or more Vice
Presidents, a Secretary, a Treasurer and such other officers, including a
Chairman of the Board of Directors and/or Chief Financial Officer, as may from
time to time be appointed by the Board of Directors. All officers shall be
elected by the Board of Directors; provided, however, that the Board of
-------- -------
Directors may empower the Chief Executive Officer of the Corporation to appoint
officers other than the Chairman of the Board, the Chief Executive Officer, the
President, the Chief Financial Officer or the Treasurer. Each officer shall
hold office until his or her successor is elected and qualified or until his or
her earlier death, resignation or removal. Any number of offices may be held by
the same person. Any officer may resign at any time upon written notice to the
Corporation. Any vacancy occurring in any office of the Corporation by death,
resignation, removal or otherwise may be filled by the Board of Directors.
Section 4.2: Chief Executive Officer. Subject to the control of the
----------- -----------------------
Board of Directors and such supervisory powers, if any, as may be given by the
Board of Directors, the powers and duties of the Chief Executive Officer of the
Corporation are:
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<PAGE>
(a) To act as the general manager and, subject to the control of the
Board of Directors, to have general supervision, direction and control of the
business and affairs of the Corporation;
(b) To preside at all meetings of the stockholders;
(c) To call meetings of the stockholders to be held at such times and,
subject to the limitations prescribed by law or by these Bylaws, at such places
as he or she shall deem proper; and
(d) To affix the signature of the Corporation to all deeds,
conveyances, mortgages, guarantees, leases, obligations, bonds, certificates and
other papers and instruments in writing which have been authorized by the Board
of Directors or which, in the judgment of the Chief Executive Officer, should be
executed on behalf of the Corporation; to sign certificates for shares of stock
of the Corporation; and, subject to the direction of the Board of Directors, to
have general charge of the property of the Corporation and to supervise and
control all officers, agents and employees of the Corporation.
The President shall be the Chief Executive Officer of the Corporation unless the
Board of Directors shall designate another officer to be the Chief Executive
Officer. If there is no President, and the Board of Directors has not
designated any other officer to be the Chief Executive Officer, then the
Chairman of the Board shall be the Chief Executive Officer.
Section 4.3: Chairman of the Board. The Chairman of the Board shall
----------- ---------------------
have the power to preside at all meetings of the Board of Directors and shall
have such other powers and duties as provided in these Bylaws and as the Board
of Directors may from time to time prescribe.
Section 4.4: President. The President shall be the Chief Executive
----------- ---------
Officer of the Corporation unless the Board of Directors shall have designated
another officer as the Chief Executive Officer of the Corporation. Subject to
the provisions of these Bylaws and to the direction of the Board of Directors,
and subject to the supervisory powers of the Chief Executive Officer (if the
Chief Executive Officer is an officer other than the President), and subject to
such supervisory powers and authority as may be given by the Board of Directors
to the Chairman of the Board and/or to any other officer, the President shall
have the responsibility for the general management and control of the business
and affairs of the Corporation and the general supervision and direction of all
of the officers, employees and agents of the Corporation (other than the Chief
Executive Officer, if the Chief Executive Officer is an officer other than the
President) and shall perform all duties and have all powers that are commonly
incident to the office of president or that are delegated to the President by
the Board of Directors.
Section 4.5: Vice President. Each Vice President shall have all such
----------- --------------
powers and duties as are commonly incident to the office of Vice President or
that are delegated to him or her by the Board of Directors or the Chief
Executive Officer. A Vice President may be designated by the Board to perform
the duties and exercise the powers of the Chief Executive Officer in the event
of the Chief Executive Officer's absence or disability.
-12-
<PAGE>
Section 4.6: Chief Financial Officer. Subject to the direction of
----------- -----------------------
the Board of Directors and the President, the Chief Financial Officer shall
perform all duties and have all powers that are commonly incident to the office
of chief financial officer.
Section 4.7: Treasurer. The Treasurer shall have custody of all
------------ ---------
monies and securities of the Corporation. The Treasurer shall make such
disbursements of the funds of the Corporation as are authorized and shall render
from time to time an account of all such transactions. The Treasurer shall also
perform such other duties and have such other powers as are commonly incident to
the office of a treasurer or as the Board of Directors or the President may from
time to time prescribe.
Section 4.8: Secretary. The Secretary shall issue or cause to be
----------- ---------
issued all authorized notices for, and shall keep or cause to be kept, minutes
of all meetings of the stockholders and the Board of Directors. The Secretary
shall have charge of the corporate minute books and similar records and shall
perform such other duties and have such other powers as are commonly incident to
the office of secretary or as the Board of Directors or the President may from
time to time prescribe.
Section 4.9: Delegation of Authority. The Board of Directors may
----------- -----------------------
from time to time delegate the powers or duties of any officer to any other
officers or agents, notwithstanding any provision hereof.
Section 4.10: Removal. Any officer of the Corporation shall serve
------------ -------
at the pleasure of the Board of Directors and may be removed at any time, with
or without cause, by the Board of Directors. Such removal shall be without
prejudice to the contractual rights of such officer, if any, with the
Corporation.
ARTICLE V
STOCK
Section 5.1: Certificates. Every holder of stock shall be entitled
----------- ------------
to have a certificate signed by or in the name of the Corporation by the
Chairman or Vice-Chairman of the Board of Directors, or the President or a Vice
President, and by the Treasurer or an Assistant Treasurer, or the Secretary or
an Assistant Secretary, of the Corporation, certifying the number of shares
owned by such stockholder in the Corporation. Any or all of the signatures on
the certificate may be a facsimile.
Section 5.2: Lost, Stolen or Destroyed Stock Certificates; Issuance
----------- ------------------------------------------------------
of New Certificates. The Corporation may issue a new certificate of stock in
- -------------------
the place of any certificate previously issued by it that is alleged to have
been lost, stolen or destroyed, and the Corporation may require the owner of the
lost, stolen or destroyed certificate, or such owner's legal representative, to
agree to indemnify the Corporation and/or to give the Corporation a bond
sufficient to indemnify
-13-
<PAGE>
it against any claim that may be made against it on account of the alleged loss,
theft or destruction of any such certificate or the issuance of such new
certificate.
Section 5.3: Other Regulations. The issue, transfer, conversion and
----------- -----------------
registration of stock certificates shall be governed by such other regulations
as the Board of Directors may establish.
ARTICLE VI
INDEMNIFICATION
Section 6.1: Indemnification of Officers and Directors. Each person
----------- -----------------------------------------
who was or is made a party to, or is threatened to be made a party to, or is
involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (a "proceeding"), by reason of the fact that he
----------
or she (or a person of whom he or she is the legal representative) is or was a
director or officer of the Corporation or a Reincorporated Predecessor (as
defined below) or is or was serving at the request of the Corporation or a
Reincorporated Predecessor (as defined below) as a director or officer of
another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, shall be
indemnified and held harmless by the Corporation to the fullest extent permitted
by the Delaware General Corporation Law against all expenses, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes and penalties
and amounts paid or to be paid in settlement) reasonably incurred or suffered by
such person in connection therewith, and such indemnification shall continue as
to a person who has ceased to be a director or officer and shall inure to the
benefit of his or her heirs, executors and administrators; provided, however,
-------- -------
that the Corporation shall indemnify any such person seeking indemnity in
connection with a proceeding (or part thereof) initiated by such person only if
such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation; provided, further, that the Corporation shall not be required
-------- -------
to indemnify a person for amounts paid in settlement of a proceeding unless the
Corporation consents in writing to such a settlement (such consent not to be
unreasonably withheld). As used herein, the term "Reincorporated Predecessor"
--------------------------
means a corporation that is merged with and into the Corporation in a statutory
merger where (a) the Corporation is the surviving corporation of such merger and
(b) the primary purpose of such merger is to change the corporate domicile of
the Reincorporated Predecessor, and shall include ONI Systems Corp., a
California corporation.
Section 6.2: Advance of Expenses. The Corporation shall pay all
----------- -------------------
expenses (including attorneys' fees) incurred by such a director or officer in
defending any such proceeding as such expenses are incurred in advance of its
final disposition; provided, however, that if the Delaware General Corporation
-------- -------
Law then so requires, the payment of such expenses incurred by such a director
or officer in advance of the final disposition of such proceeding shall be made
only upon delivery to the Corporation of an undertaking, by or on behalf of such
director or officer, to repay all amounts so advanced if it should be determined
ultimately that such director or officer is not entitled to be indemnified under
this Article VI or otherwise; and provided, further, that the Corporation shall
-------- -------
not be required to advance any expenses to a person against whom the
-14-
<PAGE>
Corporation directly brings a claim, in a proceeding, alleging that such person
has breached his or her duty of loyalty to the Corporation, committed an act or
omission not in good faith or that involves intentional misconduct or a knowing
violation of law, or derived an improper personal benefit from a transaction.
Section 6.3: Non-Exclusivity of Rights. The rights conferred on any
------------ -------------------------
person in this Article VI shall not be exclusive of any other right that such
person may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation of the Corporation, these Bylaws, agreement, vote
or consent of stockholders or disinterested directors, or otherwise.
Additionally, nothing in this Article VI shall limit the ability of the
Corporation, in its discretion, to indemnify or advance expenses to persons whom
the Corporation is not obligated to indemnify or advance expenses pursuant to
this Article VI.
Section 6.4: Indemnification Contracts. The Board of Directors is
----------- -------------------------
authorized to cause the Corporation to enter into indemnification contracts with
any director, officer, employee or agent of the Corporation, or any person
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, including employee benefit plans, providing indemnification and
related rights to such person. Such rights may be greater than those provided
in this Article VI.
Section 6.5: Effect of Amendment. Any amendment, repeal or
----------- -------------------
modification of any provision of this Article VI shall be prospective only, and
shall not adversely affect any right or protection conferred on a person
pursuant to this Article VI and existing at the time of such amendment, repeal
or modification.
ARTICLE VII
NOTICES
Section 7.1: Notice. Except as otherwise specifically provided
----------- ------
herein or required by law, all notices required to be given pursuant to these
Bylaws shall be in writing and may in every instance be effectively given by
hand delivery (including use of a delivery service) by depositing such notice in
the mail, postage prepaid, or by sending such notice by prepaid telegram, telex,
overnight express courier, mailgram or facsimile. Any such notice shall be
addressed to the person to whom notice is to be given at such person's address
as it appears on the records of the Corporation. The notice shall be deemed
given (i) in the case of hand delivery, when received by the person to whom
notice is to be given or by any person accepting such notice on behalf of such
person, (ii) in the case of delivery by mail, upon deposit in the mail, (iii) in
the case of delivery by overnight express courier, on the first business day
after such notice is dispatched, and (iv) in the case of delivery via telegram,
telex, mailgram or facsimile, when dispatched.
Section 7.2: Waiver of Notice. Whenever notice is required to be
----------- ----------------
given under any provision of these Bylaws, a written waiver of notice, signed by
the person entitled to notice,
-15-
<PAGE>
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting at the beginning of the meeting to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders, directors or members of a committee of directors need be
specified in any written waiver of notice.
ARTICLE VIII
INTERESTED DIRECTORS
Section 8.1: Interested Directors; Quorum. No contract or
----------- ----------------------------
transaction between the Corporation and one or more of its directors or
officers, or between the Corporation and any other corporation, partnership,
association or other organization in which one or more of its directors or
officers are directors or officers, or have a financial interest, shall be void
or voidable solely for this reason, or solely because the director or officer is
present at or participates in the meeting of the Board of Directors or committee
thereof that authorizes the contract or transaction, or solely because his, her
or their votes are counted for such purpose, if: (i) the material facts as to
his, her or their relationship or interest and as to the contract or transaction
are disclosed or are known to the Board of Directors or the committee, and the
Board of Directors or committee in good faith authorizes the contract or
transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; (ii)
the material facts as to his, her or their relationship or interest and as to
the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or (iii) the contract or
transaction is fair as to the Corporation as of the time it is authorized,
approved or ratified by the Board of Directors, a committee thereof or the
stockholders. Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction.
ARTICLE IX
MISCELLANEOUS
Section 9.1: Fiscal Year. The fiscal year of the Corporation shall
----------- -----------
be determined by resolution of the Board of Directors.
Section 9.2: Seal. The Board of Directors may provide for a
----------- ----
corporate seal, which shall have the name of the Corporation inscribed thereon
and shall otherwise be in such form as may be approved from time to time by the
Board of Directors.
-16-
<PAGE>
Section 9.3: Form of Records. Any records maintained by the
----------- ---------------
Corporation in the regular course of its business, including its stock ledger,
books of account and minute books, may be kept on, or be in the form of,
magnetic tape, diskettes, photographs, microphotographs or any other information
storage device, provided that the records so kept can be converted into clearly
--------
legible form within a reasonable time. The Corporation shall so convert any
records so kept upon the request of any person entitled to inspect the same.
Section 9.4: Reliance Upon Books and Records. A member of the Board
----------- -------------------------------
of Directors, or a member of any committee designated by the Board of Directors
shall, in the performance of his or her duties, be fully protected in relying in
good faith upon records of the Corporation and upon such information, opinions,
reports or statements presented to the Corporation by any of the Corporation's
officers or employees, or committees of the Board of Directors, or by any other
person as to matters the member reasonably believes are within such other
person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Corporation.
Section 9.5: Certificate of Incorporation Governs. In the event of
----------- ------------------------------------
any conflict between the provisions of the Corporation's Certificate of
Incorporation and Bylaws, the provisions of the Corporation's Certificate of
Incorporation shall govern.
Section 9.6: Severability. If any provision of these Bylaws shall be
----------- ------------
held to be invalid, illegal, unenforceable or in conflict with the provisions of
the Corporation's Certificate of Incorporation, then such provision shall
nonetheless be enforced to the maximum extent possible consistent with such
holding and the remaining provisions of these Bylaws (including, without
limitation, all portions of any section of these Bylaws containing any such
provision held to be invalid, illegal, unenforceable or in conflict with the
Corporation's Certificate of Incorporation that are not themselves invalid,
illegal, unenforceable or in conflict with the Corporation's Certificate of
Incorporation) shall remain in full force and effect.
ARTICLE X
AMENDMENT
Section 10.1: Amendments. Following the Initial Public Offering,
------------ ----------
stockholders of the Corporation holding at least sixty-six and two-thirds
percent (66-2/3%) of the Corporation's outstanding voting stock then entitled to
vote at an election of directors shall have the power to adopt, amend or repeal
these Bylaws. Prior to the Initial Public Offering, stockholders of the
Corporation holding a majority of the Corporation's outstanding voting stock
then entitled to vote at an election of directors shall have the power to adopt,
amend or repeal these Bylaws. To the extent provided in the Corporation's
Certificate of Incorporation, the Board of Directors of the Corporation shall
also have the power to adopt, amend or repeal these Bylaws.
-17-
<PAGE>
EXHIBIT 4.12
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
UNDER THE SECURITIES LAWS OF ANY STATES. THESE SECURITIES ARE SUBJECT TO
RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD
EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT
TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY
BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE
PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL
IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED
TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE
SECURITIES LAWS.
March 9, 2000
WARRANT TO PURCHASE COMMON STOCK
OF
OPTICAL NETWORKS, INCORPORATED
THIS CERTIFIES THAT for good and valuable consideration, receipt of
which is hereby acknowledged, Fenwick & West LLP (or its permitted and
registered assigns) ("Registered Holder"), is entitled, subject to the terms and
conditions of this Warrant, to purchase from Optical Networks, Incorporated, a
California corporation (the "Company") at any time beginning on March 9, 2000
and ending on 5:00 p.m. Pacific Time on March 9, 2004 (the "Expiration Date"),
(a) up to 200,000 shares of Warrant Stock (as defined below) at a price per
share equal to the Warrant Price (as defined below), upon surrender of this
Warrant at the principal office of the Company, together with a duly executed
subscription form in the form attached hereto as Exhibit 1 and simultaneous
---------
payment of the full Warrant Price for the shares of Warrant Stock so purchased
in either (i) lawful money of the United States, or (ii) for cancellation of
indebtedness owed by the Company to the Registered Holder; or (b) up to that
number of shares of Warrant Stock determined in accordance with the provisions
of Section 3 below relating to cashless net exercises, upon surrender of this
Warrant at the principal office of the Company, together with a duly executed
cashless net issue election subscription form in the form attached hereto as
Exhibit 2. The Warrant Price and the number and character of shares of Warrant
- ---------
Stock purchasable under this Warrant are subject to adjustment as provided
herein.
<PAGE>
1. Certain Definitions. The following definitions shall apply for
-------------------
purposes of this Warrant:
(a) "Warrant Price" shall mean a per share price of Fifteen Dollars
($15.00).
(b) "Warrant" shall mean this Warrant and any warrant(s) delivered in
substitution or exchange therefor, as provided herein.
(c) "Warrant Stock" shall mean the Common Stock of the Company.
2. Exercise. Subject to compliance with all applicable securities laws,
--------
this Warrant may be exercised at any time or from time to time on or before the
Expiration Date, for all, or a portion, of the 200,000 shares of Warrant Stock
issuable upon exercise of this Warrant (as such number of shares may be adjusted
pursuant to the provisions set forth below), by surrendering this Warrant at the
principal office of the Company at 166 Baypointe Parkway, San Jose, California
95134-1621, with the subscription form attached hereto as Exhibit 1 duly
---------
executed by the Registered Holder, and payment, in cash and/or cancellation of
bona fide indebtedness of the Company to the Registered Holder, of an amount
equal to the product obtained by multiplying (i) the number of shares of Warrant
Stock to be purchased by the Registered Holder by (ii) the Warrant Price or
adjusted Warrant Price therefor, if applicable, as determined in accordance with
the terms hereof. This Warrant shall be deemed to have been exercised
immediately prior to the close of business on the date of its surrender for
exercise as provided above, and the person entitled to receive the shares of
Warrant Stock issuable upon such exercise shall be treated for all purposes as
the holder of record of such shares as of the close of business on such date.
As soon as practicable on or after such date, the Company shall issue and
deliver to the person or persons entitled to receive the same a certificate or
certificates for the number of whole shares of Warrant Stock issuable upon such
exercise, together with cash in lieu of any fraction of a share equal to such
fraction of the current fair market value of one whole share of Warrant Stock as
of the date of exercise, as determined in good faith by the Company's Board of
Directors. No fractional shares may be issued upon any exercise of this
Warrant, and any fractions shall be rounded down to the nearest whole number of
shares.
3. Net Issue Election. Notwithstanding the provisions of Section 2 and
------------------
subject to compliance with all applicable securities laws, the Registered Holder
may, in lieu of exercising this Warrant in exchange for payment of cash or
cancellation of bona fide indebtedness, elect to receive instead, without the
payment by the Registered Holder of any additional consideration and upon the
delivery of a Net Issue Election Notice annexed hereto as Exhibit 2 duly
---------
executed, at the principal office of the Company, that number of shares of
Warrant Stock equal to X as is computed using the following formula:
Y(A - B)
X = --------
A
where:
X = the number of shares of Warrant Stock to be issued to the
Registered Holder pursuant to this Section 3.
-2-
<PAGE>
Y = the full number of shares of Warrant Stock that would have been
issuable upon exercise of this Warrant pursuant to Section 2 as
at the time the net issue election is made pursuant to this
Section 3.
A = the Fair Market Value (as defined below) of one share of Warrant
Stock, as at the time the net issue election is made pursuant to
this Section 3.
B = the Warrant Price in effect under this Warrant at the time the
net issue election is made pursuant to this Section 3.
As used herein, the term "Fair Market Value" of Warrant Stock as of a
particular date (the "Determination Date") shall mean (i) if the Warrant Stock
is traded on an exchange or is quoted on the National Association of Securities
Dealers, Inc. automated quotation ("NASDAQ") National Market System, the average
of the closing or last sale price, respectively, of a share of Warrant Stock as
reported for the five (5) trading days immediately preceding the Determination
Date; (ii) if the Warrant Stock is not traded on an exchange or on the NASDAQ
National Market System but are traded in the over-the-counter market, then the
average of the mean of the closing bid and asked prices for a share of Warrant
Stock reported for the five (5) trading days immediately preceding the
Determination Date; and (iii) if the Warrant Stock is not publicly traded, then
as determined in good faith by the Company's Board of Directors upon a review of
relevant factors.
4. Fully Paid Shares. All shares of Warrant Stock issued upon the
-----------------
exercise of this Warrant shall be validly issued, fully paid and nonassessable.
5. Representations and Warranties and Certain Agreements of Registered
-------------------------------------------------------------------
Holder. Registered Holder hereby represents and warrants to, and agrees with,
- ------
the Company, that:
5.1 Purchase for Own Account. Each of this Warrant and the Warrant
------------------------
Stock (collectively, the "Securities") will be acquired for investment for
Registered Holder's own account, not as a nominee or agent, and not with a view
to the public resale or distribution thereof within the meaning of the 1933 Act,
and Registered Holder has no present intention of selling, granting any
participation in, or otherwise distributing the same.
5.2 Disclosure of Information. Registered Holder believes that it has
-------------------------
received or has had full access to all the information it considers necessary or
appropriate to make an informed investment decision with respect to the
Securities. Registered Holder further has had an opportunity to ask questions
and receive answers from the Company regarding the terms and conditions of the
offering of the Securities and to obtain additional information (to the extent
the Company possessed such information or could acquire it without unreasonable
effort or expense) necessary to verify any information furnished to Registered
Holder or to which Registered Holder had access.
5.3 Investment Experience. Registered Holder understands that the
---------------------
purchase of the Securities involves substantial risk. Registered Holder (i) has
experience as an investor in securities of companies in the development stage
and acknowledges that Registered Holder is
-3-
<PAGE>
able to fend for itself, can bear the economic risk of Registered Holder's
investment in the Securities and has such knowledge and experience in financial
or business matters that Registered Holder is capable of evaluating the merits
and risks of this investment in the Securities and protecting its own interests
in connection with this investment and/or (ii) has a preexisting personal or
business relationship with the Company and certain of its officers, directors or
controlling persons of a nature and duration that enables Registered Holder to
be aware of the character, business acumen and financial circumstances of such
persons.
5.4 Accredited Investor Status. Registered Holder is an "accredited
--------------------------
investor" within the meaning of Regulation D promulgated under the 1933 Act.
5.5 Restricted Securities. Registered Holder understands that the
---------------------
Securities are characterized as "restricted securities" under the 1933 Act and
Rule 144 promulgated thereunder inasmuch as they are being acquired from the
Company in a transaction not involving a public offering, and that under the
1933 Act and applicable regulations thereunder such securities may be resold
without registration under the 1933 Act only in certain limited circumstances.
In this connection, Registered Holder represents that Registered Holder is
familiar with Rule 144 of the U.S. Securities and Exchange Commission, as
presently in effect, and understands the resale limitations imposed thereby and
by the 1933 Act.
5.6 No Solicitation. At no time was the Registered Holder presented
---------------
with or solicited by any publicly issued or circulated newspaper, mail, radio,
television or other form of general advertising or solicitation in connection
with the offer, sale and purchase of the Securities.
5.7 Limitations on Disposition. Registered Holder agrees not to make
--------------------------
any disposition of all or any portion of the Securities unless and until:
(a) there is then in effect a registration statement under the
1933 Act covering such proposed disposition and such disposition is made in
accordance with such registration statement; or
(b) Registered Holder shall have notified the Company of the
proposed disposition, and shall have furnished the Company with a statement of
the circumstances surrounding the proposed disposition, and, at the expense of
Registered Holder or its transferee, with an opinion of counsel, reasonably
satisfactory to the Company, that such disposition will not require registration
of such securities under the 1933 Act.
Notwithstanding the provisions of paragraphs (a) and (b) above, no such
registration statement or opinion of counsel shall be required: (i) for any
transfer in compliance with Rule 144 or Rule 144A; (ii) for any transfer by a
Registered Holder that is a partnership or a corporation to (A) a partner of
such partnership or shareholder of such corporation, (B) a retired partner of
such partnership who retires after the date hereof, (C) the estate of any such
partner or shareholder; or (iii) for the transfer by gift, will or intestate
succession by any Registered Holder to his or her spouse or lineal descendants
or ancestors or any trust for any of the foregoing; provided that in
--------
-4-
<PAGE>
each of the foregoing cases the transferee agrees in writing to be subject to
the terms of this Section 5.7 to the same extent as if the transferee were an
original Registered Holder hereunder.
5.8 Legends. Registered Holder understands and agrees that the
-------
certificates evidencing the Securities will bear legends substantially similar
to those set forth below in addition to any other legend that may be required by
applicable law:
(a) THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE
SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS
ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS
PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE
REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD
OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN
FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED
TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE
SECURITIES LAWS.
(b) Any legend required by the laws of the State of California,
including any legend required by the California Department of Corporations and
Sections 417 and 418 of the California Corporations Code or any other state
securities laws.
The legend set forth in (a) above shall be removed by the Company from any
certificate evidencing the Securities upon delivery to the Company of an opinion
of counsel, reasonably satisfactory to the Company, that a registration
statement under the 1933 Act is at that time in effect with respect to the
legended security or that such security can be freely transferred in a public
sale (other than pursuant to Rule 144 or Rule 145 under the 1933 Act) without
such a registration statement being in effect and that such transfer will not
jeopardize the exemption or exemptions from registration pursuant to which the
Company issued the Securities.
6. Adjustment of Warrant Price and Number of Shares. The number and
------------------------------------------------
character of shares of Warrant Stock issuable upon exercise of this Warrant (or
any shares of stock or other securities or property at the time receivable or
issuable upon exercise of this Warrant) and the Warrant Price therefor, are
subject to adjustment as follows:
6.1 Adjustment for Stock Splits, Stock Dividends, Recapitalizations,
----------------------------------------------------------------
etc. The Warrant Price and the number of shares of Warrant Stock issuable upon
- ----
exercise of this Warrant shall be proportionally adjusted to the extent
necessary to reflect any stock dividend, stock split, reverse stock split,
combination of shares, reclassification, recapitalization or other similar event
affecting the number of outstanding shares of Warrant Stock that occurs after
the date of this Warrant.
6.2 Adjustment for Other Dividends and Distributions. In case the
------------------------------------------------
Company shall, after the date of this Warrant, make or issue, or shall fix a
record date for the determination of eligible holders entitled to receive, a
dividend or other distribution payable with respect to the
-5-
<PAGE>
Warrant Stock payable in securities of the Company (other than issuances with
respect to which adjustment is made under Section 6.1), then, and in each such
case, the Registered Holder of this Warrant, upon exercise of this Warrant at
any time after the consummation, effective date or record date of such event,
shall receive, in addition to the shares of Warrant Stock issuable upon such
exercise prior to such date, the securities or such other assets of the Company
to which such Registered Holder would have been entitled upon such date if such
Registered Holder had exercised this Warrant immediately prior thereto (all
subject to further adjustment as provided in this Warrant).
6.3 Adjustment for Reorganization, Consolidation, Merger. In case of
----------------------------------------------------
any reorganization of the Company (or of any other corporation, the stock or
other securities of which are at the time receivable on the exercise of this
Warrant), after the date of this Warrant, or in case, after such date, the
Company (or any such corporation) shall consolidate with or merge into another
corporation or convey all or substantially all of its assets to another
corporation, then, and in each such case, the Registered Holder of this Warrant,
upon the exercise of this Warrant (as provided in Sections 2 or 3), at any time
after the consummation of such reorganization, consolidation, merger, or
conveyance, shall be entitled to receive, in lieu of the stock or other
securities and property receivable upon the exercise of this Warrant prior to
such consummation, the stock or other securities or property to which such
Registered Holder would have been entitled upon the consummation of such
reorganization, consolidation, merger or conveyance if such Registered Holder
had exercised this Warrant immediately prior thereto, all subject to further
adjustment as provided in this Section 6, and the successor or purchasing
corporation in such reorganization, consolidation, merger or conveyance (if
other than the Company) shall duly execute and deliver to the Registered Holder
a supplement hereto acknowledging such corporation's obligations under this
Warrant; and in each such case, the terms of this Warrant shall be applicable to
the shares of stock or other securities or property receivable upon the exercise
of this Warrant after the consummation of such reorganization, consolidation,
merger or conveyance.
7. Market Stand-Off; Piggyback Registrations. The Company and the
-----------------------------------------
Registered Holder agree that the Registered Holder and the shares of Warrant
Stock issuable hereunder shall (i) be subject to the terms of the Lock-Up
provisions contained in Section 2.7 of the Company's Investor Rights Agreement
dated December 22, 1999 (as may be amended from time to time, the "Investor
Rights Agreement"), and (ii) shall enjoy "piggyback" registration rights subject
to the terms of the Investor Rights Agreement.
8. No Impairment. The Company will not, by amendment of its Articles of
-------------
Incorporation or Bylaws, or through reorganization, consolidation, merger,
dissolution, issue or sale of securities, sale or assets or any other voluntary
action, willfully avoid or seek to avoid the observance or performance of any of
the terms of this Warrant, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the Registered Holder
under this Warrant against wrongful impairment.
9. Certificate as to Adjustments. In each case of any adjustment in
-----------------------------
either the Warrant Price or in the number of shares of Warrant Stock, or other
stock, securities or property
-6-
<PAGE>
receivable upon the exercise of this Warrant, the Chief Financial Officer of the
Company shall compute such adjustment in accordance with the terms of this
Warrant and prepare a certificate setting forth such adjustment and showing in
detail the facts upon which such adjustment is based, including a statement of
the adjusted Warrant Price. The Company will cause copies of such certificate to
be mailed (by first class mail, postage prepaid) to the Registered Holder.
10. Loss or Mutilation. Upon receipt by the Company of evidence
------------------
reasonably satisfactory to it of the ownership, and the loss, theft, destruction
or mutilation, of this Warrant, and of indemnity reasonably satisfactory to it,
and (in the case of mutilation) upon surrender and cancellation of this Warrant,
the Company will execute and deliver in lieu thereof a new Warrant of like
tenor.
11. No Rights or Liabilities as Shareholder. This Warrant does not by
---------------------------------------
itself entitle the Registered Holder to any voting rights or other rights as a
shareholder of the Company. In the absence of affirmative action by Registered
Holder to purchase Warrant Stock by exercise of this Warrant, no provisions of
this Warrant, and no enumeration herein of the rights or privileges of the
Registered Holder shall cause such Registered Holder to be a shareholder of the
Company for any purpose.
12. Amendment; Waiver. Any term of this Warrant may be amended, and the
-----------------
observance of any term of this Warrant may be waived (either generally or in a
particular instance and either retroactively or prospectively) with the written
consent of the Company and the Registered Holder.
13. Notices. All notices and other communications from the Company to the
-------
Registered Holder shall be deemed given when mailed by first-class registered or
certified mail, postage prepaid, to the address furnished to the Company in
writing by the last Registered Holder who shall have furnished an address to the
Company in writing.
14. Law Governing. This Warrant shall be construed and enforced in
-------------
accordance with, and governed by, the internal laws of the State of California,
excluding that body of law applicable to conflicts of laws.
15. Terms Binding. By acceptance of this Warrant, the Registered Holder
-------------
of this Warrant (and each subsequent assignee, transferee or Registered Holder
of this Warrant) accepts and agrees to be bound by all the terms and conditions
of this Warrant.
-7-
<PAGE>
16. Counterparts. This Warrant may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
OPTICAL NETWORKS, INCORPORATED ACKNOWLEDGED AND ACCEPTED
BY REGISTERED HOLDER:
FENWICK & WEST LLP
By: /s/ Terrence Schmid By: /s/ Horace L. Nash
-------------------------- ------------------------
Name: TERRENCE SCHMID Name: HORACE L. NASH
------------------------ ----------------------
Title: CFO Title: PARTNER
----------------------- ---------------------
[Signature page to Warrant to Purchase Common Stock of Optical Networks,
Incorporated]
-8-
<PAGE>
EXHIBIT 1
---------
FORM OF SUBSCRIPTION
--------------------
(To be signed only upon exercise of Warrant)
To: Optical Networks, Incorporated
(1) The undersigned hereby elects to purchase ________________ shares
of Common Stock of Optical Networks, Incorporated, pursuant to the terms of the
attached Warrant, and tenders herewith payment of the purchase price for such
shares in full.
(2) In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the representations and warranties of the undersigned set
forth in Section 5 of the Warrant are true and correct as of this date.
________________________________
(Name)
________________________________ ____________________________________
(Date) (Signature of Registered Holder)
<PAGE>
EXHIBIT 2
---------
Net Issue Election Notice
To: Optical Networks, Incorporated
(1) The undersigned hereby elects under Section 3 to purchase
_____________ shares of Common Stock pursuant to the terms of the attached
Warrant by surrendering the right to purchase _______________ shares of Common
Stock pursuant to this Warrant.
(2) In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the representations and warranties of the undersigned set
forth in Section 5 of the Warrant are true and correct as of this date.
________________________________
(Name)
________________________________ ____________________________________
(Date) (Signature of Registered Holder)
<PAGE>
EXHIBIT 4.13
SUBSCRIPTION AGREEMENT
This Subscription Agreement (the "Agreement") is made as of March 27, 2000
between Optical Networks, Incorporated, a California corporation, with its
principal office at 166 Baypointe Parkway, San Jose, California 95134 and
Internet Initiative Japan Inc., a Japanese corporation, with its principal
office at Takebashi Yasuda Bldg., 3-13 Kanda Nishiki-cho, Chiyoda-ku, Tokyo 101-
0054 (the "Purchaser").
1. SUBSCRIPTION
The Purchaser hereby irrevocably subscribes for and agrees to purchase, on
and subject to the terms and conditions set forth herein, from Optical Networks,
Incorporated, a California corporation, or its successor corporation upon a
reincorporation into Delaware (hereinafter, collectively referred to as the
"Company"), and the Company agrees to sell to the Purchaser, a number of shares
of its Common Stock (the "Shares") equal to $4,000,000 divided by the per share
price to the public in the Company's initial public offering (the "IPO")
(rounded down to the nearest whole share) at a price per share equal to the per
share price to the public in the IPO. Purchaser hereby acknowledges that the
Company is currently incorporated in California and may undertake a
reincorporation in Delaware and in conjunction therewith may change its name.
2. PAYMENT
At the Closing, as defined below, the aggregate purchase price for the
Shares (the "Subscription Price"), shall be paid by wire transfer to the account
of the Company pursuant to instructions and account information to be provided.
3. DOCUMENTS TO BE PROVIDED BY PURCHASER
Contemporaneously herewith, the Purchaser and the Company are entering the
Restated and Amended Investors' Rights Agreement attached hereto as Exhibit A
---------
(the "Rights Agreement").
4. CLOSING AND DELIVERY OF SHARE CERTIFICATES
Delivery and payment for the Shares will be completed in one closing (the
"Closing") at the offices of Fenwick & West LLP, Two Palo Alto Square, Palo
Alto, California at 9:00 a.m. Pacific Time (the "Closing Time") on the closing
date of the IPO or at such earlier date and time as the Company and the
Purchaser may agree in writing (the "Closing Date").
A certificate representing the Shares (the "Certificate") will be delivered
at Closing against payment to the Company of the Subscription Price in the
manner specified in Section 2 above.
<PAGE>
5. CONDITIONS TO CLOSING BY THE PURCHASER
The Purchaser's obligation to purchase the Shares at the Closing is subject
to fulfillment on or prior to the Closing Date of each of the following
conditions (any of which may be waived by the Purchaser in its sole discretion):
5.1 Rights Agreement. The Company shall have executed and delivered to
----------------
the Purchaser the Rights Agreement.
5.2 Registration Statement. The registration statement filed with the
----------------------
Securities and Exchange Commission in connection with the Company's initial
public offering of its common stock to the public shall have been declared
effective.
5.3 Representations and Warranties. The representations and warranties
------------------------------
made by the Company in Section 7 hereof shall be true and correct when made, and
shall be true and correct on the Closing Date (unless provided otherwise in
Section 7) with the same force and effect as if such representations had been
made on and as of said date. The representation in Section 7.3, other than as
updated by the Registration Statement referred to in Section 5.2 as of the
Closing Date, shall also be true and correct on the Closing Date with the same
force and effect as if such representations had been made on and as of said
date.
5.4 Opinion as to Shares. The Purchaser shall have received a customary
--------------------
opinion of Fenwick & West as to the validity of the Shares being purchased.
6. CONDITIONS TO CLOSING BY THE COMPANY
The Company's obligation to issue and sell the Shares to the Purchaser at
the Closing is subject to the fulfillment of the following conditions (any of
which may be waived by the Company in its sole discretion):
6.1 Representations and Warranties. The representations and warranties
------------------------------
made by the Purchaser in Section 9 hereof shall be true and correct when made,
and shall be true and correct on the Closing Date with the same force and effect
as if such representations had been made on and as of said date.
6.2 Payment. The Company shall have received from the Purchaser payment
-------
in full for the Subscription Price.
7. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Purchaser that, except as
otherwise set forth on the Schedule of Exceptions attached as Exhibit B hereto,
---------
the following will be true and correct as of the Closing Date (except for the
representations contained in Section 7.1 and 7.3, which are true only as of the
date hereof):
7.1 Organization and Standing. The Company is a corporation duly
-------------------------
organized and validly existing under the laws of the State of California and is
in good standing under such laws.
<PAGE>
The Company has all requisite corporate power to own and operate its properties
and assets, and to carry on its business as presently conducted and as proposed
to be conducted.
7.2 Corporate Power. The Company has all requisite power to execute and
---------------
deliver this Agreement and the Rights Agreement, to sell and issue the Shares
hereunder and to carry out and perform its obligations under the terms of this
Agreement and the Rights Agreement.
7.3 Financial Statements. The Company has delivered to the Purchaser the
--------------------
audited financial statements of the Company as of December 31, 1999 (the
"Financial Statements"). The Financial Statements, together with the notes
thereto, are complete and correct in all material respects, have been prepared
in accordance with generally accepted accounting principles consistently applied
throughout the periods covered thereby, and present fairly the financial
position of the Company as of their respective dates. The Company has no
liabilities which are, individually or in the aggregate, material to the
business or financial condition of the Company (of the type required to be
included in a balance sheet prepared in accordance with generally accepted
accounting principles), except for (i) liabilities disclosed in the Financial
Statements, (ii) liabilities that have been incurred by the Company since
December 31, 1999 in the ordinary course of business, and (iii) liabilities that
have not had a material adverse effect on the Company's business or financial
condition.
7.4 Authorization. All corporate action on the part of the Company, its
-------------
directors, and its shareholders that is necessary for the authorization,
execution, delivery, and performance of this Agreement and the Rights Agreement
by the Company, for the authorization, sale, issuance, and delivery of the
Shares, and for the performance by the Company of all of its obligations
hereunder (except for the performance of its covenants to be performed after
Closing) will have been taken prior to the Closing. This Agreement and the
Rights Agreement, when executed and delivered by the Company, will constitute
valid and legally binding obligations of the Company, enforceable in accordance
with their respective terms, subject to (i) laws of general application relating
to bankruptcy, insolvency, and the relief of debtors, (ii) rules of law
governing specific performance, injunctive relief, or other equitable remedies,
and (iii) the extent that the indemnification provisions of Section 2.9 of the
Rights Agreement may be limited by principles of public policy. The Shares,
when issued in accordance with this Agreement, will be duly authorized, validly
issued, fully paid, and nonassessable; provided, however, that the Shares may be
subject to certain restrictions on transfer under applicable state and Federal
securities laws.
7.5 Governmental Consents, etc. No consent, approval, or authorization
---------------------------
of, or designation, declaration, or filing with, any governmental authority on
the part of the Company is required in connection with the valid execution and
delivery of this Agreement, or for the offer, sale, or issuance of the Shares,
or for the consummation of any other transaction contemplated hereby, except
qualification (or taking such action as may be necessary to secure an exemption
from qualification, if available) of the offer and sale of the Shares under the
California Corporate Securities Law of 1968, as amended, and other applicable
blue sky laws, which filing and qualification, if required, will be accomplished
in a timely manner prior to or promptly after the Closing.
7.6 Brokers or Finders. The Company has not incurred, and will not incur,
------------------
directly or indirectly, as a result of any action taken by the Company, any
liability for brokerage or finders'
<PAGE>
fees or agents' commissions, or any similar charges, in connection with this
Agreement or any transaction contemplated hereby.
7.7 No Conflict. The execution, delivery, and performance of, and
-----------
compliance with, this Agreement and the Rights Agreement, and the issuance of
the Shares, (i) have not resulted in and will not result in any violation of, or
conflict with, or constitute a default under, any term of its Articles or
Certificate of Incorporation or Bylaws, or result in the creation of any
mortgage, pledge, lien, encumbrance, or charge upon any of the properties or
assets of the Company, and (ii) will not result in the suspension, revocation,
impairment, forfeiture, or non-renewal of any material permit, license,
authorization, or approval applicable to the Company, its business, or any of
its properties or assets.
8. MATTERS RELATING TO THE OFFER AND SALE OF THE SHARES
The Purchaser acknowledges and agrees that: (i) it has received no
registration statement, prospectus or any similar document in connection with
its purchase of the Shares, (ii) its decision to execute this Agreement and the
Rights Agreement and to purchase the Shares has not been based upon any verbal
or written representations made by or on behalf of the Company, and (iii) its
decision to purchase the Shares is based upon the information, representations
and covenants of the Company contained in this Agreement, its own review of
Company documents and records, and publicly available information concerning the
Company.
9. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser hereby represents, warrants, and covenants to the Company
(which representations, warranties, and covenants shall survive the Closing) as
of the date hereof and as of the Closing Date, as follows:
9.1 Purchaser Qualifications. The Purchaser is an "accredited investor"
------------------------
within the meaning of Rule 501(a) of Regulation D promulgated under the
Securities Act of 1933, as amended (the "Securities Act"), and has substantial
experience in evaluating and investing in private placement transactions, and as
such is capable of evaluating the merits and risks of its investment in the
Company. The Purchaser, by reason of its business or financial experience or
the business or financial experience of its professional advisors who are not
directly or indirectly affiliated with the Company or any affiliate or selling
agent of the Company, has the capacity to protect its own interests in
connection with its purchase of the Shares.
9.2 Investment. The Purchaser is acquiring the Shares for investment for
----------
the Purchaser's own account, not as a nominee or agent, and not with the view to
or for resale in connection with any distribution thereof. The Purchaser
understands that the offer and sale of the Shares have not been, and will not
be, registered under the Securities Act by reason of a specific exemption from
the registration provisions of the Securities Act which depends upon, among
other things, the bona fide nature of the investment intent and the accuracy of
the Purchaser's representations as expressed herein.
9.3 Rule 144. The Purchaser acknowledges that the Shares must be held
--------
indefinitely unless the resale of the Shares is subsequently registered under
the Securities Act or an exemption from such registration is available. The
Purchaser is aware of the provisions of Rule
<PAGE>
144 promulgated under the Securities Act which permit limited resales of shares
purchased in a private placement subject to the satisfaction of certain
conditions, including, among other things, (i) the existence of a public market
for the shares, (ii) the availability of certain current public information
about the Company, (iii) the resale occurring not less than one year after a
party has purchased and fully paid for the shares to be sold, (iv) the sale
being effected through a "broker's transaction" or in transactions directly with
a "market maker" and (v) the number of shares being sold during any three-month
period not exceeding specified limitations.
9.4 No Public Market. The Purchaser understands that no public market now
----------------
exists for any of the securities issued by the Company and that there is no
assurance that a public market will ever exist for the Shares.
9.5 Access to Data. The Purchaser and its representatives, if any, has
--------------
had an opportunity to ask questions of, and receive answers from,
representatives of the Company concerning the Company and the terms and the
conditions of this transaction, as well as to obtain any information requested
by the Purchaser or its representatives. Any questions raised by the Purchaser
or its representatives were answered to the satisfaction of the Purchaser or its
representatives. The Purchaser understands that such discussions, as well as
any written information issued by the Company, were intended to describe certain
aspects of the Company's business and prospects but were not a thorough or
exhaustive description. The Purchaser's decision to enter into the transaction
contemplated hereby is based in part on the answers to such questions as the
Purchaser and its representatives have raised and on the Purchaser's own
evaluation of the risks and merits of the transaction and the Company's proposed
business activities. The foregoing, however, does not limit or modify the
representations and warranties of the Company in Section 7 of this Agreement or
the right of the Purchaser to rely thereon.
9.6 Authorization. This Agreement and the Rights Agreement, when executed
-------------
and delivered by the Purchaser, will constitute valid and legally binding
obligations of the Purchaser, enforceable in accordance with their respective
terms, subject to (i) laws of general application relating to bankruptcy,
insolvency, and the relief of debtors, (ii) rules of law governing specific
performance, injunctive relief, or other equitable remedies, and (iii) the
extent that the indemnification provisions of Section 2.9of the Rights Agreement
may be limited by principles of public policy.
9.7 Brokers or Finders. The Company has not incurred, and will not incur,
------------------
directly or indirectly, as a result of any action taken by the Purchaser, any
liability for brokerage or finders' fees or agents' commissions or any similar
charges in connection with this agreement or any transaction contemplated
hereby.9.8 Tax Consequences. The Purchaser has reviewed with its own tax
--- ----------------
advisors the federal, state, local and, if necessary, foreign tax consequences
of this investment and the transactions contemplated by this Agreement. The
Purchaser is relying solely on such advisors and not on any statements or
representations of the Company or any of its agents and understands that the
Purchaser (and not the Company) shall be responsible for its own tax liability
that may arise as a result of this investment or the transactions contemplated
by this Agreement.
10. RESTRICTIONS ON TRANSFER
<PAGE>
10.1 Restrictions on Transfer. The Shares shall not be sold, assigned,
------------------------
transferred, or pledged except upon the conditions specified in this Section,
the Restated Articles, and the Bylaws, which conditions are intended, among
other things, to ensure compliance with the provisions of the Securities Act.
Any proposed transferee of the Shares held by the Purchaser must agree (prior to
transfer) to take and hold such securities subject to the provisions and upon
the conditions specified in this Article.
10.2 Restrictive Legend. Each stock certificate representing the Shares
------------------
any other securities issued in respect of the Shares upon any stock split, stock
dividend, merger, consolidation, recapitalization, or similar event, shall be
stamped or otherwise imprinted with legends in substantially the following form
(in addition to any legend required under applicable state securities laws):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THESE SECURITIES
---
HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION
WITH, THE DISTRIBUTION THEREOF. THESE SECURITIES MAY NOT BE OFFERED, SOLD,
PLEDGED, OR TRANSFERRED UNLESS (I) A REGISTRATION STATEMENT UNDER THE ACT
IS IN EFFECT AS TO THESE SECURITIES OR (II) THERE IS AN OPINION OF COUNSEL,
SATISFACTORY TO THE ISSUER, THAT AN EXEMPTION THEREFROM IS AVAILABLE.
COPIES OF THE AGREEMENTS COVERING THE PURCHASE OF THESE SECURITIES AND
RESTRICTING THEIR TRANSFER, THE CERTIFICATE OF INCORPORATION OF THE COMPANY
CONTAINING SUCH RESTRICTIONS, AND THE COMPANY'S BYLAWS, MAY BE OBTAINED AT
NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE
TO THE SECRETARY OF THE ISSUER AT THE PRINCIPAL EXECUTIVE OFFICES OF THE
ISSUER.
The Purchaser of Shares and any permitted transferees consent to the
Company making a notation on its records and giving instructions to any transfer
agent of the Shares in order to implement the restrictions on transfer described
in this Section.
10.3 Notice of Proposed Transfers. Prior to any proposed transfer of any
----------------------------
Shares, unless there is in effect a registration statement under the Securities
Act covering the proposed transfer, the holder thereof shall give written notice
(the "Notice") to the Company of such holder's intention to make such transfer.
The Notice shall describe the manner and circumstances of the proposed transfer
in sufficient detail. If reasonably requested by the Company prior to the
transfer being effected, the holder shall provide to the Company a written
opinion of legal counsel who shall be reasonably satisfactory to the Company,
addressed to the Company and reasonably satisfactory in form and substance to
the Company's counsel, to the effect that the proposed transfer of the
Restricted Securities may be effected without registration under the Securities
Act. Each stock certificate evidencing the Restricted Securities so transferred
shall bear the appropriate restrictive legends set forth in Section 10.2.
<PAGE>
11. RELIANCE UPON REPRESENTATIONS, WARRANTIES AND COVENANTS
The Purchaser acknowledges that the representations, warranties and
covenants contained in this Agreement are made with the intent that they may be
relied upon by the Company to, among other things, determine its eligibility to
purchase the Shares. The Purchaser further agrees that by accepting the Shares,
the Purchaser shall be representing and warranting that the foregoing
representations and warranties are true as of the Closing with the same force
and effect as if they had been made by the Purchaser at the Closing.
The Company acknowledges that the representations, warranties and covenants
contained in this Agreement are made with the intent that they may be relied
upon by the Purchaser. The Company further agrees that by selling the Shares,
the Company shall be representing and warranting that the foregoing
representations and warranties are true as of the Closing with the same force
and effect as if they had been made by the Company at the Closing.
12. TERMINATION
This Agreement shall terminate and be of no further force and effect, and
the rights of the Purchaser and the Company hereunder shall terminate if the
registration statement filed in connection with the Company's IPO shall not have
been declared effective by the Securities and Exchange Commission on or before
July 31, 2000. In such event, the Company shall offer the Purchaser the right
to purchase up to $4,000,000 of the Company's preferred or common stock offered
in the next private round of financing occurring after July 31, 2000 at a
valuation to be determined by the Company.
In addition, the Company shall have the right to terminate this Agreement,
and the rights of the Purchaser hereunder, if the following have not occurred by
March 31, 2000: (i) execution of a Test Plan Agreement between the parties (as
further described in a Memorandum of Understanding between the parties executed
contemporaneously herewith) and (ii) the Purchaser's purchase and acceptance of
delivery of the Company's products totaling a minimum of $400,000.
Further, the Company shall have the right to terminate this Agreement, and
the rights of the Purchaser hereunder, if the U.S. Securities and Exchange
Commission should determine that the sale of the Company securities hereunder
should be integrated with the IPO.
13. GENERAL PROVISIONS
13.1 Governing Law. This Agreement shall be governed by and construed
-------------
exclusively in accordance with the internal laws of the State of California as
applied to agreements among California residents entered into and to be
performed entirely within California, excluding that body of law relating to
conflict of laws and choice of law.
13.2 Survival. The representations, warranties, and covenants of the
--------
parties made herein shall survive the Closing and shall in no way be affected by
any investigation of the subject matter thereof made by or on behalf of the
parties.
<PAGE>
13.3 Successors and Assigns. Except as otherwise expressly limited
----------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors, and administrators of the
parties hereto, provided, however, that the rights of the Purchaser to purchase
Shares shall not be assignable without the written consent of the Company.
13.4 Entire Agreement; Amendment and Waiver. This agreement and the other
--------------------------------------
documents delivered herewith constitute the full and entire understanding and
agreement between the parties with regard to the subject matters hereof and
thereof. Any term of this agreement may be amended and the observance of any
term hereof may be waived (either prospectively or retroactively and either
generally or in a particular instance) only with the written consent of the
Purchaser and the Company.
13.5 Notices, etc. All notices and other communications required or
-------------
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by hand or by messenger,
addressed (i) if to the Purchaser, at its address set forth on Exhibit A, or at
---------
such other address as the Purchaser shall have furnished to the Company in
writing, and another copy to special counsel to the Purchaser, Takebashi Yasuda
Bldg., 3-13 Kanda Nishiki-cho, Chiyoda-ku, Tokyo 101- 0054, attention: MrAkihisa
Watai, Manager, Corporate Planning Department (by fax at +813-5259-6131 or
mail), or (ii) if to any other holder of the Shares, at such address as such
holder shall have furnished the Company in writing, or, until any such holder so
furnishes an address to the Company, then to and at the address of the last
holder of such Shares who has so furnished an address to the Company, or (iii)
if to the Company, one copy to its address set forth on the first page of this
agreement and addressed to the attention of the President, or at such other
address as the Company shall have furnished to the Purchaser, and another copy
to the Company's legal counsel to the attention of Michael Dillon, General
Counsel, 166 Baypointe Parkway, San Jose, CA 95134 .
13.6 Delays or Omissions. No delay or omission to exercise any right,
-------------------
power, or remedy accruing to any party upon any breach or default under this
Agreement, shall be deemed a waiver of any other breach or default theretofore
or thereafter occurring. Any waiver, permit, consent, or approval of any kind or
character on the part of any party of any breach or default under this
Agreement, or any waiver on the part of any party of any provisions or
conditions of this Agreement, must be in writing and shall be effective only to
the extent specifically set forth in such writing. All remedies, either under
this Agreement or by law or otherwise afforded to any of the parties, shall be
cumulative and not alternative.
13.7 Severability. If any provision of this Agreement is held to be
------------
unenforceable under applicable law, then such provision shall be excluded from
this Agreement and the balance of this Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms. The court in its discretion may substitute for the excluded provision an
enforceable provision which in economic substance reasonably approximates the
excluded provision.
13.8 California Corporate Securities Law. THE SALE OF THE SECURITIES
-----------------------------------
WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE
<PAGE>
ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE
CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS THE SALE
OF SECURITIES IS EXEMPT FROM THE QUALIFICATION BY SECTION 25100, 25102, OR 25105
OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT
ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE
SALE IS SO EXEMPT.
13.9 Headings. The headings and captions used in this Agreement are used
--------
for convenience only and are not to be considered in construing or interpreting
this Agreement. All references in this Agreement to articles, sections,
paragraphs, exhibits and schedules shall, unless otherwise provided, refer to
articles, sections and paragraphs hereof and exhibits and schedules attached
hereto, all of which exhibits and schedules are incorporated herein by this
reference.
13.10 Third Parties. Nothing in this Agreement, express or implied, is
-------------
intended to confer upon any person, other than the parties hereto and their
successors and assigns, any rights or remedies under or by reason of this
Agreement.
13.11 Costs. The Purchaser acknowledges and agrees that all costs and
-----
expenses incurred by the Purchaser (including any fees and disbursements of any
counsel retained by the Purchaser) relating to the offer and sale of the Shares
to the Purchaser shall be paid by the Purchaser.
<PAGE>
13.12 Counterparts. This agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original and enforceable against
the parties actually executing such counterpart, and all of which together shall
constitute one and the same instrument.
Effective as of the date first set forth above.
OPTICAL NETWORKS, INCORPORATED
By:/s/ Terrence J. Schmid
---------------------------------------
Name: Terrence J. Schmid
-------------------------------------
Title: CEO
------------------------------------
INTERNET INITIATIVE JAPAN INC.
By:/s/ Koichi Suzuki
---------------------------------------
Name: Koichi Suzuki
-------------------------------------
Title: President and CEO
-----------------------------------
[Signature Page to Subscription Agreement]
<PAGE>
Optical Networks, Incorporated
Regulation S Investor Representation Letter
-------------------------------------------
To: Optical Networks, Incorporated, a California corporation, or its
successor corporation upon a reincorporation into Delaware (the "Company")
The undersigned (the "Purchaser") proposes to acquire securities
issued by the Company. United States federal and state securities laws require
that the Company issue its securities only to purchasers that meet certain
qualifications. Purchaser agrees that the representations and agreements made
by it in this Representation Letter will be used and relied upon by the Company
in issuing the Company's securities to Purchaser without registration under
federal and state securities laws.
Purchaser has agreed to purchase shares of the Company's Common Stock
(the "Shares") under that certain Subscription Agreement dated as of April ___,
2000 (the "Agreement"). In addition to the agreements, representations and
warranties made by Purchaser under the Agreement, Purchaser hereby agrees,
represents and warrants as follows:
1. Business or Financial Experience. By reason of Purchaser's
--------------------------------
business or financial experience or the business or financial experience of
Purchaser's professional advisors who are unaffiliated with and who are not
compensated, directly or indirectly, by the Company or any affiliate or selling
agent of the Company, Purchaser has the capacity to protect its own interests in
connection with its investment in the Shares.
2. Offshore Transaction. The offer to Purchaser to acquire the
--------------------
Shares was not made to any person within the United States (which, for purposes
of this Representation Letter, includes the territories and possessions of the
United States, any State of the United States and the District of Columbia),
and, at the time Purchaser initiated its order to buy the Shares, Purchaser was
outside the United States. Purchaser certifies that it is not a U.S. person and
that it is not acquiring the Shares for the account or benefit of any U.S.
person.
3. Offering Restrictions. Purchaser acknowledges and agrees that the
---------------------
Shares (i) have not been registered under the U.S. Securities Act of 1933, as
amended (the "Securities Act"), will be issued under an exemption from
registration under the Securities Act provided for in Regulation S promulgated
under the Securities Act ("Regulation S") and (ii) in addition to any other
restrictions set forth herein, may not be offered or sold in the United States
or to any U.S. person (other then distributors) unless the Shares are registered
under the Securities Act or an exemption from the registration requirements of
the Securities Act is available.
4. Resale Restrictions. Purchaser acknowledges and agrees that
-------------------
hedging transactions involving the Shares may not be conducted unless in
compliance with the Securities Act. Purchaser acknowledges and agrees that
during the one year period beginning on the date of Purchaser's acquisition of
the Shares (the "Restriction Period"): (i) Purchaser may resell the Shares only
in accordance with the provisions of Regulation S, pursuant to registration
under the Securities Act or pursuant to an available exemption from the
registration requirements of the Securities Act; (ii) Purchaser may not engage
in hedging transactions with regard to the Shares prior to the end of the
Restriction Period; and (iii) (A) any offer or sale of the Shares shall not be
to a U.S. person or for the account or benefit of a U.S. person; (B) prior to
such purchase, the purchaser of such Shares
-1-
<PAGE>
shall certify that (1) it not a U.S. person and is not acquiring such Shares for
the account or benefit of any U.S. person or (2) it is a U.S. person who
purchased such Shares in a transaction that did not require registration under
the Securities Act; (C) prior to such purchase, the purchaser of such Shares
shall agree to resell during the Restrictive Period such Shares only in
accordance with the provisions of Regulation S, pursuant to registration under
the Securities Act or pursuant to an exemption from the registration
requirements of the Securities Act; and (D) prior to such purchase, the
purchaser of such Shares shall agree that hedging transactions including such
Shares may not be conducted unless in compliance with the Securities Act.
5. No Directed Selling Efforts. Purchaser acknowledges and agrees
---------------------------
that it is not aware of any activity initiated for the purpose or with the
effect of conditioning the market in the United States for the Shares offered to
it.
6. Stop Transfer Instructions and Legends. Purchaser understands
---------------------------------------
that the Company will issue, and Purchaser consents to the issuing of, stop
transfer instructions to the Company's transfer agent with respect to the Shares
to assure compliance with the Securities Act. Purchaser consents to the
placement of the following legend, in substantially the form below, on each
certificate representing the Shares, in addition to any legends described in the
Agreement:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE COMPANY DOES
NOT INTEND TO REGISTER THEM. THE SHARES MAY NOT BE OFFERED, TRANSFERRED OR SOLD
EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF REGULATION S PROMULGATED UNDER THE
SECURITIES ACT, PURSUANT TO REGISTRATION UNDER THE SECRUITIES ACT OR PURSUANT TO
AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIRMENTS OF THE SECURITIES ACT.
HEDGING TRANSACTIONS INVOLVING THE SHARES MAY NOT BE CONDUCTED UNLESS IN
COMPLIANCE WITH THE SECURITIES ACT."
7. Definition of U.S. Person. A "U.S. person", as used in this
------------------------- -----------
Representation Letter, means (i) any natural person resident in the United
States; (ii) any partnership or corporation organized or incorporated under the
laws of the United States; (iii) any estate of which any executor or
administrator is a U.S. person; (iv) any trust of which any trustee is a U.S.
person; (v) any agency or branch of a foreign entity located in the United
States; (vi) any non-discretionary account or similar account (other than an
estate or trust) held by a dealer or other fiduciary for the benefit or account
of a U.S. person; (vii) any discretionary account or similar account (other than
an estate or trust) held by a dealer or other fiduciary organized, incorporated
or (if an individual) resident in the United States; and (viii) any partnership
or corporation if: (A) organized or incorporated under the laws of any foreign
jurisdiction; and (B) formed by a U.S. person principally for the purpose of
investing in securities not registered under the Securities Act, unless it is
organized or incorporated, and owned, by accredited investors (as defined in
Rule 501(a) under the Securities Act) who are not natural persons, estates or
trusts.
8. Conflict with Agreement. To the extent that any provision herein
-----------------------
conflicts with any provision of the Agreement, Purchaser agrees that the
provision herein will govern and control.
-2-
<PAGE>
In Witness Whereof, the undersigned Purchaser has executed this Investor
Representation Letter as of the date set forth below.
Dated as of April ___, 2000 Purchaser:
[name of investor]
By:/s/ Koichi Suzuki
-----------------------------------------
Name: Koichi Suzuki
---------------------------------------
Title: President and CEO
--------------------------------------
Agreed to and Accepted:
Optical Networks, Incorporated
By:/s/ Hugh C. Martin
----------------------------------
Name: Hugh C. Martin
--------------------------------
Title: President and CEO
-------------------------------
-3-
<PAGE>
EXHIBIT 5.01
------------
April 25, 2000
ONI Systems Corp.
166 Baypointe Parkway
San Jose, California 95134-1612
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-1
(File Number 333-32104) (the "Registration Statement") filed by ONI Systems
Corp., a Delaware corporation (the "Company"), with the Securities and
Exchange Commission (the "Commission") on or about March 10, 2000, and
Amendment No. 1 thereto to be filed on or about the date hereof, in connection
with the registration under the Securities Act of 1933, of up to 9,200,000
shares of the Company's common stock (the "Stock").
In rendering this opinion, we examined the following:
(1) the Company's Amended and Restated Certificate of Incorporation,
certified by the Delaware Secretary of State on April 25, 2000.
(2) the Company's Restated Bylaws, certified by the Company's Secretary
on April 25, 2000.
(3) the Registration Statement, together with the exhibits filed as a part
thereof or incorporated therein by reference.
(4) the prospectus constituting part of the Registration Statement.
(5) the minutes of meetings and actions by written consent of the
stockholders and Board of Directors that are contained in the
Company's minute books and the minute books of your predecessor,
Optical Networks, Incorporated, a California corporation ("ONI
California"), that are in our possession.
(6) the stock records for both the Company and ONI California that the
Company has provided to us (consisting of a list of stockholders and a
list of option and warrant holders respecting the Company's capital
and of any rights to purchase capital stock) that was prepared by the
Company and dated April 25, 2000 verifying the number of such issued
and outstanding securities and the number of such options, warrants
and rights.
(7) a Management Certificate addressed to us and dated of even date
herewith executed by the Company containing factual and other
representations.
In our examination of documents for purposes of this opinion, we have
assumed, and express no opinion as to, the genuineness of all signatures on
original documents, the authenticity and completeness of all documents submitted
to us as originals, the conformity to
<PAGE>
April 25, 2000
Page 2
originals and completeness of all documents submitted to us as copies, the legal
capacity of all persons or entities executing the same, the lack of any
undisclosed termination, modification, waiver or amendment to any document
reviewed by us and the due authorization, execution and delivery of all
documents where due authorization, execution and delivery are prerequisites to
the effectiveness thereof. We have also assumed that the certificates
representing the Stock have been, or will be when issued, properly signed by
authorized officers of the Company or their agents.
As to matters of fact relevant to this opinion, we have relied solely upon
our examination of the documents referred to above and have assumed the current
accuracy and completeness of the information obtained from public officials,
records and documents referred to above. We have made no independent
investigation or other attempt to verify the accuracy of any of such information
or to determine the existence or non-existence of any other factual matters;
however, we are not aware of any facts that would cause us to believe that the
- -------
opinion expressed herein is not accurate.
We are admitted to practice law in the State of California, and we render
this opinion only with respect to, and express no opinion herein concerning the
application or effect of the laws of any jurisdiction other than, the existing
laws of the United States of America, of the State of California and, with
respect to the validity of corporate action and the requirements for the
issuance of stock, of the State of Delaware.
In connection with our opinion expressed below, we have assumed that, at or
prior to the time of the delivery of any shares of Stock, the Registration
Statement will have been declared effective under the Securities Act of 1933, as
amended, that the registration will apply to such shares of Stock and will not
have been modified or rescinded and that there will not have occurred any change
in law affecting the validity or enforceability of such shares of Stock.
Based upon the foregoing, it is our opinion that the up to 9,200,000 shares
of Stock to be issued and sold by the Company, when issued, sold and delivered
in the manner and for the consideration stated in the Registration Statement and
the prospectus included therein, will be validly issued, fully paid and
nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to all references to us, if any, in the
Registration Statement, the prospectus constituting a part thereof and any
amendments thereto. This opinion speaks only as of its date and we assume no
obligation to update this opinion should circumstances change after the date
hereof. This opinion is intended solely for use in connection with the issuance
and sale of shares subject to the Registration Statement and is not to be relied
upon for any other purpose.
Very truly yours,
FENWICK & WEST LLP
By: /s/ Horace L. Nash
___________________
<PAGE>
EXHIBIT 10.01
INDEMNITY AGREEMENT
This Indemnity Agreement (this "Agreement"), dated as of __________, 2000,
is made by and between ONI Systems Corp., a Delaware corporation (the
"Company"), and _________ a director and/or officer of the Company (the
"Indemnitee").
RECITALS
A. The Company is aware that competent and experienced persons are
increasingly reluctant to serve as directors or officers of corporations unless
they are protected by comprehensive liability insurance and/or indemnification,
due to increased exposure to litigation costs and risks resulting from their
service to such corporations, and due to the fact that the exposure frequently
bears no reasonable relationship to the compensation of such directors and
officers;
B. Based on their experience as business managers, the Board of Directors
of the Company (the "Board") has concluded that, to retain and attract talented
and experienced individuals to serve as officers and directors of the Company,
and to encourage such individuals to take the business risks necessary for the
success of the Company, it is necessary for the Company contractually to
indemnify officers and directors and to assume for itself maximum liability for
expenses and damages in connection with claims against such officers and
directors in connection with their service to the Company;
C. Section 145 of the Delaware General Corporation Law (the "DGCL")
empowers the Company to indemnify by agreement its officers, directors,
employees and agents, and persons who serve, at the request of the Company, as
directors, officers, employees or agents of other corporations or enterprises,
and expressly provides that the indemnification provided by the DGCL is not
exclusive; and
D. The Company desires and has requested the Indemnitee to serve or
continue to serve as a director or officer of the Company free from undue
concern for claims for damages arising out of or related to such services to the
Company.
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Definitions.
-----------
1.1 "Agent" of the Company means any person who is or was a director
or officer of the Company or a subsidiary of the Company; or is or was serving
at the request of, for the convenience of, or to represent the interest of the
Company or a subsidiary of the Company as a director or officer of another
foreign or domestic corporation, partnership, joint venture, trust or other
enterprise or an affiliate of the Company; or was a director or officer of a
foreign or domestic corporation which was a predecessor corporation of the
Company, including, without limitation, Optical Networks, Incorporated, a
California corporation, or was a director or officer of another enterprise or
affiliate of the Company at the request of, for the convenience of, or to
represent the interests of such predecessor corporation. The term "enterprise"
includes any employee benefit plan of the Company, its subsidiaries, affiliates
and predecessor corporations.
-1-
<PAGE>
1.2 "Expenses" includes all direct and indirect costs of any type or
nature whatsoever (including, without limitation, all attorneys' fees and
related disbursements and other out-of-pocket costs) actually and reasonably
incurred by the Indemnitee in connection with the investigation, defense or
appeal of a proceeding or establishing or enforcing a right to indemnification
or advancement of expenses under this Agreement, Section 145 or otherwise;
provided, however, that expenses shall not include any judgments, fines, ERISA
- -------- -------
excise taxes or penalties or amounts paid in settlement of a proceeding.
1.3 "Proceeding" means any threatened, pending or completed action,
suit or other proceeding, whether civil, criminal, administrative, investigative
or any other type whatsoever.
1.4 "Subsidiary" means any corporation of which more than fifty
percent (50%) of the outstanding voting securities is owned directly or
indirectly by the Company, by the Company and one or more of its subsidiaries or
by one or more of the Company's subsidiaries.
2. Agreement to Serve. The Indemnitee agrees to serve and/or continue to
------------------
serve as an agent of the Company, at the will of the Company (or under separate
agreement, if such agreement exists), in the capacity the Indemnitee currently
serves as an agent of the Company, faithfully and to the best of his ability, so
long as he is duly appointed or elected and qualified in accordance with the
applicable provisions of the charter documents of the Company or any subsidiary
of the Company; provided, however, that the Indemnitee may at any time and for
-------- -------
any reason resign from such position (subject to any contractual obligation that
the Indemnitee may have assumed apart from this Agreement), and the Company or
any subsidiary shall have no obligation under this Agreement to continue to
indemnify the Indemnitee in any such position.
3. Directors' and Officers' Insurance. The Company shall, to the extent
----------------------------------
that the Board determines it to be economically reasonable, maintain a policy of
directors' and officers' liability insurance ("D&O Insurance"), on such terms
and conditions as may be approved by the Board.
4. Mandatory Indemnification. Subject to Section 9 below, the Company
-------------------------
shall indemnify the Indemnitee:
4.1 Third Party Actions. If the Indemnitee is a person who was or is
-------------------
a party or is threatened to be made a party to any proceeding (other than an
action by or in the right of the Company) by reason of the fact that he is or
was an agent of the Company, or by reason of anything done or not done by him in
any such capacity, against any and all expenses and liabilities of any type
whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes
or penalties and amounts paid in settlement) actually and reasonably incurred by
him in connection with the investigation, defense, settlement or appeal of such
proceeding if he acted in good faith and in a manner he reasonably believed to
be in, or not opposed to, the best interests of the Company and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful; and
4.2 Derivative Actions. If the Indemnitee is a person who was or is
------------------
a party or is threatened to be made a party to any proceeding by or in the right
of the Company to procure a judgment in its favor by reason of the fact that he
is or was an agent of the Company, or by
-2-
<PAGE>
reason of anything done or not done by him in any such capacity, against any
amounts paid in settlement of any such proceeding and all expenses actually and
reasonably incurred by him in connection with the investigation, defense,
settlement or appeal of such proceeding if he acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests of
the Company; except that no indemnification under this subsection shall be made
------
in respect of any claim, issue or matter as to which such person shall have been
finally adjudged to be liable to the Company by a court of competent
jurisdiction due to willful misconduct of a culpable nature in the performance
of his duty to the Company, unless and only to the extent that the Court of
Chancery or the court in which such proceeding was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such amounts which the Court of Chancery or such other court shall
deem proper; and
4.3 Exception for Amounts Covered by Insurance. Notwithstanding the
------------------------------------------
foregoing, the Company shall not be obligated to indemnify the Indemnitee for
expenses or liabilities of any type whatsoever (including, but not limited to,
judgments, fines, ERISA excise taxes or penalties and amounts paid in
settlement) to the extent such have been paid directly to the Indemnitee by D&O
Insurance.
5. Partial Indemnification and Contribution.
----------------------------------------
5.1 Partial Indemnification. If the Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of any expenses or liabilities of any type whatsoever (including, but
not limited to, judgments, fines, ERISA excise taxes or penalties and amounts
paid in settlement) incurred by him in the investigation, defense, settlement or
appeal of a proceeding but is not entitled, however, to indemnification for all
of the total amount thereof, then the Company shall nevertheless indemnify the
Indemnitee for such total amount except as to the portion thereof to which the
Indemnitee is not entitled to indemnification.
5.2 Contribution. If the Indemnitee is not entitled to the
------------
indemnification provided in Section 4 for any reason other than the statutory
limitations set forth in the DGCL, then in respect of any threatened, pending or
completed proceeding in which the Company is jointly liable with the Indemnitee
(or would be if joined in such proceeding), the Company shall contribute to the
amount of expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred and paid or payable by the
Indemnitee in such proportion as is appropriate to reflect (a) the relative
benefits received by the Company on the one hand and the Indemnitee on the other
hand from the transaction from which such proceeding arose, and (b) the relative
fault of the Company on the one hand and of the Indemnitee on the other hand in
connection with the events which resulted in such expenses, judgments, fines or
settlement amounts, as well as any other relevant equitable considerations. The
relative fault of the Company on the one hand and of the Indemnitee on the other
hand shall be determined by reference to, among other things, the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent the circumstances resulting in such expenses, judgments, fines or
settlement amounts. The Company agrees that it would not be just and equitable
if contribution pursuant to this Section 5 were determined by pro rata
allocation or any other method of allocation which does not take account of the
foregoing equitable considerations.
-3-
<PAGE>
6. Mandatory Advancement of Expenses.
---------------------------------
6.1 Advancement. Subject to Section 9 below, the Company shall
-----------
advance all expenses incurred by the Indemnitee in connection with the
investigation, defense, settlement or appeal of any proceeding to which the
Indemnitee is a party or is threatened to be made a party by reason of the fact
that the Indemnitee is or was an agent of the Company or by reason of anything
done or not done by him in any such capacity. The Indemnitee hereby undertakes
to promptly repay such amounts advanced only if, and to the extent that, it
shall ultimately be determined that the Indemnitee is not entitled to be
indemnified by the Company under the provisions of this Agreement, the
Certificate of Incorporation or Bylaws of the Company, the DGCL or otherwise.
The advances to be made hereunder shall be paid by the Company to the Indemnitee
within thirty (30) days following delivery of a written request therefor by the
Indemnitee to the Company.
6.2 Exception. Notwithstanding the foregoing provisions of this
---------
Section 6, the Company shall not be obligated to advance any expenses to the
Indemnitee arising from a lawsuit filed directly by the Company against the
Indemnitee if an absolute majority of the members of the Board reasonably
determines in good faith, within thirty (30) days of the Indemnitee's request to
be advanced expenses, that the facts known to them at the time such
determination is made demonstrate clearly and convincingly that the Indemnitee
acted in bad faith. If such a determination is made, the Indemnitee may have
such decision reviewed by another forum, in the manner set forth in Sections
8.3, 8.4 and 8.5 hereof, with all references therein to "indemnification" being
deemed to refer to "advancement of expenses," and the burden of proof shall be
on the Company to demonstrate clearly and convincingly that, based on the facts
known at the time, the Indemnitee acted in bad faith. The Company may not avail
itself of this Section 6.2 as to a given lawsuit if, at any time after the
occurrence of the activities or omissions that are the primary focus of the
lawsuit, the Company has undergone a change in control. For this purpose, a
change in control shall mean a given person or group of affiliated persons or
groups increasing their beneficial ownership interest in the Company by at least
twenty (20) percentage points without advance Board approval.
7. Notice and Other Indemnification Procedures.
-------------------------------------------
7.1 Promptly after receipt by the Indemnitee of notice of the
commencement of or the threat of commencement of any proceeding, the Indemnitee
shall, if the Indemnitee believes that indemnification with respect thereto may
be sought from the Company under this Agreement, notify the Company of the
commencement or threat of commencement thereof.
7.2 If, at the time of the receipt of a notice of the commencement of
a proceeding pursuant to Section 7.1 hereof, the Company has D&O Insurance in
effect, the Company shall give prompt notice of the commencement of such
proceeding to the insurers in accordance with the procedures set forth in the
respective policies. The Company shall thereafter take all necessary or
desirable action to cause such insurers to pay, on behalf of the Indemnitee, all
amounts payable as a result of such proceeding in accordance with the terms of
such D&O Insurance policies.
7.3 In the event the Company shall be obligated to advance the
expenses for any proceeding against the Indemnitee, the Company, if appropriate,
shall be entitled to assume
-4-
<PAGE>
the defense of such proceeding, with counsel approved by the Indemnitee (which
approval shall not be unreasonably withheld), upon the delivery to the
Indemnitee of written notice of its election to do so. After delivery of such
notice, approval of such counsel by the Indemnitee and the retention of such
counsel by the Company, the Company will not be liable to the Indemnitee under
this Agreement for any fees of counsel subsequently incurred by the Indemnitee
with respect to the same proceeding, provided that: (a) the Indemnitee shall
--------
have the right to employ his own counsel in any such proceeding at the
Indemnitee's expense; (b) the Indemnitee shall have the right to employ his own
counsel in connection with any such proceeding, at the expense of the Company,
if such counsel serves in a review, observer, advice and counseling capacity and
does not otherwise materially control or participate in the defense of such
proceeding; and (c) if (i) the employment of counsel by the Indemnitee has been
previously authorized by the Company, (ii) the Indemnitee shall have reasonably
concluded that there may be a conflict of interest between the Company and the
Indemnitee in the conduct of any such defense or (iii) the Company shall not, in
fact, have employed counsel to assume the defense of such proceeding, then the
fees and expenses of the Indemnitee's counsel shall be at the expense of the
Company.
8. Determination of Right to Indemnification.
-----------------------------------------
8.1 To the extent the Indemnitee has been successful on the merits or
otherwise in defense of any proceeding referred to in Section 4.1 or 4.2 of this
Agreement or in the defense of any claim, issue or matter described therein, the
Company shall indemnify the Indemnitee against expenses actually and reasonably
incurred by him in connection with the investigation, defense or appeal of such
proceeding, or such claim, issue or matter, as the case may be.
8.2 In the event that Section 8.1 is inapplicable, or does not apply
to the entire proceeding, the Company shall nonetheless indemnify the Indemnitee
unless the Company shall prove by clear and convincing evidence to a forum
listed in Section 8.3 below that the Indemnitee has not met the applicable
standard of conduct required to entitle the Indemnitee to such indemnification.
8.3 The Indemnitee shall be entitled to select the forum in which the
validity of the Company's claim under Section 8.2 hereof that the Indemnitee is
not entitled to indemnification will be heard from among the following, except
------
that the Indemnitee can select a forum consisting of the stockholders of the
Company only with the approval of the Company:
(a) A quorum of the Board consisting of directors who are not
parties to the proceeding for which indemnification is being sought;
(b) The stockholders of the Company;
(c) Legal counsel mutually agreed upon by the Indemnitee and the
Board, which counsel shall make such determination in a written opinion;
(d) A panel of three arbitrators, one of whom is selected by the
Company, another of whom is selected by the Indemnitee and the last of whom is
selected by the first two arbitrators so selected; or
-5-
<PAGE>
(e) The Court of Chancery of Delaware or other court having
jurisdiction of subject matter and the parties.
8.4 As soon as practicable, and in no event later than thirty (30)
days after the forum has been selected pursuant to Section 8.3 above, the
Company shall, at its own expense, submit to the selected forum its claim that
the Indemnitee is not entitled to indemnification, and the Company shall act in
the utmost good faith to assure the Indemnitee a complete opportunity to defend
against such claim.
8.5 If the forum selected in accordance with Section 8.3 hereof is
not a court, then after the final decision of such forum is rendered, the
Company or the Indemnitee shall have the right to apply to the Court of Chancery
of Delaware, the court in which the proceeding giving rise to the Indemnitee's
claim for indemnification is or was pending or any other court of competent
jurisdiction, for the purpose of appealing the decision of such forum, provided
--------
that such right is executed within sixty (60) days after the final decision of
such forum is rendered. If the forum selected in accordance with Section 8.3
hereof is a court, then the rights of the Company or the Indemnitee to appeal
any decision of such court shall be governed by the applicable laws and rules
governing appeals of the decision of such court.
8.6 Notwithstanding any other provision in this Agreement to the
contrary, the Company shall indemnify the Indemnitee against all expenses
incurred by the Indemnitee in connection with any hearing or proceeding under
this Section 8 involving the Indemnitee and against all expenses incurred by the
Indemnitee in connection with any other proceeding between the Company and the
Indemnitee involving the interpretation or enforcement of the rights of the
Indemnitee under this Agreement unless a court of competent jurisdiction finds
that each of the material claims and/or defenses of the Indemnitee in any such
proceeding was frivolous or not made in good faith.
9. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
9.1 Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to the Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by the Indemnitee and not by way of defense, except with respect to
------
proceedings specifically authorized by the Board or brought to establish or
enforce a right to indemnification and/or advancement of expenses arising under
this Agreement, the charter documents of the Company or any subsidiary or any
statute or law or otherwise, but such indemnification or advancement of expenses
may be provided by the Company in specific cases if the Board finds it to be
appropriate; or
9.2 Unauthorized Settlements. To indemnify the Indemnitee hereunder
------------------------
for any amounts paid in settlement of a proceeding unless the Company consents
in advance in writing to such settlement, which consent shall not be
unreasonably withheld; or
9.3 Securities Law Actions. To indemnify the Indemnitee on account
----------------------
of any suit in which judgment is rendered against the Indemnitee for an
accounting of profits made from the purchase or sale by the Indemnitee of
securities of the Company pursuant to the provisions of Section l6(b) of the
Securities Exchange Act of 1934 and amendments thereto or similar provisions of
any federal, state or local statutory law; or
-6-
<PAGE>
9.4 Unlawful Indemnification. To indemnify the Indemnitee if a final
------------------------
decision by a court having jurisdiction in the matter shall determine that such
indemnification is not lawful. In this respect, the Company and the Indemnitee
have been advised that the Securities and Exchange Commission takes the position
that indemnification for liabilities arising under the federal securities laws
is against public policy and is, therefore, unenforceable and that claims for
indemnification should be submitted to appropriate courts for adjudication.
10. Non-Exclusivity. The provisions for indemnification and advancement
---------------
of expenses set forth in this Agreement shall not be deemed exclusive of any
other rights which the Indemnitee may have under any provision of law, the
Company's Certificate of Incorporation or Bylaws, the vote of the Company's
stockholders or disinterested directors, other agreements or otherwise, both as
to action in the Indemnitee's official capacity and to action in another
capacity while occupying his position as an agent of the Company, and the
Indemnitee's rights hereunder shall continue after the Indemnitee has ceased
acting as an agent of the Company and shall inure to the benefit of the heirs,
executors and administrators of the Indemnitee.
11. General Provisions.
------------------
11.1 Interpretation of Agreement. It is understood that the parties
---------------------------
hereto intend this Agreement to be interpreted and enforced so as to provide
indemnification and advancement of expenses to the Indemnitee to the fullest
extent now or hereafter permitted by law, except as expressly limited herein.
11.2 Severability. If any provision or provisions of this Agreement
------------
shall be held to be invalid, illegal or unenforceable for any reason whatsoever,
then: (a) the validity, legality and enforceability of the remaining provisions
of this Agreement (including, without limitation, all portions of any paragraphs
of this Agreement containing any such provision held to be invalid, illegal or
unenforceable that are not themselves invalid, illegal or unenforceable) shall
not in any way be affected or impaired thereby; and (b) to the fullest extent
possible, the provisions of this Agreement (including, without limitation, all
portions of any paragraphs of this Agreement containing any such provision held
to be invalid, illegal or unenforceable, that are not themselves invalid,
illegal or unenforceable) shall be construed so as to give effect to the intent
manifested by the provision held invalid, illegal or unenforceable and to give
effect to Section 11.1 hereof.
11.3 Modification and Waiver. No supplement, modification or
-----------------------
amendment of this Agreement shall be binding unless executed in writing by both
of the parties hereto. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provision hereof
(whether or not similar), nor shall such waiver constitute a continuing waiver.
11.4 Subrogation. In the event of full payment under this Agreement,
-----------
the Company shall be subrogated to the extent of such payment to all of the
rights of recovery of the Indemnitee, who shall execute all documents required
and shall do all acts that may be necessary or desirable to secure such rights
and to enable the Company effectively to bring suit to enforce such rights.
-7-
<PAGE>
11.5 Counterparts. This Agreement may be executed in one or more
------------
counterparts, which shall together constitute one agreement.
11.6 Successors and Assigns. The terms of this Agreement shall bind,
----------------------
and shall inure to the benefit of, the successors and assigns of the parties
hereto.
11.7 Notice. All notices, requests, demands and other communications
------
under this Agreement shall be in writing and shall be deemed duly given: (a) if
delivered by hand and signed for by the party addressee; or (b) if mailed by
certified or registered mail, with postage prepaid, on the third business day
after the mailing date. Addresses for notice to either party are as shown on
the signature page of this Agreement or as subsequently modified by written
notice.
11.8 Governing Law. This Agreement shall be governed exclusively by
-------------
and construed according to the laws of the State of California, as applied to
contracts between California residents entered into and to be performed entirely
within California.
11.9 Consent to Jurisdiction. The Company and the Indemnitee each
-----------------------
hereby irrevocably consent to the jurisdiction of the courts of the State of
California for all purposes in connection with any action or proceeding which
arises out of or relates to this Agreement.
11.10 Attorneys' Fees. In the event Indemnitee is required to bring
---------------
any action to enforce rights under this Agreement (including, without
limitation, the expenses of any Proceeding described in Section 3), the
Indemnitee shall be entitled to all reasonable fees and expenses in bringing and
pursuing such action, unless a court of competent jurisdiction finds each of the
material claims of the Indemnitee in any such action was frivolous and not made
in good faith.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have entered into this Indemnity
Agreement effective as of the date first written above.
ONI Systems Corp. INDEMNITEE:
Signature:
-------------------------- ------------------------------------
Printed Name: Printed Name:
----------------------- -----------------------
Title: Title:
------------------------------ ------------------------------
Address: Address:
---------------------------- ----------------------------
-9-
<PAGE>
EXHIBIT 10.05
ONI SYSTEMS CORP.
2000 EQUITY INCENTIVE PLAN
As Adopted April 7, 2000
1. PURPOSE. The purpose of this Plan is to provide incentives to
-------
attract, retain and motivate eligible persons whose present and potential
contributions are important to the success of the Company, its Parent and
Subsidiaries, by offering them an opportunity to participate in the Company's
future performance through awards of Options, Restricted Stock and Stock
Bonuses. Capitalized terms not defined in the text are defined in Section 23.
2. SHARES SUBJECT TO THE PLAN.
--------------------------
2.1 Number of Shares Available. Subject to Sections 2.2 and 18, the
--------------------------
total number of Shares reserved and available for grant and issuance pursuant to
this Plan will be 7,000,000 Shares plus Shares that are subject to: (a) issuance
upon exercise of an Option but cease to be subject to such Option for any reason
other than exercise of such Option; (b) an Award granted hereunder but are
forfeited or are repurchased by the Company at the original issue price; and (c)
an Award that otherwise terminates without Shares being issued. In addition,
any authorized shares not issued or subject to outstanding grants under the
Company's 1999 Equity Incentive Plan, 1998 Equity Incentive Plan and 1997 Stock
Option Plan (the "Prior Plans") on the Effective Date (as defined below) and any
shares issued under the Prior Plans that are forfeited or repurchased by the
Company or that are issuable upon exercise of options granted pursuant to the
Prior Plans that expire or become unexercisable for any reason without having
been exercised in full, will no longer be available for grant and issuance under
the Prior Plans, but will be available for grant and issuance under this Plan.
In addition, on each January 1, the aggregate number of Shares reserved and
available for grant and issuance pursuant to this Plan will be increased
automatically by a number of Shares equal to 5% of the total outstanding shares
of the Company as of the immediately preceding December 31; provided, that the
--------
Board may in its sole discretion reduce the amount of the increase in any
particular year; and, provided further, that no more than 50,000,000 shares
----------------
shall be issued as ISOs (as defined in Section 5 below). At all times the
Company shall reserve and keep available a sufficient number of Shares as shall
be required to satisfy the requirements of all outstanding Options granted under
this Plan and all other outstanding but unvested Awards granted under this Plan.
2.2 Adjustment of Shares. In the event that the number of
--------------------
outstanding shares is changed by a stock dividend, recapitalization, stock
split, reverse stock split, subdivision, combination, reclassification or
similar change in the capital structure of the Company without consideration,
then (a) the number of Shares reserved for issuance under this Plan, (b) the
number of Shares that may be granted pursuant to Sections 3 and 9 below, (c) the
Exercise Prices of and number of Shares subject to outstanding Options, and (d)
the number of Shares subject to other outstanding Awards will be proportionately
adjusted, subject to any required action by the Board or the stockholders of the
Company and compliance with applicable securities laws; provided, however, that
-------- -------
fractions of a Share will not be issued but will either be replaced by a cash
payment equal to the Fair Market Value of such fraction of a Share or will be
rounded up to the nearest whole Share, as determined by the Committee.
3. ELIGIBILITY. ISOs (as defined in Section 5 below) may be granted only
-----------
to employees (including officers and directors who are also employees) of the
Company or of a Parent or Subsidiary of the Company. All other Awards may be
granted to employees, officers, directors, consultants, independent contractors
and advisors of the Company or any Parent or Subsidiary of the Company; provided
--------
such consultants, contractors and advisors render bona fide services not in
connection with the offer and sale of securities in a capital-raising
transaction. No person will be eligible to receive more than 1,000,000 Shares
in any calendar year under this Plan pursuant to the grant of Awards hereunder,
other than new employees of the Company or of a Parent or Subsidiary of the
Company (including new employees who are also officers and directors of the
Company or any Parent or Subsidiary of the Company), who are eligible to receive
up to a maximum of 2,000,000 Shares in the calendar year in which they commence
their employment. A person may be granted more than one Award under this Plan.
<PAGE>
4. ADMINISTRATION.
--------------
4.1 Committee Authority. This Plan will be administered by the
-------------------
Committee or by the Board acting as the Committee. Except for automatic grants
to Outside Directors pursuant to Section 9 hereof, and subject to the general
purposes, terms and conditions of this Plan, and to the direction of the Board,
the Committee will have full power to implement and carry out this Plan. Except
for automatic grants to Outside Directors pursuant to Section 9 hereof, the
Committee will have the authority to:
(a) construe and interpret this Plan, any Award Agreement and any
other agreement or document executed pursuant to this Plan;
(b) prescribe, amend and rescind rules and regulations relating to
this Plan or any Award;
(c) select persons to receive Awards;
(d) determine the form and terms of Awards;
(e) determine the number of Shares or other consideration subject to
Awards;
(f) determine whether Awards will be granted singly, in combination
with, in tandem with, in replacement of, or as alternatives to,
other Awards under this Plan or any other incentive or
compensation plan of the Company or any Parent or Subsidiary of
the Company;
(g) grant waivers of Plan or Award conditions;
(h) determine the vesting, exercisability and payment of Awards;
(i) correct any defect, supply any omission or reconcile any
inconsistency in this Plan, any Award or any Award Agreement;
(j) determine whether an Award has been earned; and
(k) make all other determinations necessary or advisable for the
administration of this Plan.
4.2 Committee Discretion. Except for automatic grants to Outside
--------------------
Directors pursuant to Section 9 hereof, any determination made by the Committee
with respect to any Award will be made in its sole discretion at the time of
grant of the Award or, unless in contravention of any express term of this Plan
or Award, at any later time, and such determination will be final and binding on
the Company and on all persons having an interest in any Award under this Plan.
The Committee may delegate to one or more officers of the Company the authority
to grant an Award under this Plan to Participants who are not Insiders of the
Company.
5. OPTIONS. The Committee may grant Options to eligible persons and will
-------
determine whether such Options will be Incentive Stock Options within the
meaning of the Code ("ISO") or Nonqualified Stock Options ("NQSOs"), the number
of Shares subject to the Option, the Exercise Price of the Option, the period
during which the Option may be exercised, and all other terms and conditions of
the Option, subject to the following:
5.1 Form of Option Grant. Each Option granted under this Plan will
--------------------
be evidenced by an Award Agreement which will expressly identify the Option as
an ISO or an NQSO ("Stock Option Agreement"), and, except as otherwise required
by the terms of Section 9 hereof, will be in such form and contain such
provisions (which need not be the same for each Participant) as the Committee
may from time to time approve, and which will comply with and be subject to the
terms and conditions of this Plan.
2
<PAGE>
5.2 Date of Grant. The date of grant of an Option will be the date
-------------
on which the Committee makes the determination to grant such Option, unless
otherwise specified by the Committee. The Stock Option Agreement and a copy of
this Plan will be delivered to the Participant within a reasonable time after
the granting of the Option.
5.3 Exercise Period. Options may be exercisable within the times or
---------------
upon the events determined by the Committee as set forth in the Stock Option
Agreement governing such Option; provided, however, that no Option will be
-------- -------
exercisable after the expiration of ten (10) years from the date the Option is
granted; and provided further that no ISO granted to a person who directly or by
----------------
attribution owns more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or of any Parent or Subsidiary of the
Company ("Ten Percent Stockholder") will be exercisable after the expiration of
five (5) years from the date the ISO is granted. The Committee also may provide
for Options to become exercisable at one time or from time to time, periodically
or otherwise, in such number of Shares or percentage of Shares as the Committee
determines.
5.4 Exercise Price. The Exercise Price of an Option will be
--------------
determined by the Committee when the Option is granted and may be not less than
85% of the Fair Market Value of the Shares on the date of grant; provided that:
(i) the Exercise Price of an ISO will be not less than 100% of the Fair Market
Value of the Shares on the date of grant; and (ii) the Exercise Price of any ISO
granted to a Ten Percent Stockholder will not be less than 110% of the Fair
Market Value of the Shares on the date of grant. Payment for the Shares
purchased may be made in accordance with Section 8 of this Plan.
5.5 Method of Exercise. Options may be exercised only by delivery to
------------------
the Company of a written stock option exercise agreement (the "Exercise
Agreement") in a form approved by the Committee (which need not be the same for
each Participant), stating the number of Shares being purchased, the
restrictions imposed on the Shares purchased under such Exercise Agreement, if
any, and such representations and agreements regarding Participant's investment
intent and access to information and other matters, if any, as may be required
or desirable by the Company to comply with applicable securities laws, together
with payment in full of the Exercise Price for the number of Shares being
purchased.
5.6 Termination. Notwithstanding the exercise periods set forth in
-----------
the Stock Option Agreement, exercise of an Option will always be subject to the
following:
(a) If the Participant is Terminated for any reason except death or
Disability, then the Participant may exercise such Participant's
Options only to the extent that such Options would have been
exercisable upon the Termination Date no later than three (3)
months after the Termination Date (or such shorter or longer time
period not exceeding five (5) years as may be determined by the
Committee, with any exercise beyond three (3) months after the
Termination Date deemed to be an NQSO), but in any event, no
later than the expiration date of the Options.
(b) If the Participant is Terminated because of Participant's death
or Disability (or the Participant dies within three (3) months
after a Termination other than for Cause or because of
Participant's Disability), then Participant's Options may be
exercised only to the extent that such Options would have been
exercisable by Participant on the Termination Date and must be
exercised by Participant (or Participant's legal representative
or authorized assignee) no later than twelve (12) months after
the Termination Date (or such shorter or longer time period not
exceeding five (5) years as may be determined by the Committee,
with any such exercise beyond (a) three (3) months after the
Termination Date when the Termination is for any reason other
than the Participant's death or Disability, or (b) twelve (12)
months after the Termination Date when the Termination is for
Participant's death or Disability, deemed to be an NQSO), but in
any event no later than the expiration date of the Options.
3
<PAGE>
(c) Notwithstanding the provisions in paragraph 5.6(a) above, if a
Participant is terminated for Cause, neither the Participant, the
Participant's estate nor such other person who may then hold the
Option shall be entitled to exercise any Option with respect to
any Shares whatsoever, after termination of service, whether or
not after termination of service the Participant may receive
payment from the Company or Subsidiary for vacation pay, for
services rendered prior to termination, for services rendered for
the day on which termination occurs, for salary in lieu of
notice, or for any other benefits. In making such determination,
the Board shall give the Participant an opportunity to present to
the Board evidence on his behalf. For the purpose of this
paragraph, termination of service shall be deemed to occur on the
date when the Company dispatches notice or advice to the
Participant that his service is terminated.
5.7 Limitations on Exercise. The Committee may specify a reasonable
-----------------------
minimum number of Shares that may be purchased on any exercise of an Option,
provided that such minimum number will not prevent Participant from exercising
the Option for the full number of Shares for which it is then exercisable.
5.8 Limitations on ISO. The aggregate Fair Market Value (determined
------------------
as of the date of grant) of Shares with respect to which ISO are exercisable for
the first time by a Participant during any calendar year (under this Plan or
under any other incentive stock option plan of the Company, Parent or Subsidiary
of the Company) will not exceed $100,000. If the Fair Market Value of Shares on
the date of grant with respect to which ISO are exercisable for the first time
by a Participant during any calendar year exceeds $100,000, then the Options for
the first $100,000 worth of Shares to become exercisable in such calendar year
will be ISO and the Options for the amount in excess of $100,000 that become
exercisable in that calendar year will be NQSOs. In the event that the Code or
the regulations promulgated thereunder are amended after the Effective Date of
this Plan to provide for a different limit on the Fair Market Value of Shares
permitted to be subject to ISO, such different limit will be automatically
incorporated herein and will apply to any Options granted after the effective
date of such amendment.
5.9 Modification, Extension or Renewal. The Committee may modify,
----------------------------------
extend or renew outstanding Options and authorize the grant of new Options in
substitution therefor, provided that any such action may not, without the
written consent of a Participant, impair any of such Participant's rights under
any Option previously granted. Any outstanding ISO that is modified, extended,
renewed or otherwise altered will be treated in accordance with Section 424(h)
of the Code. The Committee may reduce the Exercise Price of outstanding Options
without the consent of Participants affected by a written notice to them;
provided, however, that the Exercise Price may not be reduced below the minimum
- -------- -------
Exercise Price that would be permitted under Section 5.4 of this Plan for
Options granted on the date the action is taken to reduce the Exercise Price.
5.10 No Disqualification. Notwithstanding any other provision in this
-------------------
Plan, no term of this Plan relating to ISO will be interpreted, amended or
altered, nor will any discretion or authority granted under this Plan be
exercised, so as to disqualify this Plan under Section 422 of the Code or,
without the consent of the Participant affected, to disqualify any ISO under
Section 422 of the Code.
6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the Company
----------------
to sell to an eligible person Shares that are subject to restrictions. The
Committee will determine to whom an offer will be made, the number of Shares the
person may purchase, the price to be paid (the "Purchase Price"), the
restrictions to which the Shares will be subject, and all other terms and
conditions of the Restricted Stock Award, subject to the following:
6.1 Form of Restricted Stock Award. All purchases under a Restricted
------------------------------
Stock Award made pursuant to this Plan will be evidenced by an Award Agreement
("Restricted Stock Purchase Agreement") that will be in such form (which need
not be the same for each Participant) as the Committee will from time to time
approve, and will comply with and be subject to the terms and conditions of this
Plan. The offer of Restricted Stock will be accepted by the Participant's
execution and delivery of the Restricted Stock Purchase Agreement and full
payment for the Shares to the Company within thirty (30) days from the date the
Restricted Stock Purchase Agreement is delivered to the person. If such person
does not execute and deliver the Restricted Stock Purchase Agreement along
4
<PAGE>
with full payment for the Shares to the Company within thirty (30) days, then
the offer will terminate, unless otherwise determined by the Committee.
6.2 Purchase Price. The Purchase Price of Shares sold pursuant to a
--------------
Restricted Stock Award will be determined by the Committee on the date the
Restricted Stock Award is granted, except in the case of a sale to a Ten Percent
Stockholder, in which case the Purchase Price will be 100% of the Fair Market
Value. Payment of the Purchase Price may be made in accordance with Section 8
of this Plan.
6.3 Terms of Restricted Stock Awards. Restricted Stock Awards shall
--------------------------------
be subject to such restrictions as the Committee may impose. These restrictions
may be based upon completion of a specified number of years of service with the
Company or upon completion of the performance goals as set out in advance in the
Participant's individual Restricted Stock Purchase Agreement. Restricted Stock
Awards may vary from Participant to Participant and between groups of
Participants. Prior to the grant of a Restricted Stock Award, the Committee
shall: (a) determine the nature, length and starting date of any Performance
Period for the Restricted Stock Award; (b) select from among the Performance
Factors to be used to measure performance goals, if any; and (c) determine the
number of Shares that may be awarded to the Participant. Prior to the payment
of any Restricted Stock Award, the Committee shall determine the extent to which
such Restricted Stock Award has been earned. Performance Periods may overlap
and Participants may participate simultaneously with respect to Restricted Stock
Awards that are subject to different Performance Periods and having different
performance goals and other criteria.
6.4 Termination During Performance Period. If a Participant is
-------------------------------------
Terminated during a Performance Period for any reason, then such Participant
will be entitled to payment (whether in Shares, cash or otherwise) with respect
to the Restricted Stock Award only to the extent earned as of the date of
Termination in accordance with the Restricted Stock Purchase Agreement, unless
the Committee will determine otherwise.
7. STOCK BONUSES.
-------------
7.1 Awards of Stock Bonuses. A Stock Bonus is an award of Shares
-----------------------
(which may consist of Restricted Stock) for services rendered to the Company or
any Parent or Subsidiary of the Company. A Stock Bonus may be awarded for past
services already rendered to the Company, or any Parent or Subsidiary of the
Company pursuant to an Award Agreement (the "Stock Bonus Agreement") that will
be in such form (which need not be the same for each Participant) as the
Committee will from time to time approve, and will comply with and be subject to
the terms and conditions of this Plan. A Stock Bonus may be awarded upon
satisfaction of such performance goals as are set out in advance in the
Participant's individual Award Agreement (the "Performance Stock Bonus
Agreement") that will be in such form (which need not be the same for each
Participant) as the Committee will from time to time approve, and will comply
with and be subject to the terms and conditions of this Plan. Stock Bonuses may
vary from Participant to Participant and between groups of Participants, and may
be based upon the achievement of the Company, Parent or Subsidiary and/or
individual performance factors or upon such other criteria as the Committee may
determine.
7.2 Terms of Stock Bonuses. The Committee will determine the number
----------------------
of Shares to be awarded to the Participant. If the Stock Bonus is being earned
upon the satisfaction of performance goals pursuant to a Performance Stock Bonus
Agreement, then the Committee will: (a) determine the nature, length and
starting date of any Performance Period for each Stock Bonus; (b) select from
among the Performance Factors to be used to measure the performance, if any; and
(c) determine the number of Shares that may be awarded to the Participant.
Prior to the payment of any Stock Bonus, the Committee shall determine the
extent to which such Stock Bonuses have been earned. Performance Periods may
overlap and Participants may participate simultaneously with respect to Stock
Bonuses that are subject to different Performance Periods and different
performance goals and other criteria. The number of Shares may be fixed or may
vary in accordance with such performance goals and criteria as may be determined
by the Committee. The Committee may adjust the performance goals applicable to
the Stock Bonuses to take into account changes in law and accounting or tax
rules and to make such adjustments as the Committee deems necessary or
appropriate to reflect the impact of extraordinary or unusual items, events or
circumstances to avoid windfalls or hardships.
5
<PAGE>
7.3 Form of Payment. The earned portion of a Stock Bonus may be paid
---------------
currently or on a deferred basis with such interest or dividend equivalent, if
any, as the Committee may determine. Payment may be made in the form of cash or
whole Shares or a combination thereof, either in a lump sum payment or in
installments, all as the Committee will determine.
8. PAYMENT FOR SHARE PURCHASES.
---------------------------
8.1 Payment. Payment for Shares purchased pursuant to this Plan may
-------
be made in cash (by check) or, where expressly approved for the Participant by
the Committee and where permitted by law:
(a) by cancellation of indebtedness of the Company to the
Participant;
(b) by surrender of shares that either: (1) have been owned by
Participant for more than six (6) months and have been paid for
within the meaning of SEC Rule 144 (and, if such shares were
purchased from the Company by use of a promissory note, such note
has been fully paid with respect to such shares); or (2) were
obtained by Participant in the public market;
(c) by tender of a full recourse promissory note having such terms as
may be approved by the Committee and bearing interest at a rate
sufficient to avoid imputation of income under Sections 483 and
1274 of the Code; provided, however, that Participants who are
-------- -------
not employees or directors of the Company will not be entitled to
purchase Shares with a promissory note unless the note is
adequately secured by collateral other than the Shares;
(d) by waiver of compensation due or accrued to the Participant for
services rendered;
(e) with respect only to purchases upon exercise of an Option, and
provided that a public market for the Company's stock exists:
(1) through a "same day sale" commitment from the Participant
and a broker-dealer that is a member of the National
Association of Securities Dealers (an "NASD Dealer") whereby
the Participant irrevocably elects to exercise the Option
and to sell a portion of the Shares so purchased to pay for
the Exercise Price, and whereby the NASD Dealer irrevocably
commits upon receipt of such Shares to forward the Exercise
Price directly to the Company; or
(2) through a "margin" commitment from the Participant and a
NASD Dealer whereby the Participant irrevocably elects to
exercise the Option and to pledge the Shares so purchased to
the NASD Dealer in a margin account as security for a loan
from the NASD Dealer in the amount of the Exercise Price,
and whereby the NASD Dealer irrevocably commits upon receipt
of such Shares to forward the Exercise Price directly to the
Company; or
(f) by any combination of the foregoing.
8.2 Loan Guarantees. The Committee may help the Participant pay for
---------------
Shares purchased under this Plan by authorizing a guarantee by the Company of a
third-party loan to the Participant.
9. AUTOMATIC GRANTS TO OUTSIDE DIRECTORS.
--------------------------------------
9.1 Types of Options and Shares. Options granted under this Plan and
----------------------------
subject to this Section 9 shall be NQSOs.
6
<PAGE>
9.2 Eligibility. Options subject to this Section 9 shall be granted
-----------
only to Outside Directors.
9.3 Initial Grant. Each Outside Director who first becomes a member
-------------
of the Board on or after the Effective Date will automatically be granted an
Option for 80,000 Shares (an "Initial Grant") on the date such Outside Director
first becomes a member of the Board, unless such Outside Director received a
grant of Options before the Effective Date. Each Outside Director who became a
member of the Board prior to the Effective Date and who did not receive a prior
Option grant will receive an Initial Grant immediately following the Effective
Date.
9.4 Succeeding Grant. Immediately following each Annual Meeting of
----------------
stockholders, each Outside Director will automatically be granted an Option for
40,000 Shares (a "Succeeding Grant"), provided the Outside Director is a member
of the Board on such date and has served continuously as a member of the Board
for a period of at least one year since the date of such Outside Director's
Initial Grant. If an Outside Director did not receive an Initial Grant on or
after the Effective Date, such Outside Director will automatically be granted a
Succeeding Grant on the one (1) year anniversary of such Outside Director's last
option grant from the Company.
9.5 Vesting and Exercisability. The date an Outside Director
--------------------------
receives an Initial Grant or a Succeeding Grant is referred to in this Plan as
the "Start Date" for such Option.
(a) Initial Grant. Each Initial Grant will vest and be exercisable
-------------
as to 25% of the Shares on the first one year anniversary of the
Start Date for such Initial Grant, and thereafter as to 2.08333%
of the Shares at the end of each full succeeding month, so long
as the Outside Director continuously remains a director or a
consultant of the Company.
(b) Succeeding Grant. Each Succeeding Grant will vest and be
----------------
exercisable as to 25% of the Shares on the first one year
anniversary of the Start Date for such Succeeding Grant, and
thereafter as to 2.08333% of the Shares at the end of each full
succeeding month, so long as the Outside Director continuously
remains a director or a consultant of the Company.
Notwithstanding any provision to the contrary, in the event of a Corporate
Transaction described in Section 18.1, the vesting of all options granted to
Outside Directors pursuant to this Section 9 will accelerate and such options
will become exercisable in full prior to the consummation of such event at such
times and on such conditions as the Committee determines, and must be exercised,
if at all, within three (3) months of the consummation of said event. Any
options not exercised within such three-month period shall expire.
9.6 Exercise Price. The exercise price of an Option pursuant to an
--------------
Initial Grant and Succeeding Grant shall be the Fair Market Value of the Shares,
at the time that the Option is granted.
10. WITHHOLDING TAXES.
-----------------
10.1 Withholding Generally. Whenever Shares are to be issued in
---------------------
satisfaction of Awards granted under this Plan, the Company may require the
Participant to remit to the Company an amount sufficient to satisfy federal,
state and local withholding tax requirements prior to the delivery of any
certificate or certificates for such Shares. Whenever, under this Plan,
payments in satisfaction of Awards are to be made in cash, such payment will be
net of an amount sufficient to satisfy federal, state, and local withholding tax
requirements.
10.2 Stock Withholding. When, under applicable tax laws, a
-----------------
Participant incurs tax liability in connection with the exercise or vesting of
any Award that is subject to tax withholding and the Participant is obligated to
pay the Company the amount required to be withheld, the Committee may in its
sole discretion allow the Participant to satisfy the minimum withholding tax
obligation by electing to have the Company withhold from the Shares to be issued
that number of Shares having a Fair Market Value equal to the minimum amount
required to be withheld, determined on the date that the amount of tax to be
withheld is to be determined. All elections by a Participant to have Shares
withheld for this purpose will be made in accordance with the requirements
established by the Committee and be in writing in a form acceptable to the
Committee.
7
<PAGE>
11. TRANSFERABILITY.
---------------
11.1 Except as otherwise provided in this Section 11, Awards granted
under this Plan, and any interest therein, will not be transferable or
assignable by Participant, and may not be made subject to execution, attachment
or similar process, otherwise than by will or by the laws of descent and
distribution or as determined by the Committee and set forth in the Award
Agreement with respect to Awards that are not ISOs.
11.2 All Awards other than NQSO's. All Awards other than NQSO's shall
-----------------------------
be exercisable: (i) during the Participant's lifetime, only by (A) the
Participant, or (B) the Participant's guardian or legal representative; and (ii)
after Participant's death, by the legal representative of the Participant's
heirs or legatees.
11.3 NQSOs. Unless otherwise restricted by the Committee, an NQSO
-----
shall be exercisable: (i) during the Participant's lifetime only by (A) the
Participant, (B) the Participant's guardian or legal representative, (C) a
Family Member of the Participant who has acquired the NQSO by "permitted
transfer;" and (ii) after Participant's death, by the legal representative of
the Participant's heirs or legatees. "Permitted transfer" means, as authorized
by this Plan and the Committee in an NQSO, any transfer effected by the
Participant during the Participant's lifetime of an interest in such NQSO but
only such transfers which are by gift or domestic relations order. A permitted
transfer does not include any transfer for value and neither of the following
are transfers for value: (a) a transfer of under a domestic relations order in
settlement of marital property rights or (b) a transfer to an entity in which
more than fifty percent of the voting interests are owned by Family Members or
the Participant in exchange for an interest in that entity.
12. PRIVILEGES OF STOCK OWNERSHIP; RESTRICTIONS ON SHARES..
------------------------------------------------------
12.1 Voting and Dividends. No Participant will have any of the rights
--------------------
of a stockholder with respect to any Shares until the Shares are issued to the
Participant. After Shares are issued to the Participant, the Participant will
be a stockholder and have all the rights of a stockholder with respect to such
Shares, including the right to vote and receive all dividends or other
distributions made or paid with respect to such Shares; provided, that if such
--------
Shares are Restricted Stock, then any new, additional or different securities
the Participant may become entitled to receive with respect to such Shares by
virtue of a stock dividend, stock split or any other change in the corporate or
capital structure of the Company will be subject to the same restrictions as the
Restricted Stock; provided, further, that the Participant will have no right to
-------- -------
retain such stock dividends or stock distributions with respect to Shares that
are repurchased at the Participant's Purchase Price or Exercise Price pursuant
to Section 12.
12.2 Financial Statements. The Company will provide financial
--------------------
statements to each Participant prior to such Participant's purchase of Shares
under this Plan, and to each Participant annually during the period such
Participant has Awards outstanding; provided, however, the Company will not be
-------- -------
required to provide such financial statements to Participants whose services in
connection with the Company assure them access to equivalent information.
12.3 Restrictions on Shares. At the discretion of the Committee, the
-----------------------
Company may reserve to itself and/or its assignee(s) in the Award Agreement a
right to repurchase a portion of or all Unvested Shares held by a Participant
following such Participant's Termination at any time within ninety (90) days
after the later of Participant's Termination Date and the date Participant
purchases Shares under this Plan, for cash and/or cancellation of purchase money
indebtedness, at the Participant's Exercise Price or Purchase Price, as the case
may be.
13. CERTIFICATES. All certificates for Shares or other securities
------------
delivered under this Plan will be subject to such stock transfer orders, legends
and other restrictions as the Committee may deem necessary or advisable,
including restrictions under any applicable federal, state or foreign securities
law, or any rules, regulations and other requirements of the SEC or any stock
exchange or automated quotation system upon which the Shares may be listed or
quoted.
8
<PAGE>
14. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a
------------------------
Participant's Shares, the Committee may require the Participant to deposit all
certificates representing Shares, together with stock powers or other
instruments of transfer approved by the Committee, appropriately endorsed in
blank, with the Company or an agent designated by the Company to hold in escrow
until such restrictions have lapsed or terminated, and the Committee may cause a
legend or legends referencing such restrictions to be placed on the
certificates. Any Participant who is permitted to execute a promissory note as
partial or full consideration for the purchase of Shares under this Plan will be
required to pledge and deposit with the Company all or part of the Shares so
purchased as collateral to secure the payment of Participant's obligation to the
Company under the promissory note; provided, however, that the Committee may
-------- -------
require or accept other or additional forms of collateral to secure the payment
of such obligation and, in any event, the Company will have full recourse
against the Participant under the promissory note notwithstanding any pledge of
the Participant's Shares or other collateral. In connection with any pledge of
the Shares, Participant will be required to execute and deliver a written pledge
agreement in such form as the Committee will from time to time approve. The
Shares purchased with the promissory note may be released from the pledge on a
pro rata basis as the promissory note is paid.
15. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or from
-----------------------------
time to time, authorize the Company, with the consent of the respective
Participants, to issue new Awards in exchange for the surrender and cancellation
of any or all outstanding Awards. The Committee may at any time buy from a
Participant an Award previously granted with payment in cash, Shares (including
Restricted Stock) or other consideration, based on such terms and conditions as
the Committee and the Participant may agree.
16. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will not be
----------------------------------------------
effective unless such Award is in compliance with all applicable federal and
state securities laws, rules and regulations of any governmental body, and the
requirements of any stock exchange or automated quotation system upon which the
Shares may then be listed or quoted, as they are in effect on the date of grant
of the Award and also on the date of exercise or other issuance.
Notwithstanding any other provision in this Plan, the Company will have no
obligation to issue or deliver certificates for Shares under this Plan prior to:
(a) obtaining any approvals from governmental agencies that the Company
determines are necessary or advisable; and/or (b) completion of any registration
or other qualification of such Shares under any state or federal law or ruling
of any governmental body that the Company determines to be necessary or
advisable. The Company will be under no obligation to register the Shares with
the SEC or to effect compliance with the registration, qualification or listing
requirements of any state securities laws, stock exchange or automated quotation
system, and the Company will have no liability for any inability or failure to
do so.
17. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award granted
-----------------------
under this Plan will confer or be deemed to confer on any Participant any right
to continue in the employ of, or to continue any other relationship with, the
Company or any Parent or Subsidiary of the Company or limit in any way the right
of the Company or any Parent or Subsidiary of the Company to terminate
Participant's employment or other relationship at any time, with or without
cause.
18. CORPORATE TRANSACTIONS.
----------------------
18.1 Assumption or Replacement of Awards by Successor. Except for
------------------------------------------------
automatic grants to Outside Directors pursuant to Section 9 hereof, in the event
of (a) a dissolution or liquidation of the Company, (b) a merger or
consolidation in which the Company is not the surviving corporation (other than
a merger or consolidation with a wholly-owned subsidiary, a reincorporation of
the Company in a different jurisdiction, or other transaction in which there is
no substantial change in the stockholders of the Company or their relative stock
holdings and the Awards granted under this Plan are assumed, converted or
replaced by the successor corporation, which assumption will be binding on all
Participants), (c) a merger in which the Company is the surviving corporation
but after which the stockholders of the Company immediately prior to such merger
(other than any stockholder that merges, or which owns or controls another
corporation that merges, with the Company in such merger) cease to own their
shares or other equity interest in the Company, (d) the sale of substantially
all of the assets of the Company, or (e) the acquisition, sale, or transfer of
more than 50% of the outstanding shares of the Company by tender offer or
similar
9
<PAGE>
transaction (each, a "Corporate Transaction"), any or all outstanding Awards may
be assumed, converted or replaced by the successor corporation (if any), which
assumption, conversion or replacement will be binding on all Participants. In
the alternative, the successor corporation may substitute equivalent Awards or
provide substantially similar consideration to Participants as was provided to
stockholders (after taking into account the existing provisions of the Awards).
The successor corporation may also issue, in place of outstanding Shares of the
Company held by the Participants, substantially similar shares or other property
subject to repurchase restrictions no less favorable to the Participant. In the
event such successor corporation (if any) refuses to assume or substitute
Awards, as provided above, pursuant to a transaction described in this
Subsection 18.1, such Awards will expire on such transaction at such time and on
such conditions as the Committee will determine. Notwithstanding anything in
this Plan to the contrary, the Committee may, in its sole discretion, provide
that the vesting of any or all Awards granted pursuant to this Plan will
accelerate upon a transaction described in this Section 18. If the Committee
exercises such discretion with respect to Options, such Options will become
exercisable in full prior to the consummation of such event at such time and on
such conditions as the Committee determines, and if such Options are not
exercised prior to the consummation of the corporate transaction, they shall
terminate at such time as determined by the Committee.
18.2 Other Treatment of Awards. Subject to any greater rights granted
-------------------------
to Participants under the foregoing provisions of this Section 18, in the event
of the occurrence of any Corporate Transaction described in Section 18.1, any
outstanding Awards will be treated as provided in the applicable agreement or
plan of merger, consolidation, dissolution, liquidation, or sale of assets.
18.3 Assumption of Awards by the Company. The Company, from time to
-----------------------------------
time, also may substitute or assume outstanding awards granted by another
company, whether in connection with an acquisition of such other company or
otherwise, by either; (a) granting an Award under this Plan in substitution of
such other company's award; or (b) assuming such award as if it had been granted
under this Plan if the terms of such assumed award could be applied to an Award
granted under this Plan. Such substitution or assumption will be permissible if
the holder of the substituted or assumed award would have been eligible to be
granted an Award under this Plan if the other company had applied the rules of
this Plan to such grant. In the event the Company assumes an award granted by
another company, the terms and conditions of such award will remain unchanged
(except that the exercise price and the number and nature of Shares issuable
- -------
upon exercise of any such option will be adjusted appropriately pursuant to
Section 424(a) of the Code). In the event the Company elects to grant a new
Option rather than assuming an existing option, such new Option may be granted
with a similarly adjusted Exercise Price.
19. ADOPTION AND STOCKHOLDER APPROVAL. This Plan will become effective on
---------------------------------
the date on which the registration statement filed by the Company with the SEC
under the Securities Act registering the initial public offering of the
Company's Common Stock is declared effective by the SEC (the "Effective Date").
This Plan shall be approved by the stockholders of the Company (excluding Shares
issued pursuant to this Plan), consistent with applicable laws, within twelve
(12) months before or after the date this Plan is adopted by the Board. Upon
the Effective Date, the Committee may grant Awards pursuant to this Plan;
provided, however, that: (a) no Option may be exercised prior to initial
- -------- -------
stockholder approval of this Plan; (b) no Option granted pursuant to an increase
in the number of Shares subject to this Plan approved by the Board will be
exercised prior to the time such increase has been approved by the stockholders
of the Company; (c) in the event that initial stockholder approval is not
obtained within the time period provided herein, all Awards granted hereunder
shall be cancelled, any Shares issued pursuant to any Awards shall be cancelled
and any purchase of Shares issued hereunder shall be rescinded; and (d) in the
event that stockholder approval of such increase is not obtained within the time
period provided herein, all Awards granted pursuant to such increase will be
cancelled, any Shares issued pursuant to any Award granted pursuant to such
increase will be cancelled, and any purchase of Shares pursuant to such increase
will be rescinded.
20. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided
--------------------------
herein, this Plan will terminate ten (10) years from the date this Plan is
adopted by the Board or, if earlier, the date of stockholder approval. This
Plan and all agreements thereunder shall be governed by and construed in
accordance with the laws of the State of California.
10
<PAGE>
21. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time terminate
--------------------------------
or amend this Plan in any respect, including without limitation amendment of any
form of Award Agreement or instrument to be executed pursuant to this Plan;
provided, however, that the Board will not, without the approval of the
- -------- -------
stockholders of the Company, amend this Plan in any manner that requires such
stockholder approval.
22. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by the
--------------------------
Board, the submission of this Plan to the stockholders of the Company for
approval, nor any provision of this Plan will be construed as creating any
limitations on the power of the Board to adopt such additional compensation
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and bonuses otherwise than under this Plan, and such
arrangements may be either generally applicable or applicable only in specific
cases.
23. DEFINITIONS. As used in this Plan, the following terms will have the
-----------
following meanings:
"Award" means any award under this Plan, including any Option,
Restricted Stock or Stock Bonus.
"Award Agreement" means, with respect to each Award, the signed
written agreement between the Company and the Participant setting forth the
terms and conditions of the Award.
"Board" means the Board of Directors of the Company.
"Cause" means the commission of an act of theft, embezzlement, fraud,
dishonesty or a breach of fiduciary duty to the Company or a Parent or
Subsidiary of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the Compensation Committee of the Board.
"Company" means ONI Systems Corp. or any successor corporation.
"Disability" means a disability, whether temporary or permanent,
partial or total, as determined by the Committee.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exercise Price" means the price at which a holder of an Option may
purchase the Shares issuable upon exercise of the Option.
"Fair Market Value" means, as of any date, the value of a share of the
Company's Common Stock determined as follows:
(a) if such Common Stock is then quoted on the Nasdaq National
Market, its closing price on the Nasdaq National Market on the
date of determination as reported in The Wall Street Journal;
-----------------------
(b) if such Common Stock is publicly traded and is then listed on a
national securities exchange, its closing price on the date of
determination on the principal national securities exchange on
which the Common Stock is listed or admitted to trading as
reported in The Wall Street Journal;
-----------------------
(c) if such Common Stock is publicly traded but is not quoted on the
Nasdaq National Market nor listed or admitted to trading on a
national securities exchange, the average of the
11
<PAGE>
closing bid and asked prices on the date of determination as
reported in The Wall Street Journal;
-----------------------
(d) in the case of an Award made on the Effective Date, the price per
share at which shares of the Company's Common Stock are initially
offered for sale to the public by the Company's underwriters in
the initial public offering of the Company's Common Stock
pursuant to a registration statement filed with the SEC under the
Securities Act; or
(e) if none of the foregoing is applicable, by the Committee in good
faith.
"Family Member" includes any of the following:
(a) child, stepchild, grandchild, parent, stepparent, grandparent,
spouse, former spouse, sibling, niece, nephew, mother-in-law,
father-in-law, son-in-law, daughter-in-law, brother-in-law, or
sister-in-law of the Participant, including any such person with
such relationship to the Participant by adoption;
(b) any person (other than a tenant or employee) sharing the
Participant's household;
(c) a trust in which the persons in (a) and (b) have more than fifty
percent of the beneficial interest;
(d) a foundation in which the persons in (a) and (b) or the
Participant control the management of assets; or
(e) any other entity in which the persons in (a) and (b) or the
Participant own more than fifty percent of the voting interest.
"Insider" means an officer or director of the Company or any other
person whose transactions in the Company's Common Stock are subject to Section
16 of the Exchange Act.
"Option" means an award of an option to purchase Shares pursuant to
Section 5.
"Outside Director" means a member of the Board who is not an employee
of the Company or any Parent or Subsidiary.
"Parent" means any corporation (other than the Company) in an unbroken
chain of corporations ending with the Company if each of such corporations other
than the Company owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain.
"Participant" means a person who receives an Award under this Plan.
"Performance Factors" means the factors selected by the Committee from
among the following measures to determine whether the performance goals
established by the Committee and applicable to Awards have been satisfied:
(a) Net revenue and/or net revenue growth;
(b) Earnings before income taxes and amortization and/or earnings
before income taxes and amortization growth;
(c) Operating income and/or operating income growth;
12
<PAGE>
(d) Net income and/or net income growth;
(e) Earnings per share and/or earnings per share growth;
(f) Total stockholder return and/or total stockholder return growth;
(g) Return on equity;
(h) Operating cash flow return on income;
(i) Adjusted operating cash flow return on income;
(j) Economic value added; and
(k) Individual confidential business objectives.
"Performance Period" means the period of service determined by the
Committee, not to exceed five years, during which years of service or
performance is to be measured for Restricted Stock Awards or Stock Bonuses.
"Plan" means this ONI Systems Corp. 2000 Equity Incentive Plan, as
amended from time to time.
"Restricted Stock Award" means an award of Shares pursuant to Section
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means shares of the Company's Common Stock reserved for
issuance under this Plan, as adjusted pursuant to Sections 2 and 18, and any
successor security.
"Stock Bonus" means an award of Shares, or cash in lieu of Shares,
pursuant to Section 7.
"Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
"Termination" or "Terminated" means, for purposes of this Plan with
respect to a Participant, that the Participant has for any reason ceased to
provide services as an employee, officer, director, consultant, independent
contractor, or advisor to the Company or a Parent or Subsidiary of the Company.
An employee will not be deemed to have ceased to provide services in the case of
(i) sick leave, (ii) military leave, or (iii) any other leave of absence
approved by the Committee, provided, that such leave is for a period of not more
than 90 days, unless reemployment upon the expiration of such leave is
guaranteed by contract or statute or unless provided otherwise pursuant to
formal policy adopted from time to time by the Company and issued and
promulgated to employees in writing. In the case of any employee on an approved
leave of absence, the Committee may make such provisions respecting suspension
of vesting of the Award while on leave from the employ of the Company or a
Subsidiary as it may deem appropriate, except that in no event may an Option be
exercised after the expiration of the term set forth in the Option agreement.
The Committee will have sole discretion to determine whether a Participant has
ceased to provide services and the effective date on which the Participant
ceased to provide services (the "Termination Date").
"Unvested Shares" means "Unvested Shares" as defined in the Award
Agreement.
13
<PAGE>
"Vested Shares" means "Vested Shares" as defined in the Award
Agreement.
14
<PAGE>
EXHIBIT 10.06
ONI Systems Corp.
2000 EMPLOYEE STOCK PURCHASE PLAN
As Adopted April 7, 2000
1. Establishment of Plan. ONI Systems Corp. (the "Company") proposes to
grant options for purchase of the Company's Common Stock to eligible employees
of the Company and its Participating Subsidiaries (as hereinafter defined)
pursuant to this Employee Stock Purchase Plan (this "Plan"). For purposes of
this Plan, "Parent Corporation" and "Subsidiary" shall have the same meanings as
"parent corporation" and "subsidiary corporation" in Sections 424(e) and 424(f),
respectively, of the Internal Revenue Code of 1986, as amended (the "Code").
"Participating Subsidiaries" are Parent Corporations or Subsidiaries that the
Board of Directors of the Company (the "Board") designates from time to time as
corporations that shall participate in this Plan. The Company intends this Plan
to qualify as an "employee stock purchase plan" under Section 423 of the Code
(including any amendments to or replacements of such Section), and this Plan
shall be so construed. Any term not expressly defined in this Plan but defined
for purposes of Section 423 of the Code shall have the same definition herein.
A total of 1,000,000 shares of the Company's Common Stock is reserved for
issuance under this Plan. In addition, on each January 1, the aggregate number
of shares of the Company's Common Stock reserved for issuance under the Plan
shall be increased automatically by a number of shares equal to 1% of the total
number of outstanding shares of the Company Common Stock on the immediately
preceding December 31; provided, that the Board or the Committee may in its sole
---------
discretion reduce the amount of the increase in any particular year; and,
provided further, that the aggregate number of shares issued over the term of
- ----------------
this Plan shall not exceed 10,000,000 shares. Such number shall be subject to
adjustments effected in accordance with Section 14 of this Plan.
2. Purpose. The purpose of this Plan is to provide eligible employees of
the Company and Participating Subsidiaries with a convenient means of acquiring
an equity interest in the Company through payroll deductions, to enhance such
employees' sense of participation in the affairs of the Company and
Participating Subsidiaries, and to provide an incentive for continued
employment.
3. Administration. This Plan shall be administered by the Compensation
Committee of the Board (the "Committee"). Subject to the provisions of this
Plan and the limitations of Section 423 of the Code or any successor provision
in the Code, all questions of interpretation or application of this Plan shall
be determined by the Committee and its decisions shall be final and binding upon
all participants. Members of the Committee shall receive no compensation for
their services in connection with the administration of this Plan, other than
standard fees as established from time to time by the Board for services
rendered by Board members serving on Board committees. All expenses incurred in
connection with the administration of this Plan shall be paid by the Company.
4. Eligibility. Any employee of the Company or the Participating
Subsidiaries is eligible to participate in an Offering Period (as hereinafter
defined) under this Plan except the following:
(a) employees who are not employed by the Company or a Participating
Subsidiary prior to the beginning of such Offering Period or prior to such other
time period as specified by the Committee, except that employees who are
employed on the Effective Date of the Registration Statement filed by the
Company with the Securities and Exchange Commission ("SEC") under the Securities
Act of 1933, as amended (the "Securities Act") registering the initial public
offering of the Company's Common Stock shall be eligible to participate in the
first Offering Period under the Plan;
(b) employees who are customarily employed for twenty (20) hours or
less per week;
(c) employees who are customarily employed for five (5) months or
less in a calendar year;
(d) employees who, together with any other person whose stock would
be attributed to such employee pursuant to Section 424(d) of the Code, own stock
or hold options to purchase stock possessing five
<PAGE>
percent (5%) or more of the total combined voting power or value of all classes
of stock of the Company or any of its Participating Subsidiaries or who, as a
result of being granted an option under this Plan with respect to such Offering
Period, would own stock or hold options to purchase stock possessing five
percent (5%) or more of the total combined voting power or value of all classes
of stock of the Company or any of its Participating Subsidiaries; and
(e) individuals who provide services to the Company or any of its
Participating Subsidiaries as independent contractors who are reclassified as
common law employees for any reason except for federal income and employment tax
------ ---
purposes.
5. Offering Dates. The offering periods of this Plan (each, an "Offering
Period") shall be of twenty-four (24) months duration commencing on February 1
and August 1 of each year and ending on January 31 and July 31 of each year;
provided, however, that notwithstanding the foregoing, the first such Offering
- -----------------
Period shall commence on the first business day on which price quotations for
the Company's Common Stock are available on the Nasdaq National Market (the
"First Offering Date") and shall end on July 31, 2002. Except for the first
Offering Period, each Offering Period shall consist of four (4) six month
purchase periods (individually, a "Purchase Period") during which payroll
deductions of the participants are accumulated under this Plan. The first
Offering Period shall consist of no more than five and no fewer than three
Purchase Periods, any of which may be greater or less than six months as
determined by the Committee. The first business day of each Offering Period is
referred to as the "Offering Date". The last business day of each Purchase
Period is referred to as the "Purchase Date". The Committee shall have the
power to change the Offering Dates, the Purchase Dates and the duration of
Offering Periods or Purchase Periods without stockholder approval if such change
is announced prior to the relevant Offering Period, or prior to such other time
period as specified by the Committee.
6. Participation in this Plan. Eligible employees may become
participants in an Offering Period under this Plan on the first Offering Date
after satisfying the eligibility requirements by delivering a subscription
agreement to the Company prior to such Offering Date, or such other time period
as specified by the Committee. Notwithstanding the foregoing, the Committee may
set a later time for filing the subscription agreement authorizing payroll
deductions for all eligible employees with respect to a given Offering Period.
An eligible employee who does not deliver a subscription agreement to the
Company by such date after becoming eligible to participate in such Offering
Period shall not participate in that Offering Period or any subsequent Offering
Period unless such employee enrolls in this Plan by filing a subscription
agreement with the Company prior to such Offering Date, or such other time
period as specified by the Committee. Once an employee becomes a participant in
an Offering Period, such employee will automatically participate in the Offering
Period commencing immediately following the last day of the prior Offering
Period unless the employee withdraws or is deemed to withdraw from this Plan or
terminates further participation in the Offering Period as set forth in Section
11 below. Such participant is not required to file any additional subscription
agreement in order to continue participation in this Plan.
7. Grant of Option on Enrollment. Enrollment by an eligible employee in
this Plan with respect to an Offering Period will constitute the grant (as of
the Offering Date) by the Company to such employee of an option to purchase on
the Purchase Date up to that number of shares of Common Stock of the Company
determined by dividing (a) the amount accumulated in such employee's payroll
deduction account during such Purchase Period by (b) the lower of (i) eighty-
five percent (85%) of the fair market value of a share of the Company's Common
Stock on the Offering Date (but in no event less than the par value of a share
of the Company's Common Stock), or (ii) eighty-five percent (85%) of the fair
market value of a share of the Company's Common Stock on the Purchase Date (but
in no event less than the par value of a share of the Company's Common Stock),
provided, however, that the number of shares of the Company's Common Stock
- -----------------
subject to any option granted pursuant to this Plan shall not exceed the lesser
of (x) the maximum number of shares set by the Committee pursuant to Section
10(c) below with respect to the applicable Purchase Date, or (y) the maximum
number of shares which may be purchased pursuant to Section 10(b) below with
respect to the applicable Purchase Date. The fair market value of a share of
the Company's Common Stock shall be determined as provided in Section 8 below.
8. Purchase Price. The purchase price per share at which a share of
Common Stock will be sold in any Offering Period shall be eighty-five percent
(85%) of the lesser of:
(a) The fair market value on the Offering Date; or
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<PAGE>
(b) The fair market value on the Purchase Date.
For purposes of this Plan, the term "Fair Market Value" means, as of
any date, the value of a share of the Company's Common Stock determined as
follows:
(a) if such Common Stock is then quoted on the Nasdaq National
Market, its closing price on the Nasdaq National Market on the date of
determination as reported in The Wall Street Journal;
-----------------------
(b) if such Common Stock is publicly traded and is then listed on a
national securities exchange, its closing price on the date of determination on
the principal national securities exchange on which the Common Stock is listed
or admitted to trading as reported in The Wall Street Journal;
-----------------------
(c) if such Common Stock is publicly traded but is not quoted on the
Nasdaq National Market nor listed or admitted to trading on a national
securities exchange, the average of the closing bid and asked prices on the date
of determination as reported in The Wall Street Journal; or
-----------------------
(d) if none of the foregoing is applicable, by the Board in good
faith, which in the case of the First Offering Date will be the price per share
at which shares of the Company's Common Stock are initially offered for sale to
the public by the Company's underwriters in the initial public offering of the
Company's Common Stock pursuant to a registration statement filed with the SEC
under the Securities Act.
9. Payment Of Purchase Price; Changes In Payroll Deductions; Issuance Of
Shares.
(a) The purchase price of the shares is accumulated by regular
payroll deductions made during each Offering Period. The deductions are made as
a percentage of the participant's compensation in one percent (1%) increments
not less than one percent (1%), nor greater than fifteen percent (15%) or such
lower limit set by the Committee. Compensation shall mean all W-2 cash
compensation, including, but not limited to, base salary, wages, commissions,
overtime, shift premiums and bonuses, plus draws against commissions, provided,
--------
however, that for purposes of determining a participant's compensation, any
- -------
election by such participant to reduce his or her regular cash remuneration
under Sections 125 or 401(k) of the Code shall be treated as if the participant
did not make such election. Payroll deductions shall commence on the first
payday of the Offering Period and shall continue to the end of the Offering
Period unless sooner altered or terminated as provided in this Plan.
(b) A participant may increase or decrease the rate of payroll
deductions during an Offering Period by filing with the Company a new
authorization for payroll deductions, in which case the new rate shall become
effective for the next payroll period commencing after the Company's receipt of
the authorization and shall continue for the remainder of the Offering Period
unless changed as described below. Such change in the rate of payroll
deductions may be made at any time during an Offering Period, but not more than
one (1) change may be made effective during any Purchase Period. A participant
may increase or decrease the rate of payroll deductions for any subsequent
Offering Period by filing with the Company a new authorization for payroll
deductions prior to the beginning of such Offering Period, or prior to such
other time period as specified by the Committee.
(c) A participant may reduce his or her payroll deduction percentage
to zero during an Offering Period by filing with the Company a request for
cessation of payroll deductions. Such reduction shall be effective beginning
with the next payroll period after the Company's receipt of the request and no
further payroll deductions will be made for the duration of the Offering Period.
Payroll deductions credited to the participant's account prior to the effective
date of the request shall be used to purchase shares of Common Stock of the
Company in accordance with Section (e) below. A participant may not resume
making payroll deductions during the Offering Period in which he or she reduced
his or her payroll deductions to zero.
(d) All payroll deductions made for a participant are credited to his
or her account under this Plan and are deposited with the general funds of the
Company. No interest accrues on the payroll deductions. All payroll
3
<PAGE>
deductions received or held by the Company may be used by the Company for any
corporate purpose, and the Company shall not be obligated to segregate such
payroll deductions.
(e) On each Purchase Date, so long as this Plan remains in effect and
provided that the participant has not submitted a signed and completed
withdrawal form before that date which notifies the Company that the participant
wishes to withdraw from that Offering Period under this Plan and have all
payroll deductions accumulated in the account maintained on behalf of the
participant as of that date returned to the participant, the Company shall apply
the funds then in the participant's account to the purchase of whole shares of
Common Stock reserved under the option granted to such participant with respect
to the Offering Period to the extent that such option is exercisable on the
Purchase Date. The purchase price per share shall be as specified in Section 8
of this Plan. Any cash remaining in a participant's account after such purchase
of shares shall be refunded to such participant in cash, without interest;
provided, however that any amount remaining in such participant's account on a
Purchase Date which is less than the amount necessary to purchase a full share
of Common Stock of the Company shall be carried forward, without interest, into
the next Purchase Period or Offering Period, as the case may be. In the event
that this Plan has been oversubscribed, all funds not used to purchase shares on
the Purchase Date shall be returned to the participant, without interest. No
Common Stock shall be purchased on a Purchase Date on behalf of any employee
whose participation in this Plan has terminated prior to such Purchase Date.
(f) As promptly as practicable after the Purchase Date, the Company
shall issue shares for the participant's benefit representing the shares
purchased upon exercise of his or her option.
(g) During a participant's lifetime, his or her option to purchase
shares hereunder is exercisable only by him or her. The participant will have
no interest or voting right in shares covered by his or her option until such
option has been exercised.
10. Limitations on Shares to be Purchased.
(a) No participant shall be entitled to purchase stock under this
Plan at a rate which, when aggregated with his or her rights to purchase stock
under all other employee stock purchase plans of the Company or any Subsidiary,
exceeds $25,000 in fair market value, determined as of the Offering Date (or
such other limit as may be imposed by the Code) for each calendar year in which
the employee participates in this Plan. The Company shall automatically suspend
the payroll deductions of any participant as necessary to enforce such limit
provided that when the Company automatically resumes such payroll deductions,
the Company must apply the rate in effect immediately prior to such suspension.
(b) No more than two hundred percent (200%) of the number of shares
determined by using eighty-five percent (85%) of the fair market value of a
share of the Company's Common Stock on the Offering Date as the denominator may
be purchased by a participant on any single Purchase Date.
(c) No participant shall be entitled to purchase more than the
Maximum Share Amount (as defined below) on any single Purchase Date. Prior to
the commencement of any Offering Period or prior to such time period as
specified by the Committee, the Committee may, in its sole discretion, set a
maximum number of shares which may be purchased by any employee at any single
Purchase Date (hereinafter the "Maximum Share Amount"). Until otherwise
determined by the Committee, there shall be no Maximum Share Amount. In no
event shall the Maximum Share Amount exceed the amounts permitted under Section
10(b) above. If a new Maximum Share Amount is set, then all participants must
be notified of such Maximum Share Amount prior to the commencement of the next
Offering Period. The Maximum Share Amount shall continue to apply with respect
to all succeeding Purchase Dates and Offering Periods unless revised by the
Committee as set forth above.
(d) If the number of shares to be purchased on a Purchase Date by all
employees participating in this Plan exceeds the number of shares then available
for issuance under this Plan, then the Company will make a pro rata allocation
of the remaining shares in as uniform a manner as shall be reasonably
practicable and as the Committee shall determine to be equitable. In such
event, the Company shall give written notice of such reduction of the number of
shares to be purchased under a participant's option to each participant
affected.
4
<PAGE>
(e) Any payroll deductions accumulated in a participant's account
which are not used to purchase stock due to the limitations in this Section 10
shall be returned to the participant as soon as practicable after the end of the
applicable Purchase Period, without interest.
11. Withdrawal.
(a) Each participant may withdraw from an Offering Period under this
Plan by signing and delivering to the Company a written notice to that effect on
a form provided for such purpose. Such withdrawal may be elected at any time
prior to the end of an Offering Period, or such other time period as specified
by the Committee.
(b) Upon withdrawal from this Plan, the accumulated payroll
deductions shall be returned to the withdrawn participant, without interest, and
his or her interest in this Plan shall terminate. In the event a participant
voluntarily elects to withdraw from this Plan, he or she may not resume his or
her participation in this Plan during the same Offering Period, but he or she
may participate in any Offering Period under this Plan which commences on a date
subsequent to such withdrawal by filing a new authorization for payroll
deductions in the same manner as set forth in Section 6 above for initial
participation in this Plan.
(c) If the Fair Market Value on the first day of the current Offering
Period in which a participant is enrolled is higher than the Fair Market Value
on the first day of any subsequent Offering Period, the Company will
automatically enroll such participant in the subsequent Offering Period. Any
funds accumulated in a participant's account prior to the first day of such
subsequent Offering Period will be applied to the purchase of shares on the
Purchase Date immediately prior to the first day of such subsequent Offering
Period, if any.
12. Termination of Employment. Termination of a participant's
employment for any reason, including retirement, death or the failure of a
participant to remain an eligible employee of the Company or of a Participating
Subsidiary, immediately terminates his or her participation in this Plan. In
such event, the payroll deductions credited to the participant's account will be
returned to him or her or, in the case of his or her death, to his or her legal
representative, without interest. For purposes of this Section 12, an employee
will not be deemed to have terminated employment or failed to remain in the
continuous employ of the Company or of a Participating Subsidiary in the case of
sick leave, military leave, or any other leave of absence approved by the Board;
provided that such leave is for a period of not more than ninety (90) days or
- --------
reemployment upon the expiration of such leave is guaranteed by contract or
statute.
13. Return of Payroll Deductions. In the event a participant's interest
in this Plan is terminated by withdrawal, termination of employment or
otherwise, or in the event this Plan is terminated by the Board, the Company
shall deliver to the participant all payroll deductions credited to such
participant's account. No interest shall accrue on the payroll deductions of a
participant in this Plan.
14. Capital Changes. Subject to any required action by the stockholders
of the Company, the number of shares of Common Stock covered by each option
under this Plan which has not yet been exercised and the number of shares of
Common Stock which have been authorized for issuance under this Plan but have
not yet been placed under option (collectively, the "Reserves"), as well as the
price per share of Common Stock covered by each option under this Plan which has
not yet been exercised, shall be proportionately adjusted for any increase or
decrease in the number of issued and outstanding shares of Common Stock of the
Company resulting from a stock split or the payment of a stock dividend (but
only on the Common Stock) or any other increase or decrease in the number of
issued and outstanding shares of Common Stock effected without receipt of any
consideration by the Company; provided, however, that conversion of any
-----------------
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration". Such adjustment shall be made by the
Committee, whose determination shall be final, binding and conclusive. Except
as expressly provided herein, no issue by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to, the
number or price of shares of Common Stock subject to an option.
In the event of the proposed dissolution or liquidation of the
Company, the Offering Period will terminate immediately prior to the
consummation of such proposed action, unless otherwise provided by the
5
<PAGE>
Committee. The Committee may, in the exercise of its sole discretion in such
instances, declare that this Plan shall terminate as of a date fixed by the
Committee and give each participant the right to purchase shares under this Plan
prior to such termination. In the event of (i) a merger or consolidation in
which the Company is not the surviving corporation (other than a merger or
consolidation with a wholly-owned subsidiary, a reincorporation of the Company
in a different jurisdiction, or other transaction in which there is no
substantial change in the stockholders of the Company or their relative stock
holdings and the options under this Plan are assumed, converted or replaced by
the successor corporation, which assumption will be binding on all
participants), (ii) a merger in which the Company is the surviving corporation
but after which the stockholders of the Company immediately prior to such merger
(other than any stockholder that merges, or which owns or controls another
corporation that merges, with the Company in such merger) cease to own their
shares or other equity interest in the Company, (iii) the sale of all or
substantially all of the assets of the Company or (iv) the acquisition, sale, or
transfer of more than 50% of the outstanding shares of the Company by tender
offer or similar transaction, the Plan will continue with regard to Offering
Periods that commenced prior to the closing of the proposed transaction and
shares will be purchased based on the Fair Market Value of the surviving
corporation's stock on each Purchase Date, unless otherwise provided by the
Committee consistent with pooling of interests accounting treatment.
The Committee may, if it so determines in the exercise of its sole
discretion, also make provision for adjusting the Reserves, as well as the price
per share of Common Stock covered by each outstanding option, in the event that
the Company effects one or more reorganizations, recapitalizations, rights
offerings or other increases or reductions of shares of its outstanding Common
Stock, or in the event of the Company being consolidated with or merged into any
other corporation.
15. Nonassignability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under this Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 22 below) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be void and
without effect.
16. Reports. Individual accounts will be maintained for each
participant in this Plan. Each participant shall receive promptly after the end
of each Purchase Period a report of his or her account setting forth the total
payroll deductions accumulated, the number of shares purchased, the per share
price thereof and the remaining cash balance, if any, carried forward to the
next Purchase Period or Offering Period, as the case may be.
17. Notice of Disposition. Each participant shall notify the Company in
writing if the participant disposes of any of the shares purchased in any
Offering Period pursuant to this Plan if such disposition occurs within two (2)
years from the Offering Date or within one (1) year from the Purchase Date on
which such shares were purchased (the "Notice Period"). The Company may, at any
time during the Notice Period, place a legend or legends on any certificate
representing shares acquired pursuant to this Plan requesting the Company's
transfer agent to notify the Company of any transfer of the shares. The
obligation of the participant to provide such notice shall continue
notwithstanding the placement of any such legend on the certificates.
18. No Rights to Continued Employment. Neither this Plan nor the grant
of any option hereunder shall confer any right on any employee to remain in the
employ of the Company or any Participating Subsidiary, or restrict the right of
the Company or any Participating Subsidiary to terminate such employee's
employment.
19. Equal Rights And Privileges. All eligible employees shall have
equal rights and privileges with respect to this Plan so that this Plan
qualifies as an "employee stock purchase plan" within the meaning of Section 423
or any successor provision of the Code and the related regulations. Any
provision of this Plan which is inconsistent with Section 423 or any successor
provision of the Code shall, without further act or amendment by the Company,
the Committee or the Board, be reformed to comply with the requirements of
Section 423. This Section 19 shall take precedence over all other provisions in
this Plan.
20. Notices. All notices or other communications by a participant to
the Company under or in connection with this Plan shall be deemed to have been
duly given when received in the form specified by the Company at the location,
or by the person, designated by the Company for the receipt thereof.
6
<PAGE>
21. Term; Stockholder Approval. After this Plan is adopted by the
Board, this Plan will become effective on the First Offering Date (as defined
above). This Plan shall be approved by the stockholders of the Company, in any
manner permitted by applicable corporate law, within twelve (12) months before
or after the date this Plan is adopted by the Board. No purchase of shares
pursuant to this Plan shall occur prior to such stockholder approval. This Plan
shall continue until the earlier to occur of (a) termination of this Plan by the
Board (which termination may be effected by the Board at any time), (b) issuance
of all of the shares of Common Stock reserved for issuance under this Plan, or
(c) ten (10) years from the adoption of this Plan by the Board.
22. Designation of Beneficiary.
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
this Plan in the event of such participant's death subsequent to the end of an
Purchase Period but prior to delivery to him of such shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under this Plan in the event
of such participant's death prior to a Purchase Date.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and
in the absence of a beneficiary validly designated under this Plan who is living
at the time of such participant's death, the Company shall deliver such shares
or cash to the executor or administrator of the estate of the participant, or if
no such executor or administrator has been appointed (to the knowledge of the
Company), the Company, in its discretion, may deliver such shares or cash to the
spouse or to any one or more dependents or relatives of the participant, or if
no spouse, dependent or relative is known to the Company, then to such other
person as the Company may designate.
23. Conditions Upon Issuance of Shares; Limitation on Sale of Shares.
Shares shall not be issued with respect to an option unless the exercise of such
option and the issuance and delivery of such shares pursuant thereto shall
comply with all applicable provisions of law, domestic or foreign, including,
without limitation, the Securities Act, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange or automated quotation system upon which the shares may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
24. Applicable Law. The Plan shall be governed by the substantive laws
(excluding the conflict of laws rules) of the State of California.
25. Amendment or Termination of this Plan. The Board may at any time
amend, terminate or extend the term of this Plan, except that any such
termination cannot affect options previously granted under this Plan, nor may
any amendment make any change in an option previously granted which would
adversely affect the right of any participant, nor may any amendment be made
without approval of the stockholders of the Company obtained in accordance with
Section 21 above within twelve (12) months of the adoption of such amendment (or
earlier if required by Section 21) if such amendment would:
(a) increase the number of shares that may be issued under this Plan;
or
(b) change the designation of the employees (or class of employees)
eligible for participation in this Plan.
Notwithstanding the foregoing, the Board may make such amendments to
the Plan as the Board determines to be advisable, if the continuation of the
Plan or any Offering Period would result in financial accounting treatment for
the Plan that is different from the financial accounting treatment in effect on
the date this Plan is adopted by the Board.
7
<PAGE>
Exhibit 10.22
April 14, 2000
Chris Davis
32 Ribault Drive
Hilton Head Island, SC 29926
Dear Chris:
On behalf of Optical Networks Incorporated, I am pleased to offer you a position
as our Executive Vice President, Chief Financial Officer and Chief
Administrative Officer. You will be reporting directly to the Chief Executive
Officer.
You will receive a salary of $400,000 annually, paid in equal increments on a
twice monthly basis. This offer also includes a one-time hire-on bonus of
$300,000.
Beginning in 2001, Optical Networks anticipates that it will establish an
executive bonus plan in which you will be eligible to participate. You also
will be eligible to participate in the Company's Section 423 employee stock
purchase plan following its effective date.
In addition, you will be eligible for a relocation package that will cover the
following expenses:
- Reasonable moving costs, including moving Davis family boat.
- Three house hunting trips for your entire family.
- Six months of temporary housing and rental car.
- Closing costs on your current home or loan origination fees on the
purchase of your California home.
- A loan by or guaranteed by Optical Networks for up to $3 million for a
purchase of and secured by your principal residence in California with a
term of one year at the minimum required rate to avoid imputed income
under the Internal Revenue Code of 1986, as amended (the "Code"),
repayable within ninety days of your termination of employment.
<PAGE>
Chris Davis
April 14, 2000
Page 2
[CHOOSE ONE--Note: You must choose one of these 3 alternatives by the first
date of your employment.]
Alternative 1
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We will also be granting you a stock option of 1,100,000 shares of common stock
at fair market value (currently $12.50 per share). This stock option must be
approved by our Board of Directors, which will approve this grant prior to your
start date. The option will vest over a four-year period, with the first 25% of
the shares vesting upon the twelve month anniversary of your start date
(provided you are employed on such date) and the remainder vesting at the rate
of 1/48th of the shares on the last day of each month thereafter (provided you
are employed on such date).
The shares will be immediately exercisable either by cash payment or with a
recourse promissory note (the "Note"), which shall bear interest at the minimum
required rate to avoid imputed income under the Code. The Note shall be in a
form and on terms, which are acceptable to Optical Networks and to you.
Alternative 2
- -------------
We will also be granting you a stock option of 1,000,000 shares of common stock
at $4.00 per share. This stock option must be approved by our Board of
Directors, which will approve this grant prior to your start date. The option
will vest over a four-year period, with the first 25% of the shares vesting upon
the twelve month anniversary of your start date (provided you are employed on
such date) and the remainder vesting at the rate of 1/48th of the shares on the
last day of each month thereafter (provided you are employed on such date).
The shares will be immediately exercisable either by cash payment or with a
recourse promissory note (the "Note"), which shall bear interest at the minimum
required rate to avoid imputed income under the Code. The Note shall be in a
form and on terms, which are acceptable to Optical Networks and to you.
Alternative 3
- -------------
We will also be granting you a stock option of 1,000,000 shares of common stock
at fair market value (currently $12.50 per share). This stock option must be
approved by our Board of Directors, which will approve this grant prior to your
start date. The option will vest over a four-year period, with the first 25% of
the shares vesting upon the twelve month anniversary of your start date
(provided you are employed on such date) and the remainder vesting at the rate
of 1/48th of the shares for each month thereafter (provided you are employed on
such date).
<PAGE>
Chris Davis
April 14, 2000
Page 3
The shares will be immediately exercisable either by cash payment or with a
promissory note (the "Note"), which shall bear interest at the minimum required
rate to avoid imputed income under the Code. The Note shall be in a form and on
terms, which are acceptable to Optical Networks and to you. Optical Networks
will forgive $2,125,000 of such Note on each of the first four anniversaries of
your employment commencement date with Optical Networks (provided you are
employed by Optical Networks on such date). In the event of any actual or
"involuntary" termination (as defined below) of your employment by Optical
Networks without cause (as defined below), Optical Networks will forgive an
additional $1,062,500 on the date of such termination provided that you execute
a standard form of release acceptable to Optical Networks and you.
In the event that you choose to immediately exercise your options, the shares
shall be subject to a right of repurchase in favor of Optical Networks, at the
original purchase price, which shall lapse as follows: Optical Network's
repurchase right will lapse with respect to twenty-five percent (25%) of the
shares twelve (12) months from the commencement date of your employment
(provided you are employed on such date) with Optical Networks and will lapse at
a rate of 1/48th of the shares on the last day of each month thereafter
(provided you are employed on such date). You will have the right to make an
election under Section 83(b) of the Code in conjunction with the purchase of the
shares. You should consult with your tax advisor with respect to the federal
and state income tax consequences of the exercise of your options and the
purchase of the shares.
In the event of (a) a merger or consolidation in which Optical Networks is not
the surviving corporation (other than a merger or consolidation with a wholly-
owned subsidiary, a re-incorporation of Optical Networks in a different
jurisdiction, or other transaction in which there is no substantial change in
the shareholders of Optical Networks or their relative stock holdings), (b) a
merger in which Optical Networks is the surviving corporation but after which
the shareholders of Optical Networks immediately prior to such merger cease to
own shares or other equity interests in Optical Networks representing at least
fifty percent (50%) of the voting power of all securities of Optical Networks,
or (c) the sale of all or substantially all of the assets of Optical Networks
(any and all of which are referred to as a "Transaction"), which is immediately
preceded by or followed by, within twelve (12) months, an actual or "involuntary
termination" (as defined below), Optical Networks will waive Optical Networks'
right of repurchase or other vesting restrictions with respect to fifty (50%)
percent of the shares which were subject to Optical Networks' repurchase right
or other vesting restrictions as of the effective date of the Transaction.
In the event of any actual or "involuntary" termination (as defined below) of
your employment by Optical Networks without cause (as defined below), (A) you
will continue to receive your then current salary and insurance benefits for a
period of six months following the date of such termination and (B) with respect
to your unvested options or shares to be granted pursuant to this letter
agreement, provided that there has not been, and will not be, any waiver of
repurchase rights or other vesting requirements
<PAGE>
Chris Davis
April 14, 2000
Page 4
pursuant to the preceding paragraph, Optical Networks will waive its rights of
repurchase and other vesting requirements solely to the extent that such rights
of repurchase and other vesting restrictions would have lapsed or expired by
their terms had you remained employed by Optical Networks for six months
following the date of such termination, provided that in any event you shall
receive at least six months of vesting on such options or shares; subject to
your executing a standard form of release acceptable to Optical Networks and
you. In no event or series of events will rights of repurchase or other vesting
restrictions be waived, with respect to a given equity grant, due to the terms
of both this paragraph and the preceding paragraph.
An "involuntary" termination will be deemed to have occurred if both (A) any of
the following actions is taken by Optical Networks and such action is not
reversed in full by Optical Networks within fourteen days: (i) your aggregate
compensation and benefits are materially reduced, (ii) your duties and
responsibilities are significantly decreased in a way that is adverse to you,
(iii) you are required to perform your employment obligations (other than travel
on business) at a location more than sixty (60) miles away from Optical
Networks' current offices, and/or (iv) the terms of this offer letter are not
assumed in full by any acquiror or other successor to Optical Networks, and (B)
you, after the expiration of such fourteen-day period, resign in writing stating
that your resignation is as a result of, and specifying in reasonable detail the
nature of, such uncured action listed above ("Resignation'). Notwithstanding the
foregoing, in the event of a termination in connection with a Transaction, you
shall have six (6) months from the expiration of such fourteen-day period to
submit a Resignation. Other changes in Optical Networks' management or reporting
structure, or changes in your position's title, shall not constitute an
"involuntary" termination.
If your severance and other benefits provided for in this agreement constitute
"parachute payments" within the meaning of Section 280G of the Code and, but for
this subsection, would be subject to the excise tax imposed by Section 4999 of
the Code, then your severance and other benefits under this Agreement will be
payable, at your election, either in full or in such lesser amount as would
result, after taking into account the applicable federal, state and local income
taxes and the excise tax imposed by Section 4999, in your receipt on an after-
tax basis of the greatest amount of severance and other benefits.
We will be offering you our standard benefits package that includes health,
dental, vision, term life insurance, long term disability, Section 125 and 401K
plans.
We will also be offering you 15 days of vacation per year, 10 company holidays
and up to a maximum of 10 sick days per year. The terms of our time off with
pay policies are outlined in our employee handbook.
Your employment with Optical Networks is for an indefinite term. In other
words, the employment relationship is "at will," and you have the right to
terminate that
<PAGE>
Chris Davis
April 14, 2000
Page 5
employment relationship at any time for any reason. Also, although I hope that
you will remain with us and be successful here, Optical Networks must, and does,
retain the right to terminate the employment relationship at any time for any
reason. This "at will" employment relationship can only be modified in writing
by an authorized officer of Optical Networks. This paragraph contains the entire
agreement between you and Optical Networks regarding the right and ability of
either you or Optical Networks to terminate your employment with Optical
Networks.
You represent that the performance of your duties in the position described
above will not violate the terms of any agreements you may have with others,
including your former employer. You also understand that you are not to bring
to or use at Optical Networks any trade secrets of your former employer.
Your employment is also conditioned upon your agreement and execution of Optical
Networks' attached Invention, Assignment and Confidentiality Agreement.
Please sign the bottom of this letter to accept this offer and return the
original to me. If we do not receive back confirmation of your acceptance by
April 16, 2000, this offer will terminate. This offer is contingent on your
commencing employment on or prior to May 1, 2000.
Optical Networks is committed to hiring employees like you that have the
courage, creativity, and experience to develop new ideas for new markets.
We look forward to your joining us!
Sincerely,
Hugh Martin _______________________________
Chief Executive Officer Employee Acceptance/Start Date
Optical Networks Incorporated
<PAGE>
EXHIBIT 10.23
March 29, 2000
Terrence J. Schmid
3450 Hillview Avenue
Palo Alto, California 94304
Re: Terms of Separation
-------------------
Dear Terry:
This letter confirms the agreement (the "Agreement") between you and
Optical Networks, Inc. (the "Company") concerning the terms of your separation
and offers you the separation compensation described below in exchange for the
completion of certain tasks and a release of claims, as explained further below.
1. Resignation Date. I have accepted your resignation from the Company,
----------------
effective April 28, 2000 (the "Resignation Date").
2. Separation Compensation. The Company agrees to pay you upon the
-----------------------
Resignation Date a total of ninety thousand dollars ($90,000.00), less
applicable state and federal payroll deductions, which constitutes six (6)
months wages at your current rate of pay. By signing this Agreement, you
acknowledge that the Company is offering this separation compensation solely in
exchange for your waiver of claims as set forth in paragraph 8 (the "Waiver of
Claims") and that you are not otherwise entitled to the Separation Compensation.
3. Vesting of Shares in Exchange for Waiver of Claims.
--------------------------------------------------
(a) Existing Holdings. As of the Resignation Date, you will hold:
-----------------
(i) 533,332 shares of the Company's Common Stock, issued pursuant
to a Restricted Stock Purchase Agreement dated February 25, 1998 which includes
a lapsing repurchase right in favor of the Company which lapses (or "vests")
with respect to 11,111 shares per month on the 10th of each month, of which
288,886 shares are vested and 244,446 shares are unvested (the "Group 1
Shares");
(ii) 120,000 shares of the Company's Common Stock, issued pursuant
to a Stock Option Exercise Agreement dated November 30, 1999 which includes a
lapsing repurchase right in favor of the Company which vests with respect to
2,500 shares per month on the 15th of each month, of which 37,500 shares are
vested and 82,500 shares are unvested (the "Group 2 Shares"); and
(iii) 200,000 shares of the Company's Common Stock, issued
pursuant to a Stock Option Exercise Agreement dated December 21, 1999 which
includes a lapsing repurchase right in favor of the Company which vests with
respect to 4,166 shares per
<PAGE>
month on the 21st of each month, of which 16,664 shares are vested and 183,336
shares are unvested (the "Group 3 Shares" and, collectively with the Group 1
Shares and the Group 2 Shares, the "Shares").
(b) Initial Vesting Waiver. In exchange for your Waiver of Claims,
----------------------
the Company hereby waives its lapsing repurchase right (the "Initial Vesting
Waiver") with respect to a number of shares equal to the number that would
ordinarily vest in a three (3)-month period. As a result, in addition to the
vested shares described in subparagraphs 1(a)(i-iii) above, an additional 33,333
of the Group 1 Shares, an additional 7,500 of the Group 2 Shares and an
additional 12,498 of the Group 3 Shares will be vested as of the Resignation
Date. You understand and agree that if you sign this Agreement, the Initial
Vesting Waiver is agreed to by the Company and will be approved by the Board of
Directors after you sign this Agreement, in exchange for your Waiver of Claims
as set forth below, and you are not otherwise entitled to any modification in
vesting. Subject to paragraph 4 below, all remaining unvested Shares will
remain subject to the Company's lapsing repurchase right in accordance with the
agreements under which you purchased them.
4. Vesting of Additional Shares in Exchange for Completion of Tasks. Upon
----------------------------------------------------------------
your Completion of Tasks before the Resignation Date, the Company, upon approval
by the Board of Directors, will waive its lapsing repurchase right (the
"Additional Vesting Waiver") with respect to an additional number of shares
equal to the number that would ordinarily vest in a three (3)-month period (in
addition to the Initial Vesting Waiver). As a result, in addition to the vested
shares described in paragraph 3 (a) and (b) above, an additional 33,333 of the
Group 1 Shares, an additional 7,500 of the Group 2 Shares and an additional
12,498 of the Group 3 Shares will be vested as of the Resignation Date. By
signing this Agreement, you acknowledge that the Company is offering the
Additional Vesting Waiver in exchange for the Completion of Tasks before the
Resignation Date, and that you are not otherwise entitled to any modification to
vesting. All remaining unvested Shares will remain subject to the Company's
lapsing repurchase right in accordance with the agreements under which you
purchased them.
5. Exercise of Repurchase Right. Subject to the Initial Vesting Waiver and
----------------------------
the Additional Vesting Waiver (if any), the Company elects to exercise its
lapsing repurchase right with respect to any remaining unvested Shares.
6. Amendment to Promissory Notes. In conjunction with the Initial Vesting
-----------------------------
Waiver, the Company also agrees to amend the due date and default provisions of
all promissory notes between you and the Company used to purchase the Shares as
follows:
(a) the "Maturity Date" of your Full-Recourse Promissory Note for
$40,000.00 in favor of the Company, dated February 25, 1998, is hereby modified
from "the earlier of February 25, 2008 or one-hundred-eighty (180) days
following your termination of employment with the Company" to the date that is
the later of (i) October 28, 2000 (or six (6) months after the Resignation Date)
or (ii) thirty (30) days after the expiration of the Lock-Up Agreement between
you and the representatives of the underwriters related to the Company's initial
public offering (the "30-Day Post-Lockup Date");
(b) your Secured Full Recourse Promissory Note for $10,800.00 in
favor of the Company, dated November 30, 1999, is hereby modified to provide
that (i) such note shall become due and payable upon the date that is the later
of (A) October 28, 2000 (or six (6) months
<PAGE>
after the Resignation Date) or (B) the 30-Day Post-Lockup Date, rather than
November 30, 2004 (as such note now provides), and (ii) termination of
employment (as defined in the Plan) shall not be deemed an Event of Default
under section 3 of such note;
(c) your Secured Full Recourse Promissory Note for $250,000.00 in
favor of the Company, dated December 21, 1999, is hereby modified to provide
that (i) such note shall become due and payable upon the date that is the later
of (A) October 28, 2000 (or six (6) months after the Resignation Date) or (B)
the 30-Day Post-Lockup Date, rather than December 21, 2004 (as such note now
provides), and (ii) termination of employment (as defined in the Plan) shall not
be deemed an Event of Default under section 3 of such note; and
(d) the amounts due under the notes described in paragraphs (a), (b)
and (c) above shall be proportionally adjusted to reflect the exercise by the
Company of its lapsing repurchase right as provided in paragraph 5, and the
Company hereby waives any amounts due under such notes with respect to the
shares repurchased thereunder.
All other terms and conditions in the above described promissory
notes shall remain effective and enforceable.
7. Health Insurance. In addition to the Separation Compensation, the
----------------
Initial Vesting Waiver, and the Additional Vesting Waiver (if any) provided
above, the Company also agrees to pay an amount equal to the regular "employer"
portion of the premiums for your health insurance coverage (of the type that you
had in effect as of the Resignation Date) for the period through October 31,
2000 in the event you otherwise remain eligible or elect to continue such health
insurance coverage pursuant to the COBRA. A separate notice regarding your
eligibility for continued coverage under COBRA, if any, will be sent to you. By
signing this Agreement, you acknowledge that the Company is offering these
health insurance payments in exchange for your Waiver of Claims as set forth
herein, and that you are not otherwise entitled to these health insurance
payments.
8. Waiver of Claims. The payments and promises set forth in this Agreement
----------------
are in full satisfaction of all accrued salary, vacation pay, bonus pay, profit-
sharing, stock options, termination benefits or other compensation to which you
may be entitled by virtue of your employment with the Company or your separation
from the Company. You hereby release and waive any other claims you may have
against the Company and its owners, agents, officers, shareholders, employees,
directors, attorneys, subscribers, subsidiaries, affiliates, successors and
assigns (collectively "Releasees"), whether known or not known, including,
without limitation, claims under any employment laws, including, but not limited
to, claims of unlawful discharge, breach of contract, breach of the covenant of
good faith and fair dealing, fraud, violation of public policy, defamation,
physical injury, emotional distress, claims for additional compensation or
benefits arising out of your employment or your separation of employment, claims
under Title VII of the 1964 Civil Rights Act, as amended, the California Fair
Employment and Housing Act and any other laws and/or regulations relating to
employment or employment discrimination, including, without limitation, claims
based on age or under the Age Discrimination in Employment Act or Older Workers
Benefit Protection Act. By signing below, you expressly waive any benefits of
Section 1542 of the Civil Code of the State of California, which provides as
follows:
<PAGE>
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR."
9. Completion of Tasks. You understand and agree to endeavor in good faith
-------------------
to complete the tasks listed in Exhibit A hereto on or before your Resignation
Date. You hereby acknowledge that you negotiated with Hugh Martin at arm's
length, the tasks to be completed in Exhibit A. You understand and agree that
Mr. Martin shall be the sole and final evaluator of whether the Completion of
Tasks was accomplished before your Resignation Date. If Mr. Martin is unable for
any reason to evaluate whether the tasks in Exhibit A were completed, then the
Board shall act as the sole and final evaluator for purposes of this Agreement.
Any breach of this provision will cause you to forfeit and otherwise waive any
right to retain the additional three (3) months of unvested shares described in
paragraph 4 above, and the Company will make no additional vesting waiver. Any
failure to complete the tasks in Exhibit A will not affect any other provision
of this Agreement. Specifically, you will be entitled to Separation Compensation
(paragraph 2), Amendment to Promissory Notes (paragraph 6), Health Insurance
(paragraph 7), and the Initial Vesting Waiver for the first three (3) months
following the Resignation Date (paragraph 3), as described above, in
consideration for your Waiver of Claims, regardless of your Completion of Tasks.
10. Confidential Information. You hereby acknowledge that you are bound by
------------------------
the Employee Invention Assignment and Confidentiality Agreement dated February
16, 1998 (the "Employee Invention Agreement") attached hereto as Exhibit B, and
that as a result of your employment with the Company you have had access to the
Company's Proprietary Information (as defined in the Employee Invention
Agreement), that you will hold all Proprietary Information in strictest
confidence and that you will not make use of such Proprietary Information on
behalf of anyone. You further confirm that you will deliver to the Company on
the Resignation Date all documents and data of any nature containing or
pertaining to such Proprietary Information and that you will not take with you
any such documents or data or any reproduction thereof.
11. Nondisparagement. You agree that you will not disparage Releasees or
----------------
their products, services, agents, representatives, directors, officers,
shareholders, attorneys, employees, vendors, affiliates, successors or assigns,
or any person acting by, through, under or in concert with any of them, with any
written or oral statement.
12. Taxes. You will indemnify and hold Releasees harmless from and against
-----
any and all tax obligations for which you or Releasees may become liable as a
result of this Agreement.
13. Legal and Equitable Remedies. You agree that Releasees have the right
----------------------------
to enforce this Agreement and any of its provisions by injunction, specific
performance or other equitable relief without prejudice to any other rights or
remedies Releasees may have at law or in equity for breach of this Agreement.
14. Confidentiality. The contents, terms and conditions of this Agreement
---------------
must be kept confidential by you and may not be disclosed except to your
accountant or attorneys or pursuant to subpoena or court order. You agree that
if you are asked for information
<PAGE>
concerning this Agreement, you will state only that you and the Company reached
an amicable resolution of any disputes concerning your separation from the
Company. Any breach of this confidentiality provision shall be deemed a material
breach of this Agreement.
15. No Admission of Liability. This Agreement is not and shall not be
-------------------------
construed or contended by you to be an admission or evidence of any wrongdoing
or liability on the part of Releasees, their representatives, heirs, executors,
attorneys, agents, partners, officers, shareholders, directors, employees,
subsidiaries, affiliates, divisions, successors or assigns. This Agreement
shall be afforded the maximum protection allowable under California Evidence
Code Section 1152 and/or any other state or Federal provisions of similar
effect.
16. Entire Agreement. This Agreement constitutes the entire agreement
----------------
between you and Releasees with respect to the subject matter hereof and
supersedes all prior negotiations and agreements, whether written or oral,
relating to such subject matter other than the confidentiality agreement
referred to in paragraph 10, above. You acknowledge that neither Releasees nor
their agents or attorneys have made any promise, representation or warranty
whatsoever, either express or implied, written or oral, which is not contained
in this Agreement for the purpose of inducing you to execute the Agreement, and
you acknowledge that you have executed this Agreement in reliance only upon such
promises, representations and warranties as are contained herein.
17. Modification. It is expressly agreed that this Agreement may not be
------------
altered, amended, modified, or otherwise changed in any respect except by
another written agreement that specifically refers to this Agreement, executed
by authorized representatives of each of the parties to this Agreement.
18. Expiration of Offer. This offer of separation compensation in exchange
-------------------
for a release of claims will expire at 5:00 p.m. (PDT) on March 31, 2000.
If you agree to abide by the terms outlined in this Agreement, please sign
the attached copy and return it to me. I wish you the best in your future
endeavors.
Sincerely,
OPTICAL NETWORKS, INC.
By:/s/ Hugh Martin
---------------------------------
Hugh Martin
I have read, understand and agree to the terms set forth above.
/s/ Terrence J. Schmid Date: 3/29/2000
- ------------------------------ -------------------------------
Terrence J. Schmid
<PAGE>
Exhibit A
1. Completion of IPO-related tasks as follows:
------------------------------------------
a. Continue to manage IPO on behalf of ONI;
b. Finalize agreements and contracts with the IPO banknote company,
printer and transfer agent;
c. Participate in and manage the S-1 drafting process, including ONI's
responses to SEC comments;
d. Ensure the proper completion of and submit for Board approval the
following matters:
(i) formation and charter for the audit and compensation
committees;
(ii) board actions associated with the S-1 filing process; and
(iii) adoption of new employee stock plans as well as any
additional black box financings;
e. Manage the underwriters in connection with preparation and filing
of the S-1 and amendments thereto;
f. Help develop the road show presentation and assist in the
preparation of the executives responsible for giving the presentation; and
g. Assist in the development and finalization of the Directed Share
program.
2. Completion of insurance-related tasks as follows:
------------------------------------------------
a. Negotiate to signing-Directors & Officers, Errors and Omissions,
and general corporate liability policies; and
b. Manage transfer of programs from ABD to Aon;
3. Finalize an ONI vendor financing program for implementation.
-----------------------------------------------------------
4. Negotiate to signing $30 million debt financing package.
-------------------------------------------------------
5. Coordinate with legal and Fenwick & West LLP the additional Series G
--------------------------------------------------------------------
investments by Andy Page and Greg Maffei.
- ----------------------------------------
6. Continue to manage all daily financial needs of ONI.
---------------------------------------------------
7. Provide general transition related support to new CFO if hired before
---------------------------------------------------------------------
the Resignation Date.
- --------------------
<PAGE>
Exhibit B
<PAGE>
EXHIBIT 21.01
List of Registrant's Subsidiaries
ONI Credit Corporation
Object - Mart, Inc.
<PAGE>
Report on Financial Statement Schedule and Consent
EXHIBIT 23.02
The Board of Directors
ONI Systems Corp.:
The audits referred to in our report dated March 9, 2000, except for Note
13(c) which is as of April 25, 2000, included the related financial statement
schedule of ONI Systems Corp. as of December 31, 1998 and 1999, and for the
period from October 20, 1997 (inception) to December 31, 1997 and for the
years ended December 31, 1998 and 1999, included in the registration statement
on page S-1. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits. In our opinion, such
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
We consent to the use of our reports included herein and to the reference
to our firm under the heading "Experts" and "Selected Consolidated Financial
Data" in the prospectus.
/s/ KPMG LLP
Mountain View, California
April 25, 2000
<PAGE>
Exhibit 23.03
Consent of KPMG LLP, Independent Auditors
The Board of Directors
Object-Mart Inc.
We consent to the use of our report included herein dated April 10, 2000,
related to the balance sheet of Object-Mart Inc. as of December 31, 1998, and
the related statements of operations, shareholders' equity, and cash flows for
the year ended December 31, 1998 and for the six months ended June 29, 1999,
and to the reference to our firm under the heading "Experts" in the
prospectus.
/s/ KPMG LLP
Mountain View, California
April 25, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM *ONI SYSTEMS
CORP. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR MARCH 31, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR YEAR
<FISCAL-YEAR-END> DEC-31-2000 DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-2000 JAN-01-1998 JAN-01-1999
<PERIOD-END> MAR-31-2000 DEC-31-1998 DEC-31-1999
<CASH> 50,307,041 19,061,688 80,022,591
<SECURITIES> 0 0 0
<RECEIVABLES> 3,928,630 1,092,853 163,434
<ALLOWANCES> 0 0 0
<INVENTORY> 20,783,774 0 9,648,856
<CURRENT-ASSETS> 75,976,054 20,295,044 90,605,860
<PP&E> 15,796,067 1,016,698 5,314,990
<DEPRECIATION> 829,414 289,265 953,889
<TOTAL-ASSETS> 95,868,948 21,312,242 100,942,475
<CURRENT-LIABILITIES> 16,874,779 668,014 8,847,951
<BONDS> 0 0 0
0 0 0
7,919 5,058 7,885
<COMMON> 3,494 1,800 3,128
<OTHER-SE> 78,687,378 20,558,048 91,716,806
<TOTAL-LIABILITY-AND-EQUITY> 95,868,948 21,312,242 100,942,475
<SALES> 564,726 1,732,730 3,033,995
<TOTAL-REVENUES> 564,726 1732,730 3,033,995
<CGS> 424,327 1,207,897 1,032,144
<TOTAL-COSTS> 424,327 1,207,897 1,032,144
<OTHER-EXPENSES> 5,082,405 9,558,880 49,194,794
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> (4,775,422) (8,851,342) (46,571,571)
<INCOME-TAX> 1,600 826 1,600
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (4,777,022) (8,852,168) (46,571,571)
<EPS-BASIC> (0.35) (0.74) (2.58)
<EPS-DILUTED> (0.35) (0.74) (2.58)
</TABLE>
