<PAGE>
As filed with the Securities and Exchange Commission on March 10, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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ONI SYSTEMS CORP.
(Exact name of Registrant as specified in its charter)
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Delaware 3661 77046-9657
(State or other (Primary standard industrial (I.R.S. employer
jurisdiction of classification code number) identification no.)
incorporation or
organization)
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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)
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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)
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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
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, 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 Amount of
Title of Each Class of Aggregate Offering Registration
Securities to be Registered Price(1) Fee
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<S> <C> <C>
Common Stock, $0.0001 par value............. $115,000,000 $30,360
</TABLE>
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(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
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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 March 10, 2000.
[LOGO OF ONI SYSTEMS]
Shares
ONI Systems Corp.
Common Stock
-----------
This is an initial public offering of shares of common stock of ONI Systems
Corp. All of the shares of common stock are being sold by ONI Systems.
At the request of ONI Systems, the underwriters have reserved at the initial
public offering price up to shares of common stock for sale to individuals
designated 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 $ and $ . ONI Systems has applied for approval for quotation of its
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 shares, the
underwriters have the option to purchase up to an additional shares from
ONI Systems at the initial public offering price, less the underwriting
discount.
-----------
The underwriters expect to deliver the shares against payment in New York,
New York on , 2000.
Goldman, Sachs & Co.
Banc of America Securities LLC
Chase H&Q
Robertson Stephens
-----------
Prospectus dated , 2000.
<PAGE>
[INSIDE FRONT COVER ARTWORK TO COME]
<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, 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
numbers presented in this prospectus have been retroactively restated to give
effect to all stock splits. Except as otherwise indicated, the information in
this prospectus gives effect to our reincorporation in Delaware.
ONI Systems Corp.
We develop, market and sell all-optical networking equipment specifically
designed to address the bandwidth and service limitations of regional and
metropolitan networks. Communications 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.
Our all-optical product offerings include the ONLINE9000, which we began
shipping in February 2000, and the ONLINE7000, which we anticipate will be
available in the second quarter of 2000. These products incorporate our OPTX
network operating system and OLMP inter-network communications protocols to
manage and support a diverse mix of service offerings.
In response to demand caused by the proliferation of the Internet and
Internet-related services, transmission capacity has grown rapidly in the long
distance and enterprise networks over the past several years. The availability
of high-speed optical communications solutions, which transmit data using
pulses of light rather than electricity, has enabled this growth. However,
optical solutions specifically designed to address the challenges faced by
metro networks, which bridge long distance and enterprise networks, have not
been widely available. This has contributed to a bottleneck in the metro market
that impedes service delivery. To date, optical solutions available to metro
service providers have been based on technologies originally designed to serve
other communications networks, and have been costly, difficult to scale 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. 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.
. 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.
3
<PAGE>
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.
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. References in this prospectus to "we",
"our", and "us" refer to ONI Systems Corp. ONI Systems(TM), ONI(TM), our logo,
ONLINE9000(TM), ONLINE7000(TM), OPTX(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.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered............. shares
Common stock to be outstanding
after this offering............. shares
Use of proceeds.................. For general corporate purposes, including
capital expenditures, working capital and
potential acquisitions of, or investments in,
complementary technologies or businesses. See
"Use of Proceeds".
Proposed Nasdaq National Market
symbol.......................... "ONIS"
</TABLE>
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 December 31,
1999. The number of shares to be outstanding excludes, as of December 31, 1999:
. 388,908 shares of common stock subject to options outstanding under our
1997 Stock Option Plan, at a weighted average exercise price of $0.03 per
share;
. 15,813,816 shares of common stock subject to options outstanding under
our 1998 Equity Incentive Plan, at a weighted average exercise price of
$0.24 per share, and 1,824,480 shares of common stock available for
future grant under our 1998 Equity Incentive Plan;
. 1,346,000 shares of common stock subject to options outstanding under our
1999 Equity Incentive Plan, at a weighted average exercise price of $0.95
per share, and 18,166 shares of common stock available for future grant
under our 1999 Equity Incentive Plan; and
. 1,011,394 shares of common stock issuable upon exercise of outstanding
warrants, at a weighted average exercise price of $0.69 per share.
In addition, since December 31, 1999 and through March 1, 2000, we have
granted options to purchase 5,415,952 shares of our common stock, at a weighted
average exercise price of $2.08 per share, and warrants to purchase 223,000
shares of common stock, at a weighted average exercise price of $0.91 per
share. We also intend to adopt our 2000 Equity Incentive Plan under which
shares of common stock will be available for future grant and our 2000 Employee
Stock Purchase Plan under which shares of common stock will be available
for future grant.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Period From
Inception Year Ended December
(October 20, 1997) 31,
to December 31, ----------------------
1997 1998 1999
------------------ ---------- ----------
(in thousands, except share and per
share data)
<S> <C> <C> <C>
Statement of operations data:
Revenue............................. $ -- $1,733 $ 3,034
Gross profit........................ -- 525 2,002
Operating expenses.................. 198 9,559 45,903
Operating loss...................... (198) (9,034) (43,901)
Net loss............................ (199) (8,852) (43,280)
Basic and diluted net loss per
share.............................. (0.77) (0.74) (2.40)
Weighted average shares outstanding
used in
computing basic and diluted net
loss per share..................... 257,017 11,918,628 18,043,188
Pro forma basic and diluted net loss
per share.......................... (0.55)
Shares used in computing pro forma
basic and diluted loss per share... 78,025,225
</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 period or, if later, the date of
their issuance.
<TABLE>
<CAPTION>
At December 31, 1999
------------------------
As
Actual Adjusted
------------ -----------
(in thousands)
<S> <C> <C>
Balance sheet data:
Cash and cash equivalents.............................. $ 80,023 $
Working capital........................................ 81,758
Total assets........................................... 100,272
Capital lease obligations, less current portion........ 367
Total stockholders' equity............................. 91,057
</TABLE>
The as adjusted balance sheet data at December 31, 1999 gives effect to the
sale of shares of common stock by us in this offering at an assumed
initial public offering price of $ per share, after deducting an assumed
underwriting discount and estimated offering expenses.
See notes 1 and 11 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. The occurrence of any of the following risks could cause the
trading price of our common stock to decline and you might lose all or part of
your investment.
We have a history of losses, expect to continue to incur losses and may never
achieve profitability.
Through December 31, 1999 we incurred cumulative losses of $52.3 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.
The ONLINE9000 is our only currently available product and a significant
portion of our future revenue depends on its commercial success.
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 not choose 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
7
<PAGE>
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.
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.
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 five 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.
We will not succeed if we do not add customers.
Our future success will depend on attracting new customers. If we fail to do
so, 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.
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.
8
<PAGE>
Some of our current and potential competitors are large public companies
that have longer operating histories and 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 communications
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 harm our
financial condition and results 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:
. currency exchange rate fluctuations;
. tariffs, export controls and other trade barriers;
. longer accounts receivable payment cycles and difficulties in collecting
accounts receivable;
. the impact of economic crises outside the United States;
. difficulties and costs of staffing and managing foreign operations;
. the burdens of complying with a wide variety of foreign laws;
. certification requirements with which we may be unfamiliar;
. reduced protection for intellectual property rights in some countries;
. potentially adverse tax consequences, including restrictions on the
repatriation of earnings; and
. political and economic instability.
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
9
<PAGE>
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.
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 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
10
<PAGE>
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.
We plan to increase our operating expenses significantly 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
could result in substantial operating losses.
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.
In order to succeed, we must manage growth, improve existing processes and
implement new systems, procedures and controls.
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 and at December 31, 1999, we had 202 employees. In addition,
we plan
11
<PAGE>
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.
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 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 is seeking an injunction
and has obtained a temporary restraining order against him, which prevents him
from working for us. We have agreed to defend him against this claim. 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 face an extremely competitive
environment. If the companies with whom we establish business relations are not
successful in building their systems, promoting their products, 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 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
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<PAGE>
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.
Our products may have defects that we find only after full deployment, which
could seriously harm our business.
To date, the ONLINE9000 has been deployed on only a limited basis. The
ONLINE9000 can only be fully tested when deployed for an extended period of
time. 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;
. failure to achieve market acceptance;
. diversion of development resources;
. increased service and warranty costs;
. legal actions by our customers that could expose us to liability for our
products and require us to incur significant 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.
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<PAGE>
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 any of our intellectual
property rights is uncertain. Effective 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".
Necessary licenses for third-party software may not be available to us or may
be very expensive.
We currently license, and in the future may be required to license, software
from third parties that is used in our products or is required to develop new
products or product enhancements. Third-party licenses may not be available to
us on commercially reasonable terms or at all. 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.
If we become involved in an intellectual property dispute, 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.
In the future, we may be a party to litigation to protect our intellectual
property or as a result of an alleged infringement of others' intellectual
property. These claims and any resulting lawsuit, if successful, could subject
us to significant liability for damages and 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 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.
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<PAGE>
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 dilute 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.
Insiders will continue to have substantial control over ONI Systems after this
offering and could delay or prevent a change in corporate control, which could
prevent you from realizing a premium over the market price for our common
stock.
As of December 31, 1999, the executive officers, directors and entities
affiliated with them beneficially owned approximately 37.9% of our outstanding
common stock. We anticipate that the executive officers, directors and entities
affiliated with them will, in the aggregate, beneficially own approximately %
of our outstanding common stock following the completion of this offering.
These stockholders, if acting together, would be able to influence
significantly all matters requiring approval by our stockholders, including the
election of directors and the approval of mergers or other business combination
transactions. 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. See "Principal Stockholders".
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:
. quarterly variations in operating results;
. 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;
. loss of a major customer;
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<PAGE>
. additions or departures of key personnel;
. future sales of our common stock; 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. The trading prices of many
technology companies' stocks are at or near historical highs. These high
trading prices may not be sustained. 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.
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;
. requiring a majority of the stockholders to call 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. For a further discussion of these provisions, see "Description of
Capital Stock--Anti-Takeover Provisions".
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<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.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect our management's view only as of the date of this
prospectus. Except as required by law, we undertake no obligation to update any
forward-looking statement, whether as a result of new information, future
events or otherwise.
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<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the shares of common
stock that we are offering will be approximately $ million, based on an
assumed initial public offering price of $ 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 $
million.
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.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
. on an actual basis;
. on a pro forma basis to reflect our reincorporation in Delaware and 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 of common stock in
this offering at an assumed initial public offering price of $ per share
after deducting an assumed underwriting discount and our estimated
offering expenses.
<TABLE>
<CAPTION>
As of December 31, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Capital-lease obligation....................... $ 533 $ 533 $
Stockholders' equity:
Preferred Stock, 80,309,408 shares
authorized, 78,855,900 shares issued and
outstanding, actual; shares authorized,
no shares issued and outstanding, pro forma
$0.0001 par value per share; shares
authorized, no shares issued and
outstanding, pro forma as adjusted.......... 123,291 --
Common stock, 159,690,592 shares authorized,
31,279,590 shares issued and outstanding,
actual; shares authorized, 110,135,490
shares issued and outstanding, pro forma,
$0.0001 par value per share; shares
authorized, shares issued and
outstanding, pro forma as adjusted.......... 49,295 11
Additional paid-in capital................... -- 172,575
Deferred stock compensation.................. (25,289) (25,289)
Services receivable from a shareholder....... (85) (85)
Notes receivable from stockholders........... (3,824) (3,824)
Accumulated deficit.......................... (52,331) (52,331)
-------- -------- ----
Total stockholders' equity................. 91,057 91,057
-------- -------- ----
Total capitalization..................... $ 91,590 $ 91,590 $
======== ======== ====
</TABLE>
The outstanding share information in the table above excludes:
. 388,908 shares of common stock subject to options outstanding under our
1997 Stock Option Plan, at a weighted average exercise price of $0.03 per
share;
. 15,813,816 shares of common stock subject to options outstanding under
our 1998 Equity Incentive Plan, at a weighted average exercise price of
$0.24 per share, and 1,824,480 shares of common stock available for
future grant under our 1998 Equity Incentive Plan;
. 1,346,000 shares of common stock subject to options outstanding under our
1999 Equity Incentive Plan, at a weighted average exercise price of $0.95
per share, and 18,166 shares of common stock available for future grant
under our 1999 Equity Incentive Plan; and
. 1,011,394 shares of common stock issuable upon the exercise of
outstanding warrants, at a weighted average exercise price of $0.69 per
share.
Subsequent to December 31, 1999 and through March 1, 2000, we granted
options to purchase 5,415,952 shares of common stock under our 1998 Equity
Incentive Plan and our 1999 Equity Incentive Plan at a weighted average
exercise price of $2.08 per share and we issued warrants to
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<PAGE>
purchase 223,000 shares of our common stock at a weighted average exercise
price of $0.91 per share. We also adopted our 2000 Equity Incentive Plan under
which shares of common stock will be available for future grant and our
2000 Employee Stock Purchase Plan under which 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", "Certain Transactions" and notes 7, 8 and 11 of the notes to our
consolidated financial statements.
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<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the 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 is equal to total
assets less intangible assets and total liabilities.
Our pro forma net tangible book value as of December 31, 1999 was $86.7
million, or approximately $3.97 per share, assuming the conversion of all
outstanding shares of our preferred stock into shares of our 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 $ per share
and after deducting an assumed underwriting discount and our estimated offering
expenses, our pro forma net tangible book value as of December 31, 1999 would
have been approximately $ million, or $ per share. This represents an
immediate increase in pro forma net tangible book value of $ per share to
existing stockholders and an immediate dilution in net tangible book value of
$ per share to new investors 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................... $
Pro forma net tangible book value per share as of December 31,
1999............................................................. $
Increase in net tangible book value per share attributable to new
investors........................................................
----
Pro forma net tangible book value per share after offering........
----
Dilution per share to new investors............................... $
====
</TABLE>
The following table summarizes as of December 31, 1999, on the pro forma
basis described above, the number of shares of common stock purchased from us,
the total consideration paid and the average price per share paid 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 Total
Purchased Consideration
-------------- -------------- Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... % $ % $
New investors.......................
--- ----- ---- -----
Total............................. 100.0% $ 100.0%
=== ===== ==== =====
</TABLE>
As of December 31, 1999, there were options outstanding to purchase a total
of 17,548,724 shares of our common stock at a weighted average exercise price
of $0.29 per share and warrants outstanding to purchase a total of 1,011,394
shares of our common stock at a weighted average exercise price of $0.69 per
share. Subsequent to December 31, 1999 and through March 1, 2000, we granted
options to purchase 5,415,952 shares of our common stock under our 1998 Equity
Incentive Plan and our 1999 Equity Incentive Plan at a weighted average
exercise price of $2.08 per share and we issued warrants to purchase 223,000
shares of common stock at a weighted average exercise price of $0.91 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", "Certain Transactions" and
notes 1, 7 and 11 of the notes to our consolidated financial statements.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL 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 financial statements,
which have been audited by KPMG LLP, independent auditors, and are included
elsewhere in this prospectus. 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 Notes 1 and 11 of our notes to consolidated
financial statements.
<TABLE>
<CAPTION>
Period From
Inception Year Ended
(October 20, 1997) December 31,
to December 31, ----------------------
1997 1998 1999
------------------ ---------- ----------
(in thousands, except share and per
share data)
<S> <C> <C> <C>
Revenue............................. $ -- $ 1,733 $ 3,034
Cost of revenue.................... -- 1,208 1,032
Gross profit........................ -- 525 2,002
Operating expenses:
Research and development, excluding
deferred stock compensation
amortization amounts ............. 39 4,009 25,176
Sales and marketing, excluding
deferred stock compensation
amortization amounts ............. 21 649 4,557
General and administrative,
excluding deferred stock
compensation amortization amounts
.................................. 49 1,591 4,756
Amortization of deferred stock
compensation...................... 89 3,310 8,975
Common stock warrant expense ...... -- 2,269
In-process research and
development....................... -- -- 170
------- ---------- ----------
Total operating expenses.......... 198 9,559 45,903
------- ---------- ----------
Operating loss.................... (198) (9,034) (43,901)
Interest income (expense), net...... (1) 183 623
------- ---------- ----------
Loss before income taxes.......... (199) (8,851) (43,278)
Income taxes........................ -- 1 2
------- ---------- ----------
Net loss.......................... $ (199) $ (8,852) $ (43,280)
======= ========== ==========
Basic and diluted net loss per
share.............................. $ (0.77) $ (0.74) $ (2.40)
Weighted-average shares outstanding
used in computing basic and diluted
net loss per share................. 257,017 11,918,628 18,043,188
Pro forma basic and diluted net loss
per share.......................... (0.55)
Shares used in computing pro forma
basic and diluted net loss per
share ............................. 78,025,225
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
(in thousands)
<S> <C> <C>
Cash and cash equivalents............................. $19,092 $80,023
Working capital....................................... 19,627 81,758
Total assets.......................................... 21,312 100,272
Long-term obligations, less current portion........... 79 367
Stockholders' equity.................................. $20,565 $91,057
</TABLE>
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<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
From our inception in October 1997 through December 1999, our operating
activities consisted primarily of research and development, including the
design, development and testing of our first product, the ONLINE9000. We also
formed and expanded our administrative, marketing, sales, manufacturing and
customer service and support organizations and commenced sales and marketing
activities.
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 preferred stock to Optivision shareholders. 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 the warrants to purchase capital stock of
Optivision. We will not receive any of the proceeds from the exercise of these
warrants. Optivision also retained 8,000,000 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-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 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 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 our consolidated financial statements from June 29, 1999. In
connection with this acquisition we recorded goodwill valued at $4.8 million as
of December 31, 1999, which is being amortized over a period of two years.
We began beta trials of our ONLINE9000 product in November 1999 and began
shipping this product in February 2000. In December 1999, we signed purchase
and license agreements for the ONLINE9000 covering potential orders from
communications service providers in the United States, United Kingdom, Asia and
South America. These agreements do not require these companies to make any
minimum purchases and we may never recognize any revenue from these agreements.
Since our inception, we have incurred significant losses, and as of December
31, 1999, we had an accumulated deficit of $52.3 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.
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
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<PAGE>
obligations are met or the customer accepts the product. Revenue from service
obligations are deferred and recognized ratably over the service period.
We market our products in the United States and internationally, through our
direct sales force, to communications service providers. We expect a
significant portion of our future revenue will come from sales of our
ONLINE9000 product to North American and international customers. We plan to
introduce new products, including the ONLINE7000, and product enhancements,
although we may be unsuccessful in these efforts.
Our cost of revenue primarily 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 quality assurance, supply chain management,
manufacturing engineering, documentation control and product repairs at our
manufacturing facility in San Jose, California.
Research and development expenses consist primarily of salaries and related
personnel costs, 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 primarily 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.
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 and stock options granted during 1998 at
prices subsequently deemed to be below fair value on the date of 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. In
1999, we recorded approximately $29.0 million in additional deferred stock
compensation for stock options granted during 1999 at prices subsequently
deemed to be below fair value on the date of grant. We amortized a total of
approximately $9.0 million of deferred stock compensation in the year ended
December 31, 1999 leaving a total of $25.3 million related to all prior
issuances to be amortized over four years.
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<PAGE>
Results of Operations
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.
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,
which 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. For example, 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.
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 element management solutions
software. The remaining revenue of approximately $1.9 million was derived
primarily 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 fiscal 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 $25.2
million in 1999, representing 41.9% of total operating expenses in fiscal 1998
and 54.8% of total operating expenses in fiscal 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.
Sales and marketing
Sales and marketing expenses were $649,000 in 1998 and $4.6 million in 1999,
representing 6.8% of total operating expenses in 1998 and 9.9% of total
operating expenses in 1999. The increase
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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 approximately 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 $4.8
million in 1999, representing 16.6% of total operating expenses in fiscal 1998
and 10.4% of total operating expenses in fiscal 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 the grant of stock options to employees with exercise or
sales prices subsequently determined to be below the deemed fair value of our
common stock on the date of grant, we recorded amortization of deferred stock
compensation of $3.3 million in 1998 and $9.0 million in 1999. As of December
31, 1999 our unamortized deferred stock compensation was $25.3 million, of
which approximately $18.6 million will be amortized in 2000. In addition, we
have granted additional stock-based compensation in 2000 that will result in a
substantial increase in deferred stock compensation and amortization expense.
Common stock warrant expense
In 1999, we expensed $2.3 million related to the warrant to purchase 500,000
shares of common stock issued to a communications service provider in
connection with entering into an agreement under which the service provider
may, but is not obligated to, purchase our products.
Interest income (expense), net
Interest income and other, 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 fiscal 1998 and
$623,000 in fiscal 1999. 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 carry-forwards for federal and
California income tax purposes of $34.0 million and research credit carry-
forwards of approximately $1.1 million. These carry-forwards 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 contained in Section 382 of the Internal Revenue Code. There is
sufficient uncertainty regarding the reliability of the deferred tax assets
such that a full valuation allowance has been recorded.
Liquidity and Capital Resources
Since inception, we have 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.
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We used $29.6 million in cash from operations in 1999, an increase of $23.8
million from the $5.8 million used in 1998. The increase was primarily due to
the increase in our net loss of $34.4 million, an increase in inventory of $9.6
million and other working capital of $10.0 million, offset by increased
amortization of deferred stock compensation and common stock warrants of $7.9
million, and depreciation and amortization of $2.3 million.
We used $6.6 million in cash from investing activities in 1999, an increase
of $5.6 million from the $1.0 million used in 1998. The increase was primarily
related to the net cash portion of our acquisition of Object-Mart of $1.7
million and the purchase of property and equipment.
We generated $97.1 million in cash from financing activities in 1999, an
increase of $71.2 million 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 capital purchases of property
and equipment. We had $533,000 in capital lease obligations outstanding at
December 31, 1999 and $119,000 at December 31, 1998.
At December 31, 1999, cash and cash equivalents totaled $80 million, an
increase of $60.9 million 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.
We have a lease financing facility for $1.5 million of which $467,000 had
been drawn as of December 31, 1999. This facility 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, 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 February 29, 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.
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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 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 future periods, 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.
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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
such forward-looking statements.
Overview
We develop, market and sell all-optical networking equipment specifically
designed to address the bandwidth and service limitations of regional and
metropolitan networks. We believe that our product offerings represent the
first commercially available, all-optical solution specifically designed for
metro networks. Communications 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 in 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 communications 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 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 communications 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, or DWDM,
allow transmission of multiple signals on a single strand of optical fiber,
each signal using one wavelength of light. DWDM technology currently enables
transmission of up to 160 different wavelengths on a single fiber. This means
that today a service provider 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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[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
NETWORK" 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 Los Angeles) 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 network" 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" 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" also 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" appear at the bottom of
this portion of the oval below all of the buildings. The word "Enterprise"
appears to the left of the buildings.
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 the ability 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 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. At the same 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
Communications network 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. Metro
network service providers 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 as needed, 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, inefficiently utilizes the limited
space in metro service providers' facilities 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 point-to-point
wavelength division multiplexing, or WDM, to the metro network.
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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, WDM was originally designed for long-
haul point-to-point applications in a SONET environment. WDM, 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 WDM
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
network.
The ONI Systems Solution
We develop, market and sell all-optical communications equipment that
enables network 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 is expected to be available in the second quarter of 2000,
for metro access networks, our OPTX network operating system and our OLMP
inter-network communications protocols.
Our product offerings provide the following benefits to metro network
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 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 all current networking standards and can readily be upgraded to
handle emerging services without the deployment of additional equipment.
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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 the leading provider of all-optical networking
solutions for communications 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.
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
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direct sales organization in North America and are expanding into Europe, 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,
our product architecture performs
the following functions in an all-
optical manner:
. multiplexing and de-multiplexing;
. per channel and grouped wavelength
routing;
. switching;
. dynamic channel add/drop;
. restoration switching for routing
around fiber failure or equipment
failure;
. signal amplification; and
. supervisory channels for
performance monitoring.
[GRAPHIC--DIAGRAM DEPICTING THE 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 "Optical 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 "All Optical 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 words
"Optical Switching" appear in the flowchart rectangle. The words "All-Optical
Switching" appear 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 words
"Optical Amplifiers" appear in the center of this rectangle. The words "To
Fiber Network" appear below the bottom-most rectangle of the stack.
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.
Build with software infrastructure based on XML, 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. 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 design, operations and service management capabilities by
managing networks built with our ONLINE9000 product.
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[GRAPHIC--DIAGRAM DEPICTING THE ONI SYSTEMS' OPTX ARCHITECTURE]
The center of the diagram is a large square. The word "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 Applications" appear in the right
rectangle. Below these rectangles occupying the bottom quarter of the square
is a rectangle with words "ONLINE 9000 Network" 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 "GUI/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.
Products
ONLINE9000
The ONLINE9000 is designed for Metro core 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 rapid 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 path-based optical protection switching;
. 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 in the second quarter of 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
35
<PAGE>
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;
. path-based optical protection; and
. a 19" 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, 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, or APIs, within OPTX link to other
management systems and applications. The OPTX architecture and infrastructure
makes extensive use of XML 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 calculation 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 northbound interface 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 protocols, 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 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. As of March 6, 2000, we had entered into
agreements under which the following communications service providers may, but
are not obligated to, purchase our products: COLT Telecom plc, Williams
Communications Inc., Marietta Fibernet, KVH Industries Inc. and MetroRED
Telecommunicaciones S.A. In addition, we had shipped the ONLINE9000 to Marietta
Fibernet and Williams Communications in the United States and COLT Telecom in
the United Kingdom.
Sales and Marketing
In North America, 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
36
<PAGE>
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 developing a direct sales force to sell to
potential customers outside North America.
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 TNS, Inc., a third-party
provider of "engineer, furnish and install" 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 110 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
We conduct supply chain management, production engineering, documentation
control and quality assurance at our manufacturing 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
outsourced. Currently, we use a number of manufacturing vendors for electronic
assemblies while E-Tek Dynamics performs the majority of our outsourced optical
assembly.
This approach to manufacturing allows us to:
. reduce capital equipment expenditures 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.
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<PAGE>
Competition
Competition in the communications network infrastructure market is intense.
Our existing and potential competitors include 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 which our products address
and have attracted substantial amounts of venture capital funding.
We believe that to be competitive in the communications network
infrastructure market we must deliver products that:
. provide extremely high network reliability;
. provide high performance interfaces and packet processing 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.
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 four patents in
the United States. However, only one of these patents is currently significant
to our products. In addition, we currently have pending 17 patent applications
in the United States and internationally. These patents relate to optical
architecture, hardware, software and management systems. Any 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.
Employees
As of December 31, 1999, we had a total of 202 employees:
. 110 in research and development;
. 21 in sales and marketing;
. 7 in customer service and support;
. 34 in manufacturing; and
. 30 in finance and administration.
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<PAGE>
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 against us and several of our
employees who were former employees of Nortel Networks. The suit seeks an
injunction to prevent us from hiring additional Nortel Networks employees and
prohibiting 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 certain
Nortel Networks trade secrets.
In addition, the former employer of one of our recently hired employees is
seeking an injunction and has obtained a temporary restraining order against
him, which prevents him from working for us. We have agreed to reimburse him
for the legal costs of defending against this claim.
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<PAGE>
MANAGEMENT
Executive Officers, Directors and Significant Employees
Our executive officers, directors and significant employees and their ages
as of December 31, 1999 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
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>
Hugh C. Martin has served as President, Chief Executive Officer of ONI
Systems 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 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
30, 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 received an M.B.A. from Duke University and
a B.A. in Economics from the University of San Francisco.
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 as Vice President, Engineering of
ONI Systems from September 1998
40
<PAGE>
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 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 March 2000. Prior to joining us, 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 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 board 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.
Jonathan D. Feiber has served as a director of ONI Systems since January
1998. Mr. Feiber has served as a 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 was one of the founders of Ungermann-Bass Inc. and was President and
CEO 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 served as Chief Executive Officer and 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 a B.A from Dartmouth College and an M.B.A. from
Harvard University Graduate School of Business.
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<PAGE>
Kenneth H. Calhoun has served as Vice President, Product Marketing of ONI
Systems since February 1999 and as Senior Director, Product Marketing of ONI
Systems from August 1998 to February 1999. Prior to joining us, 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. Prior to then, 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. Prior to joining us, Mr. Desroches served as Senior
Manager, High Speed Optics Operations for Nortel Optoelectronics, an optical
components company, from September 1998 to October 1999. Prior to then, 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. Prior to joining us, 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
and 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.
Following this offering, our bylaws will provide that our board of directors
will be divided into three classes as nearly equal in size as possible with
staggered three-year terms. The term of office of our Class I directors will
expire at the annual meeting of stockholders to be held in 2000; the term of
office of our Class II directors will expire at the annual meeting of
stockholders to be held in 2001; and the term of office of our Class III
directors will expire at the annual meeting of the stockholders to be held in
2002. The classification of our board of directors could have the effect of
making it more difficult for a third party to acquire, or of 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, Maffei and . Our audit committee reviews and monitors our
financial statements and accounting
42
<PAGE>
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.
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
options to purchase 360,000 shares and 180,000 shares of common stock to Mr.
Jordan at exercise prices of $0.08 per share and $0.09 per share, respectively.
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 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 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 shares. Also, each eligible
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 shares.
Immediately following each annual meeting of our stockholders, each eligible
director will automatically be granted an additional option to purchase
shares 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 such director's initial grant, provided
that no director may receive more than shares in any calendar year. The
options have 10 year terms. They will terminate three months following the date
the director ceases to be a director or a consultant or 12 months if the
termination is 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 or accrued by our Chief Executive Officer and our
three most highly compensated executive officers whose salary and bonus was
more than $100,000. 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 of each of the named executive officers in
the fiscal year ended December 31, 1999.
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<PAGE>
The table does not include compensation information for two executive
officers who commenced employment after December 31, 1999. These two officers
would have been among the four most highly compensated executive officers had
they been employees of ONI Systems in 1999. Robert 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 is
$295,000, which does not include a $200,000 bonus payable upon the
satisfaction of established performance goals. Andrew 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
<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 $ -- 4,784,164 1,215,834
President, Chief Executive Officer and
Chairman of the Board
Terrence J. Schmid....................... 173,000 -- 533,332 320,000
Chief Financial Officer, Vice President,
Finance and Administration and
Secretary
Hon Wah Chin............................. 182,820 -- 674,000 200,000
Chief Technology Officer
William R. Cumpston...................... 231,666 45,000 -- 1,300,000
Senior Vice President, Engineering and
Operations
</TABLE>
Option Grants in 1999
The following table sets forth grants of stock options to our named
executive officers in 1999.
All options granted are either incentive stock options or nonqualified
stock options and generally vest over four years, either (i) 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 (ii) at the rate 2.083% of the
shares subject to the option each month. Options expire 10 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.
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 $ 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 10 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 20,178,438 shares of common stock of ONI
Systems granted during 1999.
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<PAGE>
Mr. Jandro was granted an option to purchase 900,000 shares of common stock
in March 2000 pursuant to our 1999 Equity Incentive Plan. The exercise price
per share of the option is $3.20; and it expires in March 2010. The potential
realizable values at assumed rates of stock appreciation for the option term
are $ at 5% and $ at 10%.
Mr. Page was granted an option to purchase 300,000 shares of common stock in
March 2000 pursuant to our 1999 Equity Incentive Plan. The exercise price per
share of the option is $3.20 and it expires in March 2010. The potential
realizable values at assumed rates of stock appreciation for the option term
are $ at 5% and $ at 10%.
<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 ----------------------------
Name Granted in 1999 Per Share Date 5% 10%
- ---- ---------- ------------- --------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Hugh C. Martin.......... 1,215,834 6.03% $1.25 12/21/09 $ $
Terrence J. Schmid...... 120,000 0.59 0.09 3/4/09
200,000 0.99 1.25 12/21/09
Hon Wah Chin............ 100,000 0.50 0.09 7/15/09
100,000 0.50 1.25 12/21/09
William R. Cumpston..... 300,000 1.49 0.09 3/4/09
200,000 0.99 0.91 9/15/09
300,000 1.49 1.25 12/21/09
</TABLE>
Aggregated Option Exercises in the Fiscal Year Ended December 31, 1999
and Option Values at 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, and the number of shares of our common stock subject to "exercisable"
and "unexercisable" stock options held as of December 31, 1999 by our chief
executive officer and each of our named executive officers. Also presented are
values of "in-the-money" options, which represent the positive difference
between the exercise price of each outstanding stock option and the fair market
value of ONI Systems' common stock, as then determined by our board of
directors to be $1.25 per share on or about 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. The
options are immediately exercisable to the extent they qualify as incentive
stock options for federal income tax purposes for all of the option shares, but
any 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.
The heading "Vested" refers to shares that are no longer subject to repurchase;
the heading "Unvested" refers to shares subject to repurchase as of December
31, 1999.
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<PAGE>
Since their employment with ONI Systems commenced in 2000, neither Mr.
Jandro nor Mr. Page acquired or exercised any options during 1999.
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-
Options at Money Options
Number of December 31, at December 31,
Shares 1999 1999
Acquired on Value --------------- ---------------
Name Exercise Realized Vested Unvested Vested Unvested
- ---- ----------- -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <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 December 31, 1999, options to purchase 388,908
shares of common stock were outstanding under our 1997 Stock Option Plan. The
options outstanding as of December 31, 1999 had a weighted average exercise
price of $0.03 per share. The board of directors terminated this plan in April
1998. As a result, no options will be granted under our 1997 Stock Plan after
this offering. 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 Plan are subject to terms
substantially similar to those described below with respect to options granted
under our 2000 Equity Incentive Plan.
1998 Equity Incentive Plan. As of December 31, 1999, options to purchase
15,813,816 shares of common stock were outstanding under our 1998 Equity
Incentive Plan and 1,824,480 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 December 31, 1999 had a weighted average exercise
price of $0.24 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, 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 December 31, 1999, options to purchase
1,346,000 shares of common stock were outstanding under our 1999 Equity
Incentive Plan and 18,166 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 December 31, 1999 had a weighted average exercise
price of $0.95 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, 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.
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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
shares of common stock to be issued under this plan. In addition, shares
under the 1998 Equity Incentive Plan and the 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 pursuant to 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 stock bonuses 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.
Our 2000 Equity Incentive Plan will terminate after 10 years from the date
our board of directors approved the plan, unless it is terminated earlier by
our board of directors. The plan will authorize the award of options,
restricted stock awards and stock bonuses. No person will be 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.
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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 10 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 time 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 certain 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 shares.
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. 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. Offering periods and purchase periods will begin on
February 1 and August 1 of each year. 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.
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Our 2000 Employee Stock Purchase Plan will provide 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 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 10 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 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 $240,000 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 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 option will become fully
vested.
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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 severance pay, plus any shares that would have vested had
Mr. Chin remained employed during the six months following termination.
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 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
twelve months of employment, then he is 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
twelve months of employment, then he is 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, subject to very
limited exceptions;
. we may indemnify our employees and agents to the fullest extent permitted
by 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 photonics 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. 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. 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 2,666,666 shares of our 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. The shares held by Mr. Bross includes 1,582,904
shares of our Series G preferred stock held by Williams Communications, Inc.
Mr. Bross disclaims beneficial ownership of shares held by Williams
Communications.
<TABLE>
<CAPTION>
Total Shares of
Preferred Stock on
Series B Series C Series E Series F Series G an 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
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>
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. Holders of 79,127,796 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. See "Description of Capital
Stock--Registration Rights".
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Loans to Executive Officers and Directors in Connection with Exercise of
Options
In connection with the option exercises described under Executive
Compensation and Director Compensation, the following officers and directors
delivered full recourse promissory notes, 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 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.
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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, (i) shares vest over a four year period
and we have a repurchase option for unvested shares, and (ii) in the event of
mergers or other transactions by us, our repurchase option will lapse as to
fifty percent of the shares.
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 full recourse 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.
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 full recourse
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. 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, Terrance J. Schmid, our Chief Financial Officer, purchased
533,332 shares of our common stock for $0.08 per share. Mr. Schmid paid for the
shares with a full recourse 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.
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 full
recourse 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 and General Counsel,
purchased 20,000 shares for $0.91 per share. Mr. Dillon paid for the shares
with a full recourse 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.
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 repurchase rights for the 1,582,904
shares of our stock owned by Williams Communications and provided Williams
Communications with the right to require us to redeem the shares held by it at
$8.50 per share, which right lapses upon completion of field trials for our
ONLINE9000 product.
55
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table presents information as to the beneficial ownership of
common stock as of December 31, 1999 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 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 December 31, 1999 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 December 31, 1999 is based
on 110,135,490 shares of common stock outstanding on that date, assuming that
all outstanding preferred stock has been converted into common stock. The table
does not include shares held by Messrs. Jandro, Page and Maffei who purchased
subsequent to December 31, 1999.
<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................ 14,932,144 13.56
Mohr, Davidow Ventures and
affiliates (1)
Kevin R. Compton.................. 13,665,822 12.41
Kleiner Perkins Caufield & Byers
and affiliates (2)
Hugh C. Martin (3)................ 5,999,998 5.45
Terrence J. Schmid (4)............ 853,332 *
Hon Wah Chin (5).................. 956,000 *
William R. Cumpston (6)........... 1,252,000 1.14
Michael A. Dillon (7)............. 324,000 *
Matthew W. Bross (8).............. 1,905,364 1.73
James F. Jordan (9)............... 1,873,334 1.70
All executive officers and
directors as a group............. 41,761,994 37.92
</TABLE>
- --------
* Represents beneficial ownership of less than 1%
(1) Represents 13,443,608 shares held by held by Mohr, Davidow Ventures V,
L.P., 222,214 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 1,266,322 shares held by Mohr, Davidow Ventures V-L,
L.P. The shares represented exclude 366,348 shares held by the Mohr Family
Trust UTA dated 8/5/1985. Mohr, Davidow Ventures disclaims beneficial
ownership of the shares held by the Mohr Family Trust, and the Mohr Family
Trust disclaims beneficial ownership of the shares held by the Mohr,
Davidow Ventures entities. Jonathan
56
<PAGE>
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 614,350 shares held by KPCB VIII Founders Fund, 341,644 shares
held by KPCB Information Sciences Zaibatsu Fund II and 12,709,828 shares
held by Kleiner Perkins Caufield & Byers VIII, L.P. 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) Includes 2,118,003 shares of common stock subject to a repurchase right
that lapses at a rate of 84,719 shares per month until January 2002.
Includes 1,215,834 shares of common stock subject to repurchase right that
lapses at a rate of 25,329 shares per month until December 2003.
(4) Includes 288,888 shares of common stock subject to a repurchase right that
lapses at a rate of 11,111 shares per month until February 2002. Includes
120,000 shares of common stock subject to a repurchase right that lapses
at a rate of 30,000 shares in January 2000 and 2,500 shares per month
thereafter until January 2003. Includes 200,000 shares of common stock
subject to a repurchase right that lapses at a rate of 4,166 shares per
month until December 2003.
(5) Includes 421,262 shares of common stock subject to a repurchase right that
lapses at a rate of 14,041 shares per month until June 2002. Includes
100,000 shares of common stock subject to a repurchase right that lapses
at a rate of 25,000 shares in July 2000 and 2,083 shares per month
thereafter until July 2003. Includes 100,000 shares of common stock
subject to a repurchase right that lapses at a rate of 2,083 shares per
month until December 2003.
(6) Represents 1,252,000 shares held by William Cumpston and Christine
Cumpston. Includes 343,750 shares of common stock subject to a repurchase
right that lapses at a rate of 10,416 shares per month until September
2002. Includes 300,000 shares of common stock subject to a repurchase
right that lapses at a rate of 75,000 shares in January 2000 and 6,250
shares per month thereafter until January 2003. Includes 200,000 shares of
common stock subject to a repurchase right that lapses at a rate of 50,000
shares in September 2000 and 4,166 shares per month thereafter until
September 2003. Includes 300,000 shares of common stock subject to a
repurchase right that lapses at a rate of 6,250 shares per month until
December 2003.
(7) Includes 300,000 shares of common stock subject to a repurchase right that
lapses at a rate of 75,000 shares in October 2000 and 6,250 shares per
month thereafter until October 2003.
(8) 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
Chief Technology Officer of Williams Communications and disclaims
beneficial ownership of shares held by it. Includes 180,000 shares of
common stock subject to a repurchase right that lapses at a rate of 45,000
shares in November 2000 and 3,750 shares per month thereafter until
November 2003.
(9) Includes 202,500 shares of common stock subject to a repurchase right that
lapses at a rate of 7,500 shares per month until March 2002. Includes
105,000 shares of common stock subject to a repurchase right that lapses
at a rate of 5,000 shares per month until October 2001.
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of this offering, our authorized capital
stock will consist of 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
December 31, 1999, and assuming the conversion of all outstanding preferred
stock into common stock, there were outstanding 110,135,490 shares of common
stock held by approximately 262 stockholders, of which 8,587,699 shares were
subject to our right of repurchase, options to purchase 17,548,724 shares of
our common stock and warrants to purchase 1,011,394 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 as 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, which 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 (a) in the same proportion as
other shares voted in the same class in a class vote, or (b) 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.
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.
Each outstanding share of our common stock is, and all shares of common stock
to be outstanding upon completion of this offering will be, fully paid and
nonassessable.
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 also increase or decrease the number of shares of any
series, but not below the number of shares of such series then outstanding,
without any further vote or action by the stockholders. Our board of
58
<PAGE>
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 may 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 1,011,394 shares of common stock were outstanding as of
December 31, 1999. All warrants to purchase preferred stock will automatically
convert to warrants to purchase common stock upon the closing of the public
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 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 79,127,796 shares of our common
stock 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 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 such
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 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.
59
<PAGE>
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 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 shall not be required to pay for expenses
incurred under exercise of stockholders' demand registration rights if the
holders of such 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, Venture Lending & Leasing, Inc.
and COLT Telecom Group plc will have registration rights of 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 discouraging another
person from acquiring control of our company.
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 such 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 shall be taken by
stockholders except at an annual or special meeting of the stockholders
called in accordance with our bylaws and that stockholders may not act by
written consent;
60
<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
shall 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 such vacancies shall 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.
These provisions of our certificate of incorporation and bylaws may have
the effect of delaying, deferring or discouraging another person from
acquiring control of our company.
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 135(th) 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 equals or exceeds the amount of the proposed distribution;
or
. (a) 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
(b) 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 was 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 until , 2000, and after that 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 will apply to list our common stock on the Nasdaq National Market under
the trading symbol "ONIS".
61
<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 shares of common
stock outstanding, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options. 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 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).
After 180 days from the date of this prospectus, restricted
securities that are held for less than one year and are not yet
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 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 ended
September 30,
62
<PAGE>
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.
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 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 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 pursuant to 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 December 31, 1999, options to purchase a total of 17,548,724 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
below. See "Management--Benefit Plans".
Registration Rights
Following this offering, subject to specified blackout periods, holders of
79,127,796 shares of outstanding common stock 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".
63
<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., FleetBoston Robertson Stephens Inc., Banc of America Securities LLC and
Chase Securities Inc. are the representatives of the Underwriters.
<TABLE>
<CAPTION>
Number
of
Underwriters Shares
------------ ------
<S> <C>
Goldman, Sachs & Co...................................................
FleetBoston Robertson Stephens Inc....................................
Banc of America Securities LLC........................................
Chase Securities Inc..................................................
----
Total...............................................................
====
</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
shares from ONI Systems to cover such sales. They may exercise that option for
30 days. If any shares are purchased pursuant to this option, the Underwriters
will severally purchase shares in approximately the same proportion as set
forth in the table above.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the Underwriters by 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.
64
<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 will apply 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
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 $ .
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.
65
<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 owned or has 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 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. for the six months 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. This prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules to the registration
statement. 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., 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. 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.
66
<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' Equity......................... F-6
Notes to Consolidated Financial Statements.............................. F-8
Object Mart, Inc. Financial Statements
Independent Auditors' Report............................................ F-22
Statement of Operations................................................. F-23
Statement of Cash Flows................................................. F-24
Statement of Stockholders' Equity....................................... F-25
Notes to Financial Statements........................................... F-26
Unaudited Pro Forma Combined Condensed Financial Statements
Introduction to Unaudited Pro Forma Combined Consolidated Financial
Statements............................................................. F-28
Unaudited Pro Forma Combined Condensed Statement of Operations.......... F-29
Notes to Unaudited Pro Forma Combined Statement of Operations........... F-30
</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.
KPMG LLP
Mountain View, California
March 9, 2000
F-2
<PAGE>
ONI SYSTEMS CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1999
December 31, --------------------------
1998 Actual Pro Forma
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents........... $ 19,091,688 $ 80,022,591 $ 80,022,591
Accounts receivable................. 1,092,853 163,434 163,434
Inventory........................... -- 9,648,856 9,648,856
Prepaid expenses and other current
assets............................. 110,503 770,979 770,979
------------ ------------ ------------
Total current assets.............. 20,295,044 90,605,860 90,605,860
Property and equipment............... 1,016,698 5,314,990 5,314,990
Other assets......................... 500 24,246 24,246
Intangibles.......................... -- 737,500 737,500
Goodwill............................. -- 3,589,257 3,589,257
------------ ------------ ------------
Total assets...................... $ 21,312,242 $100,271,853 $100,271,853
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable.................... $ 201,647 $ 2,594,555 $ 2,594,555
Accrued liabilities................. 426,365 6,086,784 6,086,784
Current portion of capital lease
obligations........................ 40,002 166,612 166,612
------------ ------------ ------------
Total current liabilities......... 668,014 8,847,951 8,847,951
Capital lease obligations, less
current portion..................... 79,322 366,704 366,704
------------ ------------ ------------
Total liabilities................. 747,336 9,214,655 9,214,655
------------ ------------ ------------
Commitments
Stockholders' equity:
Convertible preferred stock, no par
value; 61,786,664 and 80,309,408
shares authorized at December 31,
1998 and 1999, respectively;
50,580,190 and 78,855,900 shares
issued and outstanding at December
31, 1998 and 1999, respectively;
aggregate liquidation preference
of 28,770,616 and 125,955,511 at
December 31, 1998 and 1999,
respectively....................... 26,015,177 123,290,546 --
Common stock, no par value;
112,000,000 and 159,690,592 shares
authorized at December 31, 1998
and 1999, respectively; 18,001,248
and 31,279,590 shares issued and
outstanding at December 31, 1998
and 1999, respectively............. 8,947,113 49,295,326 172,585,872
Notes receivable from stockholders.. (122,585) (3,824,079) (3,824,079)
Services receivable from stockhold-
ers................................ -- (85,164) (85,164)
Deferred stock compensation......... (5,223,575) (25,288,593) (25,288,593)
Accumulated deficit................. (9,051,224) (52,330,838) (52,330,838)
------------ ------------ ------------
Total stockholders' equity........ 20,564,906 91,057,198 91,057,198
------------ ------------ ------------
Total liabilities and
stockholder's equity........... $ 21,312,242 $100,271,853 $100,271,853
============ ============ ============
</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,
December 31, -------------------------
1997 1998 1999
-------------- ----------- ------------
<S> <C> <C> <C>
Revenue.............................. $ -- $ 1,732,730 $ 3,033,995
Cost of revenue.................... -- 1,207,897 1,032,144
--------- ----------- ------------
Gross profit..................... -- 524,833 2,001,851
--------- ----------- ------------
Operating expenses:
Research and development, excluding
deferred stock compensation
amortization amounts.............. 38,865 4,008,489 25,176,187
Sales and marketing, excluding
deferred stock compensation
amortization amounts.............. 20,430 649,176 4,557,245
General and administrative,
excluding deferred stock
compensation amortization
amounts........................... 49,060 1,590,847 4,755,582
Amortization of deferred stock
compensation *.................... 89,249 3,310,368 8,975,323
Common stock warrant expense....... -- -- 2,268,500
In-process research and
development....................... -- -- 170,000
--------- ----------- ------------
Total operating expenses......... 197,604 9,558,880 45,902,837
--------- ----------- ------------
Operating loss................... (197,604) (9,034,047) (43,900,986)
Interest income (expense), net....... (1,452) 182,705 622,972
--------- ----------- ------------
Loss before income taxes......... (199,056) (8,851,342) (43,278,014)
Income taxes......................... -- 826 1,600
--------- ----------- ------------
Net loss......................... $(199,056) $(8,852,168) $(43,279,614)
========= =========== ============
Basic and diluted net loss per share. $ (0.77) $ (0.74) $ (2.40)
========= =========== ============
Weighted-average shares outstanding
used in computing basic and diluted
net loss per share.................. 257,017 11,918,628 18,043,188
========= =========== ============
- -------------
(*) Amortization of deferred stock
compensation:
Research and development........... $ 32,012 $ 2,509,473 $ 6,398,250
Sales and marketing................ 16,828 160,179 1,244,104
General and administrative......... 40,409 640,716 1,332,969
--------- ----------- ------------
$ 89,249 $ 3,310,368 $ 8,975,323
========= =========== ============
</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
(inception) to Year ended Year ended
December 31, December 31, December 31,
1997 1998 1999
-------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................ $(199,056) $(8,852,168) $(43,279,614)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization..... -- 289,265 2,582,506
Amortization of deferred stock
compensation..................... 89,249 3,310,368 8,975,323
Loss on disposal of property and
equipment........................ -- -- 164,094
Value of leased facilities
received in exchange for
preferred stock.................. -- -- 97,336
Purchased in-process research and
development...................... -- -- 170,000
Amortization of debt financing
costs............................ -- -- 54,572
Common stock warrant expense...... -- -- 2,268,500
Stock based compensation for non-
employees........................ -- -- 73,065
Changes in operating assets and
liabilities:
Accounts receivable............... (91,162) (1,001,691) 1,569,976
Inventory......................... -- -- (9,648,856)
Prepaid expenses and other current
assets........................... -- (111,003) (533,915)
Accounts payable.................. 29,440 172,207 2,392,876
Accrued liabilities............... 43,760 382,605 5,527,511
--------- ----------- ------------
Net cash used in operating
activities..................... (127,769) (5,810,417) (29,586,626)
--------- ----------- ------------
Cash flows used in investing
activities:
Purchase of property and equipment.. -- (1,016,205) (4,858,824)
Acquisition of Object-Mart, net of
cash acquired...................... -- -- (1,744,645)
--------- ----------- ------------
Net cash used in investing
activities..................... -- (1,016,205) (6,603,469)
--------- ----------- ------------
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)
Proceeds from issuance of preferred
stock, net of issuance costs....... -- 27,015,177 96,889,288
Repurchase of preferred stock....... -- (1,000,000) --
Payment on shareholder notes
receivable......................... -- -- 12,000
Proceeds from issuance of common
stock.............................. 10,000 34,553 272,299
--------- ----------- ------------
Net cash provided by financing
activities..................... 140,000 25,906,079 97,120,998
--------- ----------- ------------
Net increase in cash and cash
equivalents.................... 12,231 19,079,457 60,930,903
Cash and cash equivalents at
beginning of year/period............ -- 12,231 19,091,688
--------- ----------- ------------
Cash and cash equivalents at end of
year/period......................... $ 12,231 $19,091,688 $ 80,022,591
========= =========== ============
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
========= =========== ============
Issue of preferred stock in
exchange for leased facilities... $ -- $ -- $ 182,500
========= =========== ============
Issue of common stock in relation
to Object-Mart, Inc. acquisition. $ $ $ 4,980,514
========= =========== ============
Issuance of warrants in connection
with debt financing.............. $ $ $ 203,581
========= =========== ============
</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
<TABLE>
<CAPTION>
Convertible Notes
preferred stock Common stock receivable Services Deferred
------------------------- ----------------------- from receivable stock Accumulated
Shares Amount Shares Amount stockholders from stockholder compensation deficit
----------- ------------ ----------- ----------- ------------ ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of
October 20, 1997
(inception)..... -- $ -- -- $ -- $ -- $ -- $ $ --
Issuance of
common stock.... -- -- 11,565,752 24,716 -- -- --
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 -- 11,565,752 215,591 -- -- (101,626) (199,056)
Issuance of
common stock for
notes
receivable...... -- -- 5,991,496 122,585 (122,585) -- -- --
Exercise of
stock purchase
rights for cash. -- -- 440,000 27,387 -- -- -- --
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 4,208,803 -- -- -- -- -- --
Repurchase and
cancellation of
Series B
preferred stock. (1,333,333) (1,000,000) -- -- -- -- -- --
Issuance of
Series C
preferred stock,
net of $61,823
in issuance
costs........... 2,733,332 1,988,177 -- -- -- -- -- --
Issuance of
Series D
preferred stock,
net of $45,632
in issuance
costs........... 4,969,148 4,334,797 -- -- -- -- -- --
Issuance of
Series E
preferred stock,
net of $16,609
in issuance
costs........... 18,082,200 16,483,400 -- -- -- -- -- --
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 $ 26,015,177 18,001,248 $ 8,947,113 $ (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
<TABLE>
<CAPTION>
Convertible Notes
preferred stock Common stock receivable Services Deferred
------------------------- ------------------------ from receivable stock Accumulated
Shares Amount Shares Amount stockholders from stockholder compensation deficit
----------- ------------- ----------- ------------ ------------ ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise of
stock options
for cash........ -- $ -- 3,023,220 $ 272,299 $ -- $ -- $ -- $ --
Issuance of
Series E
preferred stock,
net of $37,471
in issuance
costs........... 8,001,824 7,264,193 -- -- -- -- -- --
Issuance of
Series E
preferred stock
in exchange for
services........ 200,000 182,500 -- -- -- (182,500) -- --
Performance of
services........ -- -- -- -- -- 97,336 -- --
Issuance of
common stock for
acquisition of
Object-Mart..... -- -- 4,569,276 4,980,514 -- -- -- --
Issuance of
Series F
preferred stock,
net of $20,607
in issuance
costs........... 8,249,468 14,969,401 -- -- -- -- -- --
Exercise of
options for
notes
receivable...... -- -- 5,685,846 3,713,494 (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 74,655,694 -- -- -- -- -- --
Issuance of
warrants in
connection with
purchase and
license
agreement....... -- -- -- 2,268,500 -- -- -- --
Stock based
compensation to
non-employees... -- -- -- 73,065 -- -- -- --
Deferred stock
compensation.... -- -- -- 29,040,341 -- -- (29,040,341) --
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- 8,975,323 --
Net loss........ -- -- -- -- -- -- -- (43,279,614)
----------- ------------- ----------- ------------ ------------ --------- ------------- -------------
Balances as of
December 31,
1999............ 78,855,900 $ 123,290,546 31,279,590 $ 49,295,326 $ (3,824,079) $ (85,164) $ (25,288,593) $ (52,330,838)
=========== ============= =========== ============ ============ ========= ============= =============
<CAPTION>
Total
stockholders'
(deficit)
equity
--------------
<S> <C>
Exercise of
stock 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..... 4,980,514
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....... 2,268,500
Stock based
compensation to
non-employees... 73,065
Deferred stock
compensation.... --
Amortization of
deferred stock
compensation.... 8,975,323
Net loss........ (43,279,614)
--------------
Balances as of
December 31,
1999............ $ 91,057,198
==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<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) Summary of the Company and Significant Accounting Policies
(a) Description of Business
ONI Systems Corp. (the Company) develops, markets and sells optical
communications equipment to networking and internet service providers in the
regional and metropolitan area markets.
The Company 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. The Company recognized its
first commercial sale in the fourth quarter of 1999 with the licensing of its
network operating system. Historically the Company has also recognized revenue
derived from contracts with agencies of the United States government. These
contracts were completed in June 1999. The Company changed its name to ONI
Systems Corp. in March 2000.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the financial
statements of the Company and its wholly-owned subsidiary. 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 the Company 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
The Company 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 cash equivalents totaled
$19,091,688 and $79,004,976, respectively. Cash equivalents consisted primarily
of money market funds.
(f) Inventory
Inventories are stated at the lower of average cost or market. Primarily all
inventory as of December 31, 1999 consisted of raw materials.
F-8
<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
The Company 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
The Company'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, the Company has not capitalized any software development costs because
capitalizable costs meeting the requirements of SFAS No. 86 have not been
significant.
(j) Revenue Recognition
Historically, the Company has 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.
Revenue from the sale of the software license 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.
(k) Income Taxes
The Company 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
F-9
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
to be recovered or settled. Valuation allowances are established when necessary
to reduce deferred tax assets to the amounts expected to be realized.
(l) Fair Value of Financial Instruments Concentration of Credit Risk
The fair values of the Company'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 the Company for debt
instruments with similar terms, degrees of risk and remaining maturities. The
carrying values of these obligations approximate their respective fair values.
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash and cash equivalents.
The Company'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.
(m) Stock-Based Compensation
The Company 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. Pursuant to SFAS No. 123, the Company
discloses the pro-forma effect of using the fair value method of accounting for
employee stock-based compensation arrangements.
For non-employees, the Company 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.
(n) Impairment of Long-Lived Assets
The Company 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 expected to be generated by the asset. If such 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.
(o) 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
shareholders' (deficit) equity. For the period from October 20, 1997
(inception) to December 31, 1997, and for the years ended December 31, 1998 and
1999 and for the Company had no items of other comprehensive loss and,
accordingly, comprehensive loss is the same as net loss.
F-10
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(p) 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 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, the Company 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
(inception) to 31
December 31, ---------------------
1997 1998 1999
-------------- ---------- ----------
<S> <C> <C> <C>
Shares issuable under stock options.... 1,078,220 8,789,776 17,548,724
Shares of unvested stock subject to
repurchase............................ -- 5,992,684 8,587,699
Shares issuable pursuant to warrants to
purchase common stock................. 233,468 233,468 733,468
Shares issuable pursuant to warrants to
purchase convertible preferred stock.. -- -- 277,926
Shares issuable related to convertible
preferred stock on an "as-if-
converted" basis...................... 8,000,000 50,580,190 78,855,900
</TABLE>
The weighted-average exercise price of stock options outstanding was $0.005,
$0.08 and $0.29 as of December 31, 1997, 1998 and 1999, respectively. The
weighted-average purchase price of shares of common stock subject to the
Company's right of repurchase was $0.02 and $0.44 as of December 31, 1998 and
1999, respectively. The exercise price of warrants to purchase shares of
convertible preferred stock was $0.88 as of December 31, 1999. The weighted-
average exercise price of warrants to purchase shares of common stock was $0.62
as of December 31, 1999. Each share of preferred stock is convertible into one
share of common stock.
(q) Segment Reporting
The Company adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, for the year ended December 31, 1999. Based
on definitions contained within SFAS 131, the Company has determined that it
operates in one segment. For the year ended December 31, 1999, there were two
customers that represented 46% and 24% of total revenue.
(r) Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
(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 the Company does not currently hold
any
F-11
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
derivative instruments and does not engage in hedging activities, the Company
expects that the adoption of SFAS No. 133 will not have a material impact on
its financial position, results of operations or cash flows. The Company 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.
(2) Business Combination
On June 29, 1999, the Company acquired all of the outstanding common shares
of Object-Mart, Inc. ("Object-Mart") in exchange for 4,569,276 shares of the
Company's common stock and approximately $3,222,000 in cash for a total
purchase price of approximately $8,203,000. 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 the Company's consolidated financial statements from June 29,
1999. The excess of the purchase price over the fair value of the net
identifiable assets acquired of $4,785,676 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 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.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and Object-Mart as if the
acquisition had occurred as of the beginning of 1998, 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 the Company and Object-Mart constituted a single
entity during such periods.
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1998 1999
----------- ------------
(unaudited)
<S> <C> <C>
Revenue.......................................... $ 3,701,811 $ 4,625,795
Net loss......................................... $(8,376,985) $(44,264,006)
Basic and diluted net loss per share............. $ (0.70) $ (2.45)
</TABLE>
(3) Property and Equipment
Property and equipment as of December 31, 1998 and 1999, consisted of the
following:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Computers and equipment............................... $1,050,541 $5,569,889
Furniture and fixtures................................ 204,734 714,592
Leasehold improvements................................ 50,688 273,663
---------- ----------
1,305,963 6,558,144
Less accumulated depreciation and amortization........ 289,265 1,243,154
---------- ----------
$1,016,698 $5,314,990
========== ==========
</TABLE>
F-12
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Equipment recorded under capital leases was $132,975 and $541,580 as of
December 31, 1998 and 1999, and the related accumulated amortization was
$13,651 and $57,976 as of December 31, 1998 and 1999. There was no equipment
recorded under capital leases as of December 31, 1997.
(4) Intangibles
A summary of intangibles is as follows:
<TABLE>
<CAPTION>
1999
----------
<S> <C>
Purchased technology and workforce............................... $ 530,000
Assembled workforce and non-compete agreements................... 630,000
----------
1,160,000
Less accumulated amortization.................................... 422,500
----------
$ 737,500
==========
</TABLE>
(5) Related Party Transactions
On October 20, 1997, the Company 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, the Company was spun-out
from Optivision. In conjunction with the spin-out, the Company 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 the Company 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 1999 and 1998, the Company received $3,713,494 and $122,585,
respectively, in promissory notes from certain officers in exchange for common
stock. As of December 31, 1999, $12,000 had been repaid by the shareholders.
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.
(6) Financing Arrangements
In February 1999, the Company entered into a Loan and Security Agreement
with a financing company which allowed the Company to borrow up to $2,000,000.
The loan bears interest at the prime rate, is repayable in 36 equal monthly
installments of principal and interest and is secured by certain assets of the
Company. The Company also entered into a Subordinated Loan and Security
Agreement with the same financing company, which allowed the Company 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 the Company. As of December 31, 1999, the Company
had not borrowed any amounts under these agreements. These agreements expired
on February 10, 2000, unutilized.
F-13
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the loan and security agreement and subordinated loan and
security agreement the Company 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 5 years from
the effectiveness of the Company'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.
(7) Stockholders' Equity
(a) Preferred Stock
As of December 31, 1999, the Company had 80,309,408 shares of preferred
stock authorized. As of December 31, 1998 and 1999, the Company had designated
and issued preferred stock as follows:
<TABLE>
<CAPTION>
December 31
------------------------------------------------
1998 1999
1999 ----------------------- ------------------------
Designated Shares Liquidation Shares Liquidation
shares outstanding preference outstanding preference
---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Series B........ 25,073,436 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
Series D........ 4,969,148 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
Series F........ 8,249,468 -- -- 8,249,468 15,000,008
Series G........ 13,000,000 -- -- 11,824,418 74,700,723
---------- ---------- ----------- ---------- ------------
80,309,408 50,580,190 $28,770,616 78,855,900 $125,955,511
========== ========== =========== ========== ============
</TABLE>
In January 1998 the Company 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 the Company 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,
the Company 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, the Company 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, the Company 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, the Company closed a second round of
Series E preferred financing, raising $7,264,193, net of issuance costs of
$37,471, from the sale of 8,001,824 shares of Series E preferred stock. In
addition the Company 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.
F-14
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In September 1999, the Company 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, the Company completed another round of private financing,
raising $74,655,694, net of issuance costs of $44,668, form the sale of
11,824,418 shares of Series G preferred stock for cash of $6.32 per share.
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 the Company,
in which the Company 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, the Company had 159,690,592 shares of common stock
authorized.
In 1998, the Company 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 $122,585. In 1999, the Company
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. 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, the Company may repurchase all unvested shares at an amount equal
to the original purchase price.
F-15
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company maintains a right of first refusal with respect to restricted
common stock. A shareholder must notify the Company prior to selling these
shares to a third-party. Upon notification, the Company 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 Company products in the future,
the Company issued a warrant to purchase 500,000 shares of common stock at an
exercise price of $0.91 per share. The value of $2,268,500 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 6 years. The warrant
was expensed in 1999.
(c) Stock Option Plans
1997 Stock Option Plan
On October 29, 1997, the Company's Board of Directors adopted the 1997 Stock
Option Plan (1997 Plan) and reserved a total of 7,638,508 shares of the
Company's common stock for issuance thereunder. The Company 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.
Options granted under the 1997 Plan may be designated as "Incentive Stock
Options" or "Nonstatutory Stock Options" at the discretion of the Company, 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 10 years from the
date of grant.
1998 Equity Incentive Plan
In 1998, the Board of Directors of the Company adopted the 1998 Equity
Incentive Plan (the 1998 Plan) and reserved a total of 23,407,604 shares of the
Company'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 data and then monthly over the next three years. Options granted
under the 1998 Plan expire 10 years from the date of grant.
1999 Equity Incentive Plan
In 1999, the Board of Directors of the Company adopted the 1999 Equity
Incentive Plan (the 1999 Plan) and reserved a total of 4,200,000 shares of the
Company's common stock for issuance thereunder. The terms of the 1999 plan are
substantially similar to those of the 1998 plan.
F-16
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the status of the Company'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
=========== =========== ======
</TABLE>
The following table summarizes information with respect to stock options
outstanding as of December 31, 1999:
<TABLE>
<CAPTION>
Exercise Options Contractual Exercisable
price outstanding life (years) Options
-------- ----------- ------------ -----------
<S> <C> <C> <C>
$0.005 209,904 7.96 76,444
0.010 20,834 7.89 8,034
0.075 158,170 8.11 33,950
0.09 12,912,866 9.23 205,724
0.91 4,076,950 9.80 --
1.25 150,000 9.97 --
0.456 20,000 9.57 --
---------- -------
$0.290 17,548,724 9.34 324,152
========== =======
</TABLE>
Accounting for Stock-Based Compensation
The Company 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 $29,040,341 in 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. 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 $8,975,323 in 1999. Had compensation cost for the
Company's stock-based compensation plan
F-17
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
been determined consistent with the fair value approach set forth in SFAS No.
123, the Company's net losses would have been as follows:
<TABLE>
<CAPTION>
Period from
October 20, 1997
(inception) to Year ended December 31
December 31, -----------------------
1997 1998 1999
---------------- ---------- -----------
<S> <C> <C> <C>
Net loss--as reported................ $199,056 $8,852,168 $43,279,614
Net loss--pro forma.................. $199,056 $8,900,007 $43,625,765
Basic and diluted net loss per
share--as reported.................. $ (0.77) $ (0.74) $ (2.40)
Basic and diluted net loss per
share--pro forma.................... $ (0.77) $ (0.75) $ (2.42)
</TABLE>
The fair value of options granted are 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.
(8) Lease Obligations and Commitments
In February 1999, the Company entered into a leasing agreement with a
financing company which allows the Company 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, the Company 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 5 years from the effectiveness of the Company's initial public offering, if
earlier. No warrants have 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.
F-18
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company 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 December
31, 1999, are as follows:
<TABLE>
<CAPTION>
Year ending Capital Operating
December 31, leases leases
------------ -------- -----------
<S> <C> <C>
2000................................................. $204,256 $ 2,027,015
2001................................................. 186,525 1,498,050
2002................................................. 151,060 1,568,586
2003................................................. 62,941 1,639,122
2004................................................. -- 1,709,658
Thereafter............................................. -- 3,630,925
-------- -----------
Future minimum lease payments........................ 604,782 $12,073,356
===========
Less amount representing interest.................... 71,466
--------
Present value of future minimum lease payments....... 533,316
Less current portion................................. 166,612
--------
Long-term portion.................................... $366,704
========
</TABLE>
Total rent expense under the operating leases was $494,308 and $908,115 for
the years ended December 31, 1998 and 1999 respectively and $0 for the period
from October 20, 1997 (inception) to December 31, 1997.
In connection with the Series G preferred stock financing, the Company
entered into a redemption and repurchase agreement with a shareholder. In the
event of an unsuccessful field trial of our ONLINE9000 product, the shareholder
has the right to demand redemption of 1,582,904 shares of Series G preferred
stock at a price of $8.50 per share.
(9) 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.
F-19
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The reconciliation between the amount computed by applying the U.S. federal
statutory tax rate of 34% to pretax income 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) $(14,714,524)
State taxes net of federal income tax
benefit............................... -- 826 1,600
Permanent differences, primarily non-
deductible compensation............... 67,578 421,801 2,383,320
Current year net operating loss and
temporary differences for which no
benefit is recognized................. 101 2,587,655 12,331,204
-------- ----------- ------------
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 14,586,000
Goodwill and other Intangibles................. -- 679,000
Deferred stock compensation.................... 930,000 3,140,000
Research and other credit carryforwards........ 394,000 2,047,000
Accrual amounts................................ 12,000 117,000
----------- ------------
Total gross deferred tax assets............ 3,729,000 20,947,000
Valuation allowance.............................. (3,729,000) (20,947,000)
----------- ------------
Total deferred tax assets.................. $ -- $ --
=========== ============
</TABLE>
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 $17,218,000 in 1999.
The Company 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 beginning
in 2012 through 2019. The California research credit carryfoward carries
forward indefinitely until realized. The Company also has a California
manufacturing investment credit carryforward of $59,000 which will expire in
various years beginning in 2007 through 2008.
The Company 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.
The Company'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.
F-20
<PAGE>
ONI SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(10) Employee Benefit Plan
The Company 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 the Company'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 salary, subject to certain limitations. The Benefit Plan
allows for contributions by the Company at the discretion of the Company's
Board of Directors. The Company has not contributed to the Benefit Plan since
its inception.
(11) Subsequent Events
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 the Company to sell shares of the Company'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 the
Company'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>
Period from
October 20,
1997 (inception) Year ended December 31,
to -------------------------
December 31, 1997 1998 1999
----------------- ----------- ------------
<S> <C> <C> <C>
Pro forma net loss................ $(199,056) $(8,852,168) $(43,279,614)
Pro forma basic and diluted net
loss per share................... $ (0.46) $ (0.25) $ (0.55)
Shares used in calculation of pro
forma basic and diluted net loss
per share........................ 434,794 35,643,177 78,025,225
</TABLE>
Common Stock Warrants
In February 2000, in connection with a purchase and license agreement, the
Company, issued warrants to purchase 223,000 shares of common stock at an
exercise price of $0.91 per share.
F-21
<PAGE>
Independent Auditors' Report
The Board of Directors
Object-Mart, Inc.:
We have audited the accompanying statements of operations, stockholders'
equity and cash flows of Object-Mart, Inc. 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 audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Object-
Mart, Inc. for the six months ended June 29, 1999, in conformity with generally
accepted accounting principles.
KPMG LLP
Mountain View, California
March 9, 2000
F-22
<PAGE>
OBJECT-MART, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six month
period ended
June 29, 1999
-------------
<S> <C>
Revenue........................................................... $1,744,600
Cost of revenue................................................. 509,013
----------
1,235,587
----------
Operating expenses:
Research and development........................................ 582,927
Sales and marketing............................................. 52,888
General and administrative...................................... 105,524
Amortization of deferred stock compensation..................... 466,507
----------
Total operating expenses...................................... 1,207,846
----------
Operating income.............................................. 27,741
Interest income, net.............................................. 14,286
----------
Income before income taxes...................................... 42,027
Income taxes...................................................... 109,023
----------
Net loss...................................................... $ (66,996)
==========
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE>
OBJECT-MART, INC
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Six months
ended
June 29,
1999
----------
<S> <C>
Cash flows from operating activities:
Net loss.......................................................... $ (66,996)
Deferred tax expense.............................................. 28,543
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................... 20,811
Amortization of deferred stock compensation...................... 466,507
Changes in operating assets and liabilities:
Accounts receivable.............................................. (206,400)
Prepaid expenses and other current assets........................ (198,000)
Accounts payable................................................. (15,836)
Accrued liabilities.............................................. 154,010
Deferred revenue................................................. 1,000,000
----------
Net cash provided by operating activities...................... 1,182,639
Cash flows used in investing activities:
Purchase of property and equipment................................ (58,951)
----------
Net cash used in investing activities.......................... (58,951)
----------
Cash flows from financing activities:
Proceeds from issuance of common stock............................ 255,638
----------
Net cash provided by financing activities...................... 255,638
----------
Net increase in cash and cash equivalents...................... 1,379,326
Cash and cash equivalents at beginning of period................... 54,568
----------
Cash and cash equivalents at end of period......................... $1,433,894
==========
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
OBJECT-MART, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
Six months ended June 29, 1999
<TABLE>
<CAPTION>
Common Stock Total
------------------ Retained shareholders'
Shares Amount earnings equity
--------- -------- -------- -------------
<S> <C> <C> <C> <C>
Balances as of December 31, 1998..... 2,751,000 $ 2,700 $476,506 $ 479,206
Exercise of options for cash......... 877,500 255,638 -- 255,638
Deferred stock compensation.......... -- 466,507 -- 466,507
Net loss............................. -- -- (66,996) (66,996)
--------- -------- -------- ----------
Balances as of June 29, 1999......... 3,628,500 $724,845 $409,510 $1,134,355
========= ======== ======== ==========
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Six months ended June 29, 1999
(1) Summary of the Company and Significant Accounting Policies
(a) Description of Business
Object-Mart, Inc. (the Company) 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 the Company 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) 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 six month period
ended June 29, 1999 was $20,811.
(d) 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, the Company has not
capitalized any software development costs because capitalizable costs meeting
the requirements SFAS No. 86 have not been significant.
(e) Revenue Recognition
The Company 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 the Company 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.
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.
The Company had three customers that comprised 42%, 22% and 16% of total
revenue for the six month period ended June 29, 1999.
(f) Research and Development
All research and development costs are expensed as incurred.
F-26
<PAGE>
OBJECT-MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Six months ended June 29, 1999
(g) Income Taxes
The Company 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.
Income tax expense for the period ended June 29, 1999 consisted of:
<TABLE>
<CAPTION>
June 29, 1999
-------------
<S> <C>
Current:
Federal...................................................... $ 63,363
State........................................................ 17,117
--------
Total current tax expense.................................. $ 80,480
--------
Deferred:
Federal...................................................... 18,370
State........................................................ 10,173
--------
Total deferred tax expense................................. 28,543
--------
Total tax expense.......................................... $109,023
========
</TABLE>
The June 29, 1999 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>
June 29, 1999
-------------
<S> <C>
Federal tax at statutory rate.................................. $ 14,289
State taxes, net of federal income tax benefit................. 18,011
Deferred stock compensation.................................... 79,362
Other.......................................................... (2,639)
--------
Total tax expense.......................................... $109,023
========
</TABLE>
(h) Stock-Based Compensation
The Company 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. Had compensation expense for the
Company's plan been determined consistent with the fair value approach
enumerated in SFAS No. 123, the Company's pro forma net loss for the six months
ended June 29, 1999, would not have been materially different from the reported
net loss.
F-27
<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-28
<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........... 25,176,187 582,927 (101,108)(c) 25,658,006
Sales and marketing.... 4,557,245 52,888 12,692 (d) 4,622,825
General and
administrative........ 4,755,582 105,524 1,196,419 (e) 6,057,525
Amortization of
deferred stock
compensation.......... 8,975,323 466,507 -- 9,441,830
Amortization of common
stock warrants........ 2,268,500 -- -- 2,268,500
In-process research and
development........... 170,000 -- (170,000)(f) --
------------ ---------- ----------- ------------
Total operating
expenses........... 45,902,837 1,207,846 938,003 48,048,686
------------ ---------- ----------- ------------
Operating loss...... (43,900,986) 27,741 (1,026,419) (44,899,664)
Interest income, net... 622,972 14,286 -- 637,258
------------ ---------- ----------- ------------
Income (loss) before
income taxes....... (43,278,014) 42,027 (1,026,419) (44,262,406)
Income taxes........... 1,600 109,023 (109,023)(g) 1,600
------------ ---------- ----------- ------------
Net income (loss)... $(43,279,614) $ (66,996) $ (917,396) $(44,264,006)
============ ========== =========== ============
Basic and diluted net
loss per share........ $ (2.40) $ (2.45)
============ ============
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-29
<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) Adjustment to record additional amortization of goodwill for the six
month period ended June 29, 1999.
(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-30
<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.................................................................. 29
Management................................................................ 40
Related Party Transactions................................................ 52
Principal Stockholders.................................................... 56
Description of Capital Stock.............................................. 58
Shares Eligible for Future Sale........................................... 62
Underwriting.............................................................. 64
Validity of Common Stock.................................................. 66
Experts................................................................... 66
Where You Can Find Additional Information................................. 66
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares
ONI Systems Corp.
Common Stock
---------------
---------------
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................. $30,360
NASD filing fee..................................................... 12,000
Nasdaq National Market initial filing fee........................... *
Accounting fees and expenses........................................ *
Legal fees and expenses............................................. *
Road show expenses.................................................. *
Printing and engraving expenses..................................... *
Blue Sky qualification fees and expenses............................ *
Transfer agent and registrar fees and expenses...................... *
Miscellaneous expenses.............................................. *
-------
Total............................................................. $
=======
</TABLE>
- --------
*To be filed by amendment
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 includes a provision that eliminates 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; 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 (draft dated , 1999)............. 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 part of its holdings of
Registrant's common stock and preferred stock to Optivision
shareholders. 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 of 1,333,333 shares of its Series B preferred stock from
Optivision, for an aggregate purchase price of $1 million.
2. 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 and 2,733,332 shares of Series C preferred stock to a group of
founding investors for aggregate consideration of $5,197,980 in cash.
3. 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.
4. 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 $23,801,671.90 in cash.
II-2
<PAGE>
5. In May 1999, in connection with its acquisition of Object-Mart, Inc.,
the Registrant issued 2,284,638 shares of common stock to a group of 25
former shareholders of Object-Mart.
6. 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.
7. 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.
8. In March 2000, Registrant issued and sold a warrant to purchase
200,000 shares of common stock at an exercise price of $15 per share
to a service provider in exchange for services rendered.
9. From Registrant's inception on October 20, 1997 through December 31,
1999, the Registrant has issued 6,944,828 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.
10. From Registrant's inception on October 20, 1997 through December 31,
1999, Registrant has issued 8,199,734 shares of common stock to its
employees upon exercise of options, and as of December 31, 1999,
17,548,724 shares of common stock were issuable upon exercise of
outstanding options.
11. From Registrant's inception on October 20, 1997 through December 31,
1999, Registrant has issued warrants to purchase 1,011,394 shares of
its common stock.
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
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.
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.
3.04* Registrant's Amended and Restated Bylaws (to be effective immediately
after the closing of this offering).
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.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Number Exhibit Title
------ -------------
<C> <S>
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.
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* Form of 2000 Equity Incentive Plan.
10.06* Form of 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.
10.11* Lease Agreement, dated January 1, 2000, by and between JDS Uniphase
Corporation 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.
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.
21.01* List of Registrant's Subsidiaries.
23.01* Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Consent of KPMG LLP, independent accountants.
24.01 Power of Attorney (see signature page hereto).
27.01 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
II-4
<PAGE>
(b) The following financial statement schedule is filed herewith:
Schedule II--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 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 9th day of March, 2000.
ONI SYSTEMS CORP.
/s/ Hugh C. Martin
By: _________________________________
Hugh C. Martin
President, Chief Executive
Officer and
Chairman of the Board
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints Hugh C. Martin, Terrence J. Schmid and
Michael A. Dillon and each of them, his true and lawful attorneys-in-fact and
agents with full power of substitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to sign any
registration statement for the same offering covered by the Registration
Statement that is to be effective upon filing pursuant to Rule 462(b)
promulgated under the Securities Act, and all post-effective amendments
thereto, and to file the same, with all exhibits thereto and all documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents or any of them, or his or their
substitute or substitutes, may lawfully do or cause to be done or by virtue
hereof.
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 March 9, 2000
______________________________________ Officer and Chairman of
Hugh C. Martin the Board
Principal Financial Officer and
Principal Accounting Officer:
/s/ Terrence J. Schmid Chief Financial Officer March 9, 2000
______________________________________ and Vice President,
Terrence J. Schmid Finance and
Administration
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
Additional Directors:
/s/ Matthew W. Bross Director March 9, 2000
______________________________________
Matthew W. Bross
/s/ Kevin R. Compton Director March 9, 2000
______________________________________
Kevin R. Compton
/s/ Jonathan D. Feiber Director March 9, 2000
______________________________________
Jonathan D. Feiber
/s/ James F. Jordan Director March 9, 2000
______________________________________
James F. Jordan
/s/ Gregory B. Maffei Director March 9, 2000
______________________________________
Gregory B. Maffei
</TABLE>
II-7
<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
<TABLE>
<CAPTION>
Year Ended
December 31,
1999
------------
<S> <C>
Reserve for obsolete and excess inventory:
Balance, beginning of period....................................... $ --
Additions charged to expense....................................... 1,366,905
Additions due to acquisitions...................................... --
Reductions......................................................... --
Balance, end of period............................................. $1,366,905
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Exhibit Title
------ -------------
<C> <S>
2.01 Agreement and Plan of Reorganization with Object-Mart, dated May 21,
1999.
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.
10.02 1997 Stock Option Plan, as amended.
10.03 1998 Equity Incentive Plan, as amended.
10.04 1999 Equity Incentive Plan, as amended.
10.07 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.
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.
23.02 Consent of KPMG LLP, independent accountants.
24.01 Power of Attorney (see signature page hereto).
27.01 Financial Data Schedule.
</TABLE>
<PAGE>
EXHIBIT 2.01
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is entered into
as of May 21, 1999, by and among Optical Networks, Incorporated, a California
corporation ("Acquirer"), Object-Mart, Inc., a California corporation ("Target")
and, only with respect to Sections 10 and 11 (including 11.8), Arimilli V. Rao
("Principal Shareholder").
RECITALS
A. The parties intend that, subject to the terms and conditions of this
Agreement, a new Delaware corporation that will be organized as a wholly-owned
subsidiary of Acquirer ("Newco") will merge with and into Target in a reverse
triangular merger (the "Merger"), with Target to be the surviving corporation of
the Merger, all pursuant to the terms and conditions of this Agreement and an
Agreement of Merger substantially in the form described on Exhibit A (the
---------
"Agreement of Merger") and the applicable provisions of the laws of the States
of California and Delaware. Upon the effectiveness of the Merger, all the
outstanding capital stock of Target ("Target Stock") will be converted into
capital stock of Acquirer ("Acquirer Stock") and the right to receive cash from
Acquirer as provided in this Agreement and the Agreement of Merger.
B. The Merger will be a taxable transaction for the shareholders of Target
under the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. PLAN OF REORGANIZATION
1.1 The Merger. Subject to the terms and conditions of this
----------
Agreement, Newco will be merged with and into Target pursuant to this Agreement
and the Agreement of Merger and in accordance with applicable provisions of the
laws of the States of California and Delaware as follows:
1.1.1 Conversion of Shares. Each share of Target Common Stock
--------------------
("Target Common Stock") issued and outstanding immediately prior to the filing
of the Agreement of Merger with the Secretaries of State of California and
Delaware (the "Effective Time"), other than shares, if any, for which dissenters
rights have been or will be perfected in compliance with applicable law, will by
virtue of the Merger and at the Effective Time, and without further action on
the part of any holder thereof, be converted into the right to receive (i) a
fraction, the numerator of which is 1,142,328 and the denominator of which is
the fully diluted (assuming conversion of all outstanding convertible securities
and full exercise of all outstanding options, warrants or similar rights at the
time of the closing of the Merger (the "Closing")) number of shares of common
stock of Target (the "Applicable Fraction") of a fully paid and nonassessable
share of Acquirer common stock ("Acquirer Common Stock") and (ii) $3,081,650
divided by the fully diluted (assuming conversion of all outstanding convertible
securities and
<PAGE>
full exercise of all outstanding options, warrants or similar rights at the time
of Closing) number of shares of common stock of Target (the "Per Share Cash
Amount").
1.1.2 Adjustments for Capital Changes. If prior to the Merger
-------------------------------
Acquirer recapitalizes through a split-up of its outstanding shares into a
greater number, or a combination of its outstanding shares into a lesser number,
reorganizes, reclassifies or otherwise changes its outstanding shares into the
same or a different number of shares of other classes, or declares a dividend on
its outstanding shares payable in shares or securities convertible into shares,
the number of shares of Acquirer Common Stock into which the Target shares are
to be converted will be adjusted appropriately so as to maintain the
proportionate interests of the holders of the Target shares and the holders of
Acquirer shares.
1.1.3 Dissenting Shares. Holders of shares of Target Stock
-----------------
who have complied with all requirements for perfecting shareholders' rights of
appraisal, as set forth in Chapter 13 of the California Corporations Code
("California Law"), shall be entitled to their rights under the California Law
with respect to such shares ("Dissenting Shares").
1.2 Fractional Shares. No fractional shares of Acquirer Common
-----------------
Stock will be issued in connection with the Merger, but in lieu thereof each
holder of Target Stock who would otherwise be entitled to receive a fraction of
a share of Acquirer Common Stock will receive from Acquirer, promptly after the
Effective Time, an amount of cash equal to the per share market value of
Acquirer Common Stock as determined in good faith by Acquirer's Board of
Directors as of the date of the Closing multiplied by the fraction of a share of
Acquirer Common Stock to which such holder would otherwise be entitled.
1.3 Effects of the Merger. At the Effective Time: (a) the separate
---------------------
existence of Newco will cease and Newco will be merged with and into Target, and
Target will be the surviving corporation, pursuant to the terms of the Agreement
of Merger, (b) the Articles of Incorporation and Bylaws of Target will continue
unchanged to be the Articles of Incorporation and Bylaws of the surviving
corporation and shall be amended and restated in accordance with the Agreement
of Merger, (c) each share of Newco Common Stock outstanding immediately prior to
the Effective Time will be converted into one (1) outstanding share of the
surviving corporation, (d) the directors and officers of Newco immediately prior
to the Effective Time will become the directors and officers of the surviving
corporation, (e) each share of Target Stock outstanding immediately prior to the
Effective Time will be converted as provide in Section 1.1, and (f) the Merger
will, from and after the Effective Time, have all of the effects provided by
applicable law.
1.4 Further Assurances. Target agrees that if, at any time before or
------------------
after the Effective Time, Acquirer considers or is advised that any further
deeds, assignments or assurances are reasonably necessary or desirable to vest,
perfect or confirm in Acquirer title to any property or rights of Target,
Acquirer and its proper officers and directors may execute and deliver all such
proper deeds, assignments and assurances and do all other things necessary or
desirable to vest, perfect or confirm title to such property or rights in
Acquirer and otherwise to carry out the purpose of this Agreement, in the name
of Target or otherwise; provided that the effectiveness of any such documents or
actions shall be subject to the completion of the Closing of the Merger.
-2-
<PAGE>
1.5 Purchase Accounting. The parties intend that the Merger be
-------------------
treated as a purchase for accounting purposes.
1.6 Legends; Right of First Offer. Section 8.7 of Acquirer's Bylaws
-----------------------------
provides a right of first offer in favor of Acquirer in the event of a proposed
transfer of shares of Acquirer's capital stock by a shareholder. It is
understood that the certificates evidencing the shares of Acquirer Common Stock
issued pursuant to this Agreement will bear the legends set forth below:
(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) THE SECURITIES REPRESENTED HEREBY ARE SUBJECT
TO CERTAIN RESTRICTIONS ON TRANSFER INCLUDING A RIGHT OF
FIRST OFFER HELD BY THE ISSUER OR ITS ASSIGNEE(S) AS SET
FORTH IN THE BYLAWS OF THE ISSUER, A COPY OF WHICH MAY BE
OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH
TRANSFER RESTRICTIONS AND RIGHT OF FIRST OFFER ARE BINDING
ON TRANSFEREES OF THESE SHARES.
2. REPRESENTATIONS AND WARRANTIES OF TARGET
Target hereby represents and warrants that, on the date hereof, except
as set forth on the Target Schedule of Exceptions delivered to Acquirer herewith
as Exhibit 2.0:
-----------
2.1 Organization and Good Standing. Target and each of its
------------------------------
subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the state of its incorporation, has the corporate
power and authority to own, operate and lease its properties and to carry on its
business as now conducted and as proposed to be conducted, and is qualified as a
foreign corporation in each jurisdiction in which a failure to be so qualified
could reasonably be expected to have a material adverse effect on its present or
expected operations or financial condition.
2.2 Power, Authorization and Validity.
---------------------------------
2.2.1 Target has the right, power, legal capacity and authority
to enter into and perform its obligations under this Agreement, and all
agreements to which Target is or will be a party that are required to be
executed pursuant to this Agreement (the "Target Ancillary Agreements"). The
execution, delivery and performance of this Agreement and the Target Ancillary
Agreements have been duly and validly approved and authorized by Target's Board
of Directors.
-3-
<PAGE>
2.2.2 No filing, authorization, consent or approval,
governmental or otherwise, is necessary to enable Target to enter into, and to
perform its obligations under, this Agreement and the Target Ancillary
Agreements, except for (a) the filing of the Agreement of Merger with the
California and Delaware Secretaries of State, and the filing of appropriate
documents with the relevant authorities of other states in which Target is
qualified to do business, if any, (b) such filings as may be required to comply
with federal and state securities laws, and (c) the approval of the Target
shareholders of the transactions contemplated hereby.
2.2.3 This Agreement and the Target Ancillary Agreements are, or
when executed by Target will be, valid and binding obligations of Target
enforceable in accordance with their respective terms, except as to the effect,
if any, of (a) applicable bankruptcy and other similar laws affecting the rights
of creditors generally, (b) rules of law governing specific performance,
injunctive relief and other equitable remedies and (c) the enforceability of
provisions requiring indemnification in connection with the offering, issuance
or sale of securities; provided, however, that the Agreement of Merger will not
be effective until filed with the California and Delaware Secretaries of State.
2.3 Capitalization. As of the date of this Agreement, the authorized
--------------
capital stock of Target consists of 10,000,000 shares of Common Stock, no par
value, of which 2,826,000 shares are issued and outstanding. An aggregate of
1,000,000 shares of Target Common Stock are reserved and authorized for issuance
pursuant to Target's 1998 Stock Option Plan for Employees and Consultants (the
"Target Plan"), of which options to purchase a total of 917,500 shares of Target
Common Stock are outstanding. As of immediately prior to the Closing, the
authorized capital stock of Target will consist of 10,000,000 shares of Common
Stock, of which 3,622,000 shares will be issued and outstanding. On the Closing
Date (as defined in Section 6.1), no shares of Target Common Stock will be
reserved or authorized for issuance pursuant to the Target Plan and no options
to purchase shares of Target Common Stock will be outstanding. All issued and
outstanding shares of Target Stock have been duly authorized and validly issued,
are fully paid and nonassessable, are not, to the best of Target's knowledge,
subject to any right of rescission, and have been offered, issued, sold and
delivered by Target in compliance with all registration or qualification
requirements (or applicable exemptions therefrom) of applicable federal and
state securities laws. A list of all holders of Target Stock and options to
purchase Target Stock, and the number of shares, options held by each has been
delivered by Target to Acquirer herewith as Exhibit 2.3. All persons granted
-----------
options under the Target Plan were, at the time of grant and all time while the
grant was outstanding, directors, officers, employees and/or consultants of
Target. To the best of Target's knowledge, all Target shareholders have good,
valid and marketable title to the issued and outstanding Target Stock held by
such shareholders, free and clear of all liens, claims, pledges, options,
adverse claims, assessments or charges of any nature whatsoever, and have full
right, capacity and authority to vote such Target Stock in favor of the Merger
and the other transactions contemplated by the Agreement. Except as set forth
in this Section, there are no options, warrants, calls, commitments, conversion
privileges or preemptive or other rights or agreements outstanding to purchase
any of Target's authorized but unissued capital stock or any securities
convertible into or exchangeable for shares of Target Stock or obligating Target
to grant, extend, or enter into any such option, warrant, call, right,
commitment, conversion privilege or other right or agreement, and there is no
liability for dividends accrued but unpaid. The Target is not a party to, and
to the
-4-
<PAGE>
best of its knowledge is not aware of, any arrangements or agreements respecting
the voting of any of its securities or imposing rights of first refusal or other
restrictions with respect to such securities (other than normal restrictions on
transfer under applicable federal and state securities laws). Target is not
under any obligation to register under the Securities Act any of its presently
outstanding securities or any securities that may be subsequently issued.
2.4 Subsidiaries. Except for the subsidiaries of Target listed on
------------
Exhibit 2.0 (collectively the "Subsidiaries" and each a "Subsidiary"), each of
which is wholly-owned by Target, Target does not have any subsidiaries or any
interest, direct or indirect, in any corporation, partnership, joint venture or
other business entity.
2.5 No Violation of Existing Agreements. Neither the execution and
-----------------------------------
delivery of this Agreement nor any Target Ancillary Agreement, nor the
consummation of the transactions contemplated hereby, will conflict with, or
(with or without notice or lapse of time, or both) result in a termination,
breach, impairment or violation of (a) any provision of the Articles of
Incorporation or Bylaws of Target or any Subsidiary, as currently in effect, (b)
in any material respect, any material instrument or contract to which Target or
any Subsidiary is a party or by which Target or any Subsidiary is bound, or (c)
any federal, state, local or foreign judgment, writ, decree, order, to the best
of Target's knowledge, statute, rule or regulation applicable to Target or any
Subsidiary or their respective assets or properties. The consummation of the
Merger and the transfer to Acquirer of all material rights, licenses,
franchises, leases and agreements of Target and each Subsidiary will not require
the consent of any third party, pursuant to the agreements referred to in clause
(b) of the foregoing sentence.
2.6 Litigation. There is no action, proceeding, claim or
----------
investigation pending against Target or any Subsidiary before any court or
administrative agency that if determined adversely to Target or any Subsidiary
may reasonably be expected to have a material adverse effect on the present or
future operations or financial condition of Target or any Subsidiary, nor, to
the best of Target's knowledge, has any such action, proceeding, claim or
investigation been threatened. There is, to the best of Target's knowledge, no
reasonable basis for any shareholder or former shareholder of Target, or any
other person, firm, corporation, or entity, to assert a claim against Target or
Acquirer based upon: (a) ownership or rights to ownership of any shares of
Target Stock (except for dissenter's rights with respect to shares of Acquirer
Common Stock issuable by virtue of the Merger), (b) any rights as a Target
shareholder, including any option or preemptive rights or rights to notice or to
vote, or (c) any rights under any agreement among Target and its shareholders.
2.7 Taxes. Target and each of its Subsidiaries has filed all
-----
federal, state, local and foreign tax returns required to be filed, has paid all
taxes required to be paid in respect of all periods for which returns have been
filed, has established an adequate accrual or reserve for the payment of all
taxes payable in respect of the periods subsequent to the periods covered by the
most recent applicable tax returns, has made all necessary estimated tax
payments, and has no material liability for taxes in excess of the amount so
paid or accruals or reserves so established. Neither Target nor any Subsidiary
is delinquent in the payment of any tax or is delinquent in the filing of any
tax returns, and no deficiencies for any tax have been threatened, claimed,
assessed or, to the best of Target's knowledge, proposed. No tax return of
Target or any Subsidiary has ever been audited by the Internal Revenue Service
or any state taxing agency or authority. For
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the purposes of this Section, the terms "tax" and "taxes" include all federal,
state, local and foreign income, gains, franchise, excise, property, sales, use,
employment, license, payroll, occupation, recording, value added or transfer
taxes, governmental charges, fees, levies or assessments (whether payable
directly or by withholding), and, with respect to such taxes, any estimated tax,
interest and penalties or additions to tax and interest on such penalties and
additions to tax.
2.8 Target Financial Statements. Target has delivered to Acquirer as
---------------------------
Exhibit 2.8 Target's balance sheet as of May 17, 1999 (the "Balance Sheet") and
- -----------
profit and loss statement for the period from January 1, 1999 through May 17,
1999 (collectively the "Financial Statements"). The Financial Statements (a)
are in accordance with the books and records of Target, (b) have been prepared
in good faith and fairly present the financial condition of Target at the date
therein indicated and the results of operations for the period therein specified
and (c) have been prepared on a consistent basis. Target has no material debt,
liability or obligation of any nature, whether accrued, absolute, contingent or
otherwise, and whether due or to become due, that is not reflected or reserved
against in the Financial Statements, except for those that may have been
incurred after the date of the Financial Statements in the ordinary course of
its business, consistent with past practice and that are not material in amount
either individually or collectively.
2.9 Title to Properties. Target has good and marketable title to
-------------------
all of its assets as shown on the Balance Sheet, free and clear of all liens,
charges, restrictions or encumbrances (other than for taxes not yet due and
payable). All machinery and equipment included in such properties is in good
condition and repair, normal wear and tear excepted, and all leases of real or
personal property to which Target or any Subsidiary is a party are fully
effective and afford Target or the Subsidiary peaceful and undisturbed
possession of the subject matter of the lease. Neither Target nor any Subsidiary
is in violation of any zoning, building, safety or environmental ordinance,
regulation or requirement or other law or regulation applicable to the operation
of owned or leased properties (the violation of which would have a material
adverse effect on its business), or has received any notice of violation with
which it has not complied.
2.10 Absence of Certain Changes. Since the date of the Balance Sheet,
--------------------------
there has not been with respect to Target or any Subsidiary:
(a) any change in the financial condition, properties, assets,
liabilities, business or operations thereof which change by itself or in
conjunction with all other such changes, whether or not arising in the ordinary
course of business, has had or will have a material adverse effect thereon;
(b) any contingent liability incurred thereby as guarantor or
otherwise with respect to the obligations of others;
(c) any mortgage, encumbrance or lien placed on any of the
properties thereof;
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(d) any material obligation or liability incurred thereby other
than obligations and liabilities incurred in the ordinary course of business;
(e) any purchase or sale or other disposition, or any agreement
or other arrangement for the purchase, sale or other disposition, of any of the
properties or assets thereof other than in the ordinary course of business;
(f) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the properties, assets or business
thereof;
(g) any declaration, setting aside or payment of any dividend
on, or the making of any other distribution in respect of, the capital stock
thereof, any split, combination or recapitalization of the capital stock thereof
or any direct or indirect redemption, purchase or other acquisition of the
capital stock thereof;
(h) any labor dispute or claim of unfair labor practices, any
change in the compensation payable or to become payable to any of its officers,
employees or agents, or any bonus payment or arrangement made to or with any of
such officers, employees or agents;
(i) any change with respect to the management, supervisory or
other key personnel thereof;
(j) any payment or discharge of a material lien or liability
thereof which lien was not either shown on the Balance Sheet or incurred in the
ordinary course of business thereafter; or
(k) any obligation or liability incurred thereby to any of its
officers, directors or shareholders or any loans or advances made thereby to any
of its officers, directors or shareholders except normal compensation and
expense allowances payable to officers.
2.11 Contracts and Commitments. Except as set forth on Exhibit 2.11
-------------------------
delivered to Acquirer herewith, neither Target nor any Subsidiary has any oral
or written contract, obligation, agreement, plan, lease, instrument,
arrangement, license or commitment which is material to the business of Target
or any Subsidiary, including, but not limited to any:
(a) Contract, obligation or commitment providing for payments by
or to Target or any Subsidiary in an aggregate amount of $5,000 or more;
(b) License agreement as licensor or licensee (except for
standard non-exclusive hardware and software licenses granted to end-user
customers in the ordinary course of business a list or written description of
which has been provided to Acquirer's counsel);
(c) Agreement for the lease of real or personal property;
(d) Joint venture contract or arrangement or any other agreement
that involves a sharing of profits with other persons;
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(e) Instrument evidencing or related in any way to indebtedness
for borrowed money by way of direct loan, sale of debt securities, purchase
money obligation, conditional sale, guarantee, or otherwise, except for trade
indebtedness incurred in the ordinary course of business, and except as
disclosed in the Financial Statements;
(f) Contract containing covenants purporting to limit Target's
or any Subsidiary's freedom to compete in any line of business in any geographic
area;
(g) Contract, obligation or commitment providing for any stock
redemption.
(h) Equipment financing or lease agreement, or franchise
agreement.
A copy of each agreement or document listed on Exhibit 2.11 has been
delivered to Acquirer or its counsel. All agreements, contracts, plans, leases,
instruments, arrangements, licenses and commitments listed on Exhibit 2.11 are
valid and in full force and effect. Neither Target nor any Subsidiary is in
default in any material respect under any contract, obligation, agreement, plan,
lease, instrument, arrangement, license or commitment listed on Exhibit 2.11 or
that is otherwise material to the business of Target or a Subsidiary. Neither
Target nor any Subsidiary is a party to any contract or arrangement which has
had or could reasonably be expected to have a material adverse effect on its
business. Neither Target nor any Subsidiary has any material liability for
renegotiation of government contracts or subcontracts, if any.
2.12 Intellectual Property. Target owns or has the right to use all
---------------------
Intellectual Property Rights (as defined below) required for the conduct of its
business as presently conducted (such Intellectual Property Rights being
hereinafter collectively referred to as the "Target IP Rights") and Target's
rights to use, sell or license the Target IP Rights are reasonably sufficient
for the conduct of such business. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby will
not constitute a material breach of any instrument or agreement governing any
Target IP Right (the "Target IP Rights Agreements"), will not cause the
forfeiture or termination or give rise to a right of forfeiture or termination
of any Target IP Right or materially impair the right of Target or any
Subsidiaries to use, sell or license any Target IP Right or portion thereof.
There are no royalties, honoraria, fees or other payments payable by Target to
any person by reason of the ownership, use, license, sale or disposition of the
Target IP Rights (other than as set forth in the Target IP Rights Agreements
listed in Exhibit 2.12). Neither the manufacture, marketing, license, sale or
------------
intended use of any product currently licensed or sold by Target or any of the
Target Subsidiaries or currently under development by Target or any of the
Target Subsidiaries violates any license or agreement between Target or any of
the Target Subsidiaries and any third party or infringes any Intellectual
Property Right of any other party; and there is no pending or, to the best of
Target's knowledge, threatened, claim or litigation contesting the validity,
ownership or right to use, sell, license or dispose of any Target IP Right nor
is there any basis for any such claim, nor has Target received any notice
asserting that any Target IP Right or the proposed use, sale, license or
disposition thereof conflicts or will conflict with the rights of any other
party, nor, to the best knowledge of Target, is there any basis for any such
assertion. Target has taken reasonable and practicable steps designed to
safeguard and maintain the secrecy and confidentiality of, and its proprietary
rights in, all Target IP Rights. All officers, employees
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and consultants of Target and each Subsidiary have executed and delivered to
Target or the Subsidiary an agreement regarding the protection of proprietary
information and the assignment to Target or the Subsidiary of all Intellectual
Property Rights arising from the services performed for Target or the Subsidiary
by such persons. Copies of the form of all such agreements have been delivered
to Acquirer or its counsel. Exhibit 2.12 contains a list of all applications,
registrations, filings and other formal actions made or taken pursuant to
federal, state and foreign laws by Target to perfect or protect its interest in
Target IP Rights, including, without limitation, all patents, patent
applications, trademarks, trademark applications and service marks. As used
herein, the term "Intellectual Property Rights" shall mean all worldwide
industrial and intellectual property rights, including, without limitation,
patents, patent applications, patent rights, trademarks, trademark applications,
trade names, service marks, service mark applications, copyright, copyright
applications, franchises, licenses, inventories, know-how, trade secrets,
customer lists, proprietary processes and formulae, all source and object code,
algorithms, architecture, structure, display screens, layouts, inventions,
development tools and all documentation and media constituting, describing or
relating to the above, including, without limitation, manuals, memoranda and
records.
2.13 Compliance with Laws. Target and each of its Subsidiaries has
--------------------
complied, or prior to the Closing Date will have complied, and is or will be at
the Closing Date in full compliance, with all applicable laws, ordinances,
regulations, and rules, and all orders, writs, injunctions, awards, judgments,
and decrees applicable to it or to the assets, properties, and business thereof
(except to the extent failure of Target to comply with any of the foregoing
would not have a material adverse effect on its assets, properties, or business
as presently conducted), including, without limitation: (a) all applicable
federal and state securities laws and regulations, (b) all applicable federal,
state, and local laws, ordinances, regulations, and all orders, writs,
injunctions, awards, judgments, and decrees pertaining to (i) the sale,
licensing, leasing, ownership, or management of its owned, leased or licensed
real or personal property, products and technical data, (ii) employment,
employment practices, wages, hours, and terms and conditions of employment and
(iii) safety, health, fire prevention, environmental protection, toxic waste
disposal, building standards, zoning and other similar matters (c) the Export
Administration Act and regulations promulgated thereunder and all other laws,
regulations, rules, orders, writs, injunctions, judgments and decrees applicable
to the export or re-export of controlled commodities or technical data and (d)
the Immigration Reform and Control Act. Each of Target and the Subsidiaries has
received all permits and approvals from, and has made all filings with, third
parties, including government agencies and authorities, that are necessary in
connection with its present business, except to the extent failure to obtain any
such permit or approval, or to make such filings, would not, individually or in
the aggregate, have a material adverse affect on Target's assets, properties, or
business as presently conducted. There are no legal or administrative
proceedings or investigations pending or, to the best of Target's knowledge,
threatened, that, if enacted or determined adversely to Target or any
Subsidiary, would result in any adverse change in the present or future
operations or financial condition thereof.
2.14 Certain Transactions and Agreements. No officer or director of
-----------------------------------
Target or any Subsidiary or any "affiliate" or "associate" (as those terms are
defined in Rule 405 promulgated under the Securities Act) of any such person has
had, either directory or indirectly, a
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material interest in: (i) any person or entity which purchases from or sells,
licenses or furnishes to Target or any Subsidiary any goods, technology,
property, real or personal, tangible or intangible, including inventions,
patents, copyrights, trademarks or trade names or trade secrets or other
property rights or services; (ii) any person or entity that competes with Target
(except with respect to any interest in less than one percent of the stock of
any corporation whose stock is publicly traded), or (iii) any contract,
agreement or informal arrangement to which Target or any Subsidiary is a party
or by which it may be bound or affected, except for normal compensation for
services as an officer, director, employee or consultant thereof.
2.15. Employees, ERISA and Other Compliance.
-------------------------------------
2.15.1 Neither Target nor any Subsidiary has any employment
contracts or consulting agreements currently in effect that are not terminable
at will (other than agreements with the sole purpose of providing for the
confidentiality of proprietary information or assignment of inventions).
2.15.2 Neither Target nor any Subsidiary (i) has ever been or
is now subject to a union organizing effort, (ii) is subject to any collective
bargaining agreement with respect to any of its employees, (iii) is subject to
any other contract, written or oral, with any trade or labor union, employees'
association or similar organization, or (iv) has any current labor disputes.
Target and each of its Subsidiaries has good labor relations, and has no
knowledge of any facts indicating that the consummation of the transactions
contemplated hereby will have an adverse effect on such labor relations, and has
no knowledge that any of its key employees intends to leave its employ.
2.15.3 ERISA Plans. Exhibit 2.15.3 identifies (i) each
----------- --------------
"employee benefit plan," as defined in Section 3(1) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and (ii) all other written or
formal plans or agreements involving direct or indirect compensation or benefits
(including any employment agreements entered into between Target or any
Subsidiary and any employee of Target or any Subsidiary, but excluding workers'
compensation, unemployment compensation and other government-mandated programs)
currently or previously maintained, contributed to or entered into by Target or
any Subsidiary under which Target or any Subsidiary or any ERISA Affiliate (as
defined below) thereof has any present or future obligation or liability
(collectively, the "Target Employee Plans"). For purposes of this Section 2.15,
"ERISA Affiliate" shall mean any entity which is a member of (A) a "controlled
group of corporations," as defined in Section 414(b) of the Code, (B) a group of
entities under "common control," as defined in Section 414(c) of the Code, or
(C) an "affiliated service group," as defined in Section 414(m) of the Code, or
treasury regulations promulgated under Section 414(o) of the Code, any of which
includes Target or any Subsidiary. A list of all Target Employee Plans has been
delivered to Acquirer or its counsel. The Company does not have any Target
Employee Plans which individually or collectively would constitute an "employee
pension benefit plan," as defined in Section 3(2) of ERISA (collectively, the
"Target Pension Plans"). All contributions due from Target or any Subsidiary
with respect to any of the Target Employee Plans have been made as required
under ERISA or have been accrued on Target's or any such Target Subsidiary's
Financial Statements. Each Target Employee Plan has been maintained
substantially in compliance with its terms and with the requirements prescribed
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by any and all statutes, orders, rules and regulations, including, without
limitation, ERISA and the Code, which are applicable to such Target Employee
Plans.
2.15.4 Exhibit 2.15.4 lists each employment, severance or
--------------
other similar contract, arrangement or policy and each plan or arrangement
(written or oral) providing for insurance coverage (including any self-insured
arrangements), workers' benefits, vacation benefits, severance benefits,
disability benefits, death benefits, hospitalization benefits, retirement
benefits, deferred compensation, profit-sharing, bonuses, stock options, stock
purchase, phantom stock, stock appreciation or other forms of incentive
compensation or post-retirement insurance, compensation or benefits for
employees, consultants or directors which is entered into, maintained or
contributed to, as the case may be, by Target or any Subsidiary and covers any
employee or former employee of Target or any Subsidiary. Such contracts, plans
and arrangements as are described in this Section 2.15.4 are herein referred to
collectively as the "Target Benefit Arrangements." Each Target Benefit
Arrangement has been maintained in substantial compliance with its terms and
with the requirements prescribed by any and all statutes, orders, rules and
regulations which are applicable to such Target Benefit Arrangement. Target has
delivered to Acquirer or its counsel a complete and correct copy or description
of each Target Benefit Arrangement.
2.15.5 Exhibit 2.15.5 lists each amendment to, written
interpretation or announcement (whether or not written) by Target or any
Subsidiary relating to, or change in employee participation or coverage under,
any Target Benefit Arrangement that would increase the expense of maintaining
such Target Employee Plan or Target Benefit Arrangement above the level of the
expense incurred in respect thereof for the fiscal year ended December 31, 1999.
2.15.6 Target has provided, or will have provided prior to the
Closing, to individuals entitled thereto all required notices and coverage
pursuant to Section 4980B of the Code and the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended ("COBRA"), with respect to any
"qualifying event" (as defined in Section 4980B(f)(3) of the Code) occurring
prior to and including the Closing Date, and no Tax payable on account of
Section 4980B of the Code has been incurred with respect to any current or
former employees (or their beneficiaries) of Target or any Subsidiary.
2.15.7 No benefit payable or which may become payable by Target
or any Subsidiary pursuant to any Target Employee Plan or any Target Benefit
Arrangement or as a result of or arising under this Agreement shall constitute
an "excess parachute payment" (as defined in Section 280G(b)(1) of the Code)
which is subject to the imposition of an excise Tax under Section 4999 of the
Code or which would not be deductible by reason of Section 280G of the Code.
2.15.8 Target and each Target Subsidiary is in compliance in all
respects with all contracts relating to employment, including, but not limited
to, employee compensation matters. To the best of Target's knowledge, no
employee of Target or any Subsidiary is in violation of any term of any
employment contract, patent disclosure agreement, noncompetition agreement, or
any other contract or agreement, or any restrictive covenant relating to the
right of any such employee to be employed thereby, or to use trade secrets or
proprietary information of
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others, and the employment of such employees does not subject Target or any
Subsidiary to any liability.
2.15.9 A list of all employees, officers and consultants of
Target and the Subsidiaries and their current compensation is set forth on
Exhibit 2.15.9, which has been delivered to Acquirer.
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2.15.10 Except as set forth on Exhibit 2.15.10, neither Target
nor any Subsidiary is a party to any (a) agreement with any executive officer or
other key employee thereof (i) the benefits of which are contingent, or the
terms of which are altered, upon the occurrence of a transaction involving
Target in the nature of any of the transactions contemplated by this Agreement
and the Agreement of Merger, (ii) providing any term of employment or
compensation guarantee, or (iii) providing severance benefits or other benefits
after the termination of employment of such employee regardless of the reason
for such termination of employment, or (b) agreement or plan, including, without
limitation, any stock option plan, stock appreciation rights plan or stock
purchase plan, any of the benefits of which will be increased, or the vesting of
benefits of which will be accelerated, by the occurrence of any of the
transactions contemplated by this Agreement and the Agreement of Merger or the
value of any of the benefits of which will be calculated on the basis of any of
the transactions contemplated by this Agreement and the Agreement of Merger.
2.15.11 All of the employees of Target and its subsidiaries are
legally permitted to be employed by Target and its subsidiaries in the United
States in their current job capacities. Target and each of its subsidiaries
have reviewed, and has in its personnel records, a completed a Form I-9 for each
employee. To the extent that such Forms I-9 are incomplete or missing, Target
and its subsidiaries have reviewed and made record of any documentation
necessary to confirm that each employee is legally entitled to seek or engage in
employment in the United States. Target is in compliance with all of the United
States Department of Labor's labor condition application regulations, except to
the extent that non-compliance would not have a material effect on Target's
business, result in a material penalty or result in the invalidity of visas held
by its employees. This includes the creation, update and maintenance of the
public access file required by Department of Labor regulations and the creation
and updating of private wage memos for each non-immigrant employed and
previously employed by Target. Target has no obligation to provide any
notification to any governmental authority as a result of the Merger.
2.16 Corporate Documents. Target has made available to Acquirer for
-------------------
examination all documents and information listed in the Target Schedule of
Exceptions or other Exhibits called for by this Agreement which have been
requested by Acquirer's legal counsel, including, without limitation, the
following: (a) copies of Target's Articles of Incorporation and Bylaws as
currently in effect; (b) its Minute Book containing all records of all
proceedings, consents, actions, and meetings of the shareholders, the board of
directors and any committees thereof; (c) its stock ledger and journal
reflecting all stock issuances and transfers; and (d) all permits, orders, and
consents issued by any regulatory agency with respect to Target, or any
securities of Target, and all applications for such permits, orders, and
consents.
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2.17 No Brokers. Neither Target nor the Principal Shareholder is
----------
obligated for the payment of fees or expenses of any investment banker, broker
or finder in connection with the origin, negotiation or execution of this
Agreement or the Agreement of Merger or in connection with any transaction
contemplated hereby or thereby.
2.18 Disclosure. Neither this Agreement, its exhibits and schedules,
----------
nor any of the certificates or documents to be delivered by Target to Acquirer
under this Agreement, taken together, contains any untrue statement of material
fact or omits to state any material fact necessary in order to make the
statements contained herein and therein, in light of the circumstances under
which such statements were made, not misleading.
2.19 Information Supplied. None of the information supplied or to be
--------------------
supplied by Target for inclusion in an Application for Qualification of
Securities (the "Permit Application"), under the California Securities Law of
1968 (the "California Securities Law"), or any solicitation of written consent
of the shareholders for the Merger (the "Notice Materials"), at the date such
information is supplied and at the time of written consent of the shareholders
approving the Merger is solicited or received, contains or will contain any
untrue statement of a material fact or omits or will omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not misleading
or will, in the case of the Permit Application, at the time the Permit is
issued, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
2.20 Books and Records.
-----------------
2.20.1 The books, records and accounts of Target and its
Subsidiaries (a) are in all material respects true, complete and correct, (b)
have been maintained in accordance with good business practices on a basis
consistent with prior years, (c) are stated in reasonable detail and accurately
and fairly reflect the transactions and dispositions of the assets of Target,
and (d) accurately and fairly reflect the basis for the Financial Statements.
2.20.2 Target has devised and maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (a)
transactions are executed in accordance with management's general or specific
authorization; (b) transactions are recorded as necessary (i) to permit
preparation of financial statements, and (ii) to maintain accountability for
assets, and (c) the amount recorded for assets on the books and records of
Target is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
2.21 Insurance. Target and its Subsidiaries maintain and at all
---------
times during the prior three years have maintained fire and casualty, general
liability, business interruption, product liability, and sprinkler and water
damage insurance which it believes to be reasonably prudent for similarly sized
and similarly situated businesses.
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2.22 Environmental Matters.
---------------------
2.22.1 To the best of Target's knowledge, during the period
that Target and Subsidiary have leased or owned their respective properties or
owned or operated any facilities, there have been no disposals, releases or
threatened releases of Hazardous Materials (as defined below) on, from or under
such properties or facilities. Target has no knowledge of any presence,
disposals, releases or threatened releases of Hazardous Materials on, from or
under any of such properties or facilities, which may have occurred prior to
Target or any Subsidiary having taken possession of any of such properties or
facilities. For the purposes of this Agreement, the terms "disposal," "release,"
and "threatened release" shall have the definitions assigned thereto by the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42
U.S.C. (S) 9601 et seq., as amended ("CERCLA"). For the purposes of this
Agreement "Hazardous Materials" shall mean any hazardous or toxic substance,
material or waste which is or becomes prior to the Closing regulated under, or
defined as a "hazardous substance," "pollutant," "contaminant," "toxic
chemical," "hazardous materials," "toxic substance" or "hazardous chemical"
under (1) CERCLA; (2) any similar federal, state or local law; or (3)
regulations promulgated under any of the above laws or statutes.
2.22.2 To the best of Target's knowledge, none of the
properties or facilities of Target or any Subsidiary is in violation of any
federal, state or local law, ordinance, regulation or order relating to
industrial hygiene or to the environmental conditions on, under or about such
properties or facilities, including, but not limited to, soil and ground water
condition. During the time that Target or any Subsidiary have owned or leased
their respective properties and facilities, neither Target nor any Subsidiary
nor, to Target's knowledge, any third party, has used, generated, manufactured
or stored on, under or about such properties or facilities or transported to or
from such properties or facilities any Hazardous Materials.
2.22.3 During the time that Target or any Subsidiary have owned
or leased their respective properties and facilities, there has been no
litigation brought or threatened against Target or any Subsidiary by, or any
settlement reached by Target or any Subsidiary with, any party or parties
alleging the presence, disposal, release or threatened release of any Hazardous
Materials on, from or under any of such properties or facilities.
2.23 Cash Balance. As of the date of this Agreement, (i) the cash
------------
balance in the Target's bank accounts is $1,149,600, (ii) the invoice amount of
all completed work, which has actually been invoiced, but which has not been
collected or determined to be uncollectable, and expected collectable accounts
receivable as of May 31, 1999 for work completed prior to such date that Target
has not invoiced as of this date, less anticipated expenses is $659,050, and
(iii) the estimated proceeds from option exercises is $248,000.
3. REPRESENTATIONS AND WARRANTIES OF ACQUIRER
Acquirer hereby represents and warrants, that:
3.1 Organization and Good Standing. Acquirer is a corporation duly
------------------------------
organized, validly existing and in good standing under the laws of the State of
California, and has the corporate power and authority to own, operate and lease
its properties and to carry on its
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business as now conducted and as proposed to be conducted, and is qualified as a
foreign corporation in each jurisdiction in which a failure to be so qualified
could reasonably be expected to have a material adverse effect on its present or
expected operations or financial condition. Acquirer has no subsidiaries, except
Newco.
3.2 Power, Authorization and Validity.
---------------------------------
3.2.1 Acquirer has the right, power, legal capacity and
authority to enter into and perform its obligations under this Agreement, and
all agreements to which Acquirer is or will be a party that are required to be
executed pursuant to this Agreement (the "Acquirer Ancillary Agreements"). The
execution, delivery and performance of this Agreement and the Acquirer Ancillary
Agreements have been duly and validly approved and authorized by Acquirer's
Board of Directors.
3.2.2 No filing, authorization or approval, governmental or
otherwise, is necessary to enable Acquirer to enter into, and to perform its
obligations under, this Agreement and the Acquirer Ancillary Agreements, except
for (a) the filing of the Agreement of Merger with the California and Delaware
Secretaries of State, the recording of the Agreement of Merger in the office of
the Recorder of the Delaware county in which Newco's registered office is
located, and the filing of appropriate documents with the relevant authorities
of other states in which Acquirer is qualified to do business, if any, and (b)
such filings as may be required to comply with federal and state securities
laws.
3.2.3 This Agreement and the Acquirer Ancillary Agreements
are, or when executed by Acquirer will be, valid and binding obligations of
Acquirer enforceable in accordance with their respective terms, except as to the
effect, if any, of (a) applicable bankruptcy and other similar laws affecting
the rights of creditors generally, (b) rules of law governing specific
performance, injunctive relief and other equitable remedies and (c) the
enforceability of provisions requiring indemnification in connection with the
offering, issuance or sale of securities; provided, however, that the Agreement
of Merger will not be effective until filed with the California and Delaware
Secretaries of State.
3.3 Capitalization. As of April 26, 1999, the capitalization of the
--------------
Company consisted of the following:
(a) Preferred Stock. A total of 30,040,000 authorized
---------------
shares of preferred stock, consisting of 19,840,000 shares designated as Series
B Preferred Stock, of which 18,596,631 shares are issued and outstanding
(convertible into 6,198,876 shares of common stock), 2,050,000 shares designated
as Series C Preferred Stock, all of which are issued and outstanding
(convertible into 683,334 shares of common stock), 1,300,000 shares designated
Series D Preferred Stock, of which 1,242,287 shares are issued and outstanding,
and 6,850,000 shares designated Series E Preferred Stock, of which 6,521,006
shares are issued and outstanding.
(b) Common Stock. A total of 28,000,000 authorized shares
------------
of Common Stock, of which 4,648,044 shares are issued and outstanding.
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(c) Options and Warrants. A total of 2,754,967 shares
--------------------
consisting of (i) 58,336 shares of Common Stock issuable under certain warrants
(ii) up to 410,084 shares of Common Stock subject to outstanding options under
the Company's 1997 Stock Option Plan and (iii) 2,301,639 shares of Common Stock
subject to outstanding options under the Company's 1998 Equity Incentive Plan.
3.4 No Violation of Existing Agreements. Neither the execution and
-----------------------------------
delivery of this Agreement nor any Acquirer Ancillary Agreement, nor the
consummation of the transactions contemplated hereby, will conflict with, or
(with or without notice or lapse of time, or both) result in a termination,
breach, impairment or violation of (a) any provision of the Articles of
Incorporation or Bylaws of Acquirer, as currently in effect, (b) in any material
respect, any material instrument or contract to which Acquirer is a party or by
which Acquirer is bound, or (c) any federal, state, local or foreign judgment,
writ, decree, order, statute, rule or regulation applicable to Acquirer or its
assets or properties.
3.5 Litigation. There is no action, proceeding, claim or, to
----------
Acquirer's knowledge, investigation, pending against Acquirer before any court
or administrative agency that if determined adversely to Acquirer may reasonably
be expected to have a material adverse effect on the present or future
operations or financial condition of Acquirer, nor, to Acquirer's knowledge, has
any such action, proceeding, claim or investigation been threatened.
3.6 Acquirer Financial Statements. Acquirer has delivered to Target
-----------------------------
Acquirer's balance sheet as of March 31, 1999 and income statement and statement
of cash flows for the quarter then ended (collectively the "Acquirer Financial
Statements"). The Acquirer Financial Statements (a) are in accordance with the
books and records of Target, (b) have been prepared in good faith and fairly
present the financial condition of Acquirer at the date therein indicated and
the results of operations for the period therein specified and (c) have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis. Acquirer has no material debt, liability or obligation of
any nature, whether accrued, absolute, contingent or otherwise, and whether due
or to become due, that is not reflected or reserved against in the Acquirer
Financial Statements, except for those that (i) may have been incurred after the
date of the Financial Statements in the ordinary course of its business,
consistent with past practice and that are not material in amount either
individually or collectively or (ii) are not required to be reflected in
financial statements in accordance with generally accepted accounting
principles.
3.7 Absence of Certain Changes. Since the date of the Acquirer
--------------------------
Financial Statements, there has not been any change in the financial condition,
properties, assets, liabilities, business or operations of Acquirer which change
by itself or in conjunction with all other such changes, whether or not arising
in the ordinary course of business, has had or will have a material adverse
effect thereon.
3.8 Corporate Documents. Acquirer has made available to Target
-------------------
copies of (a) Acquirer's Articles of Incorporation and Bylaws as currently in
effect and (b) its Minute Book containing all records of all proceedings,
consents, actions, and meetings of the shareholders, the board of directors and
any committees thereof.
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3.9 No Brokers. Acquirer is not obligated for the payment of fees
----------
or expenses of any investment banker, broker or finder in connection with the
origin, negotiation or execution of this Agreement or the Agreement of Merger or
in connection with any transaction contemplated hereby or thereby.
3.10 Intellectual Property. Acquirer owns or has the right to use,
---------------------
or after the Effective Time will own or have the right to use, all Intellectual
Property Rights (as defined below) required for the conduct of its business as
presently conducted (such Intellectual Property Rights being hereinafter
collectively referred to as the "Acquirer IP Rights") and Acquirer's rights to
use, sell or license the Acquirer IP Rights are reasonably sufficient for the
conduct of such business. The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby will not
constitute a material breach of any instrument or agreement governing any
Acquirer IP Right (the "Acquirer IP Rights Agreements"), will not cause the
forfeiture or termination or give rise to a right of forfeiture or termination
of any Acquirer IP Right or materially impair the right of Acquirer or any
Subsidiaries to use, sell or license any Acquirer IP Right or portion thereof.
Neither the manufacture, marketing, license, sale or intended use of any product
currently licensed or sold by Acquirer or any of the Acquirer Subsidiaries or
currently under development by Acquirer or any of the Acquirer Subsidiaries
violates any license or agreement between Acquirer or any of the Acquirer
Subsidiaries and any third party or infringes any Intellectual Property Right of
any other party; and, to Acquirer's best knowledge, there is no pending or
threatened claim or litigation contesting the validity, ownership or right to
use, sell, license or dispose of any Acquirer IP Right nor is there any basis
for any such claim, nor has Acquirer received any notice asserting that any
Acquirer IP Right or the proposed use, sale, license or disposition thereof
conflicts or will conflict with the rights of any other party, nor, to the best
knowledge of Acquirer, is there any basis for any such assertion. Acquirer has
taken reasonable and practicable steps designed to safeguard and maintain the
secrecy and confidentiality of, and its proprietary rights in, all Acquirer IP
Rights. All officers, employees and consultants of Acquirer and each Subsidiary
have executed and delivered to Acquirer or the Subsidiary an agreement regarding
the protection of proprietary information and the assignment to Acquirer or the
Subsidiary of all Intellectual Property Rights arising from the services
performed for Acquirer or the Subsidiary by such persons.
3.11 Compliance with Laws. Acquirer has complied, or prior to the
--------------------
Closing Date will have complied, and is or will be at the Closing Date in full
compliance, with all applicable laws, ordinances, regulations, and rules, and
all orders, writs, injunctions, awards, judgments, and decrees applicable to it
or to the assets, properties, and business thereof (except to the extent failure
of Acquirer to comply with any of the foregoing would not have a material
adverse effect on its assets, properties, or business as presently conducted)
including, without limitation: (a) all applicable federal and state securities
laws and regulations, (b) all applicable federal, state, and local laws,
ordinances, regulations, and all orders, writs, injunctions, awards, judgments,
and decrees pertaining to (i) the sale, licensing, leasing, ownership, or
management of its owned, leased or licensed real or personal property, products
and technical data, (ii) employment, employment practices, wages, hours, and
terms and conditions of employment and (iii) safety, health, fire prevention,
environmental protection, toxic waste disposal, building standards, zoning and
other similar matters (c) the Export Administration Act and regulations
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promulgated thereunder and all other laws, regulations, rules, orders, writs,
injunctions, judgments and decrees applicable to the export or re-export of
controlled commodities or technical data and (d) the Immigration Reform and
Control Act. Each of Acquirer and the Subsidiaries has received all permits and
approvals from, and has made all filings with, third parties, including
government agencies and authorities, that are necessary in connection with its
present business, except to the extent failure to obtain any such permit of
approval, or to make any such filings, would not, individually or in the
aggregate, have a material adverse affect on Acquirer's assets, properties, or
business as presently conducted. There are no legal or administrative
proceedings or investigations pending or, to the best of Acquirer's knowledge,
threatened, that, if enacted or determined adversely to Acquirer or any
Subsidiary, would result in any adverse change in the present or future
operations or financial condition thereof.
3.12 Disclosure. Neither this Agreement, its exhibits and schedules,
----------
nor any of the certificates or documents to be delivered by Acquirer to Target
under this Agreement, taken together, contains any untrue statement of material
fact or omits to state any material fact necessary in order to make the
statements contained herein and therein, in light of the circumstances under
which such statements were made, not misleading.
3.13 Information Supplied. None of the information supplied or to be
--------------------
supplied by Acquirer for inclusion in the Permit Application, or any Notice
Materials, at the date such information is supplied and at the time of the
statement soliciting written consent of the shareholders approving the Merger is
solicited or received, contains or will contain any untrue statement of a
material fact or omits or will omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading or will, in the case
of the Permit Application, at the time the Permit is issued, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they are made, not misleading.
3.14 Employee Matters. Acquirer believes that it has good employee
----------------
relations, and to the best knowledge of Acquirer, no key employee or consultant
of Acquirer intends to terminate his or her employment or consulting
relationship with Acquirer.
4. TARGET PRECLOSING COVENANTS
During the period from the date of this Agreement until the Effective
Time, Target covenants and agrees as follows:
4.1 Advice of Changes. Target will promptly advise Acquirer in
-----------------
writing (a) of any event occurring subsequent to the date of this Agreement that
would render any representation or warranty of Target contained in this
Agreement, if made on or as of the date of such event or the Closing Date,
untrue or inaccurate in any material respect and (b) of any material adverse
change in Target's business, results of operations or financial condition. To
ensure compliance with this Section 4.1, Target shall deliver to Acquirer within
fifteen (15) days after the end of each monthly accounting period ending after
the date of this Agreement and before the Closing Date, an unaudited balance
sheet and statement of operations, which financial statements shall be prepared
in good faith in the ordinary course of business, in accordance with
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Target's books and records and shall fairly present the financial position of
Target as of their respective dates and the results of Target's operations for
the periods then ended.
4.2 Maintenance of Business. Target will use its commercially
-----------------------
reasonable efforts to carry on and preserve its business and its relationships
with customers, suppliers, employees and others in substantially the same manner
as it has prior to the date hereof. If Target becomes aware of a material
deterioration in the relationship with any customer, supplier or key employee,
it will promptly bring such information to the attention of Acquirer in writing
and, if requested by Acquirer, will exert its best efforts to restore the
relationship.
4.3 Conduct of Business. Target will continue to conduct its
-------------------
business and maintain its business relationships in the ordinary and usual
course and will not, without the prior written consent of the President of
Acquirer:
(a) borrow any money;
(b) enter into any transaction not in the ordinary course of
business;
(c) encumber or permit to be encumbered any of its assets
except in the ordinary course of its business consistent with past practice and
to an extent which is not material;
(d) dispose of any of its assets except in the ordinary
course of business consistent with past practice;
(e) enter into any material lease or contract for the
purchase or sale of any property, real or personal, except in the ordinary
course of business consistent with past practice;
(f) fail to maintain its equipment and other assets in good
working condition and repair according to the standards it has maintained to the
date of this Agreement, subject only to ordinary wear and tear;
(g) pay any bonus, increased salary or special remuneration
to any officer, employee or consultant or enter into any new employment or
consulting agreement with any such person, except for the proposed bonuses
described in Section 4.3(g) of the Schedule of Exceptions and the acceleration
of certain options to purchase Target common stock;
(h) change accounting methods;
(i) declare, set aside or pay any cash or stock dividend or
other distribution in respect of capital stock, or redeem or otherwise acquire
any of its capital stock;
(j) amend or terminate any contract, agreement or license to
which it is a party except those amended or terminated in the ordinary course of
business, consistent with past practice, and which are not material in amount or
effect;
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(k) lend any amount to any person or entity, other than
advances for travel and expenses which are incurred in the ordinary course of
business consistent with past practice, not material in amount and documented by
receipts for the claimed amounts;
(l) guarantee or act as a surety for any obligation except
for the endorsement of checks and other negotiable instruments in the ordinary
course of business, consistent with past practice, which are not material in
amount;
(m) waive or release any material right or claim except in
the ordinary course of business, consistent with past practice;
(n) issue or sell any shares of its capital stock of any
class (except upon the exercise of an option currently outstanding), or any
other of its securities, or issue or create any warrants, obligations,
subscriptions, options, convertible securities, or other commitments to issue
shares of capital stock, or amend the terms, accelerate the vesting, of any
outstanding option or other security (other than to accelerate the vesting of
and/or to provide for the termination of currently outstanding options);
(o) split or combine the outstanding shares of its capital
stock of any class or enter into any recapitalization affecting the number of
outstanding shares of its capital stock of any class or affecting any other of
its securities;
(p) merge, consolidate or reorganize with, or acquire any
entity;
(q) amend its Articles of Incorporation or Bylaws;
(r) license any of its technology or intellectual property
except in the ordinary course of business consistent with past practice;
(s) agree to any audit assessment by any tax authority or
file any federal or state income or franchise tax return unless copies of such
returns have been delivered to Acquirer for its review prior to filing;
(t) change any insurance coverage or issue any certificates
of insurance; or
(u) agree to do, or permit any Subsidiary to do or agree to
do, any of the things described in the preceding clauses 4.3(a) through 4.3(t).
4.4 Preparation of Permit Application. As promptly as practicable
---------------------------------
after the date hereof, Target shall provide such assistance and information as
Acquirer reasonably requests to enable Acquirer to prepare and file with the
Commissioner the Permit Application and any other documents required by the
California Securities Law of 1968, as amended in connection with the Merger.
Each of Acquirer and Target shall use its best efforts to have the Permit
Application declared effective under the California Securities Law, as amended
as promptly as practicable after such filing.
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4.5 Shareholder Approval. Target will solicit and receive the
--------------------
written consent of the shareholders approving this Agreement, the Merger and
related matters which approval will be recommended by Target's Board of
Directors and management. Such written consent will be solicited and completed
in compliance with applicable law. Concurrently with the execution of this
Agreement, Target will cause the Principal Shareholder to, and Principal
Shareholder shall, execute a voting agreement in the form of Exhibit 4.4
-----------
agreeing to vote in favor of the Merger.
4.6 Shareholder Notice of Materials. Target will send to its
-------------------------------
shareholders in a timely manner, for the purpose of considering and voting upon
the Merger, the Notice Materials. Target will promptly provide all information
relating to its business or operations necessary for inclusion in the Notice
Materials to satisfy all requirements of applicable state and federal securities
laws. Target shall be solely responsible for any statement, information or
omission in the Notice Materials relating to it or its affiliates based upon
written information furnished by it.
4.7 Regulatory Approvals. Target will execute and file, or join in
--------------------
the execution and filing, of any application or other document that may be
necessary in order to obtain the authorization, approval or consent of any
governmental body, federal, state, local or foreign which may be reasonably
required, or which Acquirer may reasonably request, in connection with the
consummation of the transactions contemplated by this Agreement. Target will use
its best efforts to obtain all such authorizations, approvals and consents.
4.8 Necessary Consents. Target will use its best efforts to obtain
------------------
such written consents and take such other actions as may be necessary or
appropriate in addition to those set forth in Section 4.4 to allow the
consummation of the transactions contemplated hereby and to allow Acquirer to
carry on Target's business after the Closing.
4.9 Litigation. Target will notify Acquirer in writing promptly
----------
after learning of any actions, suits, proceedings or investigations by or before
any court, board or governmental agency, initiated by or against it or any
Subsidiary, or known by it to be threatened against it or any Subsidiary.
4.10 No Other Negotiations. From the date hereof until the earlier
---------------------
of termination of this Agreement or consummation of the Merger, Target will not,
and will not authorize or permit any officer, director, employee or affiliate of
Target, or any other person, on its behalf to, directly or indirectly: (i)
solicit, initiate, facilitate, encourage or induce the making, submission or
announcement of, any offer, or any effort or attempt concerning any Alternative
Transaction or take any action that could reasonably be expected to lead to an
Alternative Transaction; (ii) furnish any information regarding Target to any
person or entity in connection with or in response to any Alternative
Transaction or potential Alternative Transaction or any proposal for an
Alternative Transaction, except information furnished in response to a wholly
unsolicited offer; or (iii) enter into any letter of intent or other similar
document or any written, oral or other agreement, contract or legally binding
commitment contemplating or otherwise relating to any Alternative Transaction.
Target will promptly notify Acquirer orally and in writing of any such inquiries
or proposals. For the purpose of this Section 4.10, "Alternative Transaction"
shall mean (A) any extraordinary corporate transaction, such as a merger,
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consolidation, tender offer or other business combination involving Target or
any subsidiary of Target with any person other than Acquirer; (B) any sale,
lease or transfer of a material amount of assets of Target or any subsidiary of
Target (other than in the ordinary course of business) to any person other than
Acquirer; (C) any registered public offering of Target's capital stock pursuant
to a registration statement filed under the 1933 Act.
4.11 Access to Information. Until the Closing, Target will allow
---------------------
Acquirer and its agents reasonable access to the files, books, records and
offices of Target and each Subsidiary, including, without limitation, any and
all information relating to Target's taxes, commitments, contracts, leases,
licenses, and real, personal and intangible property and financial condition,
but excluding source code, programmer's notes and the like. Target will cause
its accountants to cooperate with Acquirer and its agents in making available
all financial information reasonably requested, including without limitation the
right to examine all working papers pertaining to all financial statements
prepared or audited by such accountants.
4.12 Satisfaction of Conditions Precedent. Target will use its best
------------------------------------
efforts to satisfy or cause to be satisfied all the conditions precedent which
are set forth in Section 8, and Target will use its best efforts to cause the
transactions contemplated by this Agreement to be consummated, and, without
limiting the generality of the foregoing, to obtain all consents and
authorizations of third parties and to make all filings with, and give all
notices to, third parties that may be necessary or reasonably required on its
part in order to effect the transactions contemplated hereby.
4.14 Target Dissenting Shares. As promptly as practicable after the
------------------------
date of the written consent of Target's shareholders and prior to the Closing
Date, Target shall furnish Acquirer with the name and address of each Target
Dissenting Shareholder and the number of Target Dissenting Shares owned by such
Target Dissenting Shareholder.
4.15 Blue Sky Laws. Target shall use its best efforts to assist
-------------
Acquirer to the extent necessary to comply with the securities and Blue Sky laws
of all jurisdictions which are applicable in connection with the Merger.
5. ACQUIRER PRECLOSING COVENANTS
During the period from the date of this Agreement until the Effective
Time, Acquirer covenants and agrees as follows:
5.1 Advice of Changes. Acquirer will promptly advise Target in
-----------------
writing (a) of any event occurring subsequent to the date of this Agreement that
would render any representation or warranty of Acquirer contained in this
Agreement, if made on or as of the date of such event or the Closing Date,
untrue or inaccurate in any material respect and (b) of any material adverse
change in Acquirer's business, results of operations or financial condition. To
ensure compliance with this Section 4.1, Acquirer shall deliver to Target within
twenty (20) days after the end of each monthly accounting period ending after
the date of this Agreement and before the Closing Date, an unaudited balance
sheet and statement of operations, which financial statements shall be prepared
in good faith in the ordinary course of business, in accordance with Acquirer's
books and records and shall fairly present the financial position of Acquirer as
of their
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respective dates and the results of Acquirer's operations for the periods then
ended. In addition, Acquirer will notify Target of any matter requiring notice
to, or approval by, its shareholders at the same time and in the same manner
that Acquirer so notifies its shareholders.
5.2 Regulatory Approvals. Acquirer will execute and file, or join
--------------------
in the execution and filing, of any application or other document that may be
necessary in order to obtain the authorization, approval or consent of any
governmental body, federal, state, local or foreign, which may be reasonably
required, or which Target may reasonably request, in connection with the
consummation of the transactions contemplated by this Agreement. Acquirer will
use its best efforts to obtain all such authorizations, approvals and consents.
5.3 Satisfaction of Conditions Precedent. Acquirer will use its
------------------------------------
best efforts to satisfy or cause to be satisfied all the conditions precedent
which are set forth in Section 7, and Acquirer will use its best efforts to
cause the transactions contemplated by this Agreement to be consummated, and,
without limiting the generality of the foregoing, to obtain all consents and
authorizations of third parties and to make all filings with, and give all
notices to, third parties that may be necessary or reasonably required on its
part in order to effect the transactions contemplated hereby.
5.4 Preparation of Permit Application. As promptly as practicable
---------------------------------
after the date hereof, Acquirer, with Target's assistance, shall prepare and
file with the Commissioner the Permit Application and any other documents
required by the California Securities Law of 1968, as amended in connection with
the Merger. Acquirer, with Target's assistance, shall use its best efforts to
have the Permit Application declared effective under the California Securities
Law, as amended as promptly as practicable after such filing.
5.5 Blue Sky Laws. Acquirer shall take such steps as may be
-------------
necessary to comply with the securities and Blue Sky laws of all jurisdictions
which are applicable in connection with the Merger.
6. CLOSING MATTERS
6.1 The Closing.
-----------
(a) Subject to termination of this Agreement as provided in
Section 9 below, the Closing will take place at the offices of Fenwick & West,
Two Palo Alto Square, Palo Alto, California 94306 at 1:30 p.m., Pacific Daylight
Time on ________ ___, 1999, or, if all conditions to closing have not been
satisfied or waived by such date, such other place, time and date as Target and
Acquirer may mutually select (the "Closing Date"). Concurrently with the
Closing, the Agreement of Merger will be filed in the office of the California
and Delaware Secretaries of State. The Agreement of Merger provides that the
Merger shall become effective upon filing.
(b) Acquirer will deliver to Acquirer's counsel for
distribution and execution at or after the Effective Time in accordance with
this Section 6: (i) a check in an amount equal to the aggregate cash proceeds to
be paid to Target's shareholders by Acquirer
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pursuant by to Sections 1.1.1; and 1.2 and (ii) instructions to acquirer's
counsel to issue the shares of Acquirer Common Stock and cash amounts in
accordance with Section 1.
6.2 Exchange of Certificates.
------------------------
6.2.1 As of the Effective Time, each share of Target Stock
that is outstanding immediately prior thereto will, by virtue of the Merger and
without further action, cease to exist and will be converted into the right to
receive from Acquirer the Applicable Fraction of a share of Acquirer Common
Stock and the Per Share Cash Amount determined as set forth in Section 1.1.1,
subject to Sections 1.1.2, 1.1.3 and 1.2.
6.2.2 As soon as practicable after the Effective Time, each
holder of shares of Target Stock that are not Dissenting Shares will surrender
the certificate(s) for such shares (the "Target Certificates"), duly endorsed as
requested by Acquirer, to Acquirer for cancellation. Promptly after the
Effective Time and receipt of such Target Certificates, Acquirer will issue to
each tendering holder a certificate (with legends in accordance with Section
1.6) for the number of shares of Acquirer Common Stock to which such holder is
entitled pursuant to Section 1.1.1 hereof, and distribute any cash payable under
Section 1.1.1 and 1.2.
6.2.3 No dividends or distributions payable to holders of
record of Acquirer Common Stock after the Effective Time, or cash payable in
lieu of fractional shares, will be paid to the holder of any unsurrendered
Target Certificate(s) until the holder of the Target Certificate(s) surrenders
such Target Certificate(s). Subject to the effect, if any, of applicable escheat
and other laws, following surrender of any Target Certificate, there will be
delivered to the person entitled thereto, without interest, the amount of any
dividends and distributions therefor paid with respect to Acquirer Common Stock
so withheld as of any date subsequent to the Effective Time and prior to such
date of delivery.
6.2.4 All cash and shares of Acquirer Common Stock delivered
upon the surrender of Target Stock in accordance with the terms hereof will be
deemed to have been delivered in full satisfaction of all rights pertaining to
such Target Stock. There will be no further registration of transfers on the
stock transfer books of Target or its transfer agent of the Target Stock. If,
after the Effective Time, Target Certificates are presented for any reason, they
will be canceled and exchanged as provided in this Section 6.2.
6.2.5 Until certificates representing Target Stock outstanding
prior to the Merger are surrendered pursuant to Section 6.2.2 above, such
certificates will be deemed, for all purposes, to evidence (a) ownership of the
number of shares of Acquirer Stock into which the Target Stock will have been
converted and (b) the right to receive cash determined as set forth in Section
1.1.1 and 1.2. Notwithstanding anything herein to the contrary, any Target
Certificate that is not properly submitted to Acquirer for exchange and
cancellation within three (3) years after the Effective Time shall no longer
evidence ownership of, or any right to receive, shares of Acquirer Common Stock
and all rights of the holder of such Target Certificate, including the right to
receive shares and the right to receive cash, previously evidenced thereby,
shall lapse.
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7. CONDITIONS TO OBLIGATIONS OF TARGET
Target's obligations hereunder are subject to the fulfillment or
satisfaction, on and as of the Closing, of each of the following conditions (any
one or more of which may be waived by Target, but only in a writing signed by
Target):
7.1 Accuracy of Representations and Warranties. The representations
------------------------------------------
and warranties of Acquirer set forth in Section 3 shall be true and accurate in
every material respect on and as of the Closing with the same force and effect
as if they had been made at the Closing, and Target shall receive a certificate
to such effect executed by Acquirer's President and Chief Financial Officer.
7.2 Covenants. Acquirer shall have performed and complied in all
---------
material respects with all of its covenants contained in Section 5 on or before
the Closing, and Target shall receive a certificate to such effect signed by
Acquirer's President and Chief Financial Officer.
7.3 Absence of Material Adverse Change. There shall not have been,
----------------------------------
in the reasonable judgment of the Board of Directors of Target, any material
adverse change in the business or financial condition of Acquirer.
7.4 Compliance with Law. There shall be no order, decree, or ruling
-------------------
by any court or governmental agency or threat thereof, or any other fact or
circumstance, which would prohibit or render illegal the transactions
contemplated by this Agreement.
7.5 Government Consents. There shall have been obtained at or prior
-------------------
to the Closing Date such permits or authorizations, and there shall have been
taken such other action, as may be required to consummate the Merger by any
regulatory authority having jurisdiction over the parties and the actions herein
proposed to be taken, including but not limited to requirements under applicable
federal and state securities laws.
7.6 Permit. The Commissioner shall have issued the Permit pursuant
------
to the Permit Application with respect to the issuance of Acquirer Stock in the
Merger.
7.7 Opinion of Acquirer's Counsel. Target shall have received from
-----------------------------
counsel to Acquirer, an opinion substantially in the form of Exhibit 7.7.
-----------
7.8 Shareholder Approval. The principal terms of this Agreement and
--------------------
the Agreement of Merger shall have been approved and adopted by Target
Shareholders, as required by applicable law and Target's Articles of
Incorporation and Bylaws.
7.9 Satisfactory Form of Legal and Accounting Matters. The form,
-------------------------------------------------
scope and substance of all legal and accounting matters contemplated hereby and
all closing documents and other papers delivered hereunder shall be reasonably
acceptable to Target's counsel.
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8. CONDITIONS TO OBLIGATIONS OF ACQUIRER
The obligations of Acquirer hereunder are subject to the fulfillment
or satisfaction on, and as of the Closing, of each of the following conditions
(any one or more of which may be waived by Acquirer, but only in a writing
signed by Acquirer):
8.1 Accuracy of Representations and Warranties. The representations
------------------------------------------
and warranties of Target set forth in Section 2 shall be true and accurate in
every material respect on and as of the Closing with the same force and effect
as if they had been made at the Closing, and Acquirer shall receive a
certificate to such effect executed by Target's President and Chief Financial
Officer.
8.2 Covenants. Target shall have performed and complied in all
---------
material respects with all of its covenants contained in Section 4 on or before
the Closing, and Acquirer shall receive a certificate to such effect signed by
Target's President and Chief Financial officer.
8.3 Absence of Material Adverse Change. There shall not have been,
----------------------------------
in the reasonable judgment of the Board of Directors of Acquirer, any material
adverse change in the business or financial condition of Target.
8.4 Compliance with Law. There shall be no order, decree, or ruling
-------------------
by any court or governmental agency or threat thereof, or any other fact or
circumstance, which would prohibit or render illegal the transactions
contemplated by this Agreement.
8.5 Government Consents. There shall have been obtained at or prior
-------------------
to the Closing Date such permits or authorizations, and there shall have been
taken such other action, as may be required to consummate the Merger by any
regulatory authority having jurisdiction over the parties and the actions herein
proposed to be taken, including but not limited to requirements under applicable
federal and state securities laws.
8.6 Opinion of Target's Counsel. Acquirer shall have received from
---------------------------
counsel to Target, an opinion substantially in the form of Exhibit 8.6.
-----------
8.7 Consents. Acquirer shall have received duly executed copies of
--------
all material third-party consents, approvals, assignments, waivers,
authorizations or other certificates contemplated by this Agreement or the
Target Schedule of Exceptions or reasonably deemed necessary by Acquirer's legal
counsel to provide for the continuation in full force and effect of any and all
material contracts and leases of Target and for Acquirer to consummate the
transactions contemplated hereby in form and substance reasonably satisfactory
to Acquirer, except for such thereof as Acquirer and Target shall have agreed
shall not be obtained.
8.8 No Litigation. No litigation or proceeding shall be threatened
-------------
or pending for the purpose or with the probable effect of enjoining or
preventing the consummation of any of the transactions contemplated by this
Agreement, or which could be reasonably expected to have a material adverse
effect on the present or future operations or financial condition of Target.
8.9 Requisite Approvals. The principal terms of this Agreement and
-------------------
the Agreement of Merger shall have been approved and adopted by Target
shareholders, as required
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<PAGE>
by applicable law and Target's Articles of Incorporation and Bylaws, and by
Target's Board of Directors. In addition, the principal terms of this Agreement
and the Agreement of Merger shall have been approved and adopted by Acquirer's
Board of Directors.
8.10 Dissenting Shares. In order that the Dissenting Shares shall
-----------------
not constitute more than 5% of the total number of shares of Target Stock
outstanding immediately prior to the Effective Time, at least 95% of the Target
shareholders shall have voted in favor of this Agreement, the Merger and related
matters at a meeting of Target shareholders or given written consent of this
Agreement, the Merger and related matters as contemplated by Section 4.5.
8.11 Employment and Non-Competition. Acquirer shall have received
------------------------------
executed copies of (a) Employment and Non-Competition Agreements executed by
Acquirer and Arimilli V. Rao, Ravi Bhavanasi and Rajiv Dulepet in substantially
the form of Exhibit 8.11(a) and (b) Consulting and Non-Competition Agreements in
---------------
substantially the form of Exhibit 8.11(b) executed by acquiror and Prashant
---------------
Sawant and Nikhil Junankar.
8.12 Employee Retention. None of the individuals named in Section
------------------
8.11, nor any more than five (5) other employees shall have indicated to the
Target, Principal Shareholder or Acquirer that they intend to leave the employ
of Target or Acquirer or intend not to accept employment with Acquirer following
the Merger.
8.13 Permit. The Commissioner shall have issued the Permit pursuant
------
to the Permit Application with respect to the issuance of Acquirer Stock in the
Merger.
8.14 Termination of Rights. All registration rights, rights of first
---------------------
refusal, rights to any liquidation preference, or redemption rights of any
Target shareholder shall have been terminated or waived as of and subject to the
Closing.
8.15 FIRPTA. Acquirer, as agent for the shareholders of Target,
------
shall have received a properly executed Foreign Investment and Real Property Tax
Act of 1980 ("FIRPTA") Notification Letter, in form and substance satisfactory
to Acquirer, which states that shares of Target Stock do not constitute "United
States real property interests" under Section 897(c) of the Code, for purposes
of satisfying Acquirer's obligations under Treasury Regulation Section
1.14452(c)(3).
8.16 Resignation of Directors. The directors of Target in office
------------------------
immediately prior to the Effective Time of the Merger shall have resigned as
directors of the Surviving Corporation effective as of, and subject to, the
Effective Time of the Merger.
8.17 Satisfactory Form of Legal and Accounting Matters. The form,
-------------------------------------------------
scope and substance of all legal and accounting matters contemplated hereby and
all closing documents and other papers delivered hereunder shall be reasonably
acceptable to Acquirer's counsel.
8.18 Termination of Target's Stock Option Plan. Target's 1998 Stock
-----------------------------------------
Option Plan and any other plan or agreement pursuant to which options to
purchase Target's capital stock have been, or may be, granted to directors,
officers, employees or consultants of Target and all options outstanding
thereunder shall have been terminated, or caused to be terminated, by Target
with no expense or liability related thereto for Target or Acquirer.
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<PAGE>
8.19 Repayment of Loans. All loans or other indebtedness of Target
------------------
to shareholders, directors or officers of Target shall have been paid in full by
Target.
8.20 Independent Contractors. Target shall have amended existing, or
-----------------------
entered into new, agreements with the entities from which it receives the
services of consultants that provide that all Intellectual Property Rights
associated with the work performed by such consultants is owned by Target to the
extent that such ownership is necessary for the conduct of its business as
presently conducted.
9. TERMINATION OF AGREEMENT
9.1 Termination.
-----------
9.1.1 This Agreement may be terminated at any time prior to
the Closing by the mutual written consent of each of the parties hereto.
9.1.2 Acquirer and/or Target may terminate this Agreement if
all conditions to the Closing have not been satisfied or waived on or before
July 9, 1999; provided, however, that the right to terminate this Agreement
under this Section 9.1.2 shall not be available to any party if such breach of
any representation, warranty or agreement contained in this Agreement has been
the cause of or resulted in the failure of the Closing to occur on or before
such date. Notwithstanding the foregoing, the parties hereto may mutually agree
in writing to extend the termination date set forth in the preceding sentence.
9.1.3 Either party may terminate this Agreement by written
notice to the other party if such other party is in material breach of any
representation, warranty, covenant or agreement contained in this Agreement and
such breaching party fails to cure such material breach within ten (10) days of
written notice of such material breach from the non-breaching party.
9.2 No Liability. Any termination of this Agreement pursuant to
------------
this Section 9 will be without further obligation or liability upon any party in
favor of the other party hereto other than the obligations provided in Section
11.16, which will survive termination of this Agreement; provided, however, that
nothing herein will limit the obligation of Target and Acquirer to use their
best efforts to cause the Merger to be consummated, as set forth in Sections
4.12 and 5.3 hereof, respectively; and provided further that, following any
termination of this agreement pursuant to Section 9.1.2 and 9.1.3, the parties
hereto will continue to be liable for breaches of this Agreement prior to such
termination and will continue to perform their respective obligations under
Section 11.16, but will not continue to perform their other covenants under this
Agreement.
10. SURVIVAL OF REPRESENTATIONS, INDEMNIFICATION AND REMEDIES, CONTINUING
COVENANTS
10.1 Survival of Representations. All representations, warranties
---------------------------
and covenants of Acquirer contained in this Agreement will remain operative and
in full force and effect, regardless of any investigation made by or on behalf
of the parties to this Agreement, until the earlier of the termination of this
Agreement or the Closing Date, whereupon such
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<PAGE>
representations, warranties and covenants will expire (except for covenants that
by their terms survive for a longer period). Unless otherwise specified herein,
all representations, warranties and covenants of Target will survive the
Effective Time and will continue until twelve months from the Closing Date.
10.2 Agreement to Indemnify. Subject to the limitations set forth in
----------------------
this Section 10 and the effectiveness of the Merger, Principal Shareholder will
indemnify and hold harmless Acquirer and its officers, directors, agents and
employees, and each person, if any, who controls or may control Acquirer within
the meaning of the Securities Act (hereinafter referred to individually as an
"Indemnified Person" and collectively as "Indemnified Persons") from and against
any and all claims, demands, actions, causes of actions, losses, costs, damages,
liabilities and expenses including, without limitation, reasonable legal fees
(hereinafter referred to as "Damages") arising out of any breach of any of the
representations, warranties and covenants given or made by Target in this
Agreement or any certificate, document or instrument delivered by or on behalf
of Target pursuant hereto.
Except for intentional fraud or willful misconduct: (i) Principal
Shareholder's liability under this Agreement shall be limited to a maximum of
$100,000 and (ii) the remedies set forth in this Section 10.2 shall be the
exclusive remedies of Acquirer and the other Indemnified Persons hereunder
against Principal Shareholder. The indemnification provided for in this Section
10.2 shall (except in cases of fraud or willful misconduct) apply only to the
extent that the aggregate Damages for which one or more Indemnified Persons
seeks indemnification exceeds $50,000.
11. MISCELLANEOUS
11.1 Governing Law. The validity of this Agreement, the construction
-------------
of its terms, and the interpretation and enforcement of the rights and duties of
the parties hereto will be governed by and construed in accordance with the
internal laws of the State of California, excluding that body of laws pertaining
to conflict of laws.
11.2 Assignment; Binding Upon Successors and Assigns. No party hereto
-----------------------------------------------
may assign any of its rights or obligations hereunder without the prior written
consent of the other party hereto. This Agreement will be binding upon and inure
to the benefit of the parties hereto and their respective successors and
permitted assigns.
11.3 Severability. If any provision of this Agreement, or the
------------
application thereof, will for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances will be interpreted so as reasonably to effect
the intent of the parties hereto. The parties further agree to replace such void
or unenforceable provision of this Agreement with a valid and enforceable
provision that will achieve, to the extent possible, the economic, business and
other purposes of the void or unenforceable provision.
11.4 Counterparts. This Agreement may be executed in counterparts,
------------
each of which will be deemed an original but all of which, taken together,
constitute one and the same agreement.
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<PAGE>
11.5 Other Remedies. Except as otherwise provided herein, any and
--------------
all remedies herein expressly conferred upon a party will be deemed cumulative
with and not exclusive of any other remedy conferred hereby or by law on such
party, and the exercise of any one remedy will not preclude the exercise of any
other.
11.6 Amendment and Waiver. Any term or provision of this Agreement
--------------------
may be amended, and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively) only by a writing signed by the party to be bound thereby. The
failure by either party at any time to require performance or compliance by the
other of any of its obligations or agreements will in no way affect the right to
require such performance or compliance at any time thereafter. The waiver by a
party of any breach hereof or default in the performance hereof will not be
deemed to constitute a waiver of any other default or any succeeding breach or
default. The Agreement may be amended by the parties hereto at any time before
or after approval of the Target shareholders, but, after such approval, no
amendment will be made which by applicable law requires the further approval of
the Target shareholders without obtaining such further approval.
11.7 Expenses. If the Merger is consummated, Acquirer will bear such
--------
Target expenses and legal fees to the extent that such expenses and fees do not
exceed $25,000. Target expenses and legal fees exceeding $25,000 will be paid by
Principle Shareholder.
11.8 Attorneys' Fees. Should suit be brought to enforce or
---------------
interpret any part of this Agreement, the prevailing party will be entitled to
recover, as an element of the costs of suit and not as damages, reasonable
attorneys' fees to be fixed by the court (including without limitation, costs,
expenses and fees on any appeal). The prevailing party will be entitled to
recover its costs of suit, regardless of whether such suit proceeds to final
judgment.
11.9 Notices. Any and all notices required or permitted to be given
-------
to a party pursuant to the provisions of this Agreement will be in writing and
will be effective and deemed to provide such party sufficient notice under this
Agreement on the earliest of the following: (i) at the time of personal
delivery, if delivery is in person; (ii) one (1) business day after deposit with
an express overnight courier for United States deliveries, or two (2) business
days after such deposit for deliveries outside of the United States; or (iii)
three (3) business days after deposit in the United States mail by registered or
certified mail (return receipt requested) for United States deliveries. All
notices for delivery outside the United States will be sent by express courier.
All notices not delivered personally will be sent with postage and/or other
charges prepaid and properly addressed to the party to be notified at the
address set forth below, or at such other address as such other party may
designate by ten (10) days advance written notice to the other parties hereto.
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<PAGE>
(i) If to Acquirer: (i) If to Target:
-------------- ------------
Optical Networks, Incorporated Object-Mart, Inc.
166-B Baypointe Parkway 12 South First Street
San Jose, California 95134-1621 Suite 501
Attention: President San Jose, CA 95113
Attention: President
with copy to: with copy to:
Fenwick & West LLP Thoits, Love, Hershberger & McLean
Two Palo Alto Square 245 Lytton Avenue, Suite 300
Palo Alto, California 94306 Palo Alto, CA 94301
Attention: Richard L. Dickson, Attention: Terrence P. Conner, Esq.
Esq.
(iii) If to Principal Shareholder:
---------------------------
Arimilli V. Rao
202 Raccoon Court
Fremont, CA 94539
Attention: President
with copy to:
Thoits, Love, Hershberger & McLean
245 Lytton Avenue, Suite 300
Palo Alto, CA 94301
Attention: Terrence P. Conner, Esq.
11.10 Construction of Agreement; Title. This Agreement has been
--------------------------------
negotiated by the respective parties hereto and their attorneys and the language
hereof will not be construed for or against any party. A reference to a Section
or an exhibit will mean a Section in, or exhibit to, this Agreement unless
otherwise explicitly set forth. The titles and headings herein are for
reference purposes only and will not in any manner limit the construction of
this Agreement which will be considered as a whole. In this Agreement, the
singular includes the plural, the plural included the singular, the masculine
gender includes both male and female referents, and the word "or" is used in the
inclusive sense.
11.11 No Joint Venture. Nothing contained in this Agreement will be
----------------
deemed or construed as creating a joint venture or partnership between any of
the parties hereto. No party is by virtue of this Agreement authorized as an
agent, employee or legal representative of any other party. No party will have
the power to control the activities and operations of any other and their status
is, and at all times, will continue to be, that of independent contractors with
respect to each other. No party will have any power or authority to bind or
commit any other.
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<PAGE>
No party will hold itself out as having any authority or relationship in
contravention of this Section.
11.12 Further Assurances. Each party agrees to cooperate fully with
------------------
the other parties and to execute such further instruments, documents and
agreements and to give such further written assurances as may be reasonably
requested by any other party to evidence and reflect the transactions described
herein and contemplated hereby and to carry into effect the intents and purposes
of this Agreement.
11.13 Absence of Third Party Beneficiary Rights. No provisions of
-----------------------------------------
this Agreement are intended, nor will be interpreted, to provide or create any
third party beneficiary rights or any other rights of any kind in any client,
employee, customer, affiliate, shareholder, partner or any party hereto or any
other person or entity unless specifically provided otherwise herein, and,
except as so provided, all provisions hereof will be personal solely between the
parties to this Agreement; provided that Acquirer acknowledges that Target's
shareholders may rely on the representations, warranties and covenants of
Acquirer contained herein in connection with their decision to approve the
Merger; provided further that Acquirer's total liability to such shareholders
under this Agreement shall not exceed a maximum of $100,000.
11.14 Public Announcement. Upon execution of this Agreement, Acquirer
-------------------
and Target will issue a press release approved by each of them announcing the
Merger, which approval shall not be unreasonably withheld. Thereafter, Acquirer
may issue such press releases, and make such other disclosures regarding the
Merger, as it determines are required under applicable securities laws or
regulatory rules, subject to Target's approval of the content thereof, which
approval shall not be unreasonably withheld.
11.15 Confidentiality. Target and Acquirer each recognize that they
---------------
have received and will receive confidential information concerning the other
during the course of the Merger negotiations and preparations. Accordingly,
Acquirer and Target each agrees (a) to use its respective best efforts to
prevent the unauthorized disclosure of any confidential information concerning
the other that was or is disclosed during the course of such negotiations and
preparations, and is clearly designated in writing as confidential at the time
of disclosure, or that the recipient knows or should know to be confidential to
the disclosing party; and (b) to not make use of or permit to be used any such
confidential information other than for the purpose of effectuating the Merger
and related transactions. The obligations of this section will not apply to
information that (i) is or becomes part of the public domain, (ii) is disclosed
by the disclosing
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<PAGE>
party to third parties without restrictions on disclosure, (iii) is received by
the receiving party from a third party without breach of a nondisclosure
obligation to the other party or (iv) is required to be disclosed by law. If
this Agreement is terminated, all copies of documents containing confidential
information shall be returned by the receiving party to the disclosing party.
11.16 Entire Agreement. This Agreement and the exhibits hereto
----------------
constitute the entire understanding and agreement of the parties hereto with
respect to the subject matter hereof and supersede all prior and contemporaneous
agreements or understandings inducements or conditions, express or implied,
written or oral, between the parties with respect hereto, including the Letter
of Intent dated May 6, 1999, other than the Nondisclosure and Agreement between
Target and Acquirer dated ____________, 199_. The express terms hereof control
and supersede any course of performance or usage of the trade inconsistent with
any of the terms hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement and
Plan of Reorganization as of the date first above written.
ACQUIRER: Target:
Optical Networks, Incorporated Object-Mart, Inc.
By: /s/ Hugh C. Martin By: /s/ Arimilli V. Rao
--------------------------- ----------------------------
Name: Hugh C. Martin Name: V. Arimilli
------------------------- --------------------------
Title: President & CEO Title: President
------------------------ -------------------------
PRINCIPAL STOCKHOLDER:
/s/ Arimilli V. Rao
- ------------------------------
Arimilli V. Rao, individually
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<PAGE>
Exhibit 4.02
INVESTORS' RIGHTS AGREEMENT
---------------------------
This Investors' Rights Agreement (this "Agreement") is made and entered
---------
into as of December 22, 1999 by and among Optical Networks, Incorporated, a
California corporation with its principal office at 166-B Baypointe Parkway, San
Jose, California 95134 (the "Company"), the persons and entities listed on
-------
Exhibit A attached hereto (the "Investors"), and Venture Lending & Leasing, Inc.
- --------- ---------
("VLLI").
----
R E C I T A L S
- - - - - - - -
A. Certain of the Investors (the "Series B and C Investors") are holders
------------------------
of outstanding shares of the Company's Series B Preferred Stock ("Series B
--------
Stock") and Series C Preferred Stock ("Series C Stock") issued by the Company to
--------------
such Investors pursuant to that certain Series B and C Preferred Stock Purchase
Agreement by and among the Company and such Investors dated December 19, 1997
(the "Series B and C Agreement"), and have been granted certain information
------------------------
rights, registration rights and rights of first refusal under an Investors'
Rights Agreement of the Company dated September 2, 1999 (the "Prior Rights
------------
Agreement").
- ---------
B. Certain of the Investors (the "Additional Series C Investors") are
-----------------------------
holders of outstanding shares of the Series C Stock issued by the Company to
such Additional Series C Investors pursuant to that certain Series C Preferred
Stock Purchase Agreement by and among the Company and the Additional Series C
Investors dated March 10, 1998 (the "Additional Series C Agreement"), and have
-----------------------------
also been granted certain information rights, registration rights and rights of
first refusal under the Prior Rights Agreement.
C. VLLI holds certain warrants (the "VLLI Warrants") to acquire up to an
-------------
aggregate of 175,101 shares of common stock of Optivision, Inc. ("Optivision")
----------
and pursuant to the terms of Section 8 thereof was promised certain registration
rights (identical to those granted by Optivision to ADC Telecommunications,
Inc.) with respect to the shares issuable thereunder. Pursuant to Section
4.2(c) of the VLLI Warrants, VLLI is entitled, upon exercise of the VLLI
Warrants in accordance with their terms, to receive up to 116,734 shares (such
number as adjusted to reflect the one-for-three reverse split of the Common
Stock of the Company effected on March 11, 1998 and the two-for-one forward
split of the Common Stock of the Company effected on August 13, 1999) of the
Common Stock of the Company (the "VLLI Common Shares"). Pursuant to Section 1.2
------------------
of that certain Contribution, Services and Share Purchase Agreement dated
October 29, 1997 between Optivision and the Company, the Company has reserved
such number of shares of its Common Stock for issuance upon the exercise of the
VLLI Warrants. The Company has granted VLLI registration rights with respect to
such shares of Common Stock under the terms of the Prior Rights Agreement.
D. Cisco Systems, Inc. ("Cisco" or the "Series D Investor") is a holder
----- -----------------
of outstanding shares of the Company's Series D Preferred Stock ("Series D
--------
Stock") issued by the Company pursuant to that certain Series D Preferred Stock
- -----
Purchase Agreement by and between the Company and Cisco dated April 1, 1998 (the
"Series D Agreement") and has also been granted certain information rights,
------------------
registration rights and rights of first refusal under the Prior Rights
Agreement.
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<PAGE>
E. Certain Investors (the "Series E Investors") are holders of outstanding
------------------
shares of the Company's Series E Preferred Stock ("Series E Stock") issued by
--------------
the Company pursuant to that certain Series E Preferred Stock Purchase Agreement
by and among the Company and the Series E Investors dated December 23, 1998 (the
"Series E Agreement") and have also been granted certain information rights,
------------------
registration rights and rights of first refusal under the Prior Rights
Agreement.
F. Certain Investors (the "Series F Investors") are holders of outstanding
------------------
shares of the Company's Series F Preferred Stock ("Series F Stock") issued by
--------------
the Company pursuant to that certain Series F Preferred Stock Purchase Agreement
by and among the Company and the Series F Investors dated September 2, 1999 (the
"Series F Agreement") and have also been granted certain information rights,
------------------
registration rights and rights of first refusal under the Prior Rights
Agreement. The Series B and C Investors, Additional Series C Investors, Series
D Investor, Series E Investors and Series F Investors are collectively referred
to herein as the "Prior Investors."
---------------
G. Certain Investors (the "Series G Investors") have agreed to purchase
------------------
shares of the Company's Series G Preferred Stock ("Series G Stock") pursuant to
--------------
a certain Series G Preferred Stock Purchase Agreement dated of even date
herewith (the "Series G Agreement"). The Series G Agreement provides that, as a
------------------
condition to the Series G Investors purchase of Series G Stock thereunder, the
Series G Investors will be granted the rights set forth herein.
H. The Company and the undersigned parties hereto desire to enter into
this Agreement in order to amend, restate and replace their rights and
obligations under the Prior Rights Agreement with the rights and obligations set
forth in this Agreement. Section 4.3 of the Prior Rights Agreement provides
that the Prior Rights Agreement may be amended by the written consent of the
holders of a majority of the "Registrable Securities" (as defined in the Prior
Rights Agreement) and the undersigned parties to this Agreement hold a majority
of the Registrable Securities.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises hereinafter set forth, the parties hereto agree as follows:
1. INFORMATION RIGHTS.
------------------
The Company hereby covenants as follows:
1.1 Financial Information. The Company shall furnish the following
---------------------
reports to each Investor and/or its assignee or transferee for so long as such
Investor, assignee, or transferee is the record holder of any of the Securities
(as defined in Section 2.1 below):
(i) As soon as practicable after the end of each fiscal quarter
(except the fourth quarter), and in any event within 45 days thereafter, an
unaudited income statement for such fiscal quarter and an unaudited balance
sheet as of the end of such fiscal quarter.
(ii) As soon as practicable after the end of each fiscal year,
and in any event within 90 days thereafter, an income statement for such fiscal
year, a balance sheet of the Company as of the end of such fiscal year, a
statement of shareholder's equity as of the end of such fiscal year, and
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<PAGE>
a statement of changes in financial condition for such fiscal year, all
certified by independent public accountants of recognized national standing
selected by the Company.
All financial statements provided for above shall be prepared in accordance with
generally accepted accounting principles applied on a consistent basis (except
that such unaudited financial statements may be prepared without footnotes and
will be subject to normal year-end audit adjustments).
1.2 Additional Financial Information. The Company shall furnish to
--------------------------------
each Investor, so long as such Investor is the record holder of at least 15% of
the aggregate Securities originally purchased under the Series B and C
Agreement, Additional Series C Agreement, Series D Agreement, Series E
Agreement, Series F Agreement or Series G Agreement, as applicable, such
financial reports of the Company as are provided to the Company's Board of
Directors (the "Board") as promptly as possible upon their provision to the
-----
Board. Any information obtained by such Investor pursuant to this Section 1.2
which may be proprietary to the Company or otherwise confidential will not be
disclosed without the prior written consent of the Company. Information so
obtained which may be considered "inside" non-public information will not be
utilized by such Investor in connection with purchases and/or sales of the
Company's securities except in compliance with applicable state and federal
antifraud statutes.
1.3 Termination of Financial Information Rights. The Company's
-------------------------------------------
obligation to deliver the financial statements under Sections 1.1 and 1.2 shall
terminate and shall be of no further force or effect when a public market first
exists for any of the Company's securities. Thereafter, the Company shall
deliver to each Investor, and its assignee or transferee, such financial
information as the Company from time to time provides to holders of its Common
Stock.
1.4 Board Representation. The parties shall vote their shares of
--------------------
stock of the Company so as to elect the Chief Executive Officer of the Company
as one of the two directors to be elected to the Board by the holders of record
of the Preferred Stock and the Common Stock, voting together as a single class,
pursuant to the Company's Amended and Restated Articles of Incorporation (the
"Restated Articles").
- ------------------
2. REGISTRATION RIGHTS.
-------------------
2.1 Certain Definitions. As used in this Agreement, the following
-------------------
definitions shall apply:
"Conversion Stock" means all the shares of Common Stock of the
----------------
Company issued or issuable upon the conversion of the Shares (as defined below).
"Commission" means the Securities and Exchange Commission (the
----------
"SEC") or any other federal agency at the time administering the Securities Act
---
(as defined below).
"Form S-3" means such form under the Securities Act as in
--------
effect on the date hereof or any successor registration form under the
Securities Act subsequently adopted by the SEC
-3-
<PAGE>
which permits inclusion or incorporation of substantial information by reference
to other documents filed by the Company with the Commission.
"Holder" means any holder of outstanding Registrable Securities;
------
provided, however, that for all purposes under this Section, the holder of any
Shares shall be deemed to be the Holder of the Registrable Securities into which
such Shares are then convertible.
"Initiating Holders" means any Holders of not less than 50% of the
------------------
Registrable Securities.
"Register," "registered" and "registration" refer to a registration
-------- ---------- ------------
effected by preparing and filing a registration statement in compliance with the
Securities Act (and any post-effective amendments filed or required to be
filed), and the declaration or ordering of the effectiveness of such
registration statement.
"Registrable Securities" means (i) the Conversion Stock, (ii) the VLLI
----------------------
Common Shares, and (iii) any shares of Common Stock of the Company issued or
issuable, directly or indirectly, in respect of such stock described in either
(i) or (ii) upon any stock split, stock dividend, recapitalization, or similar
event, or any shares of Common Stock otherwise issued or issuable with respect
to such stock; provided, however, that Registrable Securities shall not include
any shares of Common Stock which have previously been registered or sold to the
public.
"Registration Expenses" means all expenses incurred by the Company in
---------------------
complying with Sections 2.2, 2.3 and 2.4, including, without limitation, all
registration, qualification and filing fees, printing expenses, escrow fees,
fees and disbursements of counsel for the Company, blue sky fees and expenses,
and the expense of any special audits incident to or required by any such
registration (but excluding the compensation of regular employees of the Company
which shall be paid in any event by the Company). Registration Expenses shall
not include selling commissions, discounts or other compensation paid to
underwriters or other agents or brokers to effect the sale.
"Securities" means the outstanding Shares and/or the outstanding
----------
Conversion Stock collectively, to the extent each is outstanding from time to
time.
"Securities Act" means the Securities Act of 1933, as amended, or any
--------------
similar federal statute and the rules and regulations of the Commission
thereunder, as shall be in effect at the time.
"Shares" means the outstanding shares of Series B Stock, Series C
------
Stock, Series D Stock, Series E Stock, Series F Stock and Series G Stock issued
under the Series B and C Agreement, Additional Series C Agreement, Series D
Agreement, Series E Agreement, Series F Agreement or Series G Agreement as such
agreement may hereafter be amended from time to time, as applicable.
2.2 Requested Registration.
----------------------
(a) Request for Registration. In case the Company shall receive from
------------------------
Initiating Holders a written request at any time after the earlier of (i)
January 5, 2005 or (ii) a date
-4-
<PAGE>
which is six (6) months after the expiration of the underwriters' lock-up in
connection with the Company's initial public offering, that the Company effect
any registration (which must be an underwritten registration if such
registration is in connection with the Company's initial public offering),
qualification, or compliance with respect to Registrable Securities held by such
Initiating Holders, then the Company shall:
(i) promptly give written notice of the proposed registration,
qualification, or compliance to all other Holders; and
(ii) as soon as practicable, use its most diligent efforts to effect
all such registration, qualification, or compliance (including, without
limitation, the execution of an undertaking to file post-effective amendments,
appropriate qualification under applicable blue sky or other state securities
laws, and appropriate compliance with applicable regulations issued under the
Securities Act and any other governmental requirements or regulations) as may be
so requested and as would permit or facilitate the sale and distribution of all
or such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Holders
joining in such request as are specified in a written request received by the
Company within 15 days after the date the Company mails such written notice;
Provided, however, that the Company shall not be obligated to take any
action to effect any such registration, qualification, or compliance pursuant to
this Section 2.2:
(A) In any jurisdiction in which the Company would be required
to execute a general consent to service of process in effecting such
registration, qualification, or compliance unless the Company is already subject
to service in such jurisdiction and except as may be required by the Securities
Act;
(B) During the period starting with the date sixty days prior to
the Company's estimated date of filing of, and ending on the date six months
immediately following the effective date of any Securities Act registration
statement pertaining to securities of the Company (other than a registration of
securities in a Rule 145 transaction or with respect to an employee benefit plan
or initiated by security holders);
(C) Unless the aggregate gross offering price thereof would be
at least $5,000,000 or such registration would be for at least 33% of the
Registrable Securities; or
(D) After the Company has effected two such registrations
pursuant to this Section 2.2 and such registrations have been declared or
ordered effective.
Subject to the foregoing clauses (A) through (D), the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practicable, and in any event within 120 days, after
receipt of the request or requests of the Initiating Holders; provided, however,
that if the Company shall furnish to such Holders a certificate signed by the
president of the Company stating that in the good faith judgment of the Board,
it would be seriously detrimental to the Company or its shareholders for such
registration statement to be filed on or before the date filing
-5-
<PAGE>
would be required and it is therefore essential to defer the filing of such
registration statement, the Company shall have the right to defer such filing
for a reasonable period not to exceed an additional 120 days.
(b) Underwriting. If the Initiating Holders intend to distribute
------------
Registrable Securities by means of an underwriting, the right of any Holder to
registration pursuant to this Section 2.2 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent requested (unless
otherwise mutually agreed by a majority in interest of the Initiating Holders
and such Holder) to the extent provided herein.
In such event, the Company shall (together with all Holders and holders of
other securities proposing to distribute their securities through such
underwriting) enter into an underwriting agreement in customary form with the
managing underwriter selected for such underwriting by a majority in interest of
the Initiating Holders. Notwithstanding any other provision of this Section 2.2,
if the managing underwriter advises the Initiating Holders in writing that
marketing factors require a limitation of the number of shares to be
underwritten, then the Company shall so advise all Holders and the other holders
distributing their securities through such underwriting, and the number of
shares of Registrable Securities and other securities that may be included in
the registration and underwriting shall be allocated among all Holders in
proportion, as nearly as practicable, to the respective amounts of securities
entitled to inclusion (determined without regard to any requirement of a request
to be included in such registration) in such registration held by all such
Holders at the time of filing the registration statement, provided, however,
that the number of shares of Registrable Securities to be included in such
underwriting shall not be reduced unless all other securities proposed to be
sold by persons other than the Holders are first entirely excluded from the
underwriting. No Registrable Securities or other securities excluded from the
underwriting by reason of the underwriter's marketing limitation shall be
included in such registration. To facilitate the allocation of shares in
accordance with the above provisions, the Company or the underwriters may round
the number of shares allocated to any Holder to the nearest 100 shares.
If any Holder of Registrable Securities disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, the managing underwriter and the Initiating Holders. The
Registrable Securities and/or other securities so withdrawn shall also be
withdrawn from registration, and such Registrable Securities shall not be
transferred in a public distribution prior to 90 days after the effective date
of such registration, or such other shorter period of time as the underwriters
may require. If by the withdrawal of such Registrable Securities a greater
number of Registrable Securities held by other Holders may be included in such
registration (up to the maximum of any limitation imposed by the underwriters),
then the Company shall offer to all Holders who have included Registrable
Securities in the registration the right to include additional Registrable
Securities in the same proportion and manner used in determining the underwriter
limitation in this Section 2.2(b).
If the managing underwriter has not limited the number of Registrable
Securities to be underwritten, the Company may include securities for its own
account or for the account of others in
-6-
<PAGE>
such registration if the underwriter so agrees and if the number of Registrable
Securities which would otherwise have been included in such registration and
underwriting will not thereby be limited.
2.3 Company Registration.
--------------------
(a) Notice of Registration. If at any time or from time to
----------------------
time, the Company shall determine to register in an underwritten offering any of
its securities, either for its own account or the account of a security holder
or holders exercising their respective demand registration rights, other than
(i) a registration relating solely to employee benefit plans, (ii) an initial
registration of the Company's shares, or (iii) a registration relating solely to
a Commission Rule 145 transaction, the Company shall:
(x) promptly give to each Holder written notice thereof; and
(y) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities specified in a written request
by each holder received by the Company within 15 days after the Company mails
such written notice, subject to the provisions below.
(b) Underwriting. The right of any Holder to registration
------------
pursuant to Section 2.3 shall be conditioned upon the participation by such
Holder in such underwriting and the inclusion of the Registrable Securities of
such Holder in the underwriting to the extent provided herein. All Holders
proposing to distribute their securities through such underwriting shall
(together with the Company and the other holders distributing their securities
through such underwriting) enter into an underwriting agreement in customary
form with the managing underwriter selected for such underwriting by the
Company. Notwithstanding any other provision of this Section 2.3, if the
managing underwriter determines that marketing factors require a limitation of
the number of shares to be underwritten, the managing underwriter may limit the
Registrable Securities held by Holders to be included in such registration. The
Company shall so advise all Holders and the other holders distributing their
securities through such underwriting, and the number of shares of Registrable
Securities and other securities that may be included in the registration and
underwriting shall be allocated among all Holders thereof in proportion, as
nearly as practicable, to the respective amounts of securities entitled to
inclusion (determined without regard to any requirement of a request to be
included in such registration) in such registration held by all such Holders at
the time of filing the registration statement, provided that no such inclusion
of Registrable Securities and other securities by the underwriter may reduce the
securities being offered by the Company for its own account. To facilitate the
allocation of shares in accordance with the above provisions, the Company may
round the number of shares allocated to any Holder or holder to the nearest 100
shares. If any Holder or other holder disapproves of the terms of any such
underwriting, he may elect to withdraw therefrom by written notice to the
Company and the managing underwriter. Any securities excluded or withdrawn from
such underwriting shall be withdrawn from such registration, and shall not be
transferred in a public distribution prior to 180 days after the effective date
of the registration statement relating thereto, or such other shorter period of
time as the underwriters may require.
-7-
<PAGE>
(c) Right to Terminate Registration. The Company shall have the right
-------------------------------
to terminate or withdraw any registration initiated by it under this Section 2.3
prior to the effectiveness of such registration whether or not any Holder has
elected to include securities in such registration.
2.4 Form S-3 Registration. In case the Company shall receive from a
---------------------
Holder or Holders a written request that the Company effect a registration on
Form S-3 and any related qualification or compliance with respect to an amount
of the Registrable Securities owned by such Holder or Holders for which the
anticipated aggregate offering price would be at least $1,000,000, the Company
shall:
(a) promptly give written notice of the proposed registration, and any
related qualification or compliance to all other Holders; and
(b) as soon as practicable, effect such registration and all such
qualifications and compliances as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Holder's or
Holders' Registrable Securities as are specified in such request, together with
all or such portion of the Registrable Securities of any other Holder or Holders
joining in such request as are specified in a written request given within 15
days after receipt of such written notice from the Company; provided, however,
that the Company shall not be obligated to effect any such registration,
qualification, or compliance pursuant to this Section 2.4: (1) if Form S-3 is
not available for such offering by the Holders; (2) if the Company shall furnish
to the Holders a certificate signed by the president of the Company stating that
in the good faith judgment of the Board, it would be seriously detrimental to
the Company and its shareholders for such Form S-3 Registration to be effected
at such time, in which event the Company shall have the right to defer the
filing of the Form S-3 registration statement for a period of not more than 120
days after receipt of the initiating request of the Holder or Holders under this
Section 2.4; provided, however, that the Company shall not utilize this right
more than once in any twelve month period; (3) if the Company has, within the
six (6) month period preceding the date of such request, already effected a
registration on Form S-3 for the Holders pursuant to this Section 2.4; or (4) in
any jurisdiction in which the Company would be required to execute a general
consent to service of process in effecting such registration, qualification or
compliance unless the Company is already subject to service in such jurisdiction
and except as may be required by the Securities Act.
Subject to the foregoing, the Company shall effect such registration,
qualification, or compliance (including, without limitation, the execution of an
undertaking to file post-effective amendments, appropriate qualification under
applicable blue sky or other state securities laws and appropriate compliance
with applicable regulations issued under the Securities Act and any other
governmental requirements or regulations) covering the Registrable Securities
and other securities so requested to be registered as soon as practicable after
receipt of the request or requests of the Holders. Registrations effected
pursuant to this Section 2.4 shall not be counted as demands for registration or
registrations effected pursuant to Sections 2.2 or 2.3.
If the registration to be effected pursuant to this Section 2.4 is to
be an underwritten public offering, it shall be managed by an underwriter or
underwriters acceptable to Company selected by a majority in interest of the
Holders requesting registration. In such event, the
-8-
<PAGE>
right of any Holder to registration pursuant to Section 2.4 shall be conditioned
upon the participation by such Holder in such underwriting and the inclusion of
the Registrable Securities of such Holder in the underwriting to the extent
provided herein. If the managing underwriter so selected determines that
marketing factors require a limitation of the number of shares to be
underwritten, the managing underwriter may limit the Registrable Securities held
by such Holders to be included in such registration. The Company shall so advise
such Holders, and the number of shares of Registrable Securities that may be
included in the registration shall be allocated among such Holders in proportion
to the respective amounts of Registrable Securities which would be held by each
of such Holders at the time of filing of the registration statement. Any
Registrable Securities that are so excluded from the underwriting shall be
excluded from the registration.
2.5 Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with the registration, qualification or compliance pursuant to
Sections 2.2, 2.3 and 2.4 shall be borne by the Company; provided, however, that
the Company shall not be required to pay for expenses of any registration
proceeding begun pursuant to Section 2.2, the request of which has been
subsequently withdrawn by the Initiating Holders, in which case such expenses
shall be borne by the Holders of securities (including Registrable Securities)
pro rata in accordance with the number of shares initially sought to be
registered requesting or causing such withdrawal, unless at the time of such
withdrawal the Holders have learned of a material adverse change in the
conditions, business, or properties of the Company that could not reasonably
have been known to the Holders at the time of their request.
2.6 Letter or Opinion of Counsel in Lieu of Registration. If in the
----------------------------------------------------
opinion of counsel for the Company concurred in by counsel for the Holders, no
registration under the Act is required in connection with the disposition of the
Registrable Securities covered by any request made under Sections 2.2, 2.3, and
2.4 in the manner in which they propose to dispose of the Registrable Securities
included in such request, the Company need not comply with such request or
requests; provided, however, that the Company shall not be so relieved of its
obligations under Sections 2.2, 2.3, and 2.4 unless such opinion of counsel for
the Company shall have been mailed by the Company to such Holders within fifteen
(15) days after the Company's receipt of their request or requests; and
provided, further, that if counsel for the Company has opined that no
registration is required in connection with any such disposition, such counsel
shall further opine as to whether the removal of any legend from certificates
representing all shares to which such opinion refers is permissible, and, if so,
the Company shall remove from such certificates all legends no longer required
thereon and shall rescind any stop-transfer instructions previously communicated
to its transfer agent relating to such shares.
2.7 Lock-up. Each Investor (or other holder of any Securities)
-------
hereby agrees not to offer, sell, or otherwise dispose of any of the Company's
Common Stock held of record or beneficially owned by such person during a period
of up to 180 days following the effective date of the registration statement for
the Company's initial underwritten public offering as is requested by the
managing underwriter for such offering, provided that (i) all officers and
directors of the Company and all other persons with registration rights are
bound by similar restrictions, (ii) the restriction set forth in this section
shall only apply to securities purchased privately from the Company, and (iii)
any discretionary waiver or termination of the restriction set forth in this
section (or any similar lock-up provision to which the Company is a party) by
the Company or the underwriter shall apply to all the Investors on a pro rata
basis (according to the total number of Securities owned by each Investor).
Such restriction
-9-
<PAGE>
shall not apply to shares registered in such offering. In order to enforce this
provision, the Company may impose stop-transfer instructions with respect to
such shares until the end of such period.
2.8 Registration Procedures. If and whenever the Company is required
-----------------------
by the provisions of this Section to use its most diligent efforts to effect
promptly the registration of Registrable Securities, the Company shall:
(a) Prepare and file with the Commission a registration
statement with respect to such Registrable Securities and use its most diligent
efforts to cause such registration statement to become and remain effective as
provided herein.
(b) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
current and to comply with the provisions of the Securities Act with respect to
the sale or other disposition of all Registrable Securities covered by such
registration statement, including such amendments and supplements as may be
necessary to reflect the intended method of disposition of the prospective
seller or sellers of such Registrable Securities, but for no longer than one
hundred twenty (120) days subsequent to the effective date of such registration
in the case of a registration statement on Form S-1 (or any similar form of
registration statement required to set forth substantially identical
information) and for no longer than ninety (90) days in the case of a
registration statement on Form S-3.
(c) Furnish to each prospective seller of Registrable Securities
such number of copies of a prospectus, including a preliminary prospectus, in
conformity with the requirements of the Securities Act, and such other
documents, as such seller may reasonably request in order to facilitate the
public sale or other disposition of the Registrable Securities of such seller.
2.9 Indemnification. In the event any of the Registrable Securities
---------------
are included in a registration statement under this Section:
(a) The Company will indemnify each Holder, each of its officers
and directors and partners and such Holder's separate legal counsel and
independent accountants, and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, and each underwriter, if any, and
each person who controls any underwriter within the meaning of Section 15 of the
Securities Act, against all expenses, claims, losses, damages or liabilities (or
actions in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement, prospectus, offering circular or other
document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading, or any violation by the Company of any rule or
regulation promulgated under the Securities Act applicable to the Company in
connection with any such registration, qualification or compliance, and the
Company will reimburse each such Holder, each of its officers and directors and
partners and such Holders' separate legal counsel and independent accountants
and each person
-10-
<PAGE>
controlling such Holder, each such underwriter and each person who controls any
such underwriter, for any legal and any other expenses reasonably incurred in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action, provided that the Company will not be liable in any
such case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission or alleged untrue
statement or omission, made in reliance upon and in conformity with written
information furnished to the Company by an instrument duly executed by such
Holder or underwriter and stated to be specifically for use therein.
(b) Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration, qualification or
compliance is being effected, severally and not jointly indemnify the Company,
each of its directors and officers and its legal counsel and independent
accountants, each underwriter, if any, of the Company's securities covered by
such a registration statement, each person who controls the Company or such
underwriter within the meaning of Section 15 of the Securities Act, and each
other such Holder, each of its officers and directors and each person
controlling such Holder within the meaning of Section 15 of the Securities Act,
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company, such Holders, such directors, officers, persons, underwriters or
control persons for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by such Holder and
stated to be specifically for use therein; provided, however, that the
obligations of such Holders hereunder shall be limited to an amount equal to the
net proceeds to each such Holder of Registrable Securities sold as contemplated
herein.
(c) Each party entitled to indemnification under this Section (the
"Indemnified Party") shall give notice to the party required to provide
- ------------------
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
------------------
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation.
(d) If the indemnification provided for in this Section is held by a
court of competent jurisdiction to be unavailable to an Indemnified Party with
respect to any loss, liability, claim, damage or expense referred to herein,
then the Indemnifying Party, in lieu of indemnifying the
-11-
<PAGE>
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party with respect to such loss, liability, claim, damage or expense
in the proportion that is appropriate to reflect the relative fault of the
Indemnifying Party and the Indemnified Party in connection with the statements
or omissions that resulted in such loss, liability, claim, damage or expense, as
well as any other relevant equitable considerations. The relative fault of the
Indemnifying Party and the Indemnified Party shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of
material fact or the omission to state a material fact relates to information
supplied by the Indemnifying Party or by the Indemnified Party, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission provided, however, that the obligations of
such Indemnifying Party hereunder shall be limited to an amount equal to the net
proceeds to each such Holder of Registrable Securities sold as contemplated
herein..
2.10 Information by Holder. The Holder or Holders of Registrable
---------------------
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders and the distribution proposed by
such Holder or Holders as the Company may request in writing and as shall be
required in connection with any registration, qualification or compliance
referred to in this Section.
2.11 Rule 144 Reporting. With a view to making available the benefits
------------------
of certain rules and regulations of the Commission which may at any time permit
the sale of the Securities to the public without registration, after such time
as a public market exists for the Common Stock of the Company and until five
years from the date hereof, the Company shall use its best efforts to:
(a) Make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act, beginning 90
days after (i) the effective date of the first registration statement filed by
the Company for an offering of its securities to the general public, (ii) the
Company registers a class of securities under Section 12 of the Securities
Exchange Act of 1934, as amended, or (iii) the Company issues an offering
circular meeting the requirements of Regulation A under the Securities Act;
(b) File with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Securities Exchange Act of 1934, as amended (at any time after it has become
subject to such reporting requirements);
(c) Furnish to any Holder promptly upon request a written
statement as to its compliance with the reporting requirements of Rule 144 (at
any time after 90 days after the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Securities Act and the Securities Exchange Act of 1934 (at
any time after it has become subject to such reporting requirements), a copy of
the most recent annual or quarterly report of the Company, and such other
reports and documents of the Company and other information in the possession of
or reasonably obtainable by the Company as a Holder may reasonably request in
availing itself of any rule or regulation of the Commission allowing a Holder to
sell any such securities without registration.
-12-
<PAGE>
3. RIGHT OF FIRST OFFER.
--------------------
3.1 The Company hereby grants to each of the Investors identified on
Exhibit A as "Selected Investors," the right of first offer to purchase pro
- --------- ------------------
rata, all (or any part) of New Securities (as defined herein) that the Company
may from time to time propose to sell and issue. Each Selected Investor's pro
rata share, for purposes of this right of first offer, is the ratio, the
numerator of which is the number of shares of Common Stock issued or issuable to
such Selected Investor pursuant to the conversion of all shares of Preferred
Stock of the Company which it holds (appropriately adjusted for any
combinations, consolidations, stock splits, stock distributions, or stock
dividends with respect to such Shares), and the denominator of which is the
total number of outstanding shares of Common Stock assuming conversion of all
outstanding shares of Preferred Stock. This right of first offer shall be
subject to the following provisions:
3.2 "New Securities" shall mean any Common Stock or shares of
--------------
Preferred Stock of the Company, whether now authorized or not, and any rights,
options or warrants to purchase said Common Stock or Preferred Stock, and
securities of any type whatsoever that are, or may become convertible into said
Common Stock or Preferred Stock; provided, however, that "New Securities" does
-------- -------
not include (i) securities issuable upon conversion of or with respect to any
series of Preferred Stock; (ii) securities offered to the public pursuant to a
registration statement filed under the Securities Act; (iii) securities issued
pursuant to the acquisition of another corporation by the Company by merger or
purchase of all or substantially all of the assets thereof; (iv) securities
offered or issued to a strategic corporate partner or potential strategic
corporate partner and approved by the Board; (v) shares of the Company's Common
Stock (or related options) issued to employees, officers, directors, or
consultants of the Company pursuant to incentive stock option or stock purchase
plans and approved by the Board; or (vi) shares of the Company's Preferred Stock
or Common Stock issued in connection with any stock split, stock dividend or
recapitalization by the Company.
3.3 In the event that the Company proposes to undertake an issuance
of New Securities, it shall deliver to each Selected Investor written notice of
its intention, describing the type of New Securities, the price, and the general
terms upon which the Company proposes to issue the same. Each Selected Investor
shall have fifteen (15) days from the date of delivery of any such notice to
agree to purchase its pro rata share as provided above of such New Securities
for the price and upon the general terms specified in the notice by giving
written notice to the Company and stating therein the quantity of New Securities
to be purchased. Each Selected Investor shall have a right of over-allotment
such that if any Selected Investor fails to exercise its right hereunder to
purchase its pro rata portion of New Securities, as provided above, the Company
shall so notify the other Selected Investors and the other Selected Investors
may purchase the non-purchasing Selected Investor's portion on a pro rata basis,
within fifteen (15) days from the date of delivery of such notice as follows:
unless the exercising Selected Investors agree otherwise in writing, each
exercising Selected Investor will have the right to purchase that number of New
Securities that is obtained by multiplying the total number of New Securities by
a fraction (x) the numerator of which is the sum of the number of shares of
stock on an as-if converted to Common Stock basis then owned by such Selected
Investor and (y) the denominator of which is the sum of the total number of
shares of stock on an as-if converted to Common Stock basis then held by all
Selected Investors then exercising their right of first offer hereunder. Any
remaining New Securities may be purchased by Selected Investors according to the
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<PAGE>
same principle of proration until all such New Securities are allocated to
Selected Investors exercising their right of first offer hereunder. A Selected
Investor which elects to purchase its pro rata share of New Securities shall pay
the price therefor within thirty (30) days of the date on which it delivers its
election to purchase.
3.4 To the extent the Selected Investors do not exercise the right of
first offer within said fifteen (15) day period, the Company shall have one
hundred twenty (120) days thereafter to sell the New Securities respecting which
the Selected Investors' rights were not exercised, at a price and upon general
terms no more favorable to the purchasers thereof than specified in the
Company's notice. In the event the Company has not sold the New Securities
within such one hundred twenty (120) day period, the Company shall not
thereafter issue or sell any New Securities without first offering such
securities to the Selected Investors in the manner provided above.
3.5 The right of first offer granted under this Section 3 shall
expire immediately prior to the closing of the sale of the Company's Common
Stock in an underwritten public offering registered under the Securities Act.
4. ASSIGNMENT AND AMENDMENT.
------------------------
4.1 Assignment. Notwithstanding anything herein to the contrary:
----------
(a) Information Rights. The rights of an Investor under
------------------
Sections 1.1 or 1.2 hereof may be assigned only to a party who acquires from an
Investor (or an Investor's permitted assigns) at least 15% of the shares of
Series B Stock, Series C Stock, Series D Stock, Series E Stock, Series F Stock
and/or Series G Stock originally purchased under the Series B and C Agreement,
Additional Series C Agreement, Series D Agreement, Series E Agreement, Series F
Agreement or Series G Agreement as applicable, and/or an equivalent number (on
an as-converted basis) of shares of Conversion Stock. The aforementioned
limitation on the assignment of information rights shall not apply to the
transfer of shares that occurs in a distribution from an Investor which is a
corporation to an affiliate (as defined in Rule 144 promulgated under the
Securities Act) thereof, provided that all such transferee affiliates and such
transferor shall be treated as one entity under Section 1.
(b) Registration Rights. The rights to cause the Company to
-------------------
register securities granted under Section 2 may be assigned to a transferee or
assignee in connection with the transfer or assignment of shares of Registrable
Securities only if the transfer or assignor provides prior written notice
thereof to the Company and (i) such transferee or assignee holds at least 2% of
the outstanding shares of the Company's capital stock (assuming conversion of
all Preferred Stock to Common Stock) on the date of such assignment (ii) the
transfer of such shares occurs in a distribution from an Investor which is a
partnership to a partner thereof, or (iii) the transfer of such shares occurs in
a distribution from an Investor which is a corporation to an affiliate (as
defined in Rule 144 promulgated under the Securities Act) thereof, provided that
all such transferee affiliates and such transferor shall be treated as one
entity under Section 2.
(c) Right of First Offer. The right of first offer provided in
--------------------
Section 3 may be assigned to any affiliate or other transferee of a Selected
Investor provided that such other transferee holds at least 2% of the
outstanding shares of the Company's capital stock (assuming conversion of all
-14-
<PAGE>
Preferred Stock to Common Stock) on the date of such assignment. The
aforementioned limitation on the assignment of the right of first offer shall
not apply to the transfer of shares that occurs in a distribution from an
Investor which is a corporation to an affiliate (as defined in Rule 144
promulgated under the Securities Act) thereof, provided that all such transferee
affiliates and such transferor shall be treated as one entity under Section 3.
4.2 Additional Registration Rights. From the date of this Agreement,
------------------------------
the Company shall not, without the prior written consent of the Company and
Investors (and/or any of their permitted successors or assigns) holding shares
of Series B Stock, Series C Stock, Series D Stock, Series E Agreement, Series F
Stock, Series G Stock and/or Conversion Stock representing and/or convertible
into a majority of all the Registrable Securities, enter into any agreement with
any holder or prospective holder of any securities of the Company which would
allow such holder or prospective holder (a) to include such securities in any
registration filed under Section 2.2 hereof, unless under the terms of such
agreement, such holder or prospective holder may include such securities in any
such registration only to the extent that the inclusion of his securities will
not reduce the amount of the Registrable Securities of the Holders which is
included or (b) to make a demand registration which could result in such
registration statement being declared effective prior to the earlier of either
of the dates set forth in 2.2(a) or within 120 days of the effective date of any
registration effected pursuant to Section 2.2.
4.3 Amendment of Rights. Any provision of this Agreement may be
-------------------
amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and Investors (and/or any of their permitted
successors or assigns) holding shares of Series B Stock, Series C Stock, Series
D Stock, Series E Stock, Series F Stock, Series G Stock and/or Conversion Stock
representing and/or convertible into a majority of all the Registrable
Securities. Any amendment or waiver made in accordance with this Section 4.3
shall be binding upon all of the parties hereto.
4.4 New Investors. Notwithstanding anything herein to the contrary,
-------------
if pursuant to Section 2.2 of the Series G Agreement, additional parties may
purchase shares of Series G Stock as "New Investors" thereunder, then each such
New Investor shall become a party to this Agreement as an "Investor" hereunder,
without the need of any consent, approval or signature of any Investor when such
New Investor has both: (a) purchased shares of Series G Stock under the Series G
Agreement and paid the Company all consideration payable for such shares and (b)
executed one or more counterpart signature pages to this Agreement as an
"Investor", with the Company's consent.
5. GENERAL PROVISIONS.
------------------
5.1 Notices. 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 an Investor, at such Investor's respective address as set
forth in Exhibit A hereto, or at such other address as such Investor shall have
---------
furnished to the Company in writing, (ii) if to any other holder of any
Securities, 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 Securities 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
-15-
<PAGE>
this agreement and addressed to the attention of the Corporate Secretary, or at
such other address as the Company shall have furnished to the Investors, and
another copy to the Company's legal counsel to the attention of Richard L.
Dickson, Esq. of Fenwick & West LLP, Two Palo Alto Square, Palo Alto, California
94306.
5.2 Entire Agreement. This Agreement constitutes the full and entire
----------------
understanding and agreement between the parties with regard to the subject
matters hereof.
5.3 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.
5.4 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.
5.5 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.
5.6 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.
5.7 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 sections,
paragraphs, exhibits and schedules shall, unless otherwise provided, refer to
sections and paragraphs hereof and exhibits and schedules attached hereto, all
of which exhibits and schedules are incorporated herein by this reference.
5.8 Adjustments for Stock Splits, Etc. Wherever in this Agreement
----------------------------------
there is a reference to a specific number of shares of Common Stock or Preferred
Stock of the Company of any class or series, then, upon the occurrence of any
subdivision, combination or stock dividend of such class or series of stock, the
specific number of shares so referenced in this Agreement shall automatically be
proportionally adjusted to reflect the affect on the outstanding shares of such
class or series of stock by such subdivision, combination or stock dividend.
5.9 Aggregation of Stock. All shares held or acquired by affiliated
--------------------
entities or persons shall be aggregated together for the purpose of determining
the availability of any rights under this Agreement.
5.10 Prior Rights Agreements Superseded. Pursuant to Section 4.3 of
----------------------------------
the Prior Rights Agreement, the undersigned parties who are parties to such
Prior Rights Agreement hereby amend and restate the Prior Rights Agreement to
read in its entirety as set forth in this Agreement, all
-16-
<PAGE>
with the intent and effect that the Prior Rights Agreement shall be hereby
terminated and entirely replaced and superseded by this Agreement.
5.11 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.
5.12 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 instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-17-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
COMPANY:
- -------
Optical Networks, Incorporated
By: /s/ Terrence J. Schmid
--------------------------
Name: Terrence J. Schmid
------------------------
Title: CFO
-----------------------
INVESTORS
- ---------
* * *
<PAGE>
Exhibit 4.03
OPTICAL NETWORKS, INCORPORATED
SERIES D PREFERRED STOCK PURCHASE AGREEMENT
This Series D Preferred Stock Purchase Agreement (the "Agreement") is made
---------
effective as of April 1, 1998, between Optical Networks, Incorporated, a
California corporation (the "Company"), with its principal office at 3450
-------
Hillview Avenue, Palo Alto, California 94304 and Cisco Systems, Inc., a
California corporation, with its principal offices at 170 West Tasman Drive, San
Jose, California 95134 ("Cisco").
-----
* * *
ARTICLE 9
VOTING AGREEMENT
----------------
9.1 Voting Restriction. Cisco and its affiliates shall in any vote of
------------------
shareholders of the Company pertaining to (i) an Acquisition Transaction, or
(ii) an underwritten public offering of securities of the Company, in each case,
whether accomplished through one or a series of related transactions (including,
without limitation, amendment of the charter documents of the Company or a
reincorporation of the Company for purposes of change of domicile in pursuance
of any of the foregoing):
(a) In any class vote, vote any and all shares representing capital
stock of such class of the Company owned by Cisco or its affiliates, whether
acquired hereunder or through another transaction, in exactly the same
proportion as all such other shares of such class are voted;
(b) In any series vote, wherein the matter being voted upon does not
provide for the authorization or issuance of an equity security of the Company
with a liquidation preference in excess of the purchase price therefor, a
dividend preference in excess of ten percent (10%) of the liquidation preference
therefor, or conversion or voting rights that are senior to those of the Shares,
vote any and all shares representing capital stock of such series of the Company
owned by Cisco or its affiliates, whether acquired hereunder or through another
transaction, in exactly the same proportion as all other shares of Preferred
Stock are voted; and
(c) In any vote of Preferred Stock together with the Common Stock,
vote any and all shares representing capital stock of the Company owned by Cisco
or its affiliates, whether acquired hereunder or through another transaction, in
exactly the same proportion as all such other shares of capital stock are voted.
9.2 Agreement Not to Dissent. Provided that the Company has not breached
------------------------
its obligations under Section 8.3 of this Agreement,Cisco agrees that it will
not exercise any dissenter's or appraisal rights which are (or may be) provided
by the laws of any jurisdiction with respect to
<PAGE>
any shares representing capital stock of the Company owned by Cisco or its
affiliates, whether acquired hereunder or through another transaction.
ARTICLE 10
GENERAL PROVISIONS
------------------
10.1 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.
10.2 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.
10.3 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 neither the rights of Cisco to purchase
Shares nor the rights of Cisco under Article 8 shall be assignable without the
written consent of the Company.
10.4 Entire Agreement; Amendment and Waiver. This agreement and the other
--------------------------------------
documents delivered pursuant hereto 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 Cisco
and the Company.
10.5 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 a Cisco, at it's address set forth in the first paragraph of
this Agreement, or at such other address as Cisco shall have furnished to the
Company in writing, or (ii) if to any other holder of any Securities, 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 Securities 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
Cisco, and another copy to the Company's legal counsel to the attention of Mark
C. Stevens, Esq. of Fenwick & West LLP, Two Palo Alto Square, Palo Alto,
California 94306.
10.6 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
<PAGE>
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.
10.7 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.
10.8 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 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.
10.9 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.
10.10 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.
10.11 Legal Expenses. The Company shall reimburse Cisco for its legal
--------------
expenses incurred in connection with this Agreement up to a maximum of $7,500.
[REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
<PAGE>
10.12 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 instrument.
Executed effective as of the date first set forth above.
OPTICAL NETWORKS, INCORPORATED
By: /s/ Hugh C. Martin
-----------------------------------------
Name: Hugh C. Martin
---------------------------------------
Title: President and CEO
--------------------------------------
CISCO SYSTEMS, INC.
By: /s/ Dennis D. Powell
-----------------------------------------
Name: Dennis D. Powell
---------------------------------------
Title: Vice President, Corporate Controller
--------------------------------------
* * *
<PAGE>
EXHIBIT 4.04
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT") AND ARE "RESTRICTED SECURITIES" AS DEFINED IN RULE
144 PROMULGATED UNDER THE ACT. THE SECURITIES MAY NOT BE
SOLD OR OFFERED FOR SALE OR OTHERWISE DISTRIBUTED EXCEPT (I)
IN CONJUNCTION WITH AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SHARES UNDER THE ACT OR (II) IN COMPLIANCE WITH RULE
144, OR (III) PURSUANT TO AN OPINION OF COUNSEL,
SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION OR
COMPLIANCE IS NOT REQUIRED AS TO SAID SALE, OFFER OR
DISTRIBUTION.
Warrant No. ___________
WARRANT TO PURCHASE
66,667 SHARES OF COMMON STOCK OF
OPTIVISION, INC.
(VOID AFTER JANUARY 30, 2002)
This certificate that VENTURE LENDING & LEASING, INC., a Maryland
corporation, or assigns (the "Holder"), for value received, is entitled to
purchase from OPTIVISION, INC., a California corporation (the "Company"), Sixty-
six Thousand Six Hundred Sixty-seven (66,667) fully paid and nonassessable
shares of the Company's Common Stock ("Common Stock") at a price of Two and
25/100 Dollars ($2.25) per share (the "Stock Purchase Price") (Pacific time) on
January 30, 2002 (the "Expiration Date"), upon surrender to the Company at its
principal office at 3450 Hillview Avenue, Palo Alto, California 94304 (or at
such other location as the Company may advise Holder in writing) of this Warrant
properly endorsed with the Form of Subscription attached hereto duly filled in
and signed and upon payment in cash or by check of the aggregate Stock Purchase
Price for the number of shares of which this Warrant is being exercised
determined in accordance with the provisions hereof. The Stock Purchase Price
and the number of shares purchasable hereunder are subject to the adjustment as
provided in Section 4 of this Warrant.
This Warrant is subject to the following terms and conditions:
1. Exercise; Issuance of Certificates; Payment for Shares.
------------------------------------------------------
(a) Unless an election is made pursuant to clause (b) of this Section
1, this Warrant shall be exercisable at the option of the Holder, at any time or
from time to time prior to the earlier of: (i) 30 days prior to the
effectiveness of the Company's first registration statement filed with the
Securities
<PAGE>
and Exchange Commission pursuant to the Securities Act of 1933, or (ii) the
Expiration Date, for all or any portion of the shares of Common Stock (but not
for a fraction of a share) which may be purchased hereunder for the Stock
Purchase Price multiplied by the number of shares to be purchased. The Company
agrees that the shares of Common Stock purchased under this Warrant shall be and
are deemed to be issued to the holder hereof as the record owner of such shares
as of the close of business on the date on which this Warrant shallhave been
surrendered and payment made for such shares. Subject to the provisions of
Section 2, certificates for the shares of Common Stock so purchased, together
with any other securities or property to which the Holder hereof is entitled
upon such exercise, shall be delivered to the Holder hereof by the Company at
the Company's expense within a reasonable time after the rights represented by
this Warrant have been so exercised. Except as provided in clause (b) of this
Section 1, in case of a purchase of less than all the shares which may be
purchased under this Warrant, the Company shall cancel this Warrant and execute
and deliver to the Holder hereof within a reasonable time a new Warrant or
Warrants of like tenor for the balance of the shares purchasable under the
Warrant surrendered upon such purchase. Each stock certificate so delivered
shall be in such denominations of Common Stock as may be requested by the Holder
hereof and shall be registered in the name of such Holder or such other name as
shall be designated by such Holder, subject to the limitations contained in
section 2.
(b) The Holder, in lieu of exercising this Warrant by the payment of
the Stock Purchase Price pursuant to clause (a) of this Section 1, may elect, at
any time on or before the Expiration Date, to receive, through conversion of
this Warrant or any portion hereof into that number of shares of Common Stock
equal to the quotient of: (i) the difference between (A) the Per Share Price (as
hereinafter defined) of the Common Stock, less (B) the Stock Purchase Price then
in effect, multiplied by the number of shares of Common Stock the Holder would
otherwise have been entitled to purchase hereunder pursuant to clause (a) of
this Section 1 (or such lesser number of shares as the Holder may designate in
the case of a partial exercise of this Warrant); over (ii) the Per Share Price.
(c) For purposes of clause (b) of this Section 1, "Per Share Price"
means: (i) if the Company's Common Stock is then listed or admitted to trading
on any national securities exchange or traded on any national market system, the
average of the closing bid and asked prices of the Company's Common Stock as
reported on such exchange or market system for the ten (10) consecutive trading
days prior to the date of the Holder's election to convert hereunder; (ii) if
this Warrant is being converted in conjunction with a public offering of stock,
the price to the public per share pursuant to the offering; or (iii) if no
shares of the Company's Common Stock are listed or admitted
2
<PAGE>
to trading on any national securities exchange or traded on any national market
system, the price per share which the company would obtain from a willing buyer
for shares sold by the Company from authorized but unissued shares as such price
shall be agreed upon by the Holder and the Company or, if agreement cannot be
reached within ten (10) business days of the Holder's election hereunder, as
such price shall be determined by a panel of three (3) appraisers, one (1) to be
chosen by the Company, one (1) to be chosen by the Holder and the third to be
chosen by the first two (2) appraisers. If the appraisers cannot reach agreement
within 30 days of the Holder's election hereunder, then each appraiser shall
deliver its appraisal and the appraisal which is neither the highest nor the
lowest shall constitute the Per Share Price. In the event either party fails to
choose an appraiser within 30 days of the Holder's election hereunder, then the
appraisal of the sole appraiser shall constitute the Per Share Price. Each party
shall bear the cost of the appraiser selected by such party and the cost of the
third appraiser shall be borne one-half by each party. In the event either party
fails to choose an appraiser, the cost of the sole appraiser shall be borne one-
half by each party.
2. Limitation on Transfer.
----------------------
(a) This Warrant and the Common Stock shall not be transferable except
upon the conditions specified in this Section 2, which conditions are intended
to insure compliance with the provisions of the Securities Act. Each holder of
this Warrant or the Common Stock issuable hereunder will cause any proposed
transferee of the Warrant or Common Stock to agree to take and hold such
securities subject to the provisions and upon the conditions specified in this
Section 2.
(b) Each certificate representing this Warrant or the Common Stock
shall (unless otherwise permitted by the provisions of 'this Section 2 or unless
such securities have been registered under the Securities Act or sold under Rule
144) be stamped or otherwise imprinted with a legend substantially in the form
set forth on the face of this Warrant.
(c) The Holder of this Warrant and each person to whom this Warrant is
subsequently transferred represents and warrants to the Company (by acceptance
of such transfer) that it will not transfer the Warrant (or securities issuable
upon exercise hereof unless a registration statement under the Securities Act
was in effect with respect to such securities at the time of issuance thereof)
except pursuant to (i) an effective registration statement under the Securities
Act, (ii) Rule 144 under the Securities Act (or any similar rule under the
Securities Act relating to the disposition of securities), or (iii) an opinion
of counsel, reasonably satisfactory to counsel for the Company, that an
exemption from such registration is available.
3
<PAGE>
3. Shares to be Fully Paid; Reservation of Shares. The Company covenants
----------------------------------------------
and agrees that all shares of Common Stock which may be issued upon the exercise
of the rights represented by this Warrant will, upon issuance, be duly
authorized, validly issued; fully paid and nonassessable and free from all
preemptive rights of any shareholder and free of all taxes, liens and charges
with respect to the issue thereof. The Company further covenants and agrees that
during the period within which the rights represented by this Warrant may be
exercised, the Company will at all times have authorized and reserved, for the
purpose of issue or transfer upon exercise of the subscription rights evidenced
by this Warrant, a sufficient number of shares of authorized but unissued Common
Stock, or other securities and property, when and as required to provide for the
exercise of the rights represented by this Warrant. The Company will take all
such action as may be necessary to assure that such shares of Common Stock may
be issued as provided herein without violation of any applicable law or
regulation, or of any requirements of any domestic securities exchange upon
which the Common Stock may be listed. The Company will not take any action which
would result in any adjustment of the Stock Purchase Price (as defined in
Section 4 hereof) if the total number of shares of Common Stock issuable after
such action upon exercise of all outstanding warrants, together with all shares
of Common Stock then outstanding and all shares of Common Stock then issuable
upon exercise of all options and upon the conversion of all convertible
securities then outstanding, would exceed the total number of shares of Common
Stock then authorized by the Company's Articles of Incorporation.
4. Adjustment of Stock Purchase Price Number of Shares. The Stock
---------------------------------------------------
Purchase Price and the number of shares purchasable upon the exercise of this
Warrant shall be subject to adjustment from time to time upon the occurrence of
certain events described in this Section 4. Upon each adjustment of the Stock
Purchase Price, the Holder of this Warrant shall thereafter be entitled to
purchase, at the Stock Purchase Price resulting from such adjustment, the number
of shares obtained by multiplying the Stock Purchase Price in effect immediately
prior to such adjustment by the number of shares purchasable pursuant hereto
immediately prior to such adjustment, and dividing the product thereof by the
Stock Purchase Price resulting from such adjustment.
4.1 Subdivision or combination of Stock. In case the Company shall
-----------------------------------
at any time subdivide its outstanding shares of Common Stock into a greater
number of shares, the Stock Purchase Price in effect immediately prior to such
subdivision shall be proportionately reduced, and conversely, in case the
outstanding shares of Common Stock of the Company shall be combined into a
smaller number of shares, the Stock Purchase Price in effect
4
<PAGE>
immediately prior to such combination shall be proportionately increased.
4.2 Dividends in Preferred Stock, Other Stock. Property,
----------------------------------------------------
Reclassification. If at any time or from time to time the holders of Common
- ----------------
Stock (or any shares of stock or other securities at the time receivable upon
the exercise of this Warrant) shall have received or become entitled to receive,
without payment therefor,
(a) by way of dividend or other distribution, any shares of
stock or other securities, whether or not such securities are at any time
directly or indirectly convertible into or exchangeable for common Stock, or any
rights or options to subscribe for, purchase or otherwise acquire any of the
foregoing, or
(b) any cash paid or payable otherwise than as a cash dividend,
or
(c) additional stock or other securities or property (including
cash) by way of spinoff, split-up, reclassification, combination of shares or
similar corporate rearrangement, (other than shares of Common Stock issued as a
stock split, adjustments in respect of which shall be covered by the terms of
Section 4.1 above), then and in each such case, the Holder hereof shall, upon
the exercise of this Warrant, be entitled to receive, in addition to the number
of shares of Common Stock receivable thereupon, and without payment of any
additional consideration therefore, the amount of stock and other securities and
property (including cash in the cases referred to in clauses (b) and (c) above)
which such Holder would hold on the date of such exercise had he been the holder
of record of such Common Stock as of the date on which holders of Common Stock
received or became entitled to receive such shares and/or all other additional
stock and other securities and property.
4.3 Reorganization, Reclassification, Consolidation, Merger or Sale.
---------------------------------------------------------------
If any capital reorganization of the capital stock of the Company, or any
consolidation or merger of the Company with another corporation, or other
reorganization, or the sale of all or substantially all of its assets to another
corporation shall be effected in such a way that holders of Common Stock shall
be entitled to receive stock, securities or assets with respect to or in
exchange for Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provisions
shall be made whereby the holder hereof shall thereafter have the right to
purchase and receive (in lieu of the shares of the Common Stock of the Company
immediately theretofore purchasable
5
<PAGE>
and receivable upon the exercise of the rights represented hereby) such shares
of stock, securities or assets as may be issued or payable with respect to or in
exchange for a number of outstanding shares of such Common Stock equal to the
number of shares of such stock immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby. In any such case,
appropriate provision shall be made with respect to the rights and interests of
the holder of this Warrant to the end that the provisions hereof (including,
without limitation, provisions for adjustments of the Stock Purchase Price and
of the number of shares purchasable and receivable upon the exercise of this
Warrant) shall thereafter be applicable, as nearly as may be possible, in
relation to any shares of stock, securities or assets thereafter deliverable
upon the exercise hereof.
4.4 Sale or Issuance Below Purchase Price. If the Company shall at
-------------------------------------
any time or from time to time issue or sell any of its Common Stock, Preferred
Stock, options to acquire (or rights to acquire such options), or any other
securities convertible into or exercisable for Common Stock, for a consideration
per share less than the Stock Purchase Price in effect immediately prior to the
time of such issue or sale, the Stock Purchase Price then in effect and then
applicable for any subsequent period or periods shall be adjusted to a price
determined by dividing (i) an amount equal to the sum of (x) the number of
shares of Common Stock outstanding immediately prior to such issue or sale
multiplied by the Stock Purchase Price then in effect and (y) the consideration,
if any, received by the Company upon such issue or sale, by (ii) the total
number of shares of Common Stock outstanding immediately after such issue or
sale. For purposes of this Section 4.4, all shares of Common Stock issuable
upon the exercise and/or conversion of all outstanding warrants (including this
Warrant), options and convertible securities shall be deemed to be outstanding.
The foregoing notwithstanding, no adjustment shall be made pursuant to this
Section 4.4 on account of a given sale to the extent that (a) the Stock Purchase
Price is adjusted pursuant to any other Section of this Warrant or (b) the
conversion price of the Preferred Stock is decreased pursuant to the terms
thereof.
4.5 Notice of Adjustment. Upon any adjustment of the Stock Purchase
--------------------
Price, and/or any increase or decrease in the number of shares purchasable upon
the exercise of this Warrant the Company shall give written notice thereof, by
first class mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of such holder as shown on the books of the Company. The
notice shall be signed by the Company's chief financial officer and shall state
the Stock Purchase Price resulting from such adjustment and the increase or
decrease, if any, in the number of shares purchasable at such price upon the
exercise of this Warrant, setting forth in reasonable detail the
6
<PAGE>
method of calculation and the facts upon which such calculation is based.
4.6 Other Notices. If at any time:
-------------
(a) the Company shall declare any cash dividend upon any of its
stock;
(b) the Company shall declare any dividend upon its stock payable
in stock, or make any special dividend or other distribution to the holders of
its stock;
(c) the Company shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class or other
rights;
(d) there shall be any capital reorganization or reclassification
of the capital stock of the Company, or consolidation or merger of the Company
with, or sale of all or substantially all of its assets to, another corporation;
(e) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company; or
(f) the Company shall take or propose to take any other action,
notice of which is actually provided to holders of the Common Stock;
then, in any one or more of said cases, the Company shall give, by first class
mail, postage prepaid, addressed to the holder of this Warrant at the address of
such holder as shown on the books of the Company, (i) at least twenty (20) day's
prior written notice of the date on which the books of the Company shall close
or a record shall be taken for establishing the right to receive such dividend,
distribution or subscription rights, and (ii) with respect to any other action,
notice of which is given to holders of the Common Stock, at the same time such
notice as is actually provided to such holders. Any notice given in accordance
with the foregoing clause (i) shall also specify, in the case of any such
dividend, distribution or subscription rights, the date on which the holders of
stock shall be entitled thereto. Any notice given in accordance with the
foregoing clause (ii) shall, if applicable, also specify the date on which the
holders of Common Stock shall be entitled to exchange their Common Stock for
securities or other property deliverable upon any reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up, or other action as the case may be.
5. Issue Tax. The issuance of certificates for shares of Preferred Stock
---------
upon the exercise of the Warrant shall be made without charge to the Holder of
the Warrant for any issue tax in respect thereof; provided, however, that the
Company shall not be
7
<PAGE>
required to pay any tax which may be payable in respect of any transfer involved
in the issuance and delivery of any certificate in a name other than that of the
then Holder of the Warrant being exercised.
6. Closing of Books. The company will at no time close its transfer
----------------
books against the transfer of any Warrant or of any shares of Common Stock
issued or issuable upon the exercise of any warrant in any manner which
interferes with the timely exercise of this Warrant.
7. No Voting or Dividend Rights; Limitation of Liability. Nothing
-----------------------------------------------------
contained in this Warrant shall be construed as conferring upon the Holder
hereof the right to vote or to consent as a shareholder in respect of meetings
of shareholders for the election of directors of the Company or any other
matters or any rights whatsoever as a shareholder of the Company. No dividends
or interest shall be payable or accrued in respect of this Warrant or the
interest represented hereby or the shares purchasable hereunder until, and only
to the extent that, this Warrant shall have been exercised. No provisions
hereof, in the absence of affirmative action by the holder to purchase shares of
Common Stock, and no mere enumeration herein of the rights or privileges of the
Holder hereof, shall give rise to any liability of such Holder for the Stock
Purchase Price or as a shareholder of the Company, whether such liability is
asserted by the Company or by its creditors.
8. Registration , Rights. The Company hereby grants to the Holder, with
---------------------
respect to the shares of Common Stock issuable hereunder, the piggyback
registration rights identical to those set forth in that certain Registration
Rights Agreement dated as of July 27, 1995 among the Company and ADC. The
Company shall take such action as may be reasonably necessary to assure that the
granting of such registration rights to the Holder does not violate or conflict
with the provisions of the aforementioned agreement, any of the Company's
charter documents, or the rights of prior grantees of registration rights.
9. Rights and Obligations Survive Exercise of Warrant. The, rights and
--------------------------------------------------
obligations of the Company, of the Holder of this Warrant and of the holder of
shares of Common Stock issued upon exercise of this Warrant, contained in
Sections 6, 8 and 9 shall survive the exercise of this Warrant.
10. Modification and Waiver. This Warrant and any provision hereof may be
-----------------------
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.
11. Notices. Any notice, request or other document required or permitted
-------
to be given or delivered to the holder
8
<PAGE>
hereof or the Company shall be deemed to have been given (i) upon receipt if
delivered personally or by courier, (ii) upon confirmation of receipt if by
telecopy, or (iii) three business days after deposit in the U.S. mail, with
postage prepaid and certified or registered, to each such holder at its address
as shown on the books of the Company or to the Company at the address indicated
therefor in the first paragraph of this Warrant.
12. Binding Effect on Successors. This Warrant shall be binding upon any
----------------------------
corporation succeeding the Company by merger, consolidation or acquisition of
all or substantially all of the Company's assets. All of the obligations of the
Company relating to the Common Stock issuable upon the exercise of this Warrant
shall survive the exercise and termination of this Warrant. All of the
covenants and agreements of the Company shall inure to the benefit of the
successors and assign of the holder hereof. The Company will, at the time of
the exercise of this Warrant, in whole or in part, upon request of the Holder
hereof but at the Company's expense, acknowledge in writing its continuing
obligation to the Holder hereof in respect of any rights (including, without
limitation, any right to registration of the shares of Common Stock) to which
the holder hereof shall continue to be entitled after such exercise in
accordance with this Warrant; provided, that the failure of the holder hereof to
make any such request shall not affect the continuing obligation of the Company
to the Holder hereof in respect of such rights.
13. Descriptive Headings and Governing Law. The descriptive headings of
--------------------------------------
the several sections and paragraphs of this Warrant are inserted for convenience
only and do not constitute a part of this Warrant. This Warrant shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the laws of the State of California.
14. Lost Warrants or Stock Certificates. The Company represents and
-----------------------------------
warrants to the Holder hereof that upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation of
any Warrant or stock certificate and, in the case of any such loss, theft or
destruction, upon receipt of an indemnity reasonably satisfactory to the
Company, or in the case of any such mutilation upon surrender and cancellation
of such Warrant or stock certificate, the Company at its expense will make and
deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost,
stolen, destroyed or mutilated Warrant or stock certificate.
15. Fractional Shares. No fractional shares shall be issued upon exercise
-----------------
of this warrant. The Company shall, in lieu of issuing any fractional share,
pay the holder entitled to such
9
<PAGE>
fraction a sum in cash equal to such fraction multiplied by the then effective
Stock Purchase Price.
17. Representations of Holder. With respect to this Warrant, Holder
-------------------------
represents and warrants to the Company as follows:
17.1 Experience. It is experienced in evaluating and investing in
----------
companies engaged in businesses similar to that of the Company; it understands
that investment in the Warrant involves substantial risks; it has made detailed
inquiries concerning the Company, its business and services, its officers and
its personnel; the officers of the Company have made available to Holder any and
all written information it has requested; the officers of the Company have
answered to Holder's satisfaction all inquiries made by it; in making this
investment it has relied upon information made available to it by the Company;
and it has such knowledge and experience in financial and business matters that
it is capable of evaluating the merits and risks of investment in the Company
and it is able to bear the economic risk of that investment.
17.2 Investment. It is acquiring the Warrant for investment for its
----------
own account and not with a view to, or for resale in connection with, any
distribution thereof. It understands that the Warrant, the shares of Common
Stock issuable upon exercise thereof, have not been registered under the
Securities Act of 1933, as amended, nor qualified under applicable state
securities laws.
17.3 Rule 144. It acknowledges that the Warrant and the Common Stock
--------
must be held indefinitely unless they are subsequently registered under the
Securities Act or an exemption from such registration is available. It has been
advised or is aware of the provisions of Rule 144 promulgated under the
Securities Act.
17.4 Access to Data. It has had an opportunity to discuss the
--------------
Company's business, management and financial affairs with the Company's
management and has had the opportunity to inspect the Company's facilities.
18. Additional Representations and Covenants of the Company. The Company
-------------------------------------------------------
hereby represents, warrants and agrees as follows:
18.1 Corporate Power. The Company has all requisite corporate power
---------------
and corporate authority to issue this Warrant and to carry out and perform its
obligations hereunder.
18.2 Authorization. All corporate action on the part of the Company,
-------------
its directors and shareholders necessary for the
10
<PAGE>
authorization, execution, delivery and performance by the Company of this has
been taken. This Warrant is a valid and binding obligation of the company,
enforceable in accordance with its terms.
18.3 Offering. Subject in part to the truth and accuracy of Holder's
--------
representations set forth in Section 17 hereof, the offer, issuance and sale of
the Warrant is, and the issuance of Common Stock upon exercise of the Warrant
will be exempt from the registration requirements of the Securities Agreement,
and are exempt from the qualification requirements of any applicable state
securities laws; and neither the company nor anyone acting on its behalf will
take any action hereafter that would cause the loss of such exemptions.
18.4 Stock Issuance. Upon exercise of the Warrant, the Company will
--------------
use its best efforts to cause stock certificates representing the shares of
Common Stock purchased pursuant to the exercise to be issued in the individual
names of Holder, its nominees or assignees, as appropriate at the time of such
exercise.
18.5 Articles and By-Laws. The Company has provided Holder with true
--------------------
and complete copies of the Company's Articles or Certificate of Incorporation,
By-Laws, and each Certificate of Determination or other charter document
setting, forth any rights, preferences and privileges of Company's capital
stock, each as amended and in effect on the date of issuance of this Warrant. .
18.6 Financial and Other Reports. From time to time up to the
---------------------------
earlier of the Expiration Date or the complete exercise of this Warrant, the
Company shall furnish to Holder (i) within 120 days after the close of each
fiscal year of the Company an audited balance sheet and statement of changes in
financial position at and as of the end of such fiscal year, together with an
audited statement of income for such fiscal year; (ii) within 45 days after the
close of each fiscal quarter of the Company, an unaudited balance sheet and
statement of cash flows at and as of the end of such quarter, together with an
unaudited statement of, income for such quarter; and (iii) promptly after
sending, copies of all reports, proxy statements, and financial statements that
the Company sends to its shareholders.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed
by its officers, thereunto duly authorized as of this 30th day of January, 1997.
OPTIVISION, INC.
By: /s/ James S. Tyler
-------------------------------
James S. Tyler, President
11
<PAGE>
FORM OF SUBSCRIPTION
--------------------
(To be signed only upon exercise of Warrant)
To: ___________________________
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, __________________________ (_________) (1) shares of Common
stock of ___________________________________________ and herewith makes payment
of ______________________________________________ Dollars ($__________)
therefor, and requests that the certificates for such shares be issued in the
name of, and delivered to, ______________________________________, whose address
is __________________________________________.
The undersigned represents that it is acquiring such Common Stock for its
own account for investment and not with a view to or for sale in connection with
any distribution thereof (subject, however, to any requirement of law that the
disposition thereof shall at all times be within its control.
DATED: ____________________________
______________________________________________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant)
_______________________________________________________
_______________________________________________________
(Address)
_______________
(1) Insert here the number of shares called for on the face of the Warrant (or,
in the case of a partial exercise, the portion thereof as to which the
Warrant is being exercised), in either case without making any adjustment
for additional Common Stock or any other stock or other securities or
property or cash which, pursuant to the adjustment provisions of the
Warrant, may be deliverable upon exercise.
12
<PAGE>
ASSIGNMENT
----------
FOR VALUE RECEIVED, the undersigned, the holder of the within Warrant,
hereby sells, assigns and transfers all of the rights of the undersigned under
the within Warrant, with respect to the number of shares of Common Stock covered
thereby set forth hereinbelow, unto:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
Dated: ________________________________
__________________________________________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant)
13
<PAGE>
EXHIBIT 4.05
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT") AND ARE "RESTRICTED SECURITIES" AS DEFINED IN RULE 144
PROMULGATED UNDER THE ACT. THE SECURITIES MAY NOT BE SOLD OR
OFFERED FOR SALE OR OTHERWISE DISTRIBUTED EXCEPT (i) IN
CONJUNCTION WITH AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SHARES UNDER THE ACT OR (ii) IN COMPLIANCE WITH RULE 144, OR
(iii) PURSUANT TO AN OPINION OF COUNSEL, SATISFACTORY TO THE
COMPANY, THAT SUCH REGISTRATION OR COMPLIANCE IS NOT REQUIRED AS
TO SAID SALE, OFFER OR DISTRIBUTION.
Warrant No. ____________
WARRANT TO PURCHASE
108,434 SHARES OF COMMON STOCK OF
OPTIVISION, INC.
(Void after September 18, 2003)
This certifies that VENTURE LENDING & LEASING, INC., a Maryland
corporation, or assigns (the "Holder"), for value received, is entitled to
purchase from OPTIVISION, INC., a California corporation (the "Company"), One
Hundred Eight Thousand Four Hundred Thirty-four (108,434) fully paid and
nonassessable shares of the Company's Common Stock ("Common Stock") at a price
of Two and 75/1000 Dollars ($2.075) per share (the "Stock Purchase Price") at
any time or from time to time up to and including 5:00 p.m. (Pacific time) on
September 18, 2003 (the "Expiration Date"), upon surrender to the Company at its
principal office at 3450 Hillview Avenue, Palo Alto, California 94304 (or at
such other location as the company may advise Holder in writing) of this Warrant
properly endorsed with the Form of Subscription attached hereto duly filled in
and signed and upon payment in cash or by check of the aggregate Stock Purchase
Price for the number of shares for which this Warrant is being exercised
determined in accordance with the provisions hereof. The Stock Purchase Price
and the number of shares purchasable hereunder are subject to adjustment as
provided in Section 4 of this Warrant. This Warrant is issued in replacement of
the Warrant issued to the Holder dated September 19, 1996.
This Warrant is subject to the following terms and conditions:
1. Exercise: Issuance of Certificates: Payment for Share.
-----------------------------------------------------
(a) Unless an election is made pursuant to clause (b) of this Section
1, this Warrant shall be exercisable at the option of the Holder, at any time or
from time to time prior to
<PAGE>
the earlier of: (i) 30 days prior to the effectiveness of the Company's first
registration statement filed with the securities and Exchange Commission
pursuant to the Securities Act of 1933, or (ii) the Expiration Date, for all or
any portion of the shares of Common Stock (but not for a fraction of a share)
which may be purchased hereunder for the Stock Purchase Price multiplied by the
number of shares to be purchased. The Company agrees that the shares of Common
Stock purchased under this Warrant shall be and are deemed to be issued to the
holder hereof as the record owner of such shares as of the close of business on
the date on which this Warrant shall have been surrendered and payment made for
such shares. Subject to the provisions of Section 2, certificates for the shares
of Common Stock so purchased, together with any other securities or property to
which the Holder hereof is entitled upon such exercise, shall be delivered to
the Holder hereof by the Company at the Company's expense within a reasonable
time after the rights represented by this Warrant have been so exercised. Except
as provided in cause (b) of this Section 1, in case of a purchase of less than
all the shares which may be purchased under this Warrant, the Company shall
cancel this Warrant and execute and deliver to the Holder hereof within a
reasonable time a new Warrant or Warrants of like tenor for the balance of the
shares purchasable under the Warrant surrendered upon such purchase. Each stock
certificate so delivered shall be in such denominations of Common Stock as may
be requested by the Holder hereof and shall be registered in the name of such
Holder or such other name as shall be designated by such Holder, subject to the
limitations contained in Section 2.
(b) The Holder, in lieu of exercising this Warrant by the payment of
the Stock Purchase Price pursuant to clause (a) of this Section 1, may elect, at
any time on or before the Expiration Date, to receive, through conversion of
this Warrant or any portion hereof into that number of shares of Common Stock
equal to the quotient of: (i) the difference between (A) the Per Share Price (as
hereinafter defined) of the Common Stock, less (B) the Stock Purchase Price then
in effect, multiplied by the number of shares of Common Stock the Holder would
otherwise have been entitled to purchase hereunder pursuant to clause (a) of
this Section 1 (or such lesser number of shares as the Holder may designate in
the case of a partial exercise of this Warrant); over (ii) the Per Share Price.
(c) For purposes of clause (b) of this Section 1, "Per Share Price"
means: (i) if the Company's Common Stock is then listed or admitted to trading
on any national securities exchange or traded on any national market system, the
average of the closing bid and asked prices of the Company's Common Stock as
reported on such exchange or market system for the ten (10) consecutive trading
days prior to the date of the Holder's election to convert hereunder; (ii) if
this warrant is being converted in conjunction with a public offering of stock,
the
2
<PAGE>
price to the public per share pursuant to the offering; or (iii) if no
shares of the Company's Common Stock are listed or admitted to trading on any
national securities exchange or traded on any national market system, the price
per share which the Company would obtain from a willing buyer for shares sold by
the Company from authorized but unissued shares as such price shall be agreed
upon by the Holder and the Company or, if agreement cannot be reached within ten
(10) business days of the Holder's election hereunder, as such price shall be
determined by a panel of three (3) appraisers, one (1) to be chosen by the
Company, one (1) to be chosen by the Holder and the third to be chosen by the
first two (2) appraisers. If the appraisers cannot reach agreement within 30
days of the Holder's election hereunder, then each appraiser shall deliver its
appraisal and the appraisal which is neither the highest nor the lowest shall
constitute the Per Share Price.
In the event either party fails to choose an appraiser within 30 days of the
Holder's election hereunder, then the appraisal of the sole appraiser shall
constitute the Per Share Price. Each party shall bear the cost of the appraiser
selected by such party and the cost of the third appraiser shall be borne one-
half by each party. In the event either party fails to choose an appraiser, the
cost of the sole appraiser shall be borne one-half by each party.
2. Limitation on Transfer.
----------------------
(a) This Warrant and the Common Stock shall not be transferable except
upon the conditions specified in this Section 2, which conditions are intended
to insure compliance with the provisions of the Securities Act. Each holder of
this Warrant or the Common Stock issuable hereunder will cause any proposed
transferee of the Warrant or Common Stock to agree to take and hold such
securities subject to the provisions and upon the conditions specified in this
Section 2.
(b) Each certificate representing this Warrant or the Common Stock
shall (unless otherwise permitted by the provisions of this Section 2 or unless
such securities have been registered under the Securities Act or sold under Rule
144) be stamped or otherwise imprinted with a legend substantially in the form
set forth on the face of this Warrant.
(c) The Holder of this Warrant and each person to whom this Warrant is
subsequently transferred represents and warrants to the Company (by acceptance
of such transfer) that it will not transfer the Warrant (or securities issuable
upon exercise hereof unless a registration statement under the Securities Act
was in effect with respect to such securities at the time of issuance thereof)
except pursuant to (i) an effective registration statement under the Securities
Act; (ii) Rule 144 under the Securities Act (or any similar rule under the
Securities Act relating to the disposition of securities), or (iii) an opinion
3
<PAGE>
of counsel, reasonably satisfactory to counsel for the Company, that an
exemption from such registration is available.
3. Sharps to be Fully Paid: Reservation of Shares. The Company covenants
----------------------------------------------
and agrees that all shares of Common Stock which may be issued upon the exercise
of the rights represented by this warrant will, upon issuance, be duly
authorized, validly issued, fully paid and nonassessable and free from all pre-
emptive rights of any shareholder and free of all taxes, liens and charges with
respect to the issue thereof. The Company further covenants and agrees that
during the period within which the rights represented by this Warrant may be
exercised, the Company will at all times have authorized and reserved, for the
purpose of issue or transfer upon exercise of the subscription rights evidenced
by this Warrant, a sufficient number of shares of authorized but unissued Common
Stock, or other securities and property, when and as required to provide for the
exercise of the rights represented by this Warrant. The Company will take all
such action as may be necessary to assure that such shares of Common Stock may
be issued as provided herein without violation of any applicable law or
regulation, or of any requirements of any domestic securities exchange upon
which the Common Stock may be listed. The Company will not take any action
which would result in any adjustment of the Stock Purchase Price (as defined in
Section 4 hereof) if the total number of shares of Common Stock issuable after
such action upon exercise of all outstanding warrants, together with all shares
of Common Stock then outstanding and all shares of Common Stock then issuable
upon exercise of all options and upon the conversion of all convertible
securities then outstanding, would exceed the total number of shares of Common
Stock then authorized by the Company's Articles of Incorporation.
4. Adjustment of Stock Purchase Price, Number of Shares. The Stock
----------------------------------------------------
Purchase Price and the number of shares purchasable upon the exercise of this
Warrant shall be subject to adjustment from time to time upon the occurrence of
certain events described in this Section 4. Upon each adjustment of the Stock
Purchase Price, the Holder of this Warrant shall thereafter be entitled to
purchase, at the Stock Purchase Price resulting from such, adjustment, the
number of shares obtained by multiplying the Stock Purchase Price in effect
immediately prior to such adjustment by the number of shares purchasable
pursuant hereto immediately prior to such adjustment, and dividing the product
thereof by the Stock Purchase Price resulting from such adjustment.
4.1 Subdivision or Combination of Stock. In case the Company shall
-----------------------------------
at any time subdivide its outstanding shares of Common Stock into a greater
number of shares, the Stock Purchase Price in effect immediately prior to such
subdivision shall be proportionately reduced, and conversely, in case the
outstanding
4
<PAGE>
shares of Common Stock of the Company shall be combined into a smaller number of
shares, the Stock Purchase Price in effect immediately prior to such combination
shall be proportionately increased.
4.2 Dividends in Preferred Stock, Other Stock, Property,
----------------------------------------------------
Reclassification. If at any time or from time to time the holders of Common
- ----------------
Stock (or any shares of stock or other securities at the time receivable upon
the exercise of this Warrant) shall have received or become entitled to receive,
without payment therefor,
(a) by way of dividend or other distribution, any shares of stock or
other securities, whether or not such securities are at any time directly or
indirectly convertible into or exchangeable for Common Stock, or any rights or
options to subscribe for, purchase or otherwise acquire any of the foregoing, or
(b) any cash paid or payable otherwise than as a cash dividend, or
(c) additional stock or other securities or property (including cash)
by way of spin-off, split-up, reclassification, combination of shares or similar
corporate rearrangement, (other than shares of Common Stock issued as a stock
split, adjustments in respect of which shall be covered by the terms of Section
4.1 above),
then and in each such case, the Holder hereof shall, upon the exercise of this
Warrant, be entitled to receive, in addition to the number of shares of Common
Stock receivable thereupon, and without payment of any additional consideration
therefore, the amount of stock and other securities and property (including cash
in the cases referred to in clauses (b) and (c) above) which such Holder would
hold on the date of such exercise had he been the holder of record of such
Common Stock as of the date on which holders of Common Stock received or became
entitled to receive such shares and/or all other additional stock and other,
securities and property.
4.3 Reorganization, Reclassification, Consolidation, Merger or Sale.
---------------------------------------------------------------
If any capital reorganization of the capital stock of the Company, or any
consolidation or merger of the Company with another corporation, or other
reorganization, or the sale of all or substantially all of its assets to another
corporation shall be effected in such a way that holders of Common Stock
shall be entitled to receive stock, securities or assets with respect to or in
exchange for Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provisions
shall be made whereby the holder hereof shall thereafter have the
5
<PAGE>
right to purchase and receive (in lieu of the shares of the Common Stock of the
Company immediately theretofore purchasable and receivable upon the exercise of
the rights represented hereby) such shares of stock, securities or assets as may
be issued or payable with respect to or in exchange for a number of outstanding
shares of such Common Stock equal to the number of shares of such stock
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby. In any such case, appropriate provision shall be made
with respect to the rights and interests of the holder of this Warrant to the
end that the provisions hereof (including, without limitation, provisions for
adjustments of the Stock Purchase Price and of the number of shares purchasable
and receivable upon the exercise of this Warrant) shall thereafter be
applicable, as nearly as may be possible, in relation to any shares of stock,
securities or assets thereafter deliverable upon the exercise hereof.
4.4 Sale or Issuance Below Purchase Price. If the Company shall at
-------------------------------------
any time or from time to time issue or sell any of its Common Stock, Preferred
Stock, options to acquire (or rights to acquire such options), or any other
securities convertible into or exercisable for Common Stock, for a consideration
per share less than the Stock Purchase Price in effect immediately prior to the
time of such issue or sale, the Stock Purchase Price then in effect and then
applicable for any subsequent period or periods shall be adjusted to a price
determined by dividing (i) an amount equal to the sum of (x) the number of
shares of Common Stock outstanding immediately prior to such issue or sale
multiplied by the Stock Purchase Price then in effect and (y) the consideration,
if any, received by the Company upon such issue or sale, by (ii) the total
number of shares of Common Stock outstanding immediately after such issue or
sale. For purposes of this Section 4.4, all shares of Common Stock issuable
upon the exercise and/or conversion of all outstanding warrants (including this
Warrant), options and convertible securities shall be deemed to be outstanding.
The foregoing notwithstanding, no adjustment shall be made pursuant to this
Section 4.4 on account of a given sale to the extent that (a) the Stock Purchase
Price is adjusted pursuant to any other Section of., this Warrant or (b) the
conversion price of the Preferred Stock is decreased pursuant to the terms
thereof.
4.5 Notice of Adjustment. Upon any adjustment of the Stock Purchase
--------------------
Price, and/or any increase or decrease in the number of shares purchasable upon
the exercise of this Warrant the Company shall give written notice thereof, by
first class mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of such holder as shown on-the books of the Company. The
notice shall be signed by the Company's chief financial officer and shall state
the Stock Purchase Price resulting from such adjustment and the increase or
decrease, if
6
<PAGE>
any, in the number of shares purchasable at such price upon the exercise of this
Warrant, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based.
4.6 Other Notices. If at any time:
-------------
(a) the Company shall declare any cash dividend upon any of its
stock;
(b) the Company shall declare any dividend upon its stock payable
in stock, or make any special dividend or other distribution to the holders of
its stock;
(c) the Company shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class or other
rights;
(d) there shall be any capital reorganization or reclassification
of the capital stock of the Company, or consolidation or merger of the Company
with, or sale of all or substantially all of its assets to, another corporation;
(e) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company; or
(f) the Company shall take or propose to take any other action,
notice of which is actually provided to holders of the Common Stock;
then, in any one or more of said cases, the Company shall give, by first class
mail, postage prepaid, addressed to the holder of this Warrant at the address of
such holder as shown on the books of the company, (i) at least twenty (20) days
prior written notice of the date on which the books of the Company shall close
or a record shall be taken for establishing the right to receive such dividend,
distribution or subscription rights, and (ii) with respect to any other action,
notice of which is given to holders of the Common Stock, at the same time such
notice as is actually provided to such holders. Any notice given in accordance
with the foregoing clause (i) shall also specify, in the case of any such
dividend, distribution or subscription rights, the date on which the holders of
stock shall be entitled thereto. Any notice given in accordance with the
foregoing clause (ii) shall, if applicable, also specify the date on which the
holders of Common Stock shall be entitled to exchange their Common Stock for
securities or other property deliverable upon any reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up, or other action as the case may be.
5. Issue Tax. The issuance of certificates for shares of Preferred Stock
---------
upon the exercise of the Warrant shall be made
7
<PAGE>
without charge to the Holder of the Warrant for any issue tax in respect
thereof; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the issuance and
delivery of any certificate in a name other than that of the then Holder of the
Warrant being exercised.
6. Closing of Books. The Company will at no time close its transfer
----------------
books against the transfer of any Warrant or of any shares of Common Stock
issued or issuable upon the exercise of any warrant in any manner which
interferes with the timely exercise of this Warrant.
7. No Voting or Dividend Rights; Limitation of Liability. Nothing
-----------------------------------------------------
contained in this Warrant shall be construed as conferring upon the Holder
hereof the right to vote or to consent as a shareholder in respect of meetings
of shareholders for the election of directors of the Company or any other
matters or any rights whatsoever as a shareholder of the Company. No dividends
or interest shall be payable or accrued in respect of this Warrant or the
interest represented hereby or the shares purchasable hereunder until, and only
to the extent that, this Warrant shall have been exercised. No provisions
hereof, in the absence of affirmative action by the holder to purchase shares
of. Common Stock, and no mere enumeration herein of the rights or privileges of
the Holder hereof, shall give rise to any liability of such Holder for the Stock
Purchase Price or as a shareholder of the Company, whether such liability is
asserted by the Company or by its creditors.
8. Registration Rights. The Company hereby grants to the Holder, with
-------------------
respect to the shares of Common Stock issuable hereunder, the piggyback
registration rights identical to those set forth in that certain Registration
Rights Agreement dated as of July 27, 1995 among the Company and ADC. The
Company shall take such action as may be reasonably necessary to assure that the
granting of such registration rights to the Holder does not violate or conflict
with the provisions of the aforementioned agreement, any of the Company's
charter documents, or the rights of prior grantees of registration rights.
9. Rights and obligations Survive Exercise of Warrant. The rights and
--------------------------------------------------
obligations of the Company, of the Holder of this Warrant and of the holder of
shares of Common Stock issued upon exercise of this Warrant, contained in
Sections 6, 8 and 9 shall survive the exercise of this Warrant.
10. Modification and Waiver. This Warrant and any provision hereof may be
-----------------------
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.
8
<PAGE>
11. Notices. Any notice, request or other document required or permitted
-------
to be given or delivered to the holder hereof or the Company shall be deemed to
have been given (i) upon receipt if delivered personally or by courier, (ii)
upon confirmation of receipt if by telecopy, or (iii) three business days after
deposit in the U.S. mail, with postage prepaid and certified or registered, to
each such holder at its address as shown on the books of the Company or to the
Company at the address indicated therefor in the first paragraph of this
Warrant.
12. Binding Effect on Successors. This Warrant shall be binding upon any
----------------------------
corporation succeeding the Company by merger, consolidation or acquisition of
all or substantially all of the Company's assets. All of the obligations of the
Company relating to the Common Stock issuable upon the exercise of this Warrant
shall survive the exercise and termination of this Warrant. All of the
covenants and agreements of the Company shall inure to the benefit of the
successors and assign of the holder hereof. The Company will, at the time of
the exercise of this Warrant, in whole or in part, upon request of the Holder
hereof but at the Company's expense, acknowledge in writing its continuing
obligation to the Holder hereof in respect of any rights (including, without
limitation, any right to registration of the shares of Common Stock) to which
the holder hereof shall continue to be entitled after such exercise in
accordance with this Warrant; provided, that the failure of the holder hereof to
make any such request shall not affect the continuing obligation of the Company
to the Holder hereof in respect of such rights.
13. Descriptive Headings and Governing Law. The descriptive headings of
--------------------------------------
the several sections and paragraphs of this Warrant are inserted for convenience
only and do not constitute a part of this Warrant. This Warrant shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the laws of the State of California.
14. Lost Warrants or Stock Certificates. The Company represents and
-----------------------------------
warrants to the Holder hereof that upon receipt of, evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation of
any Warrant or stock certificate and, in the case of any such loss, theft or
destruction, upon receipt of an indemnity reasonably satisfactory to the
Company, or in the case of any such mutilation upon surrender and cancellation
of such Warrant or stock certificate, the Company at its expense will make and
deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost,
stolen, destroyed or mutilated Warrant or stock certificate.
15. Fractional Shares. No fractional shares shall be issued upon exercise
-----------------
of this Warrant. The Company shall, in lieu
9
<PAGE>
of issuing any fractional share, pay the holder entitled to such fraction a sum
in cash equal to such fraction multiplied by the then effective Stock Purchase
Price.
17. Representations of Holder. With respect to this Warrant, Holder
-------------------------
represents and warrants to the Company as follows:
17.1 Experience. It is experienced in evaluating and investing in
----------
companies engaged in businesses similar to that of the company; it understands
that investment in the Warrant involves substantial risks; it has made detailed
inquiries concerning the company, its business and services, its officers and
its personnel; the officers of the Company have made available to Holder any and
all written information it has requested; the officers of the Company have
answered to Holder's satisfaction all inquiries made by it; in making this
investment it has relied upon information made available to it by the Company;
and it has such knowledge and experience in financial and business matters that
it is capable of evaluating the merits and risks of investment in the Company
and it is able to bear the economic risk of that investment.
17.2 Investment. It is acquiring the Warrant for investment for its
----------
own account and not with a view to, or for resale in connection with, any
distribution thereof. It understands that the Warrant, the shares of Common
Stock issuable upon exercise thereof, have not been registered under the
Securities Act of 1933, as amended, nor qualified under applicable state
securities laws.
17.3 Rule 144. It acknowledges that the Warrant and the Common Stock
--------
must be held indefinitely unless they are subsequently registered under the
Securities Act or an exemption from such registration is available. It has been
advised or is aware of the provisions of Rule 144 promulgated under the
Securities Act.
17.4 Access to Data. It has had an opportunity to discuss the
--------------
Company's business, management and financial affairs with the Company's
management and has had the opportunity to inspect the Company's facilities.
18. Additional Representations and Covenants of the Company. The Company
-------------------------------------------------------
hereby represents, warrants and agrees as follows:
18.1 Corporate Power. The Company has all requisite corporate power
---------------
and corporate authority to issue this Warrant and to carry out and perform its
obligations hereunder.
10
<PAGE>
18.2 Authorization. All corporate action on the part of the Company,
-------------
its directors and shareholders necessary for the authorization, execution,
delivery and performance by the Company of this has been taken. This Warrant is
a valid and binding obligation of the Company, enforceable in accordance with
its terms.
18.3 Offering. Subject in part to the truth and accuracy of Holder's
--------
representations set forth in Section 17 hereof, the offer, issuance and sale of
the Warrant is, and the issuance of Common Stock upon exercise of the Warrant
will be exempt from the registration requirements of the Securities Act, and are
exempt from the qualification requirements of any applicable state securities
laws; and neither the Company nor anyone acting on its behalf will take any
action hereafter that would cause the loss of such exemptions.
18.4 Stock Issuance. Upon exercise of the warrant, the Company will
--------------
use its best efforts to cause stock certificates representing the shares of
Common Stock purchased pursuant to the exercise to be issued in the individual
names of Holder, its nominees or assignees, as appropriate at the time of such
exercise.
18.5 Articles and By-Laws. The Company has provided Holder with true
--------------------
and complete copies of the Company's Articles or Certificate of Incorporation,
By-Laws, and each Certificate of Determination or other charter document
setting, forth any rights, preferences and privileges of Company's capital
stock, each as amended and in effect on the date of issuance of this Warrant.
18.6 Financial and Other Reports. From time to time up to the earlier
---------------------------
of the Expiration Date or the complete exercise of this Warrant, the Company
shall furnish to Holder (i) within 120 days' after the close of each fiscal year
of the Company an audited balance sheet and statement of changes in financial
position at and as of the end of such fiscal year, together with an audited
statement of income for such fiscal year; (ii) within 45 days after the close of
each fiscal quarter of the Company, an unaudited balance sheet and statement of
cash flows at and as of the end of such quarter, together with an unaudited
statement of income for such quarter; and (iii) promptly after sending, copies
of all reports, proxy statements, and financial statements that the Company
sends to its shareholders.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed
by its officers, thereunto duly, authorized as of this 30th day of January,
1997.
OPTIVISION, INC.
By: /s/ James S. Tyler
---------------------------
James S. Tyler, President
11
<PAGE>
FORM OF SUBSCRIPTION
--------------------
(To be signed only upon exercise of Warrant)
To: _______________________
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, _______________________________________ (_______) (1)
shares of Common stock of ________________________________________________ and
herewith makes payment of __________________________________ Dollars
($___________) therefor, and requests that the certificates for such shares be
issued in the name of, and delivered to, ___________________________________
whose address is_________________________________________.
The undersigned represents that it is acquiring such Common Stock for its
own account for investment and not with a view to or for sale in connection with
any distribution thereof (subject, however, to any requirement of law that the
disposition thereof shall at all times be within its control.
DATED: _____________________________
__________________________________________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant)
__________________________________________________
__________________________________________________
Address
_____________
(1) Insert here the number of shares called for on the face of the Warrant (or,
in the case of a partial exercise, the portion thereof as to which the
Warrant is being exercised), in either case without making any adjustment
for additional Common Stock or any other stock or other securities or
property or cash which, pursuant to the adjustment provisions of the
Warrant, may be deliverable upon exercise.
12
<PAGE>
ASSIGNMENT
----------
FOR VALUE RECEIVED, the undersigned, the holder of the within Warrant,
hereby sells, assigns and transfers all of the rights of the undersigned under
the within Warrant, with respect to the number of shares of Common Stock covered
thereby set forth hereinbelow, unto:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
Dated: _________________________
__________________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant)
13
<PAGE>
EXHIBIT 4.06
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
RELATED THERETO OR AN OPINION OF COUNSEL (WHICH MAY BE COMPANY COUNSEL)
REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES
LAWS.
WARRANT AGREEMENT NO. 1
To Purchase Shares of the Series B Preferred Stock of
OPTICAL NETWORKS, INCORPORATED
Dated as of February 10, 1999 (the "Effective Date")
WHEREAS, Optical Networks, Incorporated, a California corporation (the
"Company") has entered into a Master Lease Agreement dated as of February 10,
1998, Equipment Schedule No. VL-1 and VL-2 dated as of February 10, 1998, and
related Summary Equipment Schedules (collectively, the "Leases") with Comdisco,
Inc., a Delaware corporation (the "Warrantholder"); and
WHEREAS, the Company desires to grant to Warrantholder, in
consideration for such Leases, the right to purchase shares of its Series B
Preferred Stock;
NOW, THEREFORE, in consideration of the Warrantholder executing and
delivering such Leases and in consideration of mutual covenants and agreements
contained herein, the Company and Warrantholder agree as follows:
1. GRANT OF THE RIGHT TO PURCHASE PREFERRED STOCK
----------------------------------------------
The Company hereby grants to the Warrantholder, and the Warrantholder is
entitled, upon the terms and subject to the conditions hereinafter set forth, to
subscribe to and purchase, from the Company, 51,046 fully paid and non-
assessable shares of the Company's Series B Preferred Stock ("Preferred Stock")
at a purchase price of $1.1754 per share (the "Exercise Price"). The number and
purchase price of such shares are subject to adjustment as provided in Section 8
hereof.
If all of the Company's outstanding Preferred Stock is converted into
shares of Common Stock in connection with the registration of the Company's
Common Stock under the Securities Act of 1933, as amended, or otherwise in
accordance with the terms of the Company's Amended and Restated Articles of
Incorporation, then this Warrant shall automatically become exercisable for that
number of shares of Common Stock equal to the number of shares of Common Stock
that would have been received if this Warrant had been exercised in full and the
shares of Preferred Stock received thereupon had been simultaneously converted
into Common Stock immediately prior to such event, and the Exercise Price shall
be automatically adjusted to equal the amount obtained by dividing (1) the
aggregate Exercise Price of the shares of Preferred Stock for which this Warrant
was exercisable immediately prior to such conversion, by (ii) the number of
shares of Common Stock for which this Warrant is exercisable immediately after
such conversion. The shares of Preferred Stock or Common Stock subject to this
Warrant, as the case may be, are sometimes referred to herein as "Warrant
Stock."
2. TERM OF THE WARRANT AGREEMENT.
-----------------------------
Except as otherwise provided for herein, the term of this Warrant Agreement
and the right to purchase Preferred Stock as granted herein shall commence on
the Effective Date and shall be exercisable for a period of (i) ten (10) years
or (ii) five (5) years from the effective date of the Company's initial public
offering, whichever is shorter.
Notwithstanding the term of this Warrant Agreement as set forth above, the
right to purchase Preferred Stock as granted shall expire, if not previously
exercised, immediately upon the closing of (i) the issuance and sale of shares
of Common Stock of the Company in the Company's first public offering of
securities for its own account pursuant to an effective registration statement
under the Securities Act of 1933, as amended (the "Initial Public Offering"),
provided that the net proceeds to the Company exceed $10,000,000, and provided
further that the Warrantholder is afforded an opportunity to include Registrable
Securities issuable upon exercise hereof in such Initial Public Offering in
accordance with the terms of the Company's Investors' Rights Agreement or (ii) a
merger of consolidation of the Company with or into another corporation when the
Company is not the surviving corporation, or
1
<PAGE>
the sale of all or substantially all of the Company's properties and assets to
any other person (the "Merger"), provided that the holders of Warrantholder
realizes a value for its shares of Preferred Stock issuable hereunder receive
consideration with a value equal to or greater than $2.35 per share in such
Merger. The Company shall notify the Warrantholder if the Initial Public
Offering is proposed within a reasonable period of time prior to the filing of a
registration statement and if the Company fails to deliver such written notice
within a reasonable period of time, anything to the contrary in this Warrant
Agreement notwithstanding, the rights to purchase will not expire until ten (10)
business days after the Company delivers such notice to the Warrantholder. Such
notice shall also contain such details of the proposed Initial Public Offering
or Merger as are reasonable in the circumstances and notice that this Warrant
Agreement is expected to expire upon closing thereof.
3. EXERCISE OF THE PURCHASE RIGHTS.
-------------------------------
The purchase rights set forth in this Warrant Agreement are exercisable by
the Warrantholder, in whole or in part, at any time, or from time to time, prior
to the expiration of the term set forth in Section 2 above, by tendering to the
Company at its principal office a notice of exercise in the form attached hereto
as Exhibit I (the "Notice of Exercise"), duly completed and executed. Promptly
upon receipt of the Notice of Exercise and the payment of the purchase price in
accordance with the terms set forth below, and in no event later than twenty-one
(21) days thereafter, the Company shall issue to the Warrantholder a certificate
for the number of shares of Preferred Stock purchased and shall execute the
acknowledgment of exercise in the form attached hereto as Exhibit II (the
"Acknowledgment of Exercise") indicating the number of shares which remain
subject to future purchases, if any.
The Exercise Price may be paid at the Warrantholder's election either (i)
by cash or check, or (ii) by surrender of Warrants ("Net Issuance") as
determined below. If the Warrantholder elects the Net Issuance method, the
Company will issue Warrant Stock in accordance with the following formula:
X = Y(A-B)
------
A
Where: X = the number of shares of Warrant Stock to be issued to
the Warrantholder.
Y = the number of shares of Warrant Stock requested to be
exercised under this Warrant Agreement.
A = the fair market value of one (1) share of Warrant
Stock.
B = the Exercise Price.
For purposes of the above calculation, current fair market value of Warrant
Stock shall mean with respect to each share of Warrant Stock:
(i) if the exercise is in connection with an initial public
offering of the Company's Common Stock, and if the Company's Registration
Statement relating to such public offering has been declared effective by
the SEC, then the fair market value per share shall be the product of (x)
the initial "Price to Public" specified in the final prospectus with
respect to the offering and (y) the number of shares of Common Stack into
which each share of Preferred Stock is convertible at the time of such
exercise;
(ii) if this Warrant is exercised after, and not in connection
with the Company's initial public offering, and:
(a) if traded on a securities exchange, the fair market
value shall be deemed to be the average of the closing prices over a
twenty-one (21) day period ending three days before the day the
current fair market value of the securities is being determined; or
(b) if actively traded over-the-counter, the fair market
value shall be deemed to be the average of the closing bid and asked
prices quoted on the NASDAQ system (or similar system) over the
twenty-one (21) day period ending three days before the day the
current fair market value of the securities is being determined;
(iii) if at any time the Common Stock is not listed on any
securities exchange or quoted in the NASDAQ System or the over-the-counter
market, the current fair market value of Warrant Stock shall be the highest
price per share which the Company could obtain from a willing buyer (not a
current employee or director) for shares of Warrant Stock sold by the
Company, from authorized but unissued shares, as determined in good faith
by its Board of Directors , unless the Company shall become subject to a
merger, acquisition or other consolidation pursuant to which the Company is
not the surviving party, in which case
2
<PAGE>
the fair market value of Warrant Stock shall be deemed to be the value
received by the holders of such Warrant Stock on a common equivalent basis
pursuant to such merger or acquisition.
Upon partial exercise by either cash or Net Issuance, the Company shall
promptly issue an amended Warrant Agreement representing the remaining number of
shares purchasable hereunder. All other terms and conditions of such amended
Warrant Agreement shall be identical to those contained herein, including, but
not limited to the Effective Date hereof.
4. RESERVATION OF SHARES.
---------------------
Authorization and Reservation of Shares. During the term of this Warrant
---------------------------------------
Agreement, the Company will at all times have authorized and reserved a
sufficient number of shares of Warrant Stock to provide for the exercise of the
rights to purchase Warrant Stock as provided for herein.
5. NO FRACTIONAL SHARES OR SCRIP.
-----------------------------
No fractional shares or scrip representing fractional shares shall be
issued upon the exercise of the Warrant, but in lieu of such fractional shares
the Company shall make a cash payment therefor upon the basis of the Exercise
Price then in effect.
6. NO RIGHTS AS SHAREHOLDER.
------------------------
This Warrant Agreement does not entitle the Warrantholder to any voting
rights or other rights as a shareholder of the Company prior to the exercise of
the Warrant.
7. WARRANTHOLDER REGISTRY.
----------------------
The Company shall maintain a registry showing the name and address of the
registered holder of this Warrant Agreement.
8. ADJUSTMENT RIGHTS.
-----------------
The purchase price per share and the number of shares of Preferred Stock
purchasable hereunder are subject to adjustment, as follows:
(a) Mercer and Sale of Assets. If at any time there shall be a capital
-------------------------
reorganization of the shares of the Company's stock (other than a combination,
reclassification, exchange or subdivision of shares otherwise provided for
herein), or a merger or consolidation of the Company with or into another
corporation whether or not the Company is the surviving corporation, or the sale
of all or substantially all of the Company's properties and assets to any other
person, other than as defined in Section 2 hereof (hereinafter referred to as a
"Merger Event"), then as a part of such Merger Event, lawful provision shall be
made so that the Warrantholder shall thereafter be entitled to receive, upon
exercise of the Warrant, the number of shares of preferred stock or other
securities of the successor corporation resulting from such Merger Event,
equivalent in value to that which would have been issuable if Warrantholder had
exercised this Warrant immediately prior to the Merger Event. In any such case,
appropriate adjustment (as determined in good faith by the Company's Board of
Directors) shall be made in the application of the provisions of this Warrant
Agreement with respect to the rights and interest of the Warrantholder after the
Merger Event to the end that the provisions of this Warrant Agreement (including
adjustments of the Exercise Price and number of shares of Preferred Stock
purchasable) shall be applicable to the greatest extent possible.
(b) Reclassification of Shares. If the Company at any time shall, by
--------------------------
combination, reclassification, exchange or subdivision of securities or
otherwise, change any of the securities as to which purchase rights under this
Warrant Agreement exist into the same or a different number of securities of any
other class or classes, this Warrant Agreement shall thereafter represent the
right to acquire such number and kind of securities as would have been issuable
as the result of such change with respect to the securities which were subject
to the purchase rights under this Warrant Agreement immediately prior to such
combination, reclassification, exchange, subdivision or other change.
(c) Subdivision or Combination of Shares. If the Company at any time shall
------------------------------------
combine or subdivide its Warrant Stock, the Exercise Price shall be
proportionately decreased in the case of a subdivision, or proportionately
increased in the case of a combination.
(d) Stock Dividends. If the Company at any time shall pay a dividend
---------------
payable in, or make any other distribution (except any distribution specifically
provided for in the foregoing subsections (a) or (b)) of the Company's capital
stock to the holders of outstanding shares of the Company's Warrant Stock, then
the Warrantholder shall,
3
<PAGE>
upon exercise of this Warrant, be entitled to receive, in addition to the number
of shares of Warrant Stock receivable thereupon, and without payment of any
additional consideration therefore, the amount of the Company's capital stock
which would have been issuable to such Warrantholder if Warrantholder had
exercised this Warrant immediately prior to the date on which holders of Warrant
Stock received such dividend or distribution of the Company's capital stock.
(e) Right to Purchase Additional Stock. If, the Warrantholder's total cost
----------------------------------
of equipment leased pursuant to the Leases exceeds $1,500,000.00, Warrantholder
shall have the right to purchase from the Company, at the Exercise Price
(adjusted as set forth herein), an additional number of shares, which number
shall be determined by (i) multiplying the amount by which the Warrantholder's
total equipment cost exceeds $1,500,000.00 by 4%, and (ii) dividing the product
thereof by the Exercise Price per share referenced above.
(f) Antidilution Rights. Shares of Preferred Stock issuable upon exercise
-------------------
of this Warrant shall be entitled, with respect to such issuance or sale, to the
same antidilution benefits then applicable to other shares of the Preferred
Stock as set forth in its Company's Amended and Restated Articles of
Incorporation (the "Charter") as amended through the time of such issue or sale.
A copy of the Charter as currently in effect has been delivered to the
Warrantholder. The Company shall promptly provide the Warrantholder with any
restatement, amendment, modification or waiver of the Charter. Notwithstanding
anything herein to the contrary, no adjustment to the Exercise Price or the
number and character of securities issuable upon exercise of this Warrant shall
be made by virtue of this Section 8 to the extent that such adjustment is
effected (by adjusting the conversion price of the Preferred Stock or otherwise)
in accordance with the terms of the Charter. The Company will provide notice to
Warrantholder of any such adjustments in accordance with the terms of the
Charter (assuming, solely for purposes of such notice, that Warrantholder was
currently a holder of the shares of Warrant Stock then issuable upon an exercise
of this Warrant).
(g) Notice of Adjustments. If: (i) the Company shall declare any dividend
---------------------
or distribution upon its stock, whether in cash, property, stock or other
securities (excluding any dividend or distribution for which an adjustment will
be made pursuant to Section 8(d)); (ii) the Company shall offer for subscription
prorata to the holders of any class of its Preferred or other convertible stock
any additional shares of stock of any class or other rights; (iii) there shall
be any Merger Event; or (iv) there shall be any voluntary dissolution,
liquidation or winding up of the Company; then, in connection with each such
event, the Company shall send to the Warrantholder (A) at least twenty (20)
days' prior written notice of the date on which the books of the Company shall
close or a record shall be taken for such dividend, distribution, subscription
rights (specifying the date on which the holders of Preferred Stock shall be
entitled thereto) or for determining rights to vote in respect of such Merger
Event, dissolution, liquidation or winding up; (B) in the case of any such
Merger Event, dissolution, liquidation or winding up, at least twenty (20) days'
prior written notice of the date when the same shall take place (and specifying
the date on which the holders of Preferred Stock shall be entitled to exchange
their Preferred Stock for securities or other property deliverable upon such
Merger Event, dissolution, liquidation or winding up).
Promptly following any adjustment to the Exercise Price or the number and
character of securities issuable upon exercise of this Warrant effected pursuant
to this Section 8, the Company shall provide written notice of such adjustment
to the Warrantholder. Each such written notice shall set forth, in reasonable
detail, (i) the event requiring the adjustment, (ii) the amount of the
adjustment, (iii) the method by which such adjustment was calculated, (iv) the
Exercise Price, and (v) the number of shares subject to purchase hereunder after
giving effect to such adjustment, and shall be given by first class mail,
postage prepaid, addressed to the Warrantholder, at the address as shown on the
books of the Company.
(h) Timely Notice. Failure to timely provide such notice required by
-------------
subsection (g) above shall entitle Warrantholder to retain the benefit of the
applicable notice period notwithstanding anything to the contrary contained in
any insufficient notice received by Warrantholder. The notice period shall
begin on the date Warrantholder actually receives a written notice containing
all the information specified above.
9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY.
--------------------------------------------------------
(a) Reservation of Preferred Stock. The Preferred Stock issuable upon
------------------------------
exercise of the Warrantholder's rights has been duly and validly reserved and,
when issued in accordance with the provisions of this Warrant Agreement, will be
validly issued, fully paid and non-assessable, and will be free of any taxes,
liens, charges or encumbrances of any nature whatsoever (other than any created
by Warrantholder); provided, however, that the Warrant Stock issuable pursuant
to this Warrant Agreement may be subject to restrictions on transfer under state
and/or Federal securities laws. The Company has made available to the
Warrantholder true, correct and complete copies of its Charter and Bylaws, as
amended. The issuance of certificates for shares of Warrant Stock upon exercise
of the Warrant Agreement shall be made without charge to the Warrantholder for
any issuance tax in respect thereof, or other cost incurred by the Company in
connection with such exercise and the related issuance of
4
<PAGE>
shares of Warrant Stock. The Company shall not be required to pay any tax which
may be payable in respect of any transfer involved and the issuance and delivery
of any certificate in a name other than that of the Warrantholder.
(b) Due Authority. The execution and delivery by the Company of this
-------------
Warrant Agreement and the performance of all obligations of the Company
hereunder, including the issuance to Warrantholder of the right to acquire the
shares of Warrant Stock, have been duly authorized by all necessary corporate
action on the part of the Company, and the Leases and this Warrant Agreement are
not inconsistent with the Company's Charter or Bylaws, do not contravene any law
or governmental rule, regulation or order applicable to it, do not and will not
contravene any provision of, or constitute a material default under, any
material indenture, mortgage, contract or other instrument to which it is a
party or by which it is bound, and the Leases and this Warrant Agreement
constitute legal, valid and binding agreements of the Company, enforceable in
accordance with their respective terms.
(c) Consents and Approvals. No consent or approval of, giving of notice
----------------------
to, registration with, or taking of any other action in respect of any state,
Federal or other governmental authority or agency is required with respect to
the execution, delivery and performance by the Company of its obligations under
this Warrant Agreement, except for the filing of notices pursuant to Regulation
D under the 1933 Act and any filing required by applicable state securities law,
which filings will be effective by the time required thereby.
(d) Issued Securities. All issued and outstanding shares of Common Stock,
-----------------
Preferred Stock or any other securities of the Company have been duly authorized
and validly issued and are fully paid and nonassessable. All outstanding shares
of Common Stock, Preferred Stock and any other securities were issued in full
compliance with all Federal and state securities laws. In addition:
(i) The authorized capital stock of the Company consists of (A)
20,000,000 shares of Common Stock, of which 4,330,812 shares are issued and
outstanding, and (B) 23,190,000 shares of Preferred Stock consisting of
19,840,000 shares designated as Series B Preferred Stock, of which
18,596,631 shares are issued and outstanding and are currently convertible
into an aggregate of 6,198,876 shares of Common Stock, 2,050,000 shares
designated as Series C Preferred Stock, all of which are issued and
outstanding and are currently convertible into an aggregate of 683,334
shares of Common Stock, 1,300,000 shares designated Series D Preferred
Stock, of which 1,242,287 shares are issued and outstanding and are
currently convertible into an aggregate of 1,242,287 shares of Common Stock
and 6,850,000 shares designated Series E Preferred Stock, of which
5,562,100 are issued and outstanding.
(ii) The Company has reserved (A) 783,560 shares of Common Stock under
its 1997 Stock Option Plan and (B) 2,601,901 shares of Common Stock under
its 1998 Equity Incentive Plan. Except for (i) 22,222 shares of Common
Stock issuable to Venture Lending & Leasing, Inc. ("VLLI"), in respect of
Section 4.2(c) of that certain warrant issued to VLLI on January 30, 1997
and 36,144 shares of Common Stock issuable to VLLI in respect of Section
4.2(c) of that certain warrant also issued to VLLI on January 30, 1997,
(ii) the conversion privileges of the Series B Preferred, the Series C
Preferred and the Series D Preferred, (iii) the shares of Common Stock
reserved for issuance under the Company's 1997 Stock Option Plan and 1998
Equity Incentive Plan, (iv) the right of first offer provided in Section 3
of that certain Investors' Rights Agreement dated April 1, 1998 by and
among the Company and the persons and entities listed on Exhibit A thereto,
and (v) the right of first refusal in Section 8.7 of the Bylaws of the
Company with respect to transfers of shares of the company's capital stock,
there are no other options, warrants, conversion privileges, or preemptive
or other rights or agreements presently outstanding to purchase or
otherwise acquire any authorized but unissued shares of the capital stock
or other securities of the Company.
(e) Insurance. The Company has in full force and effect insurance
---------
policies, with extended coverage, insuring the Company and its property and
business against such losses and risks, and in such amounts, as are customary
for corporations engaged in a similar business and similarly situated and as
otherwise may be required pursuant to the terms of any other contract or
agreement.
(f) Other Commitments to Register Securities. Except as set forth in the
----------------------------------------
Company's Investors' Rights Agreement as amended, a copy of which has been
provided to Warrantholder , the Company is not, pursuant to the terms of any
other agreement currently in existence, under any obligation to register under
the 1933 Act any of its presently outstanding securities or any of its
securities which may hereafter be issued.
(g) Exempt Transaction. Subject to the accuracy of the Warrantholder's
------------------
representations in Section 10 hereof, the issuance of the Preferred Stock upon
exercise of this Warrant will constitute a transaction exempt from (i) the
registration requirements of Section 5 of the 1933 Act, in reliance upon Section
4(2) thereof, and (ii) the qualification requirements of the applicable state
securities laws.
5
<PAGE>
(h) Compliance with Rule 144. At the written request of the Warrantholder,
------------------------
who proposes to sell Preferred Stock issuable upon the exercise of the Warrant
in compliance with Rule 144 promulgated by the Securities and Exchange
Commission, the Company shall furnish to the Warrantholder, within ten days
after receipt of such request, a written statement confirming the Company's
compliance with the filing requirements of the Securities and Exchange
Commission as set forth in such Rule, as such Rule may be amended from time to
time.
10. REPRESENTATIONS AND COVENANTS OF THE WARRANTHOLDER.
--------------------------------------------------
This Warrant Agreement has been entered into by the Company in reliance
upon the following representations and covenants of the Warrantholder:
(a) Investment Purpose. Each of the right to acquire the Warrant Stock
------------------
issuable upon exercise of the Warrantholder's rights contained herein, the
Warrant Stock and any securities issuable upon any conversion of the Warrant
Stock (collectively, the "Warrant Securities"), is and will be acquired for
investment for Warrantholder's own account and not with a view to the sale or
distribution of any part thereof. The Warrantholder has no present intention of
selling or engaging in any public distribution of the same except pursuant to a
registration or exemption.
(b) Private Issue. The Warrantholder understands (i) that the Warrant
-------------
Securities are not registered under the 1933 Act or qualified under applicable
state securities laws on the ground that the issuance contemplated by this
Warrant Agreement will be exempt from the registration and qualifications
requirements thereof, and (ii) that the Company's reliance on such exemption is
predicated on the representations set forth in this Section 10. At no time was
Warrantholder 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 Warrant
Securities.
(c) Disposition of Warrantholder's Rights. In no event will the
-------------------------------------
Warrantholder make a disposition of any of the Warrant Securities unless and
until (i) it shall have notified the Company of the proposed disposition, and
(ii) if requested by the Company, it shall have furnished the Company with an
opinion of counsel (which counsel may either be inside or outside counsel to the
Warrantholder) satisfactory to the Company and its counsel to the effect that
(A) appropriate action necessary for compliance with the 1933 Act has been
taken, or (B) an exemption from the registration requirements of the 1933 Act is
available. Notwithstanding the foregoing, the restrictions imposed upon the
Warrant Securities do not apply to transfers from the beneficial owner of any of
the aforementioned securities to its nominee or from such nominee to its
beneficial owner, and shall terminate as to any particular Warrant Security when
(1) such security shall have been effectively registered under the 1933 Act and
sold by the holder thereof in accordance with such registration or (2) such
security shall have been sold without registration in compliance with Rule 144
under the 1933 Act, or (3) a letter shall have been issued to the Warrantholder
at its request by the staff of the Securities and Exchange Commission or a
ruling shall have been issued to the Warrantholder at its request by such
Commission stating that no action shall be recommended by such staff or taken by
such Commission, as the case may be, if such security is transferred without
registration under the 1933 Act in accordance with the conditions set forth in
such letter or ruling and such letter or ruling specifies that no subsequent
restrictions on transfer are required. Whenever the restrictions imposed
hereunder shall terminate, as hereinabove provided, the Warrantholder or holder
of Warrant Securities then outstanding as to which such restrictions have
terminated shall be entitled to receive from the Company, without expense to
such holder, one or more new certificates for the Warrant or Warrant Securities
not bearing any restrictive legend.
(d) Financial Risk. The Warrantholder has such knowledge and experience in
--------------
financial and business matters as to be capable of evaluating the merits and
risks of its investment, and has the ability to bear the economic risks of its
investment, and has the capacity to protect its own interests in connection with
the purchase of the Warrant Securities.
(e) Risk of No Registration. The Warrantholder understands that if the
-----------------------
Company does not register with the Securities and Exchange Commission pursuant
to Section 12 of the
6
<PAGE>
1934 Act (the "1934 Act"), or file reports pursuant to Section 15(d), of the
1934 Act, or if a registration statement covering the securities under the 1933
Act is not in effect when it desires to sell Warrant Securities, it may be
required to hold such securities for an indefinite period. The Warrantholder
also understands that any sale of Warrant Securities which might be made by it
in reliance upon Rule 144 under the 1933 Act may be made only in accordance with
the terms and conditions of that Rule.
(f) Accredited Investor. Warrantholder is an "accredited investor" within
-------------------
the meaning of the Securities and Exchange Rule 501 of Regulation D, as
presently in effect.
11. REQUESTS FOR REGISTRATION.
-------------------------
The Company and the initial Warrantholder will enter into an Amendment to
Investors' Rights Agreement in the form attached hereto as Exhibit IV to provide
the initial Warrantholder with certain registration rights in accordance with
the terms of the Company's existing Investors' Rights Agreement.
12. TRANSFERS.
---------
Subject to the terms and conditions contained in Section 10 hereof, this
Warrant Agreement and all rights hereunder are transferable in whole or in part
by the Warrantholder and any successor transferee, provided, however, in no
event shall the number of transfers of the rights and interests in all of the
Warrants exceed three (3) transfers. The transfer shall be recorded on the
books of the Company upon receipt by the Company of a notice of transfer in the
form attached hereto as Exhibit III (the "Transfer Notice") together with
representations to the Company from the transferee in form reasonably acceptable
to the Company and in substance similar to the representations made by
Warrantholder in Section 10, at its principal offices and the payment to the
Company of all transfer taxes and other governmental charges imposed on such
transfer.
13. MISCELLANEOUS.
-------------
(a) Effective Date. The provisions of this Warrant Agreement shall be
--------------
construed and shall be given effect in all respects as if it had been executed
and delivered by the Company on the date hereof. This Warrant Agreement shall
be binding upon any successors or assigns of the Company.
(b) Attorney's Fees. In any litigation, arbitration or court proceeding
---------------
between the Company and the Warrantholder relating hereto, the prevailing party
shall be entitled to attorneys' fees and expenses and all costs of proceedings
incurred in enforcing this Warrant Agreement.
(c) Governing Law. This Warrant Agreement shall be governed by and
-------------
construed for all purposes under and in accordance with the laws of the State of
California.
(d) Counterparts. This Warrant Agreement 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.
(e) Notices. Any notice required or permitted hereunder shall be given in
-------
writing and shall be deemed effectively given upon personal delivery, facsimile
transmission (provided that the original is sent by personal delivery or mail as
hereinafter set forth) or seven (7) days after deposit in the United States
mail, by registered or certified mail, addressed (i) to the Warrantholder at
6111 North River Road, Rosemont, Illinois 60018, Attention: Venture Lease
Administration, cc: Legal Department, Attention: General Counsel, (and/or, if by
facsimile, (847) 518 5465 and (847) 518-5088) and (ii) to the Company at 166-B
Baypointe Parkway, San Jose, California 95134, Attention: Chief Financial
Officer, cc: Mark C. Stevens, Esq., Fenwick & West LLP, Two Palo Alto Square,
Palo Alto, California 94306 (and/or if by facsimile, (408) 965-2665 and (650)
494-1417 or at such other address as any such party may subsequently designate
by written notice to the other party.
(f) Remedies. In the event of any default hereunder, the non-defaulting
--------
party may proceed to protect and enforce its rights either by suit in equity
and/or by action at law, including but not limited to an action for damages as a
result of any such default, and/or an action for specific performance for any
default where Warrantholder will not have an adequate remedy at law and where
damages will not be readily ascertainable.
(g) No Impairment of Rights. The Company will not 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 actions as may be necessary or appropriate in order to
protect the rights of the Warrantholder against impairment.
(h) Survival. The representations, warranties, covenants and conditions of
--------
the respective parties contained herein or made pursuant to this Warrant
Agreement shall survive the execution and delivery of this Warrant Agreement
(i) Severability. In the event any one or more of the provisions of this
------------
Warrant Agreement shall for any reason be held invalid, illegal or
unenforceable, the remaining provisions of this Warrant Agreement shall be
unimpaired, and the invalid, illegal or unenforceable provision shall be
replaced by a mutually acceptable valid, legal and enforceable provision, which
comes closest to the intention of the parties underlying the invalid, illegal or
unenforceable provision.
7
<PAGE>
(j) Amendments. Any provision of this Warrant Agreement may be amended by
----------
a written instrument signed by the Company and by the Warrantholder.
IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement to
be executed by its officers thereunto duly authorized as of the Effective Date.
Company: OPTICAL NETWORKS, INCORPORATED
By: /s/ Terrence J. Schmid
----------------------------
Title: CFO
-------------------------
Warrantholder: COMDISCO, INC.
By: /s/ James P. Labe
----------------------------
Title: President, Comdisco Ventures Division
8
<PAGE>
EXHIBIT 4.07
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT THESE
SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
RELATED THERETO OR AN OPINION OF COUNSEL (WHICH MAY BE COMPANY COUNSEL)
REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES
LAWS.
WARRANT AGREEMENT NO. 2
To Purchase Shares of the Series B Preferred of
OPTICAL NETWORKS, INCORPORATED
Dated as of February 10, 1999 ( the "Effective Date")
WHEREAS, Optical Networks, Incorporated, a California corporation (the
"Company") has entered into a Subordinated Loan and Security Agreement dated as
of February 10, 1999, and related Subordinated Promissory Note(s) (collectively,
the "Subordinated Loan Documents") with Comdiso, Inc., a Delaware corporation
(the "Warrantholder"); and
WHEREAS, the Company desires to grant Warrantholder, in consideration for
such Subordinated Loan Documents, the right to purchase shares of its Series B
Preferred Stock;
NOW, THEREFORE, in consideration of the Warrantholder executing and
delivering such Subordinated Loan Documents and in consideration of mutual
covenants and agreements contained herein, the Company and Warrantholder agree
as follows:
1. GRANT OF THE RIGHT TO PURCHASE PREFERRED STOCK.
----------------------------------------------
The Company hereby grants Warrantholder, and the Warrantholder is entitled,
upon the terms and subject to the conditions hereinafter set forth, to subscribe
to and purchase, from the Company, 89,337 fully paid and non-assessable shares
of the Company's Series B Preferred Stock ("Preferred Stock") at a purchase
price of $1.1754 per share (the "Exercise Price"). The number and purchase price
of such shares are subject to adjustment as provided in Section 8 hereof.
If all of the Company's outstanding Preferred Stock is converted into
shares of Common Stock in connection with the registration of the Company's
Common Stock under the Securities Act of 1933, as amended, or otherwise in
accordance with the terms of the Company's Amended and Restated Articles of
Incorporation, then this Warrant shall automatically become exercisable for that
number of shares of Common Stock equal to the number of shares of Common Stock
that would have been received if this Warrant had been exercised in full and the
shares of Preferred Stock received thereupon had been simultaneously converted
in Common Stock immediately prior to such even, and the Exercise Price shall be
automatically adjusted to equal the amount obtained by dividing (i) the
aggregated Exercise Price of the shares of Preferred Stock for which this
Warrant was exercisable immediately prior to such conversion, by (ii) the number
of shares of Common Stock for which this Warrant is exercisable immediately
after such conversion. The shares of Preferred Stock or Common Stock subject to
this Warrant, as the case may be, are sometimes referred to herein as "Warrant
Stock".
2. TERM OF THE WARRANT AGREEMENT.
-----------------------------
Except as otherwise provided for herein, the term of this Warrant Agreement
and the right to purchase Preferred Stock as granted herein shall commence on
the Effective Date and shall be exercisable for a period of (i) ten (10) years
or (ii) five (5) years from the effective date of the Company's initial public
offering, whichever is shorter.
Notwithstanding the terms of this Warrant Agreement as set forth above, the
right to purchase Preferred Stock as granted shall expire, if not previously
exercised, immediately upon the closing of (i) the issuance and sale of shares
of Common Stock of the Company in the Company's first public offering of
securities for its own account pursuant to an effective registration statement
under the Securities Act of 1933, as amended (the "Initial Public Offering"),
provided that the net proceeds to the Company exceed $10,000,000, and provided
further that the Warrantholder is afforded an opportunity to include Registrable
Securities issuable upon exercise hereof in such Initial Public Offering in
accordance with the terms of the Company's Investors' Rights Agreement or (ii) a
merger of consolidation of the Company with or into another corporation when the
Company is not the surviving corporation, or
1
<PAGE>
the sale of all or substantially all of the Company's properties and assets to
any other person (the "Merger"), provided that the holders of Warrantholder
realizes a value for its shares of Preferred Stock issuable hereunder receive
consideration with a value equal to or greater than $2.35 per share in such
Merger. The Company shall notify the Warrantholder if the Initial Public
Offering is proposed with a reasonable period of time prior to the filing of a
registration statement and if the Company fails to deliver such written notice
within a reasonable period of time, anything to the contrary in this Warrant
Agreement notwithstanding, the rights to purchase will not expire until ten (10)
business days after the Company delivers such notice to the Warrantholder. Such
notice shall also contain such details of the proposed Initial Public Offering
or Merger as are reasonable in the circumstances and notice that this Warrant
Agreement is expected to expire upon closing thereof.
3. EXERCISE OF THE PURCHASE RIGHTS.
-------------------------------
The purchase rights set forth in this Warrant Agreement are exercisable by
the Warrantholder, in whole or in part, at any time, or from time to time, prior
to the expiration of the term set forth in Section 2 above, by tendering to the
Company at its principal office a notice of exercise in the form attached hereto
as Exhibit 1 (the "Notice of Exercise"), duly completed and executed. Promptly
upon receipt of the Notice of Exercise and the payment of the purchase price in
accordance with the terms set forth below, and in no event later than twenty-one
(21) days thereafter, the Company shall issue to the Warrantholder a certificate
for the number of shares of Preferred Stock purchased and shall execute the
acknowledgment of exercise in the form attached hereto as Exhibit II (the
"Acknowledgment of Exercise") indicating the number of shares which remain
subject to future purchases, if any.
The Exercise Price may be paid at Warrantholder's election either (i) by
cash or check, or (ii) by surrender of Warrants ("Net Issuance") as determined
below. If the Warrantholder elects the Net Issuance method, the Company will
issue Warrant Stock in accordance with the following formula:
X = Y(A-B)
------
A
Where: X = the number of shares of Warrant Stock to be issued to the
Warrantholder.
Y = the number of shares of Warrant Stock requested to be
exercised under this Warrant Agreement.
A = the fair market value of one (1) share of Warrant Stock.
B = the Exercise Price.
For purposes of the above calculation, the current fair market value of the
Warrant Stock shall mean with respect to each share of Warrant Stock:
(i) if this exercise is in connection with an initial public
offering of the Company's Common Stock, and if the Company's Registration
Statement relating to such public offering has been declared effective by
the SEC, then the fair market value per share shall be the product of (x)
the initial "Price to Public" specified in the final prospectus with
respect to the offering and (y) the number of shares Common Stock into
which each share of Preferred Stock is convertible at the time of such
exercise;
(ii) if this Warrant is exercised after, and not in connection with
the Company's initial public offering, and:
(a) if traded on a securities exchange, the fair market value
shall be deemed to be the average of the closing prices over a twenty-
one (21) day period ending three days before the day the current fair
market value of the securities is being determined; or
(b) if actively traded over-the-counter, the fair market value
shall be deemed to be the average of the closing bid and asked prices
quoted on the NASDAQ system (or similar system) over the twenty-one
(21) day period ending three days before the day the current fair
market value of the securities is being determined;
(iii) if at any time the Common Stock is not listed on any securities
exchange or quoted in the NASDAQ System or the over-the-counter market, the
current fair market value of Warrant Stock shall be the highest price per
share which the Company could obtain from a willing buyer (not a current
employee or director) for shares of Warrant Stock sold by the Company, from
authorized but unissued shares, as determined in good faith by its Board of
Directors, unless the Company shall become subject to a merger acquisition
or other consolidation pursuant to which the Company is not the surviving
party, in which case
2
<PAGE>
the fair market value of Warrant Stock shall be deemed to be the value
received by the holders of such Warrant Stock on a common equivalent basis
pursuant to such merger or acquisition.
Upon partial exercise by either cash or Net Issuance, the Company shall
promptly issue an amended Warrant Agreement representing the remaining number of
shares purchasable hereunder. All other terms and conditions of such amended
Warrant Agreement shall be identical to those contained herein, including, but
not limited to the Effective Date hereof.
4. RESERVATION OF SHARES.
---------------------
Authorization and Reservation of Shares. During the term of this Warrant
---------------------------------------
Agreement, the Company will at all times have authorized and reserved a
sufficient number of shares of Warrant Stock to provide for the exercise of the
rights to purchase Warrant Stock as provided for herein.
5. NO FRACTIONAL SHARES OR SCRIP.
-----------------------------
No fractional shares or scrip representing fractional shares shall be
issued upon the exercise of the Warrant, but in lieu of such fractional shares
the Company shall make a cash payment therefor upon the basis of the Exercise
Price then in effect
6. NO RIGHTS AS SHAREHOLDER.
------------------------
This Warrant Agreement does not entitle the Warrantholder to any voting
rights or other rights as a shareholder of the Company prior to the exercise of
the Warrant.
7. WARRANTHOLDER REGISTRY.
----------------------
The Company shall maintain a registry showing the name and address of the
registered holder of this Warrant Agreement.
8. ADJUSTMENT RIGHTS.
-----------------
The purchase price per share and the number of shares of Preferred Stock
purchasable hereunder are subject to adjustment, as follows:
(a) Mercer and Sale of Assets. If at any time there shall be a capital
-------------------------
reorganization of the shares of the Company's stock (other than a combination,
reclassification, exchange or subdivision of shares otherwise provided for
herein), or a merger or consolidation of the Company with or into another
corporation whether or not the Company is the surviving corporation, or the sale
of all or substantially all of the Company's properties and assets to any other
person, other than as defined in Section 2 hereof (hereinafter referred to as a
"Merger Event"), then, as a part of such Merger Event, lawful provision shall be
made so that the Warrantholder shall thereafter be entitled to receive, upon
exercise of the Warrant, the number of shares of preferred stock or other
securities of the successor corporation resulting from such Merger Event,
equivalent in value to that which would have been issuable if Warrantholder had
exercised this Warrant immediately prior to the Merger Event. In any such case,
appropriate adjustment (as determined in good faith by the Company's Board of
Directors) shall be made in the application of the provisions of this Warrant
Agreement with respect to the rights and interest of the Warrantholder after the
Merger Event to the end that the provisions of this Warrant Agreement (including
adjustments of the Exercise Price and number of shares of Preferred Stock
purchasable) shall be applicable to the greatest extent possible.
(b) Reclassification of Shares. If the Company at any time shall, by
--------------------------
combination, reclassification, exchange or subdivision of securities or
otherwise, change any of the securities as to which purchase rights under this
Warrant Agreement exist into the same or a different number of securities of any
other class or classes, this Warrant Agreement shall thereafter represent the
right to acquire such number and kind of securities as would have been issuable
as the result of such change with respect to the securities which were subject
to the purchase rights under this Warrant Agreement immediately prior to such
combination, reclassification, exchange, subdivision or other change.
(c) Subdivision or Combination of Shares. If the Company at any time shall
------------------------------------
combine or subdivide its Warrant Stock, the Exercise Price shall be
proportionately decreased in the case of a subdivision, or proportionately
increased in the case of a combination.
(d) Stock Dividends. If the Company at any time shall pay a dividend
---------------
payable in, or make any other distribution (except any distribution specifically
provided for in the foregoing subsections (a) or (b)) of the Company's capital
stock to the holders of outstanding shares of the Company's Warrant Stock, then
the Warrantholder shall,
3
<PAGE>
upon exercise of this Warrant, be entitled to receive, in addition to the number
of shares or Warrant Stock receivable thereupon, and without payment of any
additional consideration therefore, the amount of the Company's capital stock
which would have been issuable to such Warrantholder if Warrantholder had
exercised this Warrant Immediately prior to the date on which holders of Warrant
Stock received such dividend or distribution of the Company's capital stock.
(e) Right to Purchase Additional Stock. If the Company has not paid any
----------------------------------
Subordinated Promissory Note(s) entered into pursuant to the Subordinated Loan
Documents in its entirety within twelve (12) months of the Maturity Date (as
defined in the applicable Subordinated Promissory Note(s)), then for each
additional month, or portion thereof, thereafter that the outstanding principal
is not paid. Warrantholder shall have the right to purchase from the Company, at
the Exercise Price (adjusted as set forth herein), an additional number of
shares of Warrant Stock which number shall be determined by (i) multiplying the
outstanding principal amount which is due, but unpaid, by 1% and (ii) dividing
the product thereof by the Exercise Price.
(f) Antidilution Rights. Shares of Preferred Stock issuable upon exercise
-------------------
of this Warrant shall be entitled, with respect to such issuance or sale, to the
same antidilution benefits then applicable to other shares of the Preferred
Stock as set forth in its Company's Amended and Restated Articles of
Incorporation (the "Charter") as amended through the time of such issue or sale.
A copy of the Charter as currently in effect has been delivered to the
Warrantholder. The Company shall promptly provide the Warrantholder with any
restatement, amendment, modification or waiver of the Charter. Notwithstanding
anything herein to the contrary, no adjustment to the Exercise Price or the
number and character of securities issuable upon exercise of this Warrant shall
be made by virtue of this Section 8 to the extent that such adjustment is
effected (by adjusting the conversion price of tile Preferred Stock or
otherwise) in accordance with the terms of the Charter. The Company will provide
notice to Warrantholder of any such adjustments in accordance with the terms of
the Charter (assuming, solely for purposes of such notice, that Warrantholder
was currently a holder of the shares of Warrant Stock then issuable upon an
exercise of this Warrant).
(g) Notice of Adjustments. If: (i) the Company shall declare any dividend
---------------------
or distribution upon its stock, whether in cash, property, stock or other
securities (excluding any dividend or distribution for which an adjustment will
be made pursuant to Section 8(d)); (ii) the Company shall offer for subscription
pro rata to the holders of any class of its Preferred or other convertible stock
any additional shams of stock of any class or other rights; (iii) there shall be
any Merger Event; or (iv) ire shall be any voluntary dissolution, liquidation or
winding up of the Company; then, in connection with each such event, the Company
shall send to the Warrantholder. (A) at least twenty (20) days' prior written
notice of the date on which the books of the Company shall close or a record
shall be taken for such dividend, distribution, subscription rights (specifying
the data on which the holders of Preferred Stock shall be titled thereto) or for
determining rights to vote in respect of such Merger Event, dissolution,
liquidation or winding up; (B) in the case of any such Merger Event,
dissolution, liquidation or winding up, at least twenty.(20) days' prior written
notice of the date when the same shall take place (and specifying the date on
which the holders of Preferred Stock shall be entitled to exchange their
Preferred Stock for securities or other property deliverable upon such Merger
Event, dissolution, liquidation or winding up).
Promptly following any adjustment to the Exercise Price or tire number and
character of securities issuable upon exercise of this Warrant effected pursuant
to this Section 8, the Company shall provide written notice of such adjustment
to the Warrantholder. Each such written notice shall set forth, in reasonable
detail, (i) the event requiring the adjustment, (ii) the amount of the
adjustment, (iii) the method by which such adjustment was calculated, (iv) the
Exercise Price, and (v) the number of shares subject to purchase hereunder after
giving effect to such adjustment, and shall be given by first class mail,
postage prepaid, addressed to the Warrantholder, at the address as shown on the
books of the Company.
(h) Timely Notice. Failure in timely provide such notice required by
-------------
subsection (g) above shall entitle Warrantholder to retain the benefit of the
applicable notice period notwithstanding anything to the contrary contained in
any insufficient notice received by Warrantholder. The notice period shall
begin on the date Warrantholder actually receives a written notice containing
all the information specified above.
9. REPRESENTATIONS. WARRANTIES AND COVENANTS OF THE COMPANY.
--------------------------------------------------------
(a) Reservation of Preferred Stock. The Preferred Stack issuable upon
------------------------------
exercise of the Warrantholder's rights has been duly and validly reserved and,
when issued in accordance with the provisions of this Warrant Agreement, will be
validly issued, fully paid and non-assessable, and will be free of any taxes,
liens, charges or encumbrances of any nature whatsoever (other than any created
by Warrantholder); provided, however, that the Warrant Stock issuable pursuant
to this Warrant Agreement may be subject to restrictions on transfer under state
and/or Federal securities laws. The Company has made available to the
Warrantholder true, correct and complete copies of its Charter and Bylaws, as
amended. The issuance of certificates for shares of Warrant Stock upon exercise
of the Warrant Agreement shall be made without charge to the Warrantholder for
any issuance tax in
4
<PAGE>
respect thereof, or other cost incurred by the Company in connection with such
exercise and the related issuance of shares of Warrant Stock. The Company shall
not be required to pay any tax which may be payable in respect of any transfer
involved and the issuance and delivery of any certificate in a name other than
that of the Warrantholder.
(b) Due Authority. The execution and delivery by the Company of this
-------------
Warrant Agreement and the performance of all obligations of the Company
hereunder, including the issuance to Warrantholder of the right to acquire the
shares of Warrant Stock, have been duly authorized by all necessary corporate
action on the part of the Company, and the Subordinated Loan Documents and this
Warrant Agreement are not inconsistent with the Company's Charter or Bylaws, do
not contravene any law or governmental rule, regulation or order applicable to
it, do not and will not contravene any provision of, or constitute a material
default under, any material indenture, mortgage, contract or other instrument to
which it is a party or by which it is bound, and the Subordinated Loan Documents
and this Warrant Agreement constitute legal, valid and binding agreements of the
Company, enforceable in accordance with their respective terms.
(c) Consents and Approvals. No consent or approval of, giving of notice
----------------------
to, registration with, or taking of any other action in respect of any state,
Federal or other governmental authority or agency is required with respect to
the execution, delivery and performance by the Company of its obligations under
this Warrant Agreement, except for the filing of notices pursuant to Regulation
D under the 1933 Act and any filing required by applicable state securities law,
which filings will be effective by the time required thereby.
(d) Issued Securities. All issued and outstanding shares of Common Stock,
-----------------
Preferred Stock or any other securities of the Company have been duly authorized
and validly issued and are fully paid and nonassessable. All outstanding shares
of Common Stock, Preferred Stock and any other securities were issued in full
compliance with all Federal and state securities laws. In addition:
(i) The authorized capital stock of the Company consists of (A)
20,000,000 shares of Common Stock, of which 4,330,812 shares are issued and
outstanding, and (B) 23,190,000 shares of Preferred Stock consisting of
19,840,000 shares designated as Series B Preferred Stock, of which
18,596,631 shares are issued and outstanding and are currently convertible
into an aggregate of 6,198,876 shares of Common Stock, 2,050,000 shares
designated as Series C Preferred Stock, all of which are issued and
outstanding and are currently convertible into an aggregate of 683,334
shares of Common Stock, 1,300,000 shares designated Series D Preferred
Stock, of which 1,242,287 shares are issued and outstanding and are
currently convertible into an aggregate of 1,242,287 shares of Common Stock
and 6,850,000 shares designated Series E Preferred Stock, of which
5,562,100 are issued and outstanding.
(ii) The Company has reserved (A) 783,560 shares of Common Stock
under its 1997 Stock Option Plan and (B) 2,601,901 shares of Common Stock
under its 1998 Equity Incentive Plan. Except for (i) 22,222 shares of
Common Stock issuable to Venture Lending & Leasing, Inc. ("VLLI"), in
respect of Section 4.2(c) of that certain warrant issued to VLLI on January
30, 1997 and 36,144 shares of Common Stock issuable to VLLI in respect of
Section 4.2(c) of that certain warrant also issued to VLLI on January 30,
1997, (ii) the conversion privileges of the Series B Preferred, the Series
C Preferred and the Series D Preferred, (iii) the shares of Common Stock
reserved for issuance under the Company's 1997 Stock Option Plan and 1998
Equity Incentive Plan, (iv) the right of first offer provided in Section 3
of that certain Investors' Rights Agreement dated April 1, 1998 by and
among the Company and the persons and entities listed on Exhibit A thereto,
and (v) the right of first refusal in Section 8.7 of the Bylaws of the
Company with respect to transfers of shares of the company's capital stock,
there are no other options, warrants, conversion privileges, or preemptive
or other rights or agreements presently outstanding to purchase or
otherwise acquire any authorized but unissued shares of the capital stock
or other securities of the Company.
(e) Insurance. The Company has in full force and effect insurance
---------
policies, with extended coverage, insuring the Company and its property and
business against such losses and risks, and in such amounts, as are customary
for corporations engaged in a similar business and similarly situated and as
otherwise may be required pursuant to the terms of any other contract or
agreement.
(f) Other Commitments to Register Securities. Except as set forth in the
----------------------------------------
Company's Investors' Rights Agreement as amended, a copy of which has been
provided to Warrantholder, the Company is not, pursuant to the terms of any
other agreement currently in existence, under any obligation to register under
the 1933 Act any of its presently outstanding securities or any of its
securities which may hereafter be issued.
(g) Exempt Transaction. Subject to the accuracy of the Warrantholder's
------------------
representations in Section 10 hereof, the issuance of the Preferred Stock upon
exercise of this Warrant will constitute a transaction exempt from (i) the
registration requirements of Section 5 of the 1933 Act, in reliance upon Section
4(2) thereof, and (ii) the qualification requirements of the applicable state
securities laws.
5
<PAGE>
(h) Compliance with Rule 144. At the written request of the Warrantholder,
------------------------
who proposes to sell Preferred Stock issuable upon the exercise of the Warrant
in compliance with Rule 144 promulgated by the Securities and Exchange
Commission, the Company shall furnish to the Warrantholder, within ten days
after receipt of such request, a written statement confirming the Company's
compliance with the filing requirements of the Securities and Exchange
Commission as set forth in such Rule, as such Rule may be amended from time to
time.
10. REPRESENTATIONS AND COVENANTS OF THE WARRANTHOLDER.
--------------------------------------------------
This Warrant Agreement has been entered into by the Company in reliance
upon the following representations and covenants of the Warrantholder:
(a) Investment Purpose. Each of the right to acquire the Warrant Stock
------------------
issuable upon exercise of the Warrantholder's rights contained herein, the
Warrant Stock and any securities issuable upon any conversion of the Warrant
Stock (collectively, the "Warrant Securities"), is and will be acquired for
investment for Warrantholder's own account and not with a view to the sale or
distribution of any part thereof. The Warrantholder has no present intention of
selling or engaging in any public distribution of the same except pursuant to a
registration or exemption.
(b) Private Issue. The Warrantholder understands (i) that the Warrant
-------------
Securities are not registered under the 1933 Act or qualified under applicable
state securities laws on the ground that the issuance contemplated by this
Warrant Agreement will be exempt from the registration and qualifications
requirements thereof, and (ii) that the Company's reliance on such exemption is
predicated on the representations set forth in this Section 10. At no time was
Warrantholder 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 Warrant
Securities.
(c) Disposition of Warrantholder's Rights. In no event will the
-------------------------------------
Warrantholder make a disposition of any of the Warrant Securities unless and
until (i) it shall have notified the Company of the proposed disposition, and
(ii) if requested by the Company, it shall have furnished the Company with an
opinion of counsel (which counsel may either by inside or outside counsel to the
Warrantholder) satisfactory to the Company and its counsel to the effect that
(A) appropriate action necessary for compliance with the 1933 Act has been
taken, or (B) an exemption from the registration requirements of the 1933 Act is
available. Notwithstanding the foregoing, the restrictions imposed upon the
Warrant Securities do not apply to transfers from the beneficial owner of any of
the aforementioned securities to its nominee or from such nominee to its
beneficial owner, and shall terminate as to any particular Warrant Security when
(1) such security shall have been effectively registered under the 1933 Act and
sold by the holder thereof in accordance with such registration or (2) such
security shall have been sold without registration in compliance with Rule 144
under the 1933 Act, or (3) a letter shall have been issued to the Warrantholder
at its request by the staff of the Securities and Exchange Commission or a
ruling shall have been issued to the Warrantholder at its request by such
Commission stating that no action shall be recommended by such staff or taken by
such Commission, as the case may be, if such security is transferred without
registration under the 1933 Act in accordance with the conditions set forth in
such letter or ruling and such letter or ruling specifies that no subsequent
restrictions on transfer are required. Whenever the restrictions imposed
hereunder shall terminate, as hereinabove provided, the Warrantholder or holder
of Warrant Securities then outstanding as to which such restrictions have
terminated shall be entitled to receive from the Company, without expense to
such holder, one or more new certificates for the Warrant or Warrant Securities
not bearing any restrictive legend.
(d) Financial Risk. The Warrantholder has such knowledge and experience in
--------------
financial and business matters as to be capable of evaluating the merits and
risks of its investment, and has the ability to bear the economic risks of its
investment, and has the capacity to protect its own interests in connection with
the purchase of the Warrant Securities.
(e) Risk of No Registration. The Warrantholder understands that if the
-----------------------
Company does not register with the Securities and Exchange Commission pursuant
to Section 12 of the 1934 Act (the "1934 Act"), or file reports pursuant to
Section 15(d), of the 1934 Act, or if a registration statement covering the
securities under the 1933 Act is not in effect when it desires to sell Warrant
Securities, it may be required to hold such securities for an indefinite period.
The Warrantholder also understands that any sale of Warrant Securities which
might be made by it in reliance upon Rule 144 under the 1933 Act may be made
only in accordance with the terms and conditions of that Rule.
(f) Accredited Investor. Warrantholder is an "accredited investor" within
-------------------
the meaning of the Securities and Exchange Rule 501 of Regulation D, as
presently in effect.
11. REQUESTS FOR REGISTRATION.
-------------------------
6
<PAGE>
The Company and the initial Warrantholder will enter into an Amendment to
Investors' Rights Agreement in the form attached hereto as Exhibit IV to provide
the initial Warrantholder with certain registration rights in accordance with
the terms of the Company's existing Investors' Rights Agreement.
12. TRANSFERS.
---------
Subject to the terms and conditions contained in Section 10 hereof, this
Warrant Agreement and all rights hereunder are transferable in whole or in part
by the Warrantholder and any successor transferee, provided, however, in no
event shall the number of transfers of the rights and interests in all of the
Warrants exceed three (3) transfers. The transfer shall be recorded on the
books of the Company upon receipt by the Company of a notice of transfer in the
form attached hereto as Exhibit III (the "Transfer Notice") together with
representations to the Company from the transferee in form reasonably acceptable
to the Company and in substance similar to the representations made by
Warrantholder in Section 10, at its principal offices and the payment to the
Company of all transfer taxes and other governmental charges imposed on such
transfer.
13. MISCELLANEOUS.
-------------
(a) Effective Date. The provisions of this Warrant Agreement shall be
--------------
construed and shall be given effect in all respects as if it had been executed
and delivered by the Company on the date hereof. This Warrant Agreement shall
be binding upon any successors or assigns of the Company.
(b) Attorney's Fees. In any litigation, arbitration or court proceeding
---------------
between the Company and the Warrantholder relating hereto, the prevailing party
shall be entitled to attorneys' fees and expenses and all costs of proceedings
incurred in enforcing this Warrant Agreement.
(c) Governing Law. This Warrant Agreement shall be governed by and
-------------
construed for all purposes under and in accordance with the laws of the State of
California, provided, however, to the extent the value of this Warrant Agreement
is considered additional consideration under the Subordinated Loan Documents for
purposes of construing the usury laws, the issue shall be governed by Illinois
law.
(d) Counterparts. The Warrant Agreement 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.
(e) Notices. Any notice required or permitted hereunder shall be given in
-------
writing and shall be deemed effectively given upon personal delivery, facsimile
transmission (provided that the original is sent by personal delivery or mail as
hereinafter set forth) or seven (7) days after deposit in the United States
mail, by registered or certified mail, addressed (i) to the Warrantholder at
6111 North River Road, Rosemont, Illinois 60018, Attention: Venture Lease
Administration, cc: Legal Department, Attention: General Counsel, (and/or, if by
facsimile, (847) 518-5465 and (847) 518-5088) and (ii) to the Company at 166-B
Baypointe Parkway, San Jose, California 95134, Attention: Chief Financial
Officer, cc: Mark C. Stevens, Esq., Fenwick & West LLP, Two Palo Alto Square,
Palo Alto, California 94306 (and/or if by facsimile, (408) 965-2665 and (650)
494-1417) or at such other address as any such party may subsequently designate
by written notice to the other party.
(f) Remedies. In the event of any default hereunder, the non-defaulting
--------
party may proceed to protect and enforce its rights either by suit in equity
and/or by action at law, including but not limited to an action for damages as a
result of any such default, and/or an action for specific performance for any
default where Warrantholder will not have an adequate remedy at law and where
damages will not be readily ascertainable.
(g) No Impairment of Rights. The Company will not 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 actions as may be necessary or appropriate in order to
protect the rights of the Warrantholder against impairment.
(h) Survival. The representations, warranties, covenants and conditions of
--------
the respective parties contained herein or made pursuant to this Warrant
Agreement shall survive the execution and delivery of this Warrant Agreement.
(i) Severability. In the event any one or more of the provisions of this
------------
Warrant Agreement shall for any reason be held invalid, illegal or
unenforceable, the remaining provisions of this Warrant Agreement shall be
unimpaired, and the invalid, illegal or unenforceable provision shall be
replaced by a mutually acceptable valid, legal and enforceable provision, which
comes closest to the intention of the parties underlying the invalid, illegal or
unenforceable provision.
7
<PAGE>
(j) Amendments. Any provision of this Warrant Agreement may be amended by
----------
a written instrument signed by the Company and by the Warrantholder.
IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement
to be executed by its officers thereunto duly authorized as of the Effective
Date.
Company: OPTICAL NETWORKS, INCORPORATED
By: /s/ Terrence J. Schmid
----------------------------------------
Title: CFO
-------------------------------------
Warrantholder: COMDISCO, INC.
By: /s/ James P. Labe
----------------------------------------
Title: President, Comdisco Ventures Division
-------------------------------------
8
<PAGE>
EXHIBIT I
NOTICE OF EXERCISE
To: Optical Networks, Incorporated
(1) The undersigned Warrantholder hereby elects to purchase ____________ shares
of the Stock of Optical Networks, Incorporated, pursuant to the terms of
the Warrant Agreement No. 2 dated the 10th day of February, 1999 (the
"Warrant Agreement") between Optical Networks, Incorporated and the
Warrantholder, and tenders herewith payment of the purchase price for such
shares in full, together with all applicable transfer taxes, if any.
(2) In exercising its rights to purchase the Stock of Optical Networks,
Incorporated, the undersigned hereby confirms and acknowledges the
investment representations and warranties made in Section 10 of the Warrant
Agreement.
(3) Please issue a certificate or certificates representing said shares of
__________ Stock in the name of the undersigned or in such other name as is
specified below.
_______________________________
(Name)
_______________________________
(Address)
Warrantholder: COMDISCO, INC.
By: ___________________________
Title: ________________________
Date: _________________________
9
<PAGE>
EXHIBIT II
ACKNOWLEDGMENT OF EXERCISE
The undersigned ________________________, hereby acknowledge receipt of the
"Notice of Exercise" from Comdisco, Inc., to purchase ____________ shares of the
Stock of Optical Networks, Incorporated, pursuant to the terms of the Warrant
Agreement No. 2, and further acknowledges that ___________ shares remain subject
to purchase under the terms of the Warrant Agreement.
Company: ____________________________
By: _________________________________
Title: ______________________________
Date: _______________________________
10
<PAGE>
EXHIBIT III
TRANSFER NOTICE
(To transfer or assign the foregoing Warrant Agreement execute this form and
supply required information. Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant Agreement No. 2 and all rights
evidenced thereby are hereby transferred and assigned to
___________________________________________________
(Please Print)
whose address is __________________________________
___________________________________________________
Dated: __________________________________
Holder's Signature: _____________________
Holder's Address: _______________________
_________________________________________
Signature Guaranteed: _____________________________
NOTE: The Signature to this Transfer Notice must correspond with the name as it
appears on the face of the Warrant Agreement, without alteration or
enlargement or any change whatever. Officers of corporations and those
acting in a fiduciary or other representative capacity should file proper
evidence of authority to assign the foregoing Warrant Agreement.
11
<PAGE>
EXHIBIT 4.08
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
RELATED THERETO OR AN OPINION OF COUNSEL (WHICH MAY BE COMPANY COUNSEL)
REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES
LAWS.
WARRANT AGREEMENT NO. 3
To Purchase Shares of the Series B Preferred Stock of
OPTICAL NETWORKS, INCORPORATED
Dated as of February 10, 1999 (the "Effective Date")
WHEREAS, Optical Networks, Incorporated, a California corporation (the
"Company") has entered into a Loan and Security Agreement dated as of February
10, 1999, and related Promissory Note(s) (collectively, the "Loan Agreement")
with Comdisco, Inc., a Delaware corporation (the "Warrantholder"); and
WHEREAS, the Company desires to grant to Warrantholder, in
consideration for such Loan Agreement, the right to purchase shares of its
Series B Preferred Stock;
NOW, THEREFORE, in consideration of the Warrantholder executing and
delivering such Loan Agreement and in consideration of mutual covenants and
agreements contained herein, the Company and Warrantholder agree as follows:
1. GRANT OF THE RIGHT TO PURCHASE PREFERRED STOCK.
----------------------------------------------
The Company hereby grants to the Warrantholder, and the Warrantholder is
entitled, upon the terms and subject to the conditions hereinafter set forth, to
subscribe to and purchase, from the Company, 68,062 fully paid and non-
assessable shares of the Company's Series B Preferred Stock ("Preferred Stock")
at a purchase price of $1.1754 per share (the "Exercise Price"). The number and
purchase price of such shares are subject to adjustment as provided in Section 8
hereof.
If all of the Company's outstanding Preferred Stock is converted into
shares of Common Stock in connection with the registration of the Company's
Common Stock under the Securities Act of 1933, as amended, or otherwise in
accordance with the terms of the Company's Amended and Restated Articles of
Incorporation, then this Warrant shall automatically become exercisable for that
number of shares of Common Stock equal to the number of shares of Common Stock
that would have been received if this Warrant had been exercised in full and the
shares of Preferred Stock received thereupon had been simultaneously converted
into Common Stock immediately prior to such event, and the Exercise Price shall
be automatically adjusted to equal the amount obtained by dividing (i) the
aggregate Exercise Price of the shares of Preferred Stock for which this Warrant
was exercisable immediately prior to such conversion, by (ii) the number of
shares of Common Stock for which this Warrant is exercisable immediately after
such conversion. The shares of Preferred Stock or Common Stock subject to this
Warrant, as the case may be, are sometimes referred to herein as "Warrant
Stock".
2. TERM OF THE WARRANT AGREEMENT.
-----------------------------
Except as otherwise provided for herein, the term of this Warrant Agreement
and the right to purchase Preferred Stock as granted herein shall commence on
the Effective Date and shall be exercisable for a period of (i) ten (10) years
or (ii) five (5) years from the effective date of the Company's initial public
offering, whichever is shorter.
Notwithstanding the term of this Warrant Agreement as set forth above, the
right to purchase Preferred Stock as granted shall expire, if not previously
exercised, immediately upon the closing of (i) the issuance and sale of shares
of Common Stock of the Company in the Company's first public offering of
securities for its own account pursuant to an effective registration statement
under the Securities Act of 1933, as amended (the "Initial Public Offering"),
provided that net proceeds to the Company exceed $10,000,000, and provided
further that the Warrantholder is afforded an opportunity to include Registrable
Securities issuable upon exercise hereof in such initial Public Offering in
accordance with the terms of the Company's Investors' Rights Agreement or (ii) a
merger of consolidation of the Company with or into another corporation when the
Company is not the surviving corporation, or the sale of all or substantially
<PAGE>
all of the Company's properties and assets to any other person (the "Merger"),
provided that the holders of Warrantholder realizes a value for its shares of
Preferred Stock issuable hereunder receive consideration with a value equal to
or greater than $2.35 per share in such Merger. The Company shall notify the
Warrantholder if the Initial Public Offering or Merger is proposed within a
reasonable period of time prior to the filing of a registration statement and if
the Company fails to deliver such written notice within a reasonable period of
time, anything to the contrary in this Warrant Agreement notwithstanding, the
rights to purchase will not expire until ten (10) business days after the
Company delivers such notice to the Warrantholder. Such notice shall also
contain such details of the proposed Initial Public Offering or Merger as are
reasonable in the circumstances and notice that this Warrant Agreement is
expected to expire upon closing thereof.
3. EXERCISE OF THE PURCHASE RIGHTS.
-------------------------------
The purchase rights set forth in this Warrant Agreement are exercisable by
the Warrantholder, in whole or in part, at any time, or from time to time, prior
to the expiration of the term set forth in Section 2 above, by tendering to the
Company at its principal office a notice of exercise in the form attached hereto
as Exhibit I (the "Notice of Exercise"), duly completed and executed. Promptly
upon receipt of the Notice of Exercise and the payment of the purchase price in
accordance with the terms set forth below, and in no event later than twenty-one
(21) days thereafter, the Company shall issue to the Warrantholder a certificate
for the number of shares of Preferred Stock purchased and shall execute the
acknowledgment of exercise in the form attached hereto as Exhibit II (the
"Acknowledgment of Exercise") indicating the number of shares which remain
subject to future purchases, if any.
The Exercise Price may be paid at the Warrantholder's election either (i)
by cash or check, or (ii) by surrender of Warrants ("Net Issuance") as
determined below. If the Warrantholder elects the Net Issuance method, the
Company will issue Warrant Stock in accordance with the following formula:
X = Y (A - B)
-------
A
Where: X = the number of shares of Warrant Stock to be issued to the
Warrantholder.
Y = the number of shares of Warrant Stock requested to be
exercised under this Warrant Agreement.
A = the fair market value of one (1) share of Warrant Stock.
B = the Exercise Price.
For purposes of the above calculation, current fair market value of Warrant
Stock shall mean with respect to each share of Warrant Stock:
(i) if the exercise is in connection with an initial public offering
of the Company's Common Stock, and if the Company's Registration Statement
relating to such public offering has been declared effective by the SEC,
then the fair market value per share shall be the product of (x) the
initial "Price to Public" specified in the final prospectus with respect to
the offering and (y) the number of shares of Common Stock into which each
share of Preferred Stock is convertible at the time of such exercise;
(ii) if this Warrant is exercised after, and not in connection with
the Company's initial public offering, and:
(a) if traded on a securities exchange, the fair market value
shall be deemed to be the average of the closing prices over a twenty-
one (21) day period ending three days before the day the current fair
market value of the securities is being determined; or
(b) if actively traded over-the-counter, the fair market value
shall be deemed to be the average of the closing bid and asked prices
quoted on the NASDAQ system (or similar system) over the twenty-one
(21) day period ending three days before the day the current fair
market value of the securities is being determined;
(iii) if at any time the Common Stock is not listed on any
securities exchange or quoted in the NASDAQ System or the over-the-counter
market, the current fair market value of Warrant Stock shall be the highest
price per share which the Company could obtain from a willing buyer (not a
current employee or director) for shares of Warrant Stock sold by the
Company, from authorized but unissued shares, as determined in good faith
by its Board of Directors, unless the Company shall become subject to a
merger, acquisition or other consolidation pursuant to which the Company is
not the surviving party, in which case
2
<PAGE>
the fair market value of Warrant Stock shall be deemed to be the value
received by the holders of such Warrant Stock on a common equivalent basis
pursuant to such merger or acquisition.
Upon partial exercise by either cash or Net Issuance, the Company shall
promptly issue an amended Warrant Agreement representing the remaining number of
shares purchasable hereunder. All other terms and conditions of such amended
Warrant Agreement shall be identical to those contained herein, including, but
not limited to the Effective Date hereof.
4. RESERVATION OF SHARES.
---------------------
Authorization and Reservation of Shares. During the term of this Warrant
---------------------------------------
Agreement, the Company will at all times have authorized and reserved a
sufficient number of shares of Warrant Stock to provide for the exercise of the
rights to purchase Warrant Stock as provided for herein.
5. NO FRACTIONAL SHARES OR SCRIP.
-----------------------------
No fractional shares or scrip representing fractional shares shall be
issued upon the exercise of the Warrant, but in lieu of such fractional shares
the Company shall make a cash payment therefore upon the basis of the Exercise
Price then in effect.
6. NO RIGHTS AS SHAREHOLDER.
------------------------
This Warrant Agreement does not entitle the Warrantholder to any voting
rights or other rights as a shareholder of the Company prior to the exercise of
the Warrant.
7. WARRANTHOLDER REGISTRY.
----------------------
The Company shall maintain a registry showing the name and address of the
registered holder of this Warrant Agreement.
8. ADJUSTMENT RIGHTS.
-----------------
The purchase price per share and the number of shares of Preferred Stock
purchasable hereunder are subject to adjustment, as follows:
(a) Merger and Sale of Assets. If at any time there shall be a capital
-------------------------
reorganization of the shares of the Company's stock (other than a combination,
reclassification, exchange or subdivision of shares otherwise provided for
herein), or a merger or consolidation of the Company with or into another
corporation whether or not the Company is the surviving corporation, or the sale
of all or substantially all of the Company's properties and assets to any other
person, other than as defined in Section 2 hereof (hereinafter referred to as a
"Merger Event"), then, as a part of such Merger Event, lawful provision shall be
made so that the Warrantholder shall thereafter be entitled to receive, upon
exercise of the Warrant, the number of shares of preferred stock or other
securities of the successor corporation resulting from such Merger Event,
equivalent in value to that which would have been issuable if Warrantholder had
exercise this Warrant immediately prior to the Merger Event. In any such case,
appropriate adjustment (as determined in good faith by the Company's Board of
Directors) shall be made in the application of the provisions of this Warrant
Agreement with respect to the rights and interest of the Warrantholder after the
Merger Event to the end that the provisions of this Warrant Agreement (including
adjustments of the Exercise Price and number of shares of Preferred Stock
purchasable) shall be applicable to the greatest extent possible.
(b) Reclassification of Shares. If the Company at any time shall, by
--------------------------
combination, reclassification, exchange or subdivision of securities or
otherwise, change any of the securities as to which purchase rights under this
Warrant Agreement exist into the same or a different number of securities of any
other class or classes, this Warrant Agreement shall thereafter represent the
right to acquire such number and kind of securities as would have been issuable
as the result of such change with respect to the securities which were subject
to the purchase rights under this Warrant Agreement immediately prior to such
combination, reclassification, exchange, subdivision or other change.
(c) Subdivision or Combination of Shares. If the Company at any time shall
------------------------------------
combine or subdivide its Warrant Stock, the Exercise Price shall be
proportionately decreased in the case of a subdivision, or proportionately
increased in the case of a combination.
(d) Stock Dividends. If the Company at any time shall pay a dividend
---------------
payable in, or make any other distribution (except any distribution specifically
provided for in the foregoing subsections (a) or (b)) of the Company's capital
stock to the holders of outstanding shares of the Company's Warrant Stock, then
the Warrantholder shall,
3
<PAGE>
upon exercise of this Warrant, be entitled to receive, in addition to the number
of shares of Warrant Stock receivable thereupon, and without payment of any
additional consideration therefore, the amount of the Company's capital stock
which would have been issuable to such Warrantholder if Warrantholder had
exercised this Warrant immediately prior to the date on which holders of Warrant
Stock received such dividend or distribution of the Company's capital stock.
(e) Right to Purchase Additional Stock. If the Company has not paid any
----------------------------------
Promissory Note(s) entered into pursuant to the Loan Agreement in its entirety
within twelve (12) months of the Maturity Date (as defined in the applicable
Promissory Note(s)), then for each additional month, or portion thereof,
thereafter that the outstanding principal is not paid, Warrantholder shall have
right to purchase from the Company, at the Exercise Price (adjusted as set forth
herein), an additional number of shares of Warrant Stock which number shall be
determined by (i) multiplying the outstanding principal amount which is due, but
unpaid, by 1% and (ii) dividing the product thereof by the Exercise Price.
(f) Antidilution Rights. Shares of Preferred Stock issuable upon exercise
-------------------
of this Warrant shall be entitled, with respect to such issuance or sale, to the
same antidilution benefits then applicable to other shares of the Preferred
Stock as set forth in its Company's Amended and Restated Articles of
Incorporation (the "Charter") as amended through the time of such issue or sale.
A copy of the Charter as currently in effect has been delivered to the
Warrantholder. The Company shall promptly provide the Warrantholder with any
restatement, amendment, modification or waiver of the Charter. Notwithstanding
anything herein to the contrary, no adjustment to the Exercise Price or the
number and character of securities issuable upon exercise of this Warrant shall
be made by virtue of this Section 8 to the extent that such adjustment is
effected (by adjusting the conversion price of the Preferred Stock or otherwise)
in accordance with the terms of the Charter. The Company will provide notice to
Warrantholder of any such adjustments in accordance with the terms of the
Charter (assuming, solely for purposes of such notice, that Warrantholder was
currently a holder of the shares of Warrant Stock then issuable upon an exercise
of this Warrant).
(g) Notice of Adjustments. If: (i) the Company shall declare any dividend
---------------------
or distribution upon its stock, whether in cash, property, stock or other
securities (excluding any dividend or distribution for which an adjustment will
be made pursuant to Section 8(d); (ii) the Company shall offer for subscription
prorata to the holders of any class of its Preferred or other convertible stock
any additional shares of stock of any class or other rights; (iii) there shall
be any Merger Event; or (iv) there shall be any voluntary dissolution,
liquidation or winding up of the Company; then, in connection with each such
event, the Company shall send to the Warrantholder: (A) at least twenty (20)
days' prior written notice of the date on which the books of the Company shall
close or a record shall be taken for such dividend, distribution, subscription
rights (specifying the date on which the holders of Preferred Stock shall be
entitled thereto) or by determining rights to vote in respect of such Merger
Event, dissolution, liquidation or winding up; (B) in the case of any such
Merger Event, dissolution, liquidation or winding up, at least twenty (20) days'
prior written notice of the date when the same shall take place (and specifying
the date on which the holders of Preferred Stock shall be entitled to exchange
their Preferred Stock for securities or other property deliverable upon such
Merger Event, dissolution, liquidation or winding up).
Promptly following any adjustment to the Exercise Price or the number and
character of securities issuable upon exercise of this Warrant effected pursuant
to this Section 8, the Company shall provide written notice of such adjustment
to the Warrantholder. Each such written notice shall set forth, in reasonable
detail, (i) the event requiring the adjustment, (ii) the amount of the
adjustment, (iii) the method by which such adjustment was calculated, (iv) the
Exercise Price, and (v) the number of shares subject to purchase hereunder after
giving effect to such adjustment, and shall be given by first class mail,
postage prepaid, addressed to the Warrantholder, at the address as shown on the
books of the Company.
(h) Timely Notice. Failure to timely provide such notice required by
-------------
subsection (g) above shall entitle Warrantholder to retain the benefit of the
applicable notice period notwithstanding anything to the contrary contained in
any insufficient notice received by Warrantholder. The notice period shall
begin on the date Warrantholder actually receives a written notice containing
all the information specified above.
9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY.
--------------------------------------------------------
(a) Reservation of Preferred Stock. The Preferred Stock issuable upon
------------------------------
exercise of the Warrantholder's rights has been duly and validly reserved and,
when issued in accordance with the provisions of this Warrant Agreement, will be
validly issued, fully paid and non-assessable, and will be free of any taxes,
liens, charges or encumbrances of any nature whatsoever (other than any created
by Warrantholder); provided, however, that the Warrant Stock issuable pursuant
to this Warrant Agreement may be subject to restrictions on transfer under state
and/or Federal securities laws. The Company has made available to the
Warrantholder true, correct and complete copies of its Charter and Bylaws, as
amended. The issuance of certificates for shares of Warrant Stock upon exercise
of the Warrant Agreement shall be made without charge to the Warrantholder for
any issuance tax in
4
<PAGE>
respect thereof, or other cost incurred by the Company in connection with such
exercise and the related issuance of shares of Warrant Stock. The Company shall
not be required to pay any tax which may be payable in respect of any transfer
involved and the issuance and delivery of any certificate in a name other than
that of the Warrantholder.
(b) Due Authority. The execution and delivery by the Company of this
-------------
Warrant Agreement and the performance of all obligations of the Company
hereunder, including the issuance to Warrantholder of the right to acquire the
shares of Warrant Stock, have been duly authorized by all necessary corporate
action on the part of the Company, and the Loan Agreement and this Warrant
Agreement are not inconsistent with the Company's Charter or Bylaws, do not
contravene any law or governmental rule, regulation or order applicable to it,
do not and will not contravene any provision of, or constitute a material
default under, any material indenture, mortgage, contract or other instrument to
which it is a party or by which it is bound, and the Loan Agreement and this
Warrant Agreement constitute legal, valid and binding agreements of the Company,
enforceable in accordance with their respective terms.
(c) Consents and Approvals. No consent or approval of, giving of notice
----------------------
to, registration with, or taking of any other action in respect of any state,
Federal or other governmental authority or agency is required with respect to
the execution, delivery and performance by the Company of its obligations under
this Warrant Agreement, except for the filing of notices pursuant to Regulation
D under the 1933 Act and any filing required by applicable state securities law,
which filings will be effective by the time required thereby.
(d) Issued Securities. All issued and outstanding shares of Common Stock,
-----------------
Preferred Stock or any other securities of the Company have been duly authorized
and validly issued and are fully paid and nonassessable. All outstanding shares
of Common Stock, Preferred Stock and any other securities were issued in full
compliance with all Federal and state securities laws. In addition:
(i) The authorized capital stock of the Company consists of (A)
20,000,000 shares of Common Stock, of which 4,330,812 shares are issued and
outstanding, and (B) 23,190,000 shares of Preferred Stock consisting of
19,840,000 shares designated as Series B Preferred Stock, of which
18,596,631 shares are issued and outstanding and are currently convertible
into an aggregate of 6,198,876 shares of Common Stock, 2,050,000 shares
designated as Series C Preferred Stock, all of which are issued and
outstanding and are currently convertible into an aggregate of 683,334
shares of Common Stock, 1,300,000 shares designated Series D Preferred
Stock, of which 1,242,287 shares are issued and outstanding and are
currently convertible into an aggregate of 1,242,287 shares of Common Stock
and 6,850,000 shares designated Series E Preferred Stock, of which
5,562,100 are issued and outstanding.
(ii) The Company has reserved (A) 783,560 shares of Common Stock under
its 1997 Stock Option Plan and (B) 2,601,901 shares of Common Stock under
its 1998 Equity Incentive Plan. Except for (i) 22,222 shares of Common
Stock issuable to Venture Lending & Leasing, Inc. ("VLLI"), in respect of
Section 4.2(c) of that certain warrant issued to VLLI on January 30, 1997
and 36,144 shares of Common Stock issuable to VLLI in respect of Section
4.2(c) of that certain warrant also issued to VLLI on January 30, 1997,
(ii) the conversion privileges of the Series B Preferred, the Series C
Preferred and the Series D Preferred, (iii) the shares of Common Stock
reserved for issuance under the Company's 1997 Stock Option Plan and 1998
Equity Incentive Plan, (iv) the right of first offer provided in Section 3
of that certain Investors' Rights Agreement dated April 1, 1998 by and
among the Company and the persons and entities listed on Exhibit A thereto,
and (v) the right of first refusal in Section 8.7 of the Bylaws of the
Company with respect to transfers of shares of the company's capital stock,
there are no other options, warrants, conversion privileges, or preemptive
or other rights or agreements presently outstanding to purchase or
otherwise acquire any authorized but unissued shares of the capital stock
or other securities of the Company.
(e) Insurance. The Company has in full force and effect insurance
---------
policies, with extended coverage, insuring the Company and its property and
business against such losses and risks, and in such amounts, as are customary
for corporations engaged in a similar business and similarly situated and as
otherwise may be required pursuant to the terms of any other contract or
agreement.
(f) Other Commitments to Register Securities. Except as set forth in the
----------------------------------------
Company's Investors' Rights Agreement as amended, a copy of which has been
provided to Warrantholder, the Company is not, pursuant to the terms of any
other agreement currently in existence, under any obligation to register under
the 1933 Act any of its presently outstanding securities or any of its
securities which may hereafter be issued.
(g) Exempt Transaction. Subject to the accuracy of the Warrantholder's
------------------
representations in Section 10 hereof, the issuance of the Preferred Stock upon
exercise of this Warrant will constitute a transaction exempt from (i) the
registration requirements of Section 5 of the 1933 Act, in reliance upon Section
4(2) thereof, and (ii) the qualification requirements of the applicable state
securities laws.
5
<PAGE>
(h) Compliance with Rule 144. At the written request of the Warrantholder,
------------------------
who proposes to sell Preferred Stock issuable upon the exercise of the Warrant
in compliance with Rule 144 promulgated by the Securities and Exchange
Commission, the Company shall furnish to the Warrantholder, within ten days
after receipt of such request, a written statement confirming the Company's
compliance with the filing requirements of the Securities and Exchange
Commission as set forth in such Rule, as such Rule may be amended from time to
time.
10. REPRESENTATIONS AND COVENANTS OF THE WARRANTHOLDER.
--------------------------------------------------
This Warrant Agreement has been entered into by the Company in reliance
upon the following representations and covenants of the Warrantholder:
(a) Investment Purpose. Each of the right to acquire the Warrant Stock
------------------
issuable upon exercise of the Warrantholder's rights contained herein, the
Warrant Stock and any securities issuable upon the conversion of the Warrant
Stock (collectively, the "Warrant Securities"), is and will be acquired for
investment for Warrantholder's own account and not with a view to the sale or
distribution of any part thereof. The Warrantholder has not present intention of
selling or engaging in any public distribution of the same except pursuant to a
registration or exemption.
(b) Private Issue. The Warrantholder understands (i) that the Warrant
-------------
Securities are not registered under the 1933 Act or qualified under applicable
state securities laws on the ground that the issuance contemplated by this
Warrant Agreement will be exempt from the registration and qualifications
requirements thereof, and (ii) that the Company's reliance on such exemption is
predicated on the representations set forth in this Section 10. At no time was
Warrantholder 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 Warrant
Securities.
(c) Disposition of Warrantholder's Rights. In no event will the
-------------------------------------
Warrantholder make a disposition of any of the Warrant Securities unless and
until (i) it shall have notified the Company of the proposed disposition, and
(ii) if requested by the Company, it shall have furnished the Company with an
opinion of counsel (which counsel may either be inside or outside counsel to the
Warrantholder) satisfactory to the Company and its counsel to the effect that
(A) appropriate action necessary for compliance with the 1933 Act has been
taken, or (B) an exemption from the registration requirements of the 1933 Act is
available. Notwithstanding the foregoing, the restrictions imposed upon the
Warrant Securities do not apply to transfers from the beneficial owner of any of
the aforementioned securities to its nominee or from such nominee to its
beneficial owner, and shall terminate as to any particular Warrant Security when
(1) such security shall have been effectively registered under the 1933 Act and
sold by the holder thereof in accordance with such registration or (2) such
security shall have been sold without registration in compliance with Rule 144
under the 1933 Act, or (3) a letter shall have been issued to the Warrantholder
at its request by the staff of the Securities and Exchange Commission or a
ruling shall have been issued to the Warrantholder at its request by such
Commission stating that no action shall be recommended by such staff or taken by
such Commission, as the case may be, if such security is transferred without
registration under the 1933 Act in accordance with the conditions set forth in
such letter or ruling and such letter or ruling specifies that no subsequent
restrictions on transfer are required. Whenever the restrictions imposed
hereunder shall terminate, as hereinabove provided, the Warrantholder or holder
of Warrant Securities then outstanding as to which such restrictions have
terminated shall be entitled to receive from the Company, without expense to
such holder, one or more new certificates for the Warrant or Warrant Securities
not bearing any restrictive legend.
(d) Financial Risk. The Warrantholder has such knowledge and experience in
--------------
financial and business matters as to be capable of evaluating the merits and
risks of its investment, and has the ability to bear the economic risks of its
investment, and has the capacity to protect its own interests in connection with
the purchase of the Warrant Securities.
(e) Risk of No Registration. The Warrantholder understands that if the
-----------------------
Company does not register with the Securities and Exchange Commission pursuant
to Section 12 of the 1934 Act (the "1934 Act"), or file reports pursuant to
Section 15(d), of the "1934 Act", or if a registration statement covering the
securities under the 1933 Act is not in effect when it desires to sell Warrant
Securities, it may be required to hold such securities for an indefinite period.
The Warrantholder also understands that any sale of Warrant Securities which
might be made by it in reliance upon Rule 144 under the 1933 Act may be made
only in accordance with the terms and conditions of that Rule.
(f) Accredited Investor. Warrantholder is an "accredited investor" within
-------------------
the meaning of the Securities and Exchange Rule 501 of Regulation D, as
presently in effect.
6
<PAGE>
11. REQUESTS FOR REGISTRATION.
-------------------------
The Company and the initial Warrantholder will enter into an Amendment to
Investors' Rights Agreement in the form attached hereto as Exhibit IV to provide
the initial Warrantholder with certain registration rights in accordance with
the terms of the Company's existing Investors' Rights Agreement.
12. TRANSFERS.
---------
Subject to the terms and conditions contained in Section 10 hereof, this
Warrant Agreement and all rights hereunder are transferable in whole or in part
by the Warrantholder and any successor transferee, provided, however, in no
event shall the number of transfers of the rights and interests in all of the
Warrants exceed three (3) transfers. The transfer shall be recorded on the
books of the Company upon receipt by the Company of a notice of transfer in the
form attached hereto as Exhibit III (the "Transfer Notice") together with
representations to the Company from the transferee in form reasonably acceptable
to the Company and in substance similar to the representations made by
Warrantholder in Section 10, at its principal offices and the payment to the
Company of all transfer taxes and other governmental charges imposed on such
transfer.
13. MISCELLANEOUS.
-------------
(a) Effective Date. The provisions of this Warrant Agreement shall be
--------------
construed and shall be given effect in all respects as if it had been executed
and delivered by the Company on the date hereof. This Warrant Agreement shall
be binding upon any successors or assigns of the Company.
(b) Attorney's Fees. In any litigation, arbitration or court proceeding
---------------
between the Company and the Warrantholder relating hereto, the prevailing party
shall be entitled to attorneys' fees and expenses and all costs of proceedings
incurred in enforcing this Warrant Agreement.
(c) Governing Law. This Warrant Agreement shall be governed by and
-------------
construed for all purposes under and in accordance with the laws of the State of
California, provided, however, to the extent the value of this Warrant Agreement
is considered additional consideration under the Loan Agreement for purposes of
construing the usury laws, the issue shall be governed by Illinois law.
(d) Counterparts. This Warrant Agreement 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.
(e) Notices. Any notice required or permitted hereunder shall be given in
-------
writing and shall be deemed effectively given upon personal delivery, facsimile
transmission (provided that the original is sent by personal delivery or mail as
hereinafter set forth) or seven (7) days after deposit in the United States
mail, by registered or certified mail, addressed (i) to the Warrantholder at
6111 North River Road, Rosemont, Illinois 60018, Attention: Venture Lease
Administration, cc: Legal Department, Attention: General Counsel, (and/or, if by
facsimile, (847) 518-5465 and (847) 518-5088) and (ii) to the Company at 166-B
Baypointe Parkway, San Jose, California 95134, Attention: Chief Financial
Officer, cc: Mark C. Stevens, Esq., Fenwick & West LLP, Two Palo Alto Square,
Palo Alto, California 94306 (and/or if by facsimile, (408) 965-2665 and (650)
494-1417) or at such other address as any such party may subsequently designate
by written notice to the other party.
(f) Remedies. In the event of any default hereunder, the non-defaulting
--------
party may proceed to protect and enforce its rights either by suit in equity
and/or by action at law, including but not limited to an action for damages as a
result of any such default, and/or an action for specific performance for any
default where Warrantholder will not have an adequate remedy at law and where
damages will not be readily ascertainable.
(g) No Impairment of Rights. The Company will not 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 actions as may be necessary or appropriate in order to
protect the rights of the Warrantholder against impairment.
(h) Survival. The representations, warranties, covenants and conditions of
--------
the respective parties contained herein or made pursuant to this Warrant
Agreement shall survive the execution and delivery of this Warrant Agreement.
(i) Severability. In the event any one or more of the provisions of this
------------
Warrant Agreement shall for any reason be held invalid, illegal or
unenforceable, the remaining provisions of this Warrant Agreement shall be
unimpaired, and the invalid, illegal or unenforceable provision shall be
replaced by a mutually acceptable valid, legal and enforceable provision, which
comes closest to the intention of the parties underlying the invalid, illegal or
unenforceable provision.
10
<PAGE>
(j) Amendments. Any provision of this Warrant Agreement may be amended by a
----------
written instrument signed by the Company and by the Warrantholder.
IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement
to be executed by its officers thereunto duly authorized as of the Effective
Date.
Company: OPTICAL NETWORKS, INCORPORATED
By: /s/ Terrence J. Schmid
------------------------------------------
Title: CFO
---------------------------------------
Warrantholder: COMDISCO, INC.
By: /s/ James P. Labe
------------------------------------------
Title: President, Comdisco Ventures Division
---------------------------------------
8
<PAGE>
EXHIBIT 4.09
Attachment C Warrant
THIS WARRANT IS NOT TRANSFERABLE AND THE SHARES ISSUABLE HEREUNDER ARE SUBJECT
TO RESTRICTIONS ON TRANSFER AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED
WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144
OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS
COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE COMMON STOCK
OF
OPTICAL NETWORKS, INCORPORATED
Maximum Number of Shares: 250,000
Class of Stock: Common Stock
Initial Exercise Price: $1.82 per share
Issue Date: December 08 1999
Expiration Date: December 07, 2005
This Warrant certifies that, for value received pursuant to the Purchase
and License Agreement (the "Purchase Agreement") entered into between Optical
Networks, Incorporated, a California corporation (the "Company") and COLT
Telecommunications, dated of even date with this Warrant COLT Telecom Group plc
("COLT" or "Holder") is entitled to purchase from the Company, until 5:00 p.m.
Pacific standard time, on the Expiration Date set forth above, up to the number
of fully paid and nonassessable shares of Common Stock (the "Shares") of the
Company described in Section 1 below at the Initial Exercise Price per Share
(the "Warrant Price") set forth above and as adjusted pursuant to Section 3 of
this Warrant, subject to the provisions and upon the terms and conditions set
forth in this Warrant.
1. EXERCISE.
--------
1.1. Exercisability.
--------------
As of the Issue Date, this Warrant shall be unexercisable with respect to
all Shares that are the subject of this Warrant. For so long as (a) the
Purchase Agreement has not been terminated by the Company due to a material
breach by COLT and (b) this Warrant remains unexpired this Warrant shall become
vested and exercisable with respect to the number of Shares determined according
to the following formula:
V = P * Z
-----
C
where V = the aggregate number of shares that are vested and exercisable
under this Warrant.
P = the total amount of all Paid Orders.
C = $30,000,000
<PAGE>
Z = 250,000, the Maximum Number of Shares.
For purposes of this Section 1.1, "Paid Orders" shall mean the dollar
amount of all (i) Product (as defined in the Purchase Agreement) purchased by
COLT within the term of the Purchase Agreement (calculated using the prices set
out in Attachment A of the Purchase Agreement without applying any Credits (as
defined in the Purchase Agreement) (ii) Product ordered by COLT and Affiliates
within the term of the Purchase Agreement that the Company is unable to fulfill
provided the unfulfilled order is within the Product volumes set forth in COLT's
forecast under Section 3.1 of the Purchase Agreement and is not due to a force
majeure event under Section 12.6 of the Purchase Agreement (for the avoidance of
doubt a force majeure event affecting the Company will not serve to reduce the
number of Shares exercisable by COLT); and (iii) the amount of the Company's
Products that COLT would have in good faith ordered but for a material failure
of the Company to meet its obligations under the Service and Support plan
described in Attachment B of the Purchase Agreement. -Notwithstanding the
foregoing formula, this Warrant shall become vested and exercisable with respect
to all remaining unexercisable Shares that are the subject of this Warrant on
the fifth anniversary of the Issue Date.
-----
1.2 Method of Exercise. Holder may exercise this Warrant, in whole or
------------------
in part, by delivering a duly executed Notice of Exercise in substantially the
form attached as Exhibit A to the principal office of the Company. Unless Holder
---------
is exercising the conversion right set forth in Section 1.3, Holder shall also
deliver to the Company a check for the aggregate Warrant Price for the Shares
being purchased.
1.3 Net Exercise Election. The Holder may elect to convert all or a
---------------------
portion of this Warrant, without the payment by the Holder of any additional
consideration, by the surrender of this Warrant or such portion of this Warrant
to the Company, with the net exercise election selected in the Notice of
Exercise attached hereto as Exhibit A duly executed by the Holder, up to the
---------
number of Shares that is obtained under the following formula:
X = Y (A-B)
-------
A
where X = the number of Shares to be issued to the Holder pursuant to this
Section 1.3.
Y = the number of exercisable Shares subject to this Warrant with
respect to which the net exercise election is made.
A = the fair market value of one Share, as determined in good faith
by the Company's Board of Directors, as at the time the net
exercise election is made pursuant to this Section 1.3.
B = the Exercise Price.
The Company will promptly respond in writing to an inquiry by the Holder as
to the then current fair market value of one Share.
For purposes of the above calculation, fair market value of one Share shall
be determined by the Company's Board of Directors in good faith, however, that
where there exists a public market for the Company's Common Stock at the time of
such exercise, the fair market value per share shall be the average of the
closing price quoted on the Nasdaq National Market or on any
2
<PAGE>
exchange on which the Common Stock is listed, whichever is applicable, as
published in the (Western Edition of The Wall Street Journal) for the five (5)
trading days prior to the date of determination of fair market value.
Notwithstanding the foregoing, in the event the Warrant is exercised in
connection with the Company's initial public offering of Common Stock, the fair
market value per share shall be equal to the per share offering price to the
public of the Company's initial public offering.
1.4 Delivery of Certificate and New Warrant. Promptly, and no later
---------------------------------------
than thirty (30) days after Holder exercises this Warrant, the Company shall
deliver to Holder certificates for the Shares acquired and, if this Warrant has
not been fully exercised or converted and has not expired, this Warrant shall
automatically be reduced by the number of Shares issued and remain exercisable
for such remaining Shares not so acquired, and all other terms of the Warrant
shall otherwise remain in full force and effect as so adjusted. Upon final
exercise of this Warrant for any such remaining number of Shares, this Warrant
shall be surrendered by the Holder to the Company for cancellation.
1.5 Replacement of Warrants. On receipt of evidence reasonably
-----------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, or surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor.
1.6 Merger or Consolidation of the Company.
--------------------------------------
1.6.1. "Acquisition". For the purpose of this Warrant,
-----------
"Acquisition" means any consolidation or merger of the Company where the holders
of the Company's securities before the transaction beneficially own less than
fifty percent (50%) of the outstanding voting securities of the surviving entity
after the transaction.
1.6.2 Assumption of Warrant. Upon the closing of any Acquisition
---------------------
where the consideration for the Acquisition to be received by the Company's
shareholders consists solely of stock or securities of the acquirer or an entity
affiliated with the acquirer, the successor entity shall assume the obligations
of this Warrant, and this Warrant shall become exercisable (solely in accordance
with to the provisions of Section 1.1) for the same securities as would be
payable for the Shares subject to the unexercised portion of this Warrant as if
such Shares were outstanding on the record date for the Acquisition and
subsequent closing thereof. The Warrant Price shall be adjusted accordingly.
1.6.3 Termination of Warrant. In the case of (a) an Acquisition
----------------------
where the consideration for the Acquisition to be received by the Company's
shareholders in return for their capital stock of the Company consists of cash
or a combination of cash and other property or (b) the proposed liquidation and
dissolution of the Company, the Company shall give Holder at least ten (10) days
advance written notice of such event (the "Company Notice"), which notice shall
include the Company's best estimate of the value of the Shares receivable upon
exercise or conversion of this Warrant (based upon the consideration to be
received by the Company or its shareholders in the Acquisition) and the proposed
date upon which such event is expected to occur. During such notice period,
Holder may exercise or convert this Warrant in accordance with its terms,
without regard to the provisions of Section 1.1 whether or not exercise or
3
<PAGE>
conversion is contingent upon the happening of such event and/or existence of a
minimum value of the Shares receivable upon exercise or conversion as provided
on Holder's exercise notice; provided that such minimum value shall be no
greater than the per share price set forth in the Company Notice. Subject to
prior exercise or conversion as provided in the preceding sentence, this Warrant
will terminate at 5:00 p.m. Pacific time on the day prior to the date such event
is expected to occur as set forth in the Company Notice; provided that (a) the
Company Notice of the proposed event is actually received by Holder, as
evidenced by a return receipt of certified mail delivery, a certificate of
delivery by hand delivery or written verification of delivery from the overnight
courier, and (b) the event actually occurs within sixty (60) days after the date
it is expected to occur, as such date was specified in the Company Notice.
2. REPRESENTATIONS.
---------------
2.1 Representations of Holder. Holder hereby represents and warrants
-------------------------
to the Company as follows, that Holder is a sophisticated investor having such
knowledge and experience in business and investment matters that Holder is
capable of protecting Holder's own interests in connection with the acquisition,
exercise or disposition of this Warrant. Holder is an "accredited investor"
within the meaning of Regulation D promulgated under the Securities Act of 1933
(the "Act"). Holder is aware that this Warrant and the Shares are being, or will
be, issued to Holder in reliance upon Holder's representation in this Section 2
and that such securities are restricted securities that cannot be publicly sold
except in certain prescribed situations. Holder is aware of the provisions of
Rule 144 promulgated under the Act and of the conditions under which sales may
be made thereunder. Holder has received such information about the Company as
Holder deems reasonable, has had the opportunity to ask questions and receive
answers from the Company with respect to its business, assets, prospects and
financial condition and has verified any answers Holder has received from the
Company with independent third parties to the extent Holder deems necessary. The
Holder of this Warrant, by acceptance hereof, acknowledges this Warrant and the
Shares to be issued upon exercise hereof or conversion thereof are being
acquired solely for the Holder's own account and not as a nominee for any other
party, and for investment, and that the Holder will not offer, sell or otherwise
dispose of this Warrant or any Shares to be issued upon exercise hereof or
conversion thereof except under circumstances that will not result in a
violation of the Act or any state securities laws.
2.2 Representations of The Company.
------------------------------
The Company hereby represents and warrants to the Holder as
follows, that:
2.2.1 all Shares which may be issued upon the exercise of the
purchase right represented by this Warrant, and all securities, if any, issuable
upon conversion of the Shares, shall, upon issuance, be duly authorized, validly
issued, fully paid and nonassessable, and free of any liens and encumbrances
except for restrictions on transfer provided for herein, in the Company's
charter documents or under applicable federal and state securities laws.
2.2.2 to the Company's knowledge, there are no voting trusts,
stockholder agreements, proxies or other agreements in effect which relate to
voting or transfer of the Shares. The Shares are not and will not be, during
the term of this Warrant, subject to any preemptive rights that have not been
properly waived or complied with.
4
<PAGE>
2.2.3 the Shares issuable upon the exercise in full of this
Warrant have been, and at all times will be, duly and validly authorized and
reserved.
2.2.4 subject to the accuracy of the Holder representations in
Section 2.1 hereof, the offer, sale, and issuance of this Warrant and the
issuance of the Shares in conformity with the terms of this Warrant, constitute
transactions exempt from the registration requirements of Section 5 of the Act.
---
2.2.5 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. 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; the Company is not qualified to do business as a
foreign corporation in any jurisdiction; and such qualification is not presently
required in any jurisdiction where a failure to so qualify would have a material
adverse effect on the Company.
2.2.6 all corporate action on the part of the Company, its
officers, directors and shareholders necessary for the authorization, execution,
delivery and performance of this Warrant, the authorization, sale, issuance and
delivery of the Shares pursuant hereto, and for the performance of the Company's
obligations hereunder has been taken. This Warrant, when executed and delivered
by the Company, will constitute a valid and binding obligation of the Company,
enforceable in accordance with its terms, subject to (i) laws of general
application relating to bankruptcy, insolvency, and the relief of debtors and
(ii) rules of law governing specific performance, injunctive relief, or other
equitable remedies.
2.2.7 The Company is not in violation of any term of its Amended
and Restated Articles of Incorporation or Bylaws, or in any material respect of
any term or provision of any mortgage, indebtedness, indenture, contract,
agreement, instrument, judgment, or decree, and to the best of its knowledge, is
not in material violation of any order, statute, rule, or regulation applicable
to the Company. The execution, delivery, and performance of and compliance with
this Agreement and the Rights Agreement, and the issuance of the Securities,
have not resulted and will not result in (i) any violation of, or conflict with,
or constitute a default under, any such term or result in the creation of any
mortgage, pledge, lien, encumbrance, or charge upon any of the properties or
assets of the Company, or (ii) 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.
3. ADJUSTMENTS TO THE SHARES.
-------------------------
3.1 Stock Dividends, Splits, Combinations, Etc. If the Company shall
------------------------------------------
at any time prior to the expiration of this Warrant subdivide its Common Stock,
by split-up or otherwise, or combine its Common Stock, or issue additional
shares of its Common Stock as a dividend with respect to any shares of its
Common Stock, the number of Shares issuable on the exercise of this Warrant
shall forthwith be proportionately increased in the case of a subdivision or
stock dividend, or proportionately decreased in the case of a combination.
3.2 Reclassification or Reorganization. In case of any
----------------------------------
reclassification, capital reorganization, or change in the Common Stock (other
than as a result of a subdivision, combination, or stock dividend provided for
above), then, as a condition of such reclassification,
5
<PAGE>
reorganization, or change, lawful provision shall be made, so that Holder shall
have the right at any time prior to the expiration of this Warrant to purchase,
at a total price equal to that payable upon the exercise of this Warrant, the
kind and amount of shares of stock and other securities and property receivable
in connection with such reclassification, reorganization, or change by a holder
of the same number of shares of Common Stock as were purchasable by Holder
immediately prior to such reclassification, reorganization, or change. In any
such case appropriate provisions shall be made with respect to the rights and
interest of Holder so that the provisions hereof shall thereafter be applicable
with respect to any shares of stock or other securities and property deliverable
upon exercise hereof.
3.3 Adjustments of Warrant Price. If the outstanding Shares are
----------------------------
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares, the Warrant Price shall be proportionately increased, provided that
the aggregate purchase price shall remain the same. If the outstanding Shares
are divided by reclassification or otherwise, into a greater number of shares,
the Warrant Price shall be proportionately decreased, provided that the
aggregate purchase price shall remain the same.
3.4 Adjustment is Cumulative. The provisions of this Section 3 shall
------------------------
similarly apply to successive, stock dividends, stock spits or combinations,
reclassifications, exchanges, substitutions, or other events.
3.5 Fractional Shares. No fractional Shares shall be issuable upon
-----------------
exercise or conversion of the Warrant and the number of Shares to be issued
shall be rounded down to the nearest whole Share. If a fractional share interest
arises upon any exercise or conversion of the Warrant, the Company shall
eliminate such fractional Share interest by paying Holder an amount by check
computed by multiplying the fractional interest by the fair market value of a
full Share.
3.6 Certificate as to Adjustments. Upon each adjustment of the Warrant
-----------------------------
Price and/or the number or kind of securities purchasable upon exercise of this
Warrant, the Company at its expense shall compute such adjustment, and furnish
Holder with a certificate setting forth such adjustment and the facts upon which
such adjustment is based. The Company shall, upon written request, furnish
Holder a certificate setting forth the number or kind of securities purchasable
upon exercise of this Warrant and the Warrant Price in effect upon the date
thereof.
4. RESTRICTIONS ON TRANSFER.
------------------------
4.1 Legends. This Warrant and the Shares (and the securities issuable,
-------
directly or indirectly, upon conversion of the Shares, if any) shall be
imprinted with a legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY STATE SECURITIES LAW AND MAY NOT BE
SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE
REGISTRATION THEREOF UNDER SUCH ACT OR LAW OR PURSUANT TO RULE
144 AND ANY STATE EXEMPTION FROM REGISTRATION OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
4.2 Transferability. Holder may not transfer or assign any part or all
---------------
of this Warrant other than with the agreement of the Company in its sole
discretion. The Shares issuable upon
6
<PAGE>
exercise of this Warrant may not be transferred prior to an initial public
offering by the Company of its Common Stock pursuant to a registration statement
filed and declared effective under the Securities Act of 1933.
4.3 Compliance with Securities Laws on Transfer. This Warrant and the
-------------------------------------------
Shares issuable upon exercise this Warrant may not be transferred or assigned in
whole or in part without compliance with applicable federal and state securities
laws by the transferor and the transferee (including, without limitation, the
delivery of investment representation letters and legal opinions reasonably
satisfactory to the Company, as reasonably requested by the Company). The
Company shall not require Holder to provide an opinion of counsel if (a) the
transfer is to the shareholders or constituent partners of Holders by way of
dividend or distribution to all of the same or (b) there is no material question
as to the availability of current information as referenced in Rule 144(c),
Holder represents that it has complied with Rule 144(d) and (e) in reasonable
detail, the selling broker represents that it has complied with Rule 144(f), and
the Company is provided with a copy of Holder's notice of proposed sale and/or
transfer.
4.4 Market Standoff. The Holder agrees in connection with any
---------------
registration of the Company's securities under the Act that, upon the request of
the Company or the underwriters managing any registered public offering of the
Company's securities, Holder will not sell or otherwise dispose of any Shares or
any other securities of the Company without the prior written consent of the
Company or such managing underwriters, as the case may be, for a period of time
(not to exceed one hundred eighty (180) days, or such lesser period of time as
agreed to by the directors and other significant shareholders of the Company)
after the effective date of such registration requested by such managing
underwriters subject to all restrictions as the Company or the managing
underwriters may specify generally. Holder further agrees to enter into any
agreement reasonably required by the underwriters to implement the foregoing. In
order to enforce the foregoing covenant, the Company shall have the right to
place restrictive legends on the certificates representing the Shares subject to
this Section and to impose stop transfer instructions with respect to the Shares
held by Holder until the end of such period.
4.5 Registration Rights. Upon the Company's next financing in which it
-------------------
raises at least One Million Dollars ($1,000,000) through sale of its capital
stock in a single transaction or series of related transactions but not later
than January 31, 2000, the Company shall cause the Holder to become a party to
the Company's Restated and Amended Investor Rights Agreement dated September 2,
1999 or any successor thereto then in effect.
5. GENERAL PROVISIONS.
------------------
5.1 Notices. Any and all notices required or permitted to be given to
-------
a party pursuant to the provisions of this Warrant will be in writing and will
be effective and deemed to provide such party sufficient notice under this
Warrant on the earliest of the following: (i) at the time of personal delivery,
if delivery is in person; (ii) at the time of transmission by facsimile,
addressed to the other party at its facsimile number specified herein (or
hereafter modified by subsequent notice to the parties hereto), with
confirmation of receipt made by printed confirmation sheet verifying successful
transmission of the facsimile; (iii) one (1) business day after deposit with an
express overnight courier for United States deliveries, or two (2) business days
after such deposit for deliveries outside of the United States, with proof of
delivery from the courier requested; or (iv) three (3) business days after
deposit in the United States mail by certified mail (return receipt requested)
for United States deliveries.
7
<PAGE>
All notices for delivery outside the United States will be sent by
facsimile or by express courier. All notices not delivered personally or by
facsimile will be sent with postage and/or other charges prepaid and properly
addressed to the party to be notified at the address or facsimile number set
forth below the signature lines to this Warrant, or at such other address or
facsimile number as such other party may designate by one of the indicated means
of notice herein to the other parties hereto. Notices to the Company will be
marked "Attention: President". Notices by facsimile shall be machine verified as
received.
5.2 Waiver. This Warrant and any term hereof may be changed, waived,
------
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
5.3 Attorneys Fees. In the event of any dispute between the parties
--------------
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys' fees.
5.4 Governing Law. This Warrant will be governed by and construed in
-------------
accordance with the laws of the State of California without giving effect to
that body of laws pertaining to conflict of laws.
5.5 Further Assurances. The parties agree to execute such further
------------------
documents and instruments and to take such further actions as may be reasonably
necessary to carry out the purposes and intent of this Warrant.
5.6 Titles and Headings. The titles, captions and headings of this
-------------------
Warrant are included for ease of reference only and will be disregarded in
interpreting or construing this Warrant. Unless otherwise specifically stated,
all references herein to "sections" and "exhibits" will mean "sections" and
"exhibits" to this Warrant.
5.7 Counterparts. This Warrant may be executed in any number of
------------
counterparts, each of which when so executed and delivered will be deemed an
original, and all of which together shall constitute one and the same agreement.
5.8 Severability. If any provision of this Warrant is determined by
------------
any court or arbitrator of competent jurisdiction to be invalid, illegal or
unenforceable in any respect, such provision will be enforced to the maximum
extent possible given the intent of the parties hereto. If such clause or
provision cannot be so enforced, such provision shall be stricken from this
Warrant and the remainder of this Warrant shall be enforced as if such invalid,
illegal or unenforceable clause or provision had (to the extent not enforceable)
never been contained in this Warrant. Notwithstanding the forgoing, if the value
of this Warrant based upon the substantial benefit of the bargain for any party
is materially impaired, which determination as made by the presiding court or
arbitrator of competent jurisdiction shall be binding, then both parties agree
to substitute such provision(s) through good faith negotiations.
5.9 Facsimile Signatures. This Warrant may be executed and delivered
--------------------
by facsimile and upon such delivery the facsimile signature will be deemed to
have the same effect as if the original signature had been delivered to the
other party.
8
<PAGE>
5.10 Amendment and Waivers. This Warrant may be amended only by a
---------------------
written agreement executed by each of the parties hereto. No amendment of or
waiver of, or modification of any obligation under this Warrant will be
enforceable unless set forth in a writing signed by the party against which
enforcement is sought. Any amendment effected in accordance with this section
will be binding upon all parties hereto and each of their respective successors
and assigns. No delay or failure to require performance of any provision of this
Warrant shall constitute a waiver of that provision as to that or any other
instance. No waiver granted under this Warrant as to any one provision herein
shall constitute a subsequent waiver of such provision or of any other provision
herein, nor shall it constitute the waiver of any performance other than the
actual performance specifically waived.
5.11 Entire Agreement. This Warrant and the documents referred to
----------------
herein constitute the entire agreement and understanding of the parties with
respect to the subject matter of this Warrant, and supersede all prior
understandings and agreements, whether oral or written, between or among the
parties hereto with respect to the specific subject matter hereof.
COLT Telecom Group plc Optical Networks, Incorporated
By: /s/ By: /s/ Bill Jarvis
------------------------------- -------------------------------
Address: __________________________ Address: __________________________
___________________________________ ___________________________________
___________________________________ ___________________________________
Attention to: _____________________ Attention to: _____________________
Facsimile: ________________________ Facsimile: ________________________
9
<PAGE>
EXHIBIT A
NOTICE OF EXERCISE
------------------
(TO BE SIGNED ONLY UPON EXERCISE OF WARRANT)
1. The undersigned hereby elects to purchase ____________________
shares of the Common Stock (the "Shares") of Optical Networks, Incorporated, a
California corporation, pursuant to the terms of the attached Warrant to
Purchase Common Stock with an Issue Date of ____________________ (the
"Warrant"), as follows:
(Initial applicable method:)
_____ a. Undersigned tenders herewith payment of the total purchase
price of such Shares in full, pursuant to a check or wire
transfer, in the amount of $__________.
_____ b. This exercise or conversion _____ [is] _____ [is not]
contingent upon the closing of the Acquisition or other event
specified in the Company Notice to Holder in accordance with
Section 1.6 of the Warrant received by Holder on
________________ and _____ [is] _____ [is not] contingent upon
a sale price or fair market value for the Company's
_________________ Common Stock in the Acquisition or other
event of no less than the lesser of (a) $__________ per share
or (b) the per share price set forth in the Company Notice.
_____ c. Undersigned hereby elects to convert the Warrant into Shares
by the net exercise election pursuant to Section 1.2 of the
Warrant. This conversion is exercised with respect to
__________ shares of Common Stock covered by the Warrant.
2. Please issue a certificate or certificates representing said Shares
in the name of the undersigned. The undersigned represents that it is acquiring
the shares solely for its own account and not as a nominee for any other party
and not with a view toward the resale or distribution thereof except in
compliance with applicable securities laws and hereby repeats the
representations and warranties of the undersigned that are set forth in Section
2.1 of the attached Warrant.
___________________________________
(Name)
___________________________________
___________________________________
___________________________________
Address
___________________________________
(Signature of Holder)
10
<PAGE>
EXHIBIT 4.10
THIS WARRANT IS NOT TRANSFERABLE AND THE SHARES ISSUABLE HEREUNDER ARE SUBJECT
TO RESTRICTIONS ON TRANSFER AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED
WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144
OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS
COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE COMMON STOCK
OF
OPTICAL NETWORKS, INCORPORATED
Maximum Number of Shares: 111,500
Class of Stock: Common Stock
Initial Exercise Price: $1.82 per share
Issue Date: February 15, 2000
Expiration Date: February 14, 2005
This Warrant certifies that, for value received pursuant to the Purchase
and License Agreement (the "Purchase Agreement") entered into between Optical
Networks, Incorporated, a California corporation (the "Company") and FMR Corp.
("Fidelity" or "Holder"), dated as of December 21, 1999, Holder is entitled to
purchase from the Company, until 5:00 p.m. Pacific standard time, on the
Expiration Date set forth above, up to the number of fully paid and
nonassessable shares of Common Stock (the "Shares") of the Company described in
Section 1 below at the Initial Exercise Price per Share (the "Warrant Price")
set forth above and as adjusted pursuant to Section 2 of this Warrant, subject
to the provisions and upon the terms and conditions set forth in this Warrant.
1. EXERCISE.
--------
1.1. Exercisability.
--------------
As of the Issue Date, this Warrant shall be unexercisable with respect to
all Shares that are the subject of this Warrant. For so long as (a) the Purchase
Agreement has not been terminated by the Company due to a material breach by
Fidelity and (b) this Warrant remains unexpired, this Warrant shall become
vested and exercisable with respect to the number of Shares determined according
to the following formula:
<PAGE>
V = P*Z
---
C
where V = the aggregate number of shares that are vested and exercisable
under this Warrant.
P = the total amount of all Paid Orders.
C = $20,000,000
Z = 111,500 the Maximum Number of Shares.
For purposes of this Section 1.1, "Paid Orders" shall mean the dollar
amount of all Product (as defined in the Purchase Agreement) purchased by Holder
within the term of the Purchase Agreement (calculated using the prices set out
in Attachment A of the Purchase Agreement). Notwithstanding the foregoing
formula, this Warrant shall become vested and exercisable with respect to all
remaining unexercisable Shares that are the subject of this Warrant on the
seventh (7/th/) anniversary of the Issue Date.
1.2 Method of Exercise. Holder may exercise this Warrant, in whole or
------------------
in part, by delivering a duly executed Notice of Exercise in substantially the
form attached as Exhibit A to the principal office of the Company. Unless Holder
---------
is exercising the conversion right set forth in Section 1.3, Holder shall also
deliver to the Company a check for the aggregate Warrant Price for the Shares
being purchased.
1.3 Net Exercise Election. The Holder may elect to convert all or a
---------------------
portion of this Warrant, without the payment by the Holder of any additional
consideration, by the surrender of this Warrant or such portion of this Warrant
to the Company, with the net exercise election selected in the Notice of
Exercise attached hereto as Exhibit A duly executed by the Holder, up to the
---------
number of Shares that is obtained under the following formula:
X = Y (A-B)
-------
A
where X = the number of Shares to be issued to the Holder pursuant to this
Section 1.3.
Y = the number of exercisable Shares subject to this Warrant with
respect to which the net exercise election is made.
A = the fair market value of one Share, as determined in good faith
by the Company's Board of Directors, as at the time the net
exercise election is made pursuant to this Section 1.3.
B = the Warrant Price.
The Company will promptly respond in writing to an inquiry by the Holder as
to the then current fair market value of one Share.
-2-
<PAGE>
For purposes of the above calculation, fair market value of one Share shall
be determined by the Company's Board of Directors in good faith; provided,
however, that where there exists a public market for the Company's Common Stock
at the time of such exercise, the fair market value per share shall be the
average closing price quoted on the Nasdaq National Market or on any exchange on
which the Common Stock is listed, whichever is applicable, as published in the
(Western Edition of The Wall Street Journal) for the five (5) trading days prior
to the date of determination of fair market value. Notwithstanding the
foregoing, in the event the Warrant is exercised in connection with the
Company's initial public offering of Common Stock, the fair market value per
share shall be equal to the per share offering price to the public of the
Company's initial public offering.
1.4 Delivery of Certificate and New Warrant. Promptly after Holder
---------------------------------------
exercises this Warrant, the Company shall deliver to Holder certificates for the
Shares acquired and, if this Warrant has not been fully exercised or converted
and has not expired, this Warrant shall automatically be reduced by the number
of Shares issued and remain exercisable for such remaining Shares not so
acquired, and all other terms of the Warrant shall otherwise remain in full
force and effect as so adjusted. Upon final exercise of this Warrant for any
such remaining number of Shares, this Warrant shall be surrendered by the Holder
to the Company for cancellation.
1.5 Replacement of Warrants. On receipt of evidence reasonably
-----------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, or surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor.
1.6 Merger or Consolidation of the Company.
--------------------------------------
1.6.1. "Acquisition". For the purpose of this Warrant,
-----------
"Acquisition" means any consolidation or merger of the Company where the holders
of the Company's securities before the transaction beneficially own less than
fifty percent (50%) of the outstanding voting securities of the surviving entity
after the transaction.
1.6.2 Assumption of Warrant. Upon the closing of any Acquisition
---------------------
where the consideration for the Acquisition to be received by the Company's
shareholders consists solely of stock or securities of the acquirer or an entity
affiliated with the acquirer, the successor entity shall assume the obligations
of this Warrant, and this Warrant shall become exercisable (solely in accordance
with to the provisions of Section 1.1) for the same securities as would be
payable for the Shares subject to the unexercised portion of this Warrant as if
such Shares were outstanding on the record date for the Acquisition and
subsequent closing thereof. The Warrant Price shall be adjusted accordingly.
1.6.3 Termination of Warrant. In the case of (a) an Acquisition
----------------------
where the consideration for the Acquisition to be received by the Company's
shareholders in return for their capital stock of the Company consists of cash
or a combination of cash and other property or (b) the proposed liquidation and
dissolution of the Company, the Company shall give Holder
-3-
<PAGE>
at least ten (10) days advance written notice of such event (the "Company
Notice"), which notice shall include the Company's best estimate of the value of
the Shares receivable upon exercise or conversion of this Warrant (based upon
the consideration to be received by the Company or its shareholders in the
Acquisition) and the proposed date upon which such event is expected to occur.
During such notice period, Holder may exercise or convert this Warrant in
accordance with its terms, without regard to the provisions of Section 1.1
whether or not exercise or conversion is contingent upon the happening of such
event and/or existence of a minimum value of the Shares receivable upon exercise
or conversion as provided on Holder's exercise notice; provided that such
-------- ----
minimum value shall be no greater than the per share price set forth in the
Company Notice. Subject to prior exercise or conversion as provided in the
preceding sentence, this Warrant will terminate at 5:00 p.m. Pacific time on the
day prior to the date such event is expected to occur as set forth in the
Company Notice; provided that (a) the Company Notice of the proposed event is
-------- ----
actually received by Holder, as evidenced by a return receipt of certified mail
delivery, a certificate of delivery by hand delivery or written verification of
delivery from the overnight courier, and (b) the event actually occurs within
sixty (60) days after the date it is expected to occur, as such date was
specified in the Company Notice.
2. ADJUSTMENTS TO THE SHARES.
-------------------------
2.1 Stock Dividends, Splits, Combinations, Etc. If the Company shall
------------------------------------------
at any time prior to the expiration of this Warrant subdivide its Common Stock,
by split-up or otherwise, or combine its Common Stock, or issue additional
shares of its Common Stock as a dividend with respect to any shares of its
Common Stock, the number of Shares issuable on the exercise of this Warrant
shall forthwith be proportionately increased in the case of a subdivision or
stock dividend, or proportionately decreased in the case of a combination.
2.2 Reclassification or Reorganization. In case of any
----------------------------------
reclassification, capital reorganization, or change in the Common Stock (other
than as a result of a subdivision, combination, or stock dividend provided for
above), then, as a condition of such reclassification, reorganization, or
change, lawful provision shall be made, so that Holder shall have the right at
any time prior to the expiration of this Warrant to purchase, at a total price
equal to that payable upon the exercise of this Warrant, the kind and amount of
shares of stock and other securities and property receivable in connection with
such reclassification, reorganization, or change by a holder of the same number
of shares of Common Stock as were purchasable by Holder immediately prior to
such reclassification, reorganization, or change. In any such case appropriate
provisions shall be made with respect to the rights and interest of Holder so
that the provisions hereof shall thereafter be applicable with respect to any
shares of stock or other securities and property deliverable upon exercise
hereof.
2.3 Adjustments of Warrant Price. If the outstanding Shares are
----------------------------
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares, the Warrant Price shall be proportionately increased, provided that
the aggregate purchase price shall remain the same. If the outstanding Shares
are divided by reclassification or otherwise, into a greater number of shares,
the Warrant Price shall be proportionately decreased, provided that the
aggregate purchase price shall remain the same.
-4-
<PAGE>
2.4 Adjustment is Cumulative. The provisions of this Section 2 shall
------------------------
similarly apply to successive, stock dividends, stock spits or combinations,
reclassifications, exchanges, substitutions, or other events.
2.5 Fractional Shares. No fractional Shares shall be issuable upon
-----------------
exercise or conversion of the Warrant and the number of Shares to be issued
shall be rounded down to the nearest whole Share. If a fractional share interest
arises upon any exercise or conversion of the Warrant, the Company shall
eliminate such fractional Share interest by paying Holder an amount by check
computed by multiplying the fractional interest by the fair market value of a
full Share.
2.6 Certificate as to Adjustments. Upon each adjustment of the Warrant
-----------------------------
Price and/or the number or kind of securities purchasable upon exercise of this
Warrant, the Company at its expense shall compute such adjustment, and furnish
Holder with a certificate setting forth such adjustment and the facts upon which
such adjustment is based. The Company shall, upon written request, furnish
Holder a certificate setting forth the number or kind of securities purchasable
upon exercise of this Warrant and the Warrant Price in effect upon the date
thereof.
3. REPRESENTATIONS; RESTRICTIONS ON TRANSFER.
-----------------------------------------
3.1 Representations of Company. The Company hereby represents
--------------------------
and warrants to the Holder as follows, that:
3.1.1 all Shares which may be issued upon the exercise
of the purchase right represented by this Warrant, and all securities, if
any, issuable upon conversion of the Shares, shall, upon issuance, be duly
authorized, validly issued, fully paid and nonassessable, and free of any
liens and encumbrances except for restrictions on transfer provided for
herein, in the Company's charter documents or under applicable federal and
state securities laws.
3.1.2 to the Company's knowledge, there are no voting
trusts, stockholder agreements, proxies or other agreements in effect which
relate to voting or transfer of the Shares. The Shares are not and will not
be, during the term of this Warrant, subject to any preemptive rights that
have not been properly waived or complied with.
3.1.3 the Shares issuable upon the exercise in full of
this Warrant have been, and at all times will be, duly and validly
authorized and reserved.
3.1.4 subject to the accuracy of the Holder
representations in Section 2.1 hereof, the offer, sale, and issuance of
this Warrant and the issuance of the Shares in conformity with the terms of
this Warrant, constitute transactions exempt from the registration
requirements of Section 5 of the Act.
3.1.5 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. 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; the
-5-
<PAGE>
Company is not qualified to do business as a foreign corporation in any
jurisdiction; and such qualification is not presently required in any
jurisdiction where a failure to so qualify would have a material adverse
effect on the Company.
3.1.6 all corporate action on the part of the Company,
its officers, directors and shareholders necessary for the authorization,
execution, delivery and performance of this Warrant, the authorization,
sale, issuance and delivery of the Shares pursuant hereto, and for the
performance of the Company's obligations hereunder has been taken. This
Warrant, when executed and delivered by the Company, will constitute a
valid and binding obligation of the Company, enforceable in accordance with
its terms, subject to (i) laws of general application relating to
bankruptcy, insolvency, and the relief of debtors and (ii) rules of law
governing specific performance, injunctive relief, or other equitable
remedies.
3.1.7 The Company is not in violation of any term of its
Amended and Restated Articles of Incorporation or Bylaws, or in any
material respect of any term or provision of any mortgage, indebtedness,
indenture, contract, agreement, instrument, judgment, or decree, and to the
best of its knowledge, is not in material violation of any order, statute,
rule, or regulation applicable to the Company. The execution, delivery, and
performance of and compliance with this Agreement and the issuance of the
Securities, have not resulted and will not result in (i) any violation of,
or conflict with, or constitute a default under, any such term or result in
the creation of any mortgage, pledge, lien, encumbrance, or charge upon any
of the properties or assets of the Company, or (ii) 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.
3.2 Representations of Holder. Holder hereby represents and warrants
-------------------------
to the Company as follows. Holder is a sophisticated investor having such
knowledge and experience in business and investment matters that Holder is
capable of protecting Holder's own interests in connection with the acquisition,
exercise or disposition of this Warrant. Holder is an "accredited investor"
within the meaning of Regulation D promulgated under the Securities Act of 1933
(the "Act"). Holder is aware that this Warrant and the Shares are being, or will
be, issued to Holder in reliance upon Holder's representation in this Section 3
and that such securities are restricted securities that cannot be publicly sold
except in certain prescribed situations. Holder is aware of the provisions of
Rule 144 promulgated under the Act and of the conditions under which sales may
be made thereunder. Holder has received such information about the Company as
Holder deems reasonable, has had the opportunity to ask questions and receive
answers from the Company with respect to its business, assets, prospects and
financial condition and has verified any answers Holder has received from the
Company with independent third parties to the extent Holder deems necessary. The
Holder of this Warrant, by acceptance hereof, acknowledges this Warrant and the
Shares to be issued upon exercise hereof or conversion thereof are being
acquired solely for the Holder's own account and not as a nominee for any other
party, and for investment, and that the Holder will not offer, sell or otherwise
dispose of this Warrant or any Shares to be issued upon exercise hereof or
conversion thereof except under circumstances that will not result in a
violation of the Act or any state securities laws.
-6-
<PAGE>
3.3 Legends. This Warrant and the Shares (and the securities issuable,
-------
directly or indirectly, upon conversion of the Shares, if any) shall be
imprinted with a legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY STATE SECURITIES LAW AND MAY NOT BE SOLD,
PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
THEREOF UNDER SUCH ACT OR LAW OR PURSUANT TO RULE 144 AND ANY STATE
EXEMPTION FROM REGISTRATION OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION
IS NOT REQUIRED.
3.4 Transferability. Holder may not transfer or assign any part or all
---------------
of this Warrant except to Affiliates or by donative transfers to Fidelity
Foundation, Fidelity Non-Profit Management Foundation and the Edward C. Johnson
Fund. For purposes of this Section 3.4, "Affiliates" shall include FMR Corp. and
its subsidiaries
and affiliates; Fidelity International Limited and its subsidiaries and
affiliates; Fidelity Investors Limited Partnership, Fidelity Seaport Limited
Partnership, Fidelity Investors II Limited Partnership and any other partnership
owned or controlled by shareholders of FMR Corp. The Shares issuable upon
exercise of this Warrant may not be transferred prior to an initial public
offering by the Company of its Common Stock pursuant to a registration statement
filed and declared effective under the Securities Act of 1933.
3.5 Compliance with Securities Laws on Transfer. This Warrant and the
-------------------------------------------
Shares issuable upon exercise this Warrant may not be transferred or assigned in
whole or in part without compliance with applicable federal and state securities
laws by the transferor and the transferee (including, without limitation, the
delivery of investment representation letters and legal opinions reasonably
satisfactory to the Company, as reasonably requested by the Company). The
Company shall not require Holder to provide an opinion of counsel if (a) the
transfer is to the shareholders or constituent partners of Holders by way of
dividend or distribution to all of the same or (b) there is no material question
as to the availability of current information as referenced in Rule 144(c),
Holder represents that it has complied with Rule 144(d) and (e) in reasonable
detail, the selling broker represents that it has complied with Rule 144(f), and
the Company is provided with a copy of Holder's notice of proposed sale and/or
transfer.
3.6 Market Standoff. The Holder agrees in connection with any
---------------
registration of the Company's securities under the Act that, upon the request of
the Company or the underwriters managing any registered public offering of the
Company's securities, Holder will not sell or otherwise dispose of any Shares or
any other securities of the Company without the prior written consent of the
Company or such managing underwriters, as the case may be, for a period of time
(not to exceed one hundred eighty (180) days) after the effective date of such
registration requested by such managing underwriters subject to all restrictions
as the Company or the managing underwriters may specify generally. Holder
further agrees to enter into any agreement reasonably required by the
underwriters to implement the foregoing. In order to enforce the foregoing
covenant, the Company shall have the right to place restrictive legends on the
-7-
<PAGE>
certificates representing the Shares subject to this Section and to impose stop
transfer instructions with respect to the Shares held by Holder until the end of
such period.
4. GENERAL PROVISIONS.
------------------
4.1 Notices. Any and all notices required or permitted to be given to
-------
a party pursuant to the provisions of this Warrant will be in writing and will
be effective and deemed to provide such party sufficient notice under this
Warrant on the earliest of the following: (i) at the time of personal delivery,
if delivery is in person; (ii) at the time of transmission by facsimile,
addressed to the other party at its facsimile number specified herein (or
hereafter modified by subsequent notice to the parties hereto), with
confirmation of receipt made by both telephone and printed confirmation sheet
verifying successful transmission of the facsimile; (iii) one (1) business day
after deposit with an express overnight courier for United States deliveries, or
two (2) business days after such deposit for deliveries outside of the United
States, with proof of delivery from the courier requested; or (iv) three (3)
business days after deposit in the United States mail by certified mail (return
receipt requested) for United States deliveries.
All notices for delivery outside the United States will be sent by
facsimile or by express courier. All notices not delivered personally or by
facsimile will be sent with postage and/or other charges prepaid and properly
addressed to the party to be notified at the address or facsimile number set
forth below the signature lines to this Warrant, or at such other address or
facsimile number as such other party may designate by one of the indicated means
of notice herein to the other parties hereto. Notices to the Company will be
marked "Attention: President". Notices by facsimile shall be machine verified as
received.
4.2 Waiver. This Warrant and any term hereof may be changed, waived,
------
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
4.3 Attorneys Fees. In the event of any dispute between the parties
--------------
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys' fees.
4.4 Governing Law. This Warrant will be governed by and construed in
-------------
accordance with the laws of the State of California, without giving effect to
that body of laws pertaining to conflict of laws.
4.5 Further Assurances. The parties agree to execute such further
------------------
documents and instruments and to take such further actions as may be reasonably
necessary to carry out the purposes and intent of this Warrant.
4.6 Titles and Headings. The titles, captions and headings of this
-------------------
Warrant are included for ease of reference only and will be disregarded in
interpreting or construing this Warrant. Unless otherwise specifically stated,
all references herein to "sections" and "exhibits" will mean "sections" and
"exhibits" to this Warrant.
-8-
<PAGE>
4.7 Counterparts. This Warrant may be executed in any number of
------------
counterparts, each of which when so executed and delivered will be deemed an
original, and all of which together shall constitute one and the same agreement.
4.8 Severability. If any provision of this Warrant is determined by
------------
any court or arbitrator of competent jurisdiction to be invalid, illegal or
unenforceable in any respect, such provision will be enforced to the maximum
extent possible given the intent of the parties hereto. If such clause or
provision cannot be so enforced, such provision shall be stricken from this
Warrant and the remainder of this Warrant shall be enforced as if such invalid,
illegal or unenforceable clause or provision had (to the extent not enforceable)
never been contained in this Warrant. Notwithstanding the forgoing, if the value
of this Warrant based upon the substantial benefit of the bargain for any party
is materially impaired, which determination as made by the presiding court or
arbitrator of competent jurisdiction shall be binding, then both parties agree
to substitute such provision(s) through good faith negotiations.
4.9 Facsimile Signatures. This Warrant may be executed and delivered
--------------------
by facsimile and upon such delivery the facsimile signature will be deemed to
have the same effect as if the original signature had been delivered to the
other party.
4.10 Amendment and Waivers. This Warrant may be amended only by a
---------------------
written agreement executed by each of the parties hereto. No amendment of or
waiver of, or modification of any obligation under this Warrant will be
enforceable unless set forth in a writing signed by the party against which
enforcement is sought. Any amendment effected in accordance with this section
will be binding upon all parties hereto and each of their respective successors
and assigns. No delay or failure to require performance of any provision of this
Warrant shall constitute a waiver of that provision as to that or any other
instance. No waiver granted under this Warrant as to any one provision herein
shall constitute a subsequent waiver of such provision or of any other provision
herein, nor shall it constitute the waiver of any performance other than the
actual performance specifically waived.
4.11 Entire Agreement. This Warrant and the documents referred to
----------------
herein constitute the entire agreement and understanding of the parties with
respect to the subject matter of this Warrant, and supersede all prior
understandings and agreements, whether oral or written, between or among the
parties hereto with respect to the specific subject matter hereof.
-9-
<PAGE>
FMR Corp. Optical Networks, Incorporated
By: /s/ John H. Remondi By: /s/ Terrence J. Schmid
------------------------------ ------------------------------
Address: 82 Devonshire Street Address: 166 Baypointe Parkway
------------------------- -------------------------
R25C San Jose, CA 95134
- ---------------------------------- ----------------------------------
Boston, MA 02109
- ---------------------------------- ----------------------------------
Attention to: John H. Remondi Attention to: Terry Schmid
-------------------- --------------------
Facsimile: 617-476-5015 Facsimile: 408-965-2665
------------------------ -----------------------
-10-
<PAGE>
EXHIBIT A
NOTICE OF EXERCISE
------------------
(TO BE SIGNED ONLY UPON EXERCISE OF WARRANT)
1. The undersigned hereby elects to purchase ____________________
shares of the Common Stock (the "Shares") of Optical Networks, Incorporated, a
California corporation, pursuant to the terms of the attached Warrant to
Purchase Common Stock with an Issue Date of ____________________ (the
"Warrant"), as follows:
(Initial applicable method:)
____ a. Undersigned tenders herewith payment of the total purchase
price of such Shares in full, pursuant to a check or wire
transfer, in the amount of $__________.
_____ b. This exercise or conversion _____ [is] _____ [is not]
contingent upon the closing of the Acquisition or other event
specified in the Company Notice to Holder in accordance with
Section 1.6 of the Warrant received by Holder on
________________ and _____ [is] _____ [is not] contingent upon
a sale price or fair market value for the Company's
_________________ Common Stock in the Acquisition or other
event of no less than the lesser of (a) $__________ per share
or (b) the per share price set forth in the Company Notice.
____ c. Undersigned hereby elects to convert the Warrant into Shares
by the net exercise election pursuant to Section 1.2 of the
Warrant. This conversion is exercised with respect to
__________ shares of Common Stock covered by the Warrant.
2. Please issue a certificate or certificates representing said Shares
in the name of the undersigned. The undersigned represents that it is acquiring
the shares solely for its own account and not as a nominee for any other party
and not with a view toward the resale or distribution thereof except in
compliance with applicable securities laws and hereby repeats the
representations and warranties of the undersigned that are set forth in Section
3.2 of the attached Warrant.
__________________________________
(Name)
__________________________________
__________________________________
__________________________________
Address
__________________________________
(Signature of Holder)
<PAGE>
EXHIBIT 4.11
OPTICAL NETWORKS, INCORPORATED
REDEMPTION AND REPURCHASE AGREEMENT
This Redemption and Repurchase Agreement (the "Agreement") is made effective as
---------
of December 22, 1999, between Optical Networks, Incorporated, a California
corporation (the "Company"), with its principal office at 166-B Baypointe
-------
Parkway, San Jose, California 95134 and Williams Communications, Inc., a
Delaware corporation ("Williams"), with its principal office at One Williams
--------
Center, Tulsa, Oklahoma 74172.
Redemption Right: Immediately following execution of this Agreement, the
parties will enter into good faith negotiations to
establish a mutually agreeable test plan ("Test Plan")
for Company products ("Products") to be purchased under
the terms and conditions set forth in a definitive
Purchase and License Agreement to be negotiated and
executed by the Company and Williams subsequent to the
date of this Agreement (the "Purchase Agreement"). The
Test Plan will include at a minimum the following
terms: (i) technical test criteria, (ii) notice of
failures, (iii) period for correction and retesting. In
the event that the Products fail to meet the
requirements of the Test Plan, Company shall, upon
written demand from Williams, redeem all or part of
Williams' shares of Series G Preferred Stock of the
Company (the "Williams Shares") for $17.00 per share
plus accrued but unpaid dividends.
Repurchase Right: If, despite the Company's performance of all of its
material obligations in accordance with the terms and
conditions set forth in the Purchase Agreement,
Williams fails to purchase or commit to purchase the
pursuant to a non-cancelable purchase order or orders
of at least an aggregate of $30 million of the
Company's products and services (whether under the
Purchase Agreement or not) by June 30, 2001, the
Company shall have a right to repurchase the Williams
Shares for $12.635 per share accrued but unpaid
dividends upon written demand.
No Fault Divorce: If for any reason Williams and the Company fail to
execute the Purchase Agreement within 60 days after the
date of this Agreement, the Company shall have a right
to repurchase, and Williams shall have a right to
redeem, all or part of the Williams Shares for $12.635
per share plus accrued but unpaid dividends upon
written demand.
Preferential Pricing: Williams shall receive preferential pricing for the
Company's products and services, such pricing or a
mechanism for establishing such pricing to be set forth
in the Purchase Agreement. For purposes of this
Agreement, "preferential pricing" means pricing no less
favorable than the prices offered to any other customer
purchasing similar products and volumes under
equivalent terms.
Advisory Board In the event that Company establishes a Technical
Representation: Advisory Board, Williams shall be entitled to appoint
one member to the board subject to the approval of the
Company.
Additional Terms: Effectiveness of this Agreement is subject to
compliance with applicable laws, including but not
limited to, any required Company Board of Directors or
Shareholder approvals. This Agreement will be
interpreted and governed by California law, excluding
choice of law rules.
<PAGE>
OPTICAL NETWORKS, INCORPORATED WILLIAMS COMMUNICATIONS, INC.
By: /s/ Terrence J. Schmid By: /s/
------------------------ -------------------------------------
Name: Terrence J. Schmid
Title: Chief Financial Officer Name:___________________________________
Title:__________________________________
Date:___________________________________
2
<PAGE>
EXHIBIT 10.02
OPTICAL NETWORKS, INCORPORATED
1997 STOCK PLAN
1. Purposes of the Plan. The purposes of this Stock Plan are to attract
--------------------
and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants and to promote the success of the Company's business. Options
granted under the Plan may be Incentive Stock Options or Nonstatutory Stock
Options, as determined by the Administrator at the time of grant. Stock
Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as shall
-------------
be administering the Plan in accordance with Section 4 hereof.
(b) "Applicable Laws" means the requirements relating to the
---------------
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options or Stock Purchase Rights are
granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the Board
---------
in accordance with Section 4 hereof.
(f) "Common Stock" means the Common Stock of the Company.
------------
(g) "Company" means Optical Networks, Incorporated, a California
-------
corporation.
(h) "Consultant" means any person who is engaged by the Company or any
----------
Parent or Subsidiary to render consulting or advisory services and is
compensated for such services.
(i) "Director" means a member of the Board of Directors of the
--------
Company.
(j) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the
<PAGE>
Company or (ii) transfers between locations of the Company or between the
Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive
Stock Options, no such leave may exceed ninety days, unless reemployment upon
expiration of such leave is guaranteed by statute or contract. If reemployment
upon expiration of a leave of absence approved by the Company is not so
guaranteed, on the 181st day of such leave any Incentive Stock Option held by
the Optionee shall cease to be treated as an Incentive Stock Option and shall be
treated for tax purposes as a Nonstatutory Stock Option. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(l) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
on the last market trading day prior to the day of determination; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(m) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code.
(n) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(o) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(p) "Option" means a stock option granted pursuant to the Plan.
------
(q) "Option Agreement" means an agreement between the Company and an
----------------
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
-2-
<PAGE>
(r) "Option Exchange Program" means a program whereby outstanding
-----------------------
Options are exchanged for Options with a lower exercise price.
(s) "Optioned Stock" means the Common Stock subject to an Option or a
--------------
Stock Purchase Right.
(t) "Optionee" means the holder of an outstanding Option or Stock
--------
Purchase Right granted under the Plan.
(u) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(v) "Plan" means this 1997 Stock Plan.
----
(w) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of a Stock Purchase Right under Section 11 below.
(x) "Section 16(b)" means Section 16(b) of the Exchange Act.
-------------
(y) "Service Provider" means an Employee, Director or Consultant.
----------------
(z) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 12 below.
(aa) "Stock Purchase Right" means a right to purchase Common Stock
--------------------
pursuant to Section 11 below.
(bb) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be subject to option
and sold under the Plan is 2,424,921 Shares. The Shares may be authorized but
unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated). However, Shares that have actually been issued under the Plan, upon
exercise of either an Option or Stock Purchase Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
-3-
<PAGE>
4. Administration of the Plan.
--------------------------
(a) The Plan shall be administered by the Board or a Committee
appointed by the Board, which Committee shall be constituted to comply with
Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and, in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities, the
Administrator shall have the authority in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may from time to time be granted hereunder;
(iii) to determine the number of Shares to be covered by each
such award granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions of any Option or
Stock Purchase Right granted hereunder. Such terms and conditions include, but
are not limited to, the exercise price, the time or times when Options or Stock
Purchase Rights may be exercised (which may be based on performance criteria),
any vesting acceleration or waiver of forfeiture restrictions, and any
restriction or limitation regarding any Option or Stock Purchase Right or the
Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vi) to determine whether and under what circumstances an Option
may be settled in cash under subsection 9(f) instead of Common Stock;
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option has declined since the date the Option was granted;
(viii) to initiate an Option Exchange Program;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having a
Fair Market Value equal to the amount required to be withheld. The Fair Market
Value of the Shares to be withheld shall be determined
-4-
<PAGE>
on the date that the amount of tax to be withheld is to be determined. All
elections by Optionees to have Shares withheld for this purpose shall be made in
such form and under such conditions as the Administrator may deem necessary or
advisable; and
(xi) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan.
(c) Effect of Administrator's Decision. All decisions,
----------------------------------
determinations and interpretations of the Administrator shall be final and
binding on all Optionees.
5. Eligibility.
-----------
(a) Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
(b) Each Option shall be designated in the Option Agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 5(b), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(c) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon any Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall it interfere in
any way with his or her right or the Company's right to terminate such
relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon its adoption by the
------------
Board. It shall continue in effect for a term of ten (10) years unless sooner
terminated under Section 14 of the Plan.
7. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement; provided, however, that the term shall be no more than ten (10) years
from the date of grant thereof. In the case of an Incentive Stock Option
granted to an Optionee who, at the time the Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Option shall
be five (5) years from the date of grant or such shorter term as may be provided
in the Option Agreement.
-5-
<PAGE>
8. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued upon
exercise of an Option shall be such price as is determined by the Administrator,
but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of grant of
such Option, owns stock representing more than ten percent (10%) of the voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
exercise price shall be no less than 110% of the Fair Market Value per Share on
the date of grant.
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a Service Provider who, at the time of grant
of such Option, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the exercise price shall be no less than 110% of the Fair Market Value per Share
on the date of the grant.
(B) granted to any other Service Provider, the per Share
exercise price shall be no less than 85% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price other than as required above pursuant to a merger or
other corporate transaction.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant). Such consideration may consist of (1) cash,
(2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5) consideration received by the Company
under a cashless exercise program implemented by the Company in connection with
the Plan, or (6) any combination of the foregoing methods of payment. In making
its determination as to the type of consideration to accept, the Administrator
shall consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
-6-
<PAGE>
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable according to the terms hereof at such
times and under such conditions as determined by the Administrator and set forth
in the Option Agreement, but in no case at a rate of less than 20% per year over
five (5) years from the date the Option is granted. Unless the Administrator
provides otherwise, vesting of Options granted hereunder shall be tolled during
any unpaid leave of absence. An Option may not be exercised for a fraction of a
Share.
An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Shares, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares thereafter available, both for purposes of the Plan and for
sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
-------------------------------------------------
ceases to be a Service Provider, such Optionee may exercise his or her Option
within such period of time as is specified in the Option Agreement (of at least
thirty (30) days) to the extent that the Option is vested on the date of
termination (but in no event later than the expiration of the term of the Option
as set forth in the Option Agreement). To the extent that the Optionee is not
entitled to exercise the Option on the date of such termination, or if the
Optionee does not exercise such Option to the extent so entitled within the time
specified herein, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of Optionee's disability, the Optionee may within twelve
(12) months from the date of such termination (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise an Option to the extent otherwise entitled to exercise it
at the date of such termination. If such disability is not a "disability" as
such term is defined in Section 22(e)(3) of the Code, in the case of an
Incentive Stock Option such Incentive Stock Option shall automatically cease to
be treated as an Incentive Stock Option and shall be treated for tax purposes as
a Nonstatutory Stock Option on the day three months and one day following such
termination. To the extent that the Optionee is not entitled to exercise the
Option on the date of
-7-
<PAGE>
termination, or if the Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
-----------------
the Option may be exercised at any time within twelve (12) months following the
date of death (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant) to the extent vested on the date of
death. If, at the time of death, the Optionee is not vested as to the entire
Option, the Shares covered by the unvested portion of the Option shall revert to
the Plan. The Option may be exercised by the executor or administrator of the
Optionee's estate or, if none, by the person(s) entitled to exercise the Option
under the Optionee's will or the laws of descent or distribution. If the Option
is not so exercised within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to buy
-----------------
out for a payment in cash or Shares, an Option previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
10. Non-Transferability of Options and Stock Purchase Rights. Options and
--------------------------------------------------------
Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically of the terms, conditions and restrictions
related to the offer, including the number of Shares that such person shall be
entitled to purchase, the price to be paid, and the time within which such
person must accept such offer. The terms of the offer shall comply in all
respects with Section 260.140.42 of Title 10 of the California Code of
Regulations. The offer shall be accepted by execution of a Restricted Stock
purchase agreement in the form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise,
-----------------
the Restricted Stock purchase agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's service with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine, but in no case at a rate of less than 20% per year
over five years from the date of purchase.
-8-
<PAGE>
(c) Other Provisions. The Restricted Stock purchase agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have rights equivalent to those of a shareholder
and shall be a shareholder when his or her purchase is entered upon the records
of the duly authorized transfer agent of the Company. No adjustment shall be
made for a dividend or other right for which the record date is prior to the
date the Stock Purchase Right is exercised, except as provided in Section 12 of
the Plan.
12. Adjustments Upon Changes in Capitalization, Merger or Asset Sale.
----------------------------------------------------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company. The conversion of any convertible securities
of the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify the
Optionee at least fifteen (15) days prior to such proposed action. To the
extent it has not been previously exercised, the Option or Stock Purchase Right
shall terminate immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the
event that the successor corporation refuses to assume or substitute for the
Option or Stock Purchase Right, the Optionee shall fully vest in and have the
right to exercise the Option or Stock Purchase Right as to all of the Optioned
Stock, including Shares as to which it would not otherwise be vested or
exercisable. If an Option or Stock Purchase Right becomes fully vested
-9-
<PAGE>
and exercisable in lieu of assumption or substitution in the event of a merger
or sale of assets, the Administrator shall notify the Optionee in writing or
electronically that the Option or Stock Purchase Right shall be fully
exercisable for a period of fifteen (15) days from the date of such notice, and
the Option or Stock Purchase Right shall terminate upon the expiration of such
period. For the purposes of this paragraph, the Option or Stock Purchase Right
shall be considered assumed if, following the merger or sale of assets, the
option or right confers the right to purchase or receive, for each Share of
Optioned Stock subject to the Option or Stock Purchase Right immediately prior
to the merger or sale of assets, the consideration (whether stock, cash, or
other securities or property) received in the merger or sale of assets by
holders of Common Stock for each Share held on the effective date of the
transaction (and if holders were offered a choice of consideration, the type of
consideration chosen by the holders of a majority of the outstanding Shares);
provided, however, that if such consideration received in the merger or sale of
assets is not solely common stock of the successor corporation or its Parent,
the Administrator may, with the consent of the successor corporation, provide
for the consideration to be received upon the exercise of the Option or Stock
Purchase Right, for each Share of Optioned Stock subject to the Option or Stock
Purchase Right, to be solely common stock of the successor corporation or its
Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
13. Time of Granting Options and Stock Purchase Rights. The date of grant
--------------------------------------------------
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Employee or Consultant to
whom an Option or Stock Purchase Right is so granted within a reasonable time
after the date of such grant.
14. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or terminate the Plan.
(b) Shareholder Approval. The Board shall obtain shareholder approval
--------------------
of any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
15. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall
-10-
<PAGE>
comply with Applicable Laws and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option, the Administrator may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required.
16. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
17. Reservation of Shares. The Company, during the term of this Plan and
---------------------
for so long as Options are outstanding under the Plan, shall at all times
reserve and keep available such number of Shares as shall be sufficient to
satisfy the requirements of the Plan.
18. Shareholder Approval. The Plan shall be subject to approval by the
--------------------
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the degree and manner
required under Applicable Laws.
19. Information to Optionees and Purchasers. The Company shall provide to
---------------------------------------
each Optionee and to each individual who acquires Shares pursuant to the Plan,
not less frequently than annually during the period such Optionee or purchaser
has one or more Options or Stock Purchase Rights outstanding, and, in the case
of an individual who acquires Shares pursuant to the Plan, during the period
such individual owns such Shares, copies of annual financial statements. The
Company shall not be required to provide such statements to key employees whose
duties in connection with the Company assure their access to equivalent
information.
-11-
<PAGE>
EXHIBIT 10.03
OPTICAL NETWORKS, INCORPORATED
1998 EQUITY INCENTIVE PLAN
as Adopted April 22, 1998
as Amended December 14, 1998,
April 29, 1999, August 16, 1999,
November 18, 1999, December 8, 1999
and January 31, 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 and Restricted Stock. Capitalized terms not defined
in the text are defined in Section 22 hereof. This Plan is intended to be a
written compensatory benefit plan within the meaning of Rule 701 promulgated
under the Securities Act.
2. SHARES SUBJECT TO THE PLAN.
--------------------------
2.1 Number of Shares Available. Subject to Sections 2.2 and 17
--------------------------
hereof, the total number of Shares reserved and available for grant and issuance
pursuant to this Plan will be 13,203,802 Shares or such lesser number of Shares
as permitted under Section 260.140.45 of Title 10 of the California Code of
Regulations. Subject to Sections 2.2 and 17 hereof, Shares will again be
available for grant and issuance in connection with future Awards under this
Plan that: (a) are subject to issuance upon exercise of an Option but cease to
be subject to such Option for any reason other than exercise of such Option or
(b) are subject to a Restricted Stock Award that otherwise terminates without
Shares being issued. At all times the Company will reserve and keep available a
sufficient number of Shares as will be required to satisfy the requirements of
all Awards granted under this Plan.
2.2 Adjustment of Shares. In the event that the number of
--------------------
outstanding shares of the Company's Common Stock 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 Exercise Prices of and number of Shares subject to
outstanding Options and (c) the Purchase Prices of and number of Shares subject
to other outstanding Awards will be proportionately adjusted, subject to any
required action by the Board or the shareholders of the Company and compliance
with applicable securities laws; provided, however, that fractions of a Share
will not be issued but will either be paid in cash at Fair Market Value of such
fraction of a Share or will be rounded down to the nearest whole Share, as
determined by the Committee.
3. ELIGIBILITY. ISOs (as defined in Section 5 hereof) 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. NQSOs (as defined in
Section 5 hereto) and Restricted Stock Awards may be granted to employees,
officers, directors and consultants of the Company or any Parent or Subsidiary
of the Company; provided such consultants render bona fide services not in
connection with the offer and sale of securities in a capital-raising
transaction. A person may be granted more than one Award under this Plan.
4. ADMINISTRATION.
--------------
4.1 Committee Authority. This Plan will be administered by the
-------------------
Committee or the Board acting as the Committee. Subject to the general
purposes, terms and conditions of this Plan, and to the direction of
<PAGE>
the Board, the Committee will have full power to implement and carry out this
Plan. Without limitation, 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;
(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 awards under 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, any Award Agreement, any
Exercise Agreement or any Restricted Stock Purchase 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. 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, and subject to Section 5.9 hereof, 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,
provided such officers are members of the Board.
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 ("ISOs" 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 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.
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.
2
<PAGE>
5.3 Exercise Period. Options may be exercisable immediately (subject
---------------
to repurchase pursuant to Section 11 hereof) or 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 Shareholder") 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. Subject to earlier termination of the Option as
provided herein, each Participant who is not an officer, director or consultant
of the Company or of a Parent or Subsidiary of the Company shall have the right
to exercise an Option granted hereunder at the rate of at least twenty percent
(20%) per year over five (5) years from the date such Option is granted.
5.4 Exercise Price. The Exercise Price of an Option will be
--------------
determined by the Committee when the Option is granted and may not be less than
eighty-five percent (85%) of the Fair Market Value of the Shares on the date of
grant; provided that (a) the Exercise Price of an ISO will not be less than one
hundred percent (100%) of the Fair Market Value of the Shares on the date of
grant and (b) the Exercise Price of any Option granted to a Ten Percent
Shareholder will not be less than one hundred ten percent (110%) of the Fair
Market Value of the Shares on the date of grant. Payment for the Shares
purchased must be made in accordance with Section 7 hereof.
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, and any applicable taxes, for the
number of Shares being purchased.
5.6 Termination. Subject to earlier termination pursuant to Sections
-----------
17 and 18 hereof and 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 are exercisable upon
the Termination Date and such Options must be exercised by the
Participant, if at all, as to all or some of the Vested Shares
calculated as of the Termination Date, within three (3) months
after the Termination Date (or within such shorter time period,
not less than thirty (30) days, or within such longer time
period, not exceeding five (5) years, after the Termination Date
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, non 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), then Participant's Options may be exercised
only to the extent that such Options are exercisable by
Participant on the Termination Date and must be exercised by
Participant (or Participant's legal representative or authorized
assignee), if at all, as to all or some of the Vested Shares
calculated as of the Termination Date, within twelve (12) months
after the Termination Date (or within such shorter time period,
not less than six (6) months, or within such longer time period,
not exceeding five (5) years, after the Termination Date as may
be determined by the Committee, with any exercise beyond (i)
three (3) months after the Termination Date when the Termination
is for any reason other than the Participant's
3
<PAGE>
death or disability, within the meaning of Section 22(e)(3) of
the Code, or (ii) twelve (12) months after the Termination Date
when the Termination is for Participant's disability, within the
meaning of Section 22(e)(3) of the Code, deemed to be an NQSO)
but in any event no later than the expiration date of the
Options.
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 ISOs. The aggregate Fair Market Value (determined
-------------------
as of the date of grant) of Shares with respect to which ISOs 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 or any 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 ISOs 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 ISOs 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 (as defined in Section 18 hereof) to provide for a different
limit on the Fair Market Value of Shares permitted to be subject to ISOs, then
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 Removal. 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. Subject to Section 5.10 hereof, 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 hereof 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 ISOs 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 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 Restricted Stock Award 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 with
full payment for the Shares to the Company within such 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 and will be at least
eighty-five percent (85%) of the Fair Market Value of the Shares on the date the
Restricted Stock Award is granted or at the time the purchase is consummated,
except in the case of a sale to a Ten Percent Shareholder, in which case the
Purchase Price will be one hundred percent (100%) of
4
<PAGE>
the Fair Market Value on the date the Restricted Stock Award is granted or at
the time the purchase is consummated. Payment of the Purchase Price must be made
in accordance with Section 7 hereof.
6.3 Restrictions. Restricted Stock Awards may be subject tot he
------------
restrictions set forth in Section 11 hereof or such other restrictions not
inconsistent with Section 25102(o) of the California Corporations Code.
7. PAYMENT FOR SHARE PURCHASES.
---------------------------
7.1 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: (i) either (A) 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 (B) were
obtained by Participant in the public market and (ii) are clear
of all liens, claims, encumbrances or security interests.
(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 whoa re
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 an
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.
7.2 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.
8. WITHHOLDING TAXES.
-----------------
8.1 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
5
<PAGE>
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.
8.2 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 for such elections and be in writing in a form
acceptable to the Committee.
9. PRIVILEGES OF STOCK OWNERSHIP.
-----------------------------
9.1 Voting and Dividends. No Participant will have any of the rights
--------------------
of a shareholder 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 shareholder and have all the rights of a shareholder 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 Unvested
Shares that are repurchased pursuant to Section 11 hereof. The Company will
comply with Section 260.140.1 of Title 10 of the California Code of Regulations
with respect to the voting rights of Common Stock.
9.2 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, or as otherwise required under Section
260.140.46 of Title 10 of the California Code of Regulations. Notwithstanding
the foregoing, the Company will not be required to provide such financial
statements to Participants when issuance is limited to key employees whose
services in connection with the Company assure them access to equivalent
information.
10. TRANSFERABILITY. 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. During the lifetime of the
Participant an Award will be exercisable only by the Participant or
Participant's legal representative and any elections with respect to an Award,
may be made only by the Participant or Participant's legal representative.
11. RESTRICTIONS OF SHARES.
----------------------
11.1 Right of First Refusal. At the discretion of the Committee, the
----------------------
Company may reserve to itself and/or its assignee(s) in the Award Agreement a
right of first refusal to purchase all Shares that a Participant (or a
subsequent transferee) may propose to transfer to a third party, unless
otherwise not permitted by Section 25102(o) of the California Corporations Code,
provided, that such right of first refusal terminates upon the Company's initial
public offering of Common Stock pursuant to an effective registration statement
filed under the Securities Act.
11.2 Right of Repurchase. At the discretion of the Committee, the
-------------------
Company reserve to itself and/or its assignee(s) in the Award Agreement a right
to repurchase Unvested Shares held by a Participant for cash and/or cancellation
of purchase money indebtedness following such Participant's Termination at any
time within the later of ninety (90) days after the Participant's Termination
Date and the date the Participant purchases Shares under the Plan at the
Participant's Exercise Price or Purchase Price, as the case may be, provided,
that unless the
6
<PAGE>
Participant is an officer, director or consultant of the Company or of a Parent
or Subsidiary of the Company, such right of repurchase lapses at the rate of at
least twenty percent (20%) per year over five (5) years from: (a) the date of
grant of the Option or (b) in the case of Restricted Stock, the date the
Participant purchases the Shares.
12. 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.
13. 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.
14. 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 of Common
Stock of the Company (including Restricted Stock) or other consideration, based
on such terms and conditions as the Committee and the Participant may agree.
15. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. This Plan is intended
----------------------------------------------
to comply with Section 25102(o) of the California Corporations Code. Any
provision of this Plan which is inconsistent with Section 25102(o) shall,
without further act or amendment by the Company or the Board, be reformed to
comply with the requirements of Section 25102(o). 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) compliance with any exemption,
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
exemption, 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.
16. 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.
7
<PAGE>
17. CORPORATE TRANSACTIONS.
----------------------
17.1 Assumption or Replacement of Awards by Successor or Acquiring
-------------------------------------------------------------
Corporation. 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 shareholders of
the Company or their relative stock holdings and the Awards granted under this
Plan are assumed, converted or replaced by the successor or acquiring
corporation, which assumption, conversion or replacement will be binding on all
Participants), (c) a merger in which the Company is the surviving corporation
but after which the shareholders of the Company immediately prior to such merger
(other than any shareholder which merges with the Company in such merger, or
which owns or controls another corporation which merges, with the Company in
such merger) cease to own their shares or other equity interests in the Company,
or (d) the sale of all or substantially all of the assets of the Company, any or
all outstanding Awards may be assumed, converted or replaced by the successor or
acquiring corporation (if any), which assumption, conversion or replacement will
be binding on all Participants. In the alternative, the successor or acquiring
corporation may substitute equivalent Awards or provide substantially similar
consideration to Participants as was provided to shareholders (after taking into
account the existing provisions of the Awards). The successor or acquiring
corporation may also issue, in place of outstanding Shares of the Company held
by the Participant, substantially similar shares or other property subject to
repurchase restrictions and other provisions no less favorable to the
Participant than those which applied to such outstanding Shares immediately
prior to such transaction described in this Section 17.1. In the event such
successor or acquiring corporation (if any) does not assume or substitute
Awards, as provided above, pursuant to a transaction described in this Section
17.1, then notwithstanding any other provision in this Plan to the contrary, the
vesting of such Awards will accelerate and the 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 if such Options are not exercised
prior to the consummation of the corporate transaction, they shall terminate in
accordance with the provisions of this Plan.
17.2 Other Treatment of Awards. Subject to any greater rights
-------------------------
granted to Participants under the foregoing provisions of this Section 17, in
the event of the occurrence of any transaction described in Section 17.1 hereof,
any outstanding Awards will be treated as provided in the applicable agreement
or plan of merger, consolidation, dissolution, liquidation or sale of assets.
17.3 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.
18. ADOPTION AND SHAREHOLDER APPROVAL. This Plan will become effective on
---------------------------------
the date that it is adopted by the Board (the "Effective Date"). This Plan will
be approved by the shareholders of the Company (excluding Shares issued pursuant
to this Plan), consistent with applicable laws, within twelve (12) months before
or after the Effective Date. Upon the effective Date, the Board may grant
Awards pursuant to this Plan; provided, however, that: (a) no Option may be
exercised prior to initial shareholder approval of this Plan; (b) no Option
granted pursuant to an increase in the number of Shares approved by the Board
shall be exercised prior to the time such increase has been approved by the
shareholders of the Company; (c) in the event that initial shareholder approval
is not obtained within the time period provided herein, all Awards granted
hereunder shall be canceled, any Shares issued pursuant to any Award shall be
canceled and any purchase of Shares issued hereunder shall be rescinded; and (d)
Awards granted pursuant to an increase in the number of Shares approved by the
Board which increase is not timely approved by shareholders shall be canceled,
any Shares issued pursuant to any such Awards shall be canceled, and any
purchase of Shares subject to any such
8
<PAGE>
Award shall be rescinded. In the event that initial shareholder approval is not
obtained within twelve (12) months before or after the date this Plan is adopted
by the Board, all Awards granted hereunder will be canceled, any Shares issued
pursuant to any Award will be canceled and any purchase of Shares hereunder will
be rescinded.
19. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided
--------------------------
herein, this Plan will terminate ten (10) years from the Effective Date or, if
earlier, the date of shareholder approval. This Plan and all agreements
hereunder shall be governed by and construed in accordance with the laws of the
State of California.
20. AMENDMENT OR TERMINATION OF PLAN. Subject to Section 5.9 hereof, 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 shareholders of the Company, amend this Plan in any
manner that requires such shareholder approval pursuant to Section 25102(o) of
the California Corporations Code or the Code or the regulations promulgated
thereunder as such provisions apply to ISO plans.
21. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by the
--------------------------
Board, the submission of this Plan to the shareholders 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 other equity awards otherwise than under this
Plan, and such arrangements may be either generally applicable or applicable
only in specific cases.
22. DEFINITIONS. As used in this Plan, the following terms will have the
-----------
following meanings:
"Award" means any award under this Plan, including any Option or
Restricted Stock Award.
"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 Termination because of (i) any willful material
violation by the Participant of any law or regulation applicable to the business
of the Company or a Parent or Subsidiary of the Company, the Participant's
conviction for, or guilty plea to, a felony or a crime involving moral
turpitude, any willful perpetration by the Participant of a common law fraud,
(ii) the Participant's commission of an act of personal dishonesty which
involves personal profit in connection with the Company or any other entity
having a business relationship with the Company, (iii) any material breach by
the Participant of any provision of any agreement or understanding between the
Company or any Parent or Subsidiary of the Company and the Participant regarding
the terms of the Participant's service as an employee, director or consultant to
the Company or a Parent or Subsidiary of the Company, including without
limitation, the willful and continued failure or refusal of the Participant to
perform the material duties required of such Participant as an employee,
director or consultant of the Company or a Parent or Subsidiary of the Company,
other than as a result of having a Disability, or a breach of any applicable
invention assignment and confidentiality agreement or similar agreement between
the Company and the Participant, (iv) Participant's disregard of the policies of
the Company or any Parent or Subsidiary of the Company so as to cause loss,
damage or injury to the property, reputation or employees of the Company or a
Parent or Subsidiary of the Company, or (v) any other misconduct by the
Participant which is materially injurious to the financial condition or business
reputation of, or is otherwise materially injurious to, the Company or a Parent
or Subsidiary of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the committee appointed by the Board to administer
this Plan, or if no committee is appointed, the Board.
9
<PAGE>
"Company" means Optical Networks, Incorporated, or any successor
corporation.
"Disability" means a disability, whether temporary or permanent,
partial or total, as determined by the Committee.
"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
last trading day prior to 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 last
trading day prior to 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 last trading day prior to the date of
determination as reported by The Wall Street Journal (or, if not
-----------------------
so reported, as otherwise reported by any newspaper or other
source as the Board may determine); or
(d) if none of the foregoing is applicable, by the Committee in good
faith.
"Option" means an award of an option to purchase Shares pursuant to
Section 5 hereof.
"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 fifty percent (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
"Plan" means this Optical Networks, Incorporated 1998 Equity Incentive
Plan, as amended from time to time.
"Purchase Price" means the price at which a Participant may purchase
Restricted Stock
"Restricted Stock" means Shares purchased pursuant to a Restricted
Stock Award.
"Restricted Stock Award" means an award of Shares pursuant to Section
6 hereof.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Ac t 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 17 hereof, and
any successor security.
10
<PAGE>
"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 fifty percent (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 or consultant to the Company
or a Parent or Subsidiary of the Company. A Participant 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 ninety (90) days unless
reinstatement (or, in the case of an employee with an ISO, 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 in writing. In the case of any Participant
on (i) sick leave, (ii) military leave or (iii) an approved leave of absence,
the Committee may make such provisions respecting suspension of vesting of the
Award while on leave from the Company or a Parent or Subsidiary of the Company
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 Stock 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.
"Vested Shares" means "Vested Shares" as defined in the Award
Agreement.
11
<PAGE>
EXHIBIT 10.04
OPTICAL NETWORKS, INCORPORATED
1999 EQUITY INCENTIVE PLAN
as Adopted November 18, 1999
as Amended December 8, 1999
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 and Restricted Stock. Capitalized terms not defined
in the text are defined in Section 22 hereof.
2. SHARES SUBJECT TO THE PLAN.
--------------------------
2.1 Number of Shares Available. Subject to Sections 2.2 and 17
--------------------------
hereof, the total number of Shares reserved and available for grant and issuance
pursuant to this Plan will be 2,100,000 Shares or such lesser number of Shares
as permitted under Section 260.140.45 of Title 10 of the California Code of
Regulations. Subject to Sections 2.2 and 17 hereof, Shares will again be
available for grant and issuance in connection with future Awards under this
Plan that: (a) are subject to issuance upon exercise of an Option but cease to
be subject to such Option for any reason other than exercise of such Option or
(b) are subject to a Restricted Stock Award that otherwise terminates without
Shares being issued. At all times the Company will reserve and keep available a
sufficient number of Shares as will be required to satisfy the requirements of
all Awards granted under this Plan.
2.2 Adjustment of Shares. In the event that the number of
--------------------
outstanding shares of the Company's Common Stock 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 Exercise Prices of and number of Shares subject to
outstanding Options and (c) the Purchase Prices of and number of Shares subject
to other outstanding Awards will be proportionately adjusted, subject to any
required action by the Board or the shareholders of the Company and compliance
with applicable securities laws; provided, however, that fractions of a Share
will not be issued but will either be paid in cash at Fair Market Value of such
fraction of a Share or will be rounded down to the nearest whole Share, as
determined by the Committee.
3. ELIGIBILITY. ISOs (as defined in Section 5 hereof) 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. NQSOs (as defined in
Section 5 hereto) and Restricted Stock Awards may be granted to employees,
officers, directors and consultants of the Company or any Parent or Subsidiary
of the Company; provided such consultants render bona fide services not in
connection with the offer and sale of securities in a capital-raising
transaction. A person may be granted more than one Award under this Plan.
4. ADMINISTRATION.
--------------
4.1 Committee Authority. This Plan will be administered by the
-------------------
Committee or the Board acting as the Committee. 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.
Without limitation, 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;
<PAGE>
(b) prescribe, amend and rescind rules and regulations relating to
this Plan;
(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 awards under 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, any Award Agreement, any
Exercise Agreement or any Restricted Stock Purchase 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. 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, and subject to Section 5.9 hereof, 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,
provided such officers are members of the Board.
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 ("ISOs" 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 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.
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 immediately (subject
---------------
to repurchase pursuant to Section 11 hereof) or 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
2
<PAGE>
("Ten Percent Shareholder") 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. Subject to earlier termination of the Option as provided herein,
each Participant who is not an officer, director or consultant of the Company or
of a Parent or Subsidiary of the Company shall have the right to exercise an
Option granted hereunder at the rate of at least twenty percent (20%) per year
over five (5) years from the date such Option is granted.
5.4 Exercise Price. The Exercise Price of an Option will be
--------------
determined by the Committee when the Option is granted and may not be less than
eighty-five percent (85%) of the Fair Market Value of the Shares on the date of
grant; provided that (a) the Exercise Price of an ISO will not be less than one
hundred percent (100%) of the Fair Market Value of the Shares on the date of
grant and (b) the Exercise Price of any Option granted to a Ten Percent
Shareholder will not be less than one hundred ten percent (110%) of the Fair
Market Value of the Shares on the date of grant. Payment for the Shares
purchased must be made in accordance with Section 7 hereof.
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, and any applicable taxes, for the
number of Shares being purchased.
5.6 Termination. Subject to earlier termination pursuant to Sections
-----------
17 and 18 hereof and 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 are exercisable upon
the Termination Date and such Options must be exercised by the
Participant, if at all, as to all or some of the Vested Shares
calculated as of the Termination Date, within three (3) months
after the Termination Date (or within such shorter time period,
not less than thirty (30) days, or within such longer time
period, not exceeding five (5) years, after the Termination Date
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, non 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), then Participant's Options may be exercised
only to the extent that such Options are exercisable by
Participant on the Termination Date and must be exercised by
Participant (or Participant's legal representative or authorized
assignee), if at all, as to all or some of the Vested Shares
calculated as of the Termination Date, within twelve (12) months
after the Termination Date (or within such shorter time period,
not less than six (6) months, or within such longer time period,
not exceeding five (5) years, after the Termination Date as may
be determined by the Committee, with any exercise beyond (i)
three (3) months after the Termination Date when the Termination
is for any reason other than the Participant's death or
disability, within the meaning of Section 22(e)(3) of the Code,
or (ii) twelve (12) months after the Termination Date when the
Termination is for Participant's disability, within the meaning
of Section 22(e)(3) of the Code, deemed to be an NQSO) but in any
event no later than the expiration date of the Options.
3
<PAGE>
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 ISOs. The aggregate Fair Market Value
-------------------
(determined as of the date of grant) of Shares with respect to which ISOs 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 or any
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 ISOs 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 ISOs 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 (as defined in Section 18 hereof) to provide for a
different limit on the Fair Market Value of Shares permitted to be subject to
ISOs, then 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 Removal. 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. Subject to Section 5.10 hereof, 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 hereof 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 ISOs 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, to disqualify any Participant's ISO
under Section 422 of the Code. In no event shall the total number of Shares
issued (counting each reissuance of a Share that was previously issued and then
forfeited or repurchased by the Company as a separate issuance) under the Plan
upon exercise of ISOs will in no event exceed 1,800,000 Shares (adjusted in
proportion to any adjustments under Section 2.2. hereof) over the term of the
Plan.
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 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 Restricted Stock Award 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 with full payment for the Shares to the Company within such 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 and will be at least
eighty-five percent (85%) of the Fair Market Value of the Shares on the date the
Restricted Stock Award is granted or at the time the purchase is consummated,
except in the case of a sale to a Ten Percent Shareholder, in which case the
Purchase Price will be one hundred percent (100%) of
4
<PAGE>
the Fair Market Value on the date the Restricted Stock Award is granted or at
the time the purchase is consummated. Payment of the Purchase Price must be made
in accordance with Section 7 hereof.
6.3 Restrictions. Restricted Stock Awards may be subject to the
------------
restrictions set forth in Section 11 hereof or such other restrictions not
inconsistent with applicable securities laws.
7. PAYMENT FOR SHARE PURCHASES.
---------------------------
7.1 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: (i) either (A) 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 (B) were
obtained by Participant in the public market and (ii) are clear
of all liens, claims, encumbrances or security interests.
(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 whoa re
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 an
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.
7.2 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.
8. WITHHOLDING TAXES.
-----------------
8.1 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
5
<PAGE>
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.
8.2 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 for such elections and be in writing in a form
acceptable to the Committee.
9. PRIVILEGES OF STOCK OWNERSHIP.
-----------------------------
9.1 Voting and Dividends. No Participant will have any of the rights
--------------------
of a shareholder 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 shareholder and have all the rights of a shareholder 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 Unvested
Shares that are repurchased pursuant to Section 11 hereof. The Company will
comply with Section 260.140.1 of Title 10 of the California Code of Regulations
with respect to the voting rights of Common Stock.
9.2 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, or as otherwise required under Section
260.140.46 of Title 10 of the California Code of Regulations. Notwithstanding
the foregoing, the Company will not be required to provide such financial
statements to Participants when issuance is limited to key employees whose
services in connection with the Company assure them access to equivalent
information.
10. TRANSFERABILITY. 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. During the lifetime of the
Participant an Award will be exercisable only by the Participant or
Participant's legal representative and any elections with respect to an Award,
may be made only by the Participant or Participant's legal representative.
11. RESTRICTIONS OF SHARES.
----------------------
11.1 Right of First Refusal. At the discretion of the Committee, the
----------------------
Company may reserve to itself and/or its assignee(s) in the Award Agreement a
right of first refusal to purchase all Shares that a Participant (or a
subsequent transferee) may propose to transfer to a third party, unless
otherwise not permitted by applicable securities laws, provided, that such right
of first refusal terminates upon the Company's initial public offering of Common
Stock pursuant to an effective registration statement filed under the Securities
Act.
11.2 Right of Repurchase. At the discretion of the Committee, the
-------------------
Company reserve to itself and/or its assignee(s) in the Award Agreement a right
to repurchase Unvested Shares held by a Participant for cash and/or cancellation
of purchase money indebtedness following such Participant's Termination at any
time within the later of ninety (90) days after the Participant's Termination
Date and the date the Participant purchases Shares under the Plan at the
Participant's Exercise Price or Purchase Price, as the case may be, provided,
that unless the Participant is an officer, director or consultant of the Company
or of a Parent or Subsidiary of the Company, such
6
<PAGE>
right of repurchase lapses at the rate of at least twenty percent (20%) per year
over five (5) years from: (a) the date of grant of the Option or (b) in the case
of Restricted Stock, the date the Participant purchases the Shares.
12. 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.
13. 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.
14. 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 of Common
Stock of the Company (including Restricted Stock) or other consideration, based
on such terms and conditions as the Committee and the Participant may agree.
15. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. This Plan is intended
----------------------------------------------
to comply with applicable securities laws. 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) compliance with any exemption,
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
exemption, 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.
16. 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.
17. CORPORATE TRANSACTIONS.
----------------------
7
<PAGE>
17.1 Assumption or Replacement of Awards by Successor or Acquiring
-------------------------------------------------------------
Corporation. 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 shareholders of
the Company or their relative stock holdings and the Awards granted under this
Plan are assumed, converted or replaced by the successor or acquiring
corporation, which assumption, conversion or replacement will be binding on all
Participants), (c) a merger in which the Company is the surviving corporation
but after which the shareholders of the Company immediately prior to such merger
(other than any shareholder which merges with the Company in such merger, or
which owns or controls another corporation which merges, with the Company in
such merger) cease to own their shares or other equity interests in the Company,
or (d) the sale of all or substantially all of the assets of the Company, any or
all outstanding Awards may be assumed, converted or replaced by the successor or
acquiring corporation (if any), which assumption, conversion or replacement will
be binding on all Participants. In the alternative, the successor or acquiring
corporation may substitute equivalent Awards or provide substantially similar
consideration to Participants as was provided to shareholders (after taking into
account the existing provisions of the Awards). The successor or acquiring
corporation may also issue, in place of outstanding Shares of the Company held
by the Participant, substantially similar shares or other property subject to
repurchase restrictions and other provisions no less favorable to the
Participant than those which applied to such outstanding Shares immediately
prior to such transaction described in this Section 17.1. In the event such
successor or acquiring corporation (if any) does not assume or substitute
Awards, as provided above, pursuant to a transaction described in this Section
17.1, then notwithstanding any other provision in this Plan to the contrary, the
vesting of such Awards will accelerate and the 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 if such Options are not exercised
prior to the consummation of the corporate transaction, they shall terminate in
accordance with the provisions of this Plan.
17.2 Other Treatment of Awards. Subject to any greater rights
-------------------------
granted to Participants under the foregoing provisions of this Section 17, in
the event of the occurrence of any transaction described in Section 17.1 hereof,
any outstanding Awards will be treated as provided in the applicable agreement
or plan of merger, consolidation, dissolution, liquidation or sale of assets.
17.3 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.
18. ADOPTION AND SHAREHOLDER APPROVAL. This Plan will become effective on
---------------------------------
the date that it is adopted by the Board (the "Effective Date"). This Plan will
be approved by the shareholders of the Company (excluding Shares issued pursuant
to this Plan), consistent with applicable laws, within twelve (12) months before
or after the Effective Date. Upon the effective Date, the Board may grant
Awards pursuant to this Plan; provided, however, that: (a) no Option may be
exercised prior to initial shareholder approval of this Plan; (b) no Option
granted pursuant to an increase in the number of Shares approved by the Board
shall be exercised prior to the time such increase has been approved by the
shareholders of the Company; (c) in the event that initial shareholder approval
is not obtained within the time period provided herein, all Awards granted
hereunder shall be canceled, any Shares issued pursuant to any Award shall be
canceled and any purchase of Shares issued hereunder shall be rescinded; and (d)
Awards granted pursuant to an increase in the number of Shares approved by the
Board which increase is not timely approved by shareholders shall be canceled,
any Shares issued pursuant to any such Awards shall be canceled, and any
purchase of Shares subject to any such Award shall be rescinded. In the event
that initial shareholder approval is not obtained within twelve (12) months
before or after the date this Plan is
8
<PAGE>
adopted by the Board, all Awards granted hereunder will be canceled, any Shares
issued pursuant to any Award will be canceled and any purchase of Shares
hereunder will be rescinded.
19. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided
--------------------------
herein, this Plan will terminate ten (10) years from the Effective Date or, if
earlier, the date of shareholder approval. This Plan and all agreements
hereunder shall be governed by and construed in accordance with the laws of the
State of California.
20. AMENDMENT OR TERMINATION OF PLAN. Subject to Section 5.9 hereof, 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 shareholders of the Company, amend this Plan in any
manner that requires such shareholder approval pursuant to the California
Corporations Code or the Code or the regulations promulgated thereunder as such
provisions apply to ISO plans.
21. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by the
--------------------------
Board, the submission of this Plan to the shareholders 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 other equity awards otherwise than under this
Plan, and such arrangements may be either generally applicable or applicable
only in specific cases.
22. DEFINITIONS. As used in this Plan, the following terms will have the
-----------
following meanings:
"Award" means any award under this Plan, including any Option or
Restricted Stock Award.
"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 Termination because of (i) any willful material
violation by the Participant of any law or regulation applicable to the business
of the Company or a Parent or Subsidiary of the Company, the Participant's
conviction for, or guilty plea to, a felony or a crime involving moral
turpitude, any willful perpetration by the Participant of a common law fraud,
(ii) the Participant's commission of an act of personal dishonesty which
involves personal profit in connection with the Company or any other entity
having a business relationship with the Company, (iii) any material breach by
the Participant of any provision of any agreement or understanding between the
Company or any Parent or Subsidiary of the Company and the Participant regarding
the terms of the Participant's service as an employee, director or consultant to
the Company or a Parent or Subsidiary of the Company, including without
limitation, the willful and continued failure or refusal of the Participant to
perform the material duties required of such Participant as an employee,
director or consultant of the Company or a Parent or Subsidiary of the Company,
other than as a result of having a Disability, or a breach of any applicable
invention assignment and confidentiality agreement or similar agreement between
the Company and the Participant, (iv) Participant's disregard of the policies of
the Company or any Parent or Subsidiary of the Company so as to cause loss,
damage or injury to the property, reputation or employees of the Company or a
Parent or Subsidiary of the Company, or (v) any other misconduct by the
Participant which is materially injurious to the financial condition or business
reputation of, or is otherwise materially injurious to, the Company or a Parent
or Subsidiary of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the committee appointed by the Board to administer
this Plan, or if no committee is appointed, the Board.
"Company" means Optical Networks, Incorporated, or any successor
corporation.
9
<PAGE>
"Disability" means a disability, whether temporary or permanent,
partial or total, as determined by the Committee.
"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
last trading day prior to 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 last
trading day prior to 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 last trading day prior to the date of
determination as reported by The Wall Street Journal (or, if not
-----------------------
so reported, as otherwise reported by any newspaper or other
source as the Board may determine); or
(d) if none of the foregoing is applicable, by the Committee in good
faith.
"Option" means an award of an option to purchase Shares pursuant to
Section 5 hereof.
"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 fifty percent (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
"Plan" means this Optical Networks, Incorporated 1999 Equity Incentive
Plan, as amended from time to time.
"Purchase Price" means the price at which a Participant may purchase
Restricted Stock
"Restricted Stock" means Shares purchased pursuant to a Restricted
Stock Award.
"Restricted Stock Award" means an award of Shares pursuant to Section
6 hereof.
"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 17 hereof, and
any successor security.
"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
10
<PAGE>
chain owns stock possessing fifty percent (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 or consultant to the Company
or a Parent or Subsidiary of the Company. A Participant 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 ninety (90) days unless
reinstatement (or, in the case of an employee with an ISO, 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 in writing. In the case of any Participant
on (i) sick leave, (ii) military leave or (iii) an approved leave of absence,
the Committee may make such provisions respecting suspension of vesting of the
Award while on leave from the Company or a Parent or Subsidiary of the Company
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 Stock 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.
"Vested Shares" means "Vested Shares" as defined in the Award
Agreement.
11
<PAGE>
EXHIBIT 10.07
ASSIGNMENT OF LEASE
Recitals
Section 1. Assignment
Section 2. Assumption of Lease Obligations
Section 3. Effect of Landlord's Consent
Section 4. Assignor's Covenants
Section 5. Successors and Assigns
Section 6. Governing Law
Exhibit A. Lease
Exhibit B. Legal description
_________________________
This Assignment of Lease ("Assignment") is made as of June 23, 1998 between
----------
JTS CORPORATION, a Delaware corporation ("Assignor"), and OPTICAL NETWORKS,
--------
INC., a California corporation ("Assignee").
--------
Recitals
--------
A. The Cilker Revocable Trust of October 9, 1990 ("Landlord"), as
--------
Landlord, and Assignor, as Tenant, executed a lease dated June 15, 1995
("Lease"), a copy of which is attached hereto as Exhibit A and incorporated
-----
herein by reference, pursuant to which Landlord leased to Tenant and Tenant
leased from Landlord certain properties identified in Paragraph 2 of the Lease
and other Lease provisions cross-referenced in such Paragraph 2 for a term of
five (5) years commencing on August 18, 1995 and ending on August 17, 2000
subject to earlier termination as provided in the Lease.
B. Assignor desires to assign to Assignee the portion of the "Premises"
(as such term is defined in the Lease) which is identified on Exhibit B which is
attached hereto and incorporated herein by reference ("Assigned Portion of the
-----------------------
Premises"), and Assignee desires to accept the assignment of the Assigned
- --------
Portion of the Premises from Assignor and assume all obligations under the
Lease.
Therefore, for good and valuable consideration, the receipt and adequacy of
which are acknowledged, Assignor and Assignee agree as follows:
<PAGE>
Section 1. Assignment.
Except for the obligations to pay the amortized amount of the Additional
Tenant Improvement Allowance as set forth in Paragraph 6A of Exhibit C the
Master Lease, Assignor assigns and transfers to Assignee all of Assignor's
right, title, and interest in the Assigned Portion of the Premises and Assignee
accepts from Assignor all of Assignor's right, title, and interest in the
Assigned Portion of the Lease, subject to the terms and conditions set forth in
this Assignment.
Section 2. Consideration.
Assignee shall pay Landlord the Base Rent sum of $1.70 psf/month NNN for 25
months as Consideration for this Assignment. The amortization of the Additional
Tenant Improvement Allowance will be paid by Assignor under the Master Lease for
the Assigned and Retained Portion of the Premises. The Consideration shall be
paid by Assignee to Landlord in equal monthly installments beginning July 18,
1998. Notwithstanding the foregoing, Assignee shall receive a credit to
reimburse Assignee for the sum of the following: (a) the real estate commission
in connection with the assignment, (b) the cost of alterations to be paid for by
Assignee to create the separation of the Assigned Portion of the Premises from
the Retained Premises, and (c) Assignee's attorneys fees in connection with the
assignment transaction (collective, the "Credit"). This Credit shall be applied
------
by Assignee to the initial installments of the Consideration, not to exceed
Eighty Four cents ($0.84) per square foot per month until Assignee is reimbursed
for the total amount of the Credit. Each month as Landlord receives payment of
the Consideration from Assignee, Landlord agrees to pay to Assignor a portion of
said Consideration ("Profit Portion") which is calculated as 50% of the
--------------
Consideration after reducing said consideration by the sum of the following
amounts: (a) the Credit, (b) the Base Rent for the Assigned Portion of the
Premises.
Section 3. Assumption of Lease Obligations.
Assignee assumes and agrees to perform and fulfill all the terms,
covenants, conditions, and obligations required to be performed and fulfilled by
Assignor as Tenant under the Lease with respect to the Assigned Portion of the
Premises, including the making of all payments due to or payable on behalf of
Tenant with respect to the Assigned Portion of the Premises as they become due
and payable.
Section 4. Effect of Landlord's Consent.
Landlord's consent to this Assignment shall not release or discharge
Assignor from performance of any of its obligations under the Lease, or release,
discharge or alter the primary liability of Assignor under the Lease to pay rent
and all other sums due from Assignor under the Lease.
2
<PAGE>
Section 5. Assignor's Covenants.
(a) Assignor covenants that the copy of the Lease attached as Exhibit A is
a true and accurate copy of the Lease as currently in effect and that there
exists no other agreement affecting Assignor's tenancy under the Lease.
(b) Assignor covenants that the Lease is in full effect and no defaults
exist under the Lease, nor any acts or events which, with the passage of time or
the giving of notice or both, could become defaults.
Section 6. Successors and Assigns.
This Assignment shall be binding and inure to the benefit of the parties to
it, their heirs, executors, administrators, successors in interest, and assigns.
Section 7. Miscellaneous.
In the event Assignee wishes to extend the Lease and is willing to assume
responsibility for the 100% of the Assigned and Retained Portion of the
Premises, Assignor assigns and transfers to Assignees all of Assignor's right,
title, and interest in the Option to Renew referenced in Paragraph 40 of the
Master Lease. In the event that Assignee subleases any portion of the Premises
to Assignor during the Option term, Assignee agrees to pay 100% of any such
profit derived by Assignee to Landlord from such sublet to Assignor, after
deducting reasonable costs such as the cost of alterations, legal fees, and
brokerage commissions.
In the event any of the parking spaces are taken due to condemnation,
Assignee and Assignor agrees to reallocate the total number of remaining spaces
such that Assignee still has the right to use 3.6 spaces per 1000 square feet of
the assigned portion of the Premises.
Section 8. Governing Law.
This Assignment shall be governed by and construed in accordance with
California law.
The parties have executed this Agreement as of the date first above
written.
ASSIGNOR:
- --------
JTS CORPORATION
a Delaware corporation
By: /s/
-------------------------
Its: President
------------------------
3
<PAGE>
By: /s/
-------------------------
Its: Chairman
------------------------
ASSIGNEE:
- --------
OPTICAL NETWORKS, INC.
a California corporation
By: /s/ Hugh C. Martin
-------------------------
Its: President
------------------------
By: /s/ Terrence J. Schmid
-------------------------
Its: CFO
------------------------
Consent of Landlord
The undersigned, as Landlord under the Lease, consents to this Assignment
of the Assigned Portion of the Premises to Assignee, provided, however, that
notwithstanding this Assignment and the undersigned's consent to this
Assignment, Assignor shall remain primarily obligated as Tenant under the Lease
for the performance of all obligations under the Lease that are to be performed
by Tenant including the payment of rent and all other sums due from Tenant under
the Lease.
CILKER REVOCABLE TRUST OF OCTOBER 9, 1990
By: /s/ Leila A. Cilker
----------------------------------
By: /s/ William H. Cilker
----------------------------------
By: _________________________________
By: _________________________________
4
<PAGE>
EXHIBIT A
LEASE
-----
(SINGLE-TENANT SINGLE BUILDING MODIFIED NET)
by and between
CILKER REVOCABLE TRUST OF OCTOBER 9, 1990
-----------------------------------------
("Landlord")
and
JT STORAGE, INC.
----------------
("Tenant")
For the 52,000 Square Foot Premises at
166 Baypointe Parkway, San Jose, CA 95134
------------------------------------------
5
<PAGE>
LEASE SUMMARY
-------------
Lease Date: June 15, 1994
------------------------------
Landlord: Cilker Revocable Trust
------------------------------
of October 9, 1990
------------------------------
Address of Landlord: 1631 Willow Street, Suite 225
------------------------------
San Jose, CA 95125
------------------------------
Tenant: JT Storage, Inc.
------------------------------
Address of Tenant: 1289 Anvilwood
------------------------------
Sunnyvale, CA 94086
------------------------------
Contact: Burton R. Feldstein
------------------------------
Telephone: (408) 747-1315
------------------------------
Building Address: 166 Baypointe Parkway
------------------------------
San Jose, CA 95134
------------------------------
Premises Square Footage: 52,000
------------------------------
Building Square Footage: 52,000
------------------------------
Anticipated Commencement Date: July 1, 1995
------------------------------
Term: Five (5) Years
------------------------------
Base Monthly Rent: $40,820.00/month
------------------------------
Security Deposit: $46,020.00
------------------------------
Tenant's Percentage: 100%
------------------------------
<PAGE>
LEASE
-----
(SINGLE TENANT SINGLE BUILDING MODIFIED NET)
Table of Contents
-----------------
PARAGRAPH PAGE
- --------- ----
1 Parties 1
2 Premises 1
3 Definitions 1
4 Lease Term 3
5 Rent 3
6 Late Payment Charges 4
7 Security Deposit 4
8 Holding Over 5
9 Tenant Improvements 5
10 Condition of Premises 5
11 Use of the Premises 6
12 Quiet Enjoyment 8
13 Alterations 8
14 Surrender of the Premises 9
15 Real Property Taxes 9
16 Utilities and Services 10
17 Repair and Maintenance 11
18 Liens 13
19 Landlord's Right to Enter the Premises 13
20 Signs 14
21 Insurance 14
22 Waiver of Subrogation 16
23 Damage or Destruction 16
24 Condemnation 18
25 Assignment and Subletting 19
26 Default 20
i
<PAGE>
27 Subordination 22
28 Notices 23
29 Attorneys' Fees 23
30 Estoppel Certificates 23
31 Transfer of the Premises by Landlord 24
32 Landlord's Right to Perform Tenant's Covenants 24
33 Tenant's Remedy 24
34 Mortgagee Protection 24
35 Brokers 25
36 Acceptance 25
37 Modifications for Lender 25
38 Parking 25
39 General 25
40 Option to Renew 26
41 Approvals 27
42 Reasonable Expenditures 28
ii
<PAGE>
TABLE OF EXHIBITS
-----------------
EXHIBIT A The Premises
---------
EXHIBIT B The Property
---------
EXHIBIT C Work Letter Agreement
---------
EXHIBIT D Commencement Date Memorandum
---------
EXHIBIT E CC&R'S
---------
iii
<PAGE>
LEASE
-----
(SINGLE TENANT BUILDING ON SINGLE-BUILDING PROPERTY)
1. Parties.
-------
THIS LEASE (the "Lease"), dated June 15, 1995, is entered into by and
between The Cilker Revocable Trust of October 9, 1990 ("Landlord"), whose
---------------------------------------------
address is 1631 Willow Street, Suite 225, San Jose, California 95125 and JT
--
Storage, Inc., a Delaware corporation ("Tenant"), whose address is 1289
- -------------------------------------
Anvilwood, Sunnyvale, California 94086.
2. Premises. Landlord hereby leases to Tenant and Tenant hereby leases
--------
from Landlord those certain premises consisting of approximately fifty two
---------
thousand (52,000) square feet, as shown in EXHIBIT "A" (the "Premises") in that
- --------
certain building commonly known as 166 Baypointe Parkway (the "Building"), as
---------------------
further defined in Paragraph 3.B., in the City of San Jose, County of Santa
-------- -----
Clara (the "County"), California located on that certain real property
- -----
consisting of approximately three and 4/100ths (3.04) acres as more particularly
-------------------------
described in EXHIBIT "B", (the "Property") together with a right to the Outside
-----------
Area as defined in Paragraph 3.E.
3. Definitions: The following terms shall have the following meanings in
-----------
this Lease:
A. Alterations. Any alterations, additions or improvements made in,
-----------
on or about the Building or the Premises after the Commencement Date, including,
but not limited to, lighting, heating, ventilating, air conditioning,
electrical, partitioning, drapery and carpentry installations.
B. Building. That certain building on the Property consisting of
--------
approximately fifty two thousand (52, 000) square feet.
------------------ -------
C. CC&R's. Those certain covenants, conditions and restrictions
------
recorded at Page 94 Book 1771 on August 2, 1984 of the official Records of Santa
Clara County, State of California, as attached hereto as EXHIBIT "E".
-----------
D. Commencement Date. The Commencement Date of this Lease shall be
-----------------
the first day of the Term determined in accordance with Paragraph 4.A.
E. Outside Area. All areas and facilities within the Property and
------------
outside the Premises, including, without limitation, the roof, parking areas,
sidewalks, landscaped areas, service areas, trash disposal facilities, and
similar areas and facilities.
F. HVAC. Heating, ventilating and air conditioning.
----
G. Interest Rate. Ten percent (10%) per annum, however, in no event
-------------
to exceed the maximum rate of interest permitted by law.
H. Landlord's Agents. Landlord's authorized agents, partners,
-----------------
subsidiaries, directors, officers, contractors and employees.
1
<PAGE>
I. Base Monthly Rent. The rent payable pursuant to Paragraph 5.A.,
-----------------
as adjusted from time to time pursuant to the terms of this Lease.
J. Real Property Taxes. Any form of association fee, assessment,
-------------------
license, fee, rent tax, levy, penalty (if a result of Tenant's delinquency), or
tax (other than net income, estate, succession, inheritance, transfer or
franchise taxes), imposed by any authority having the direct or indirect power
to tax, or by any city, county, state or federal government or any improvement
or other district or division thereof, whether such tax is: (i) determined by
the area of the Property or any part thereof or the rent and other sums payable
hereunder by Tenant or by other tenants, including, but not limited to, any
gross income or excise tax levied by any of the foregoing authorities with
respect to receipt of such rent or other sums due under this Lease; (ii) upon
any legal or equitable interest of Landlord in the Property or the Premises or
any part thereof; (iii) upon this transaction or any document to which Tenant is
a party creating or transferring any interest in the Property; (iv) levied or
assessed in lieu of, in substitution for, or in addition to, existing or
additional taxes against the Property whether or not now customary or within the
contemplation of the parties; or (v) surcharged against the parking area. As of
the date hereof, the parties acknowledge that an association fee is levied
against the Premises.
K. Rent. Monthly Rent plus the Additional Rent defined in Paragraph
----
5.B.
L. Security Deposit. That amount paid by Tenant pursuant to
----------------
Paragraph 7.
M. Sublet. Any transfer, sublet, assignment, license or concession
------
agreement, change of ownership, mortgage, or hypothecation of this Lease or the
Tenant's interest in the Lease or in and to all or a portion of the Premises.
N. Subrent. Any consideration of any kind received, or to be
-------
received, by Tenant from a subtenant if such sums are related to Tenant's
interest in this Lease or in the Premises, including, but not limited to, bonus
money and payments (in excess of book value) for Tenant's assets including its
trade fixtures, equipment and other personal property, goodwill, general
intangibles, and any capital stock or other equity ownership of Tenant.
O. Subtenant. The person or entity with whom a Sublet agreement is
---------
proposed to be or is made.
P. Tenant Improvements and Work Letter Agreement. Those certain
---------------------------------------------
improvements to the Premises to be constructed by Landlord as outlined in the
Work Letter Agreement, pursuant to EXHIBITS "C" and "C-1".
Q. Tenant Improvements Allowance. The cost allowance provided by
-----------------------------
Landlord for the construction of the Tenant Improvements as further described in
EXHIBIT "C".
R. Tenant's Percentage. The percentage of the area of the Premises
-------------------
to the total area of the Building. Tenant's Percentage is agreed to be one
---
hundred percent (100%) for the purpose of this Lease.
- ------- ---
S. Tenant's Personal Property. Tenant's trade fixtures, furniture,
--------------------------
telephone and computer equipment and cabling equipment and other personal
property in the Premises.
T. Term. The term of this Lease set forth in Paragraph 4.A., as it
----
may be extended hereunder pursuant to any options to extend granted herein.
2
<PAGE>
4. Lease Term.
----------
A. Term. The Term of this Lease shall be a period of five (5) years,
---- --------
beginning on the Commencement Date of July 1, 1995 (subject to Paragraph 5.A of
------------
the Work Letter Agreement), and terminating on June 30, 2000, unless sooner
-------------
terminated, subject to any extensions granted hereunder. Tenant agrees that if
Landlord, for any reason whatsoever, is unable to deliver possession of the
Premises on the anticipated Commencement Date, Landlord shall not be liable to
Tenant for any loss or damage therefrom, nor shall this Lease be void or
voidable. In such event, the Commencement Date, termination date and all other
dates of this Lease shall be extended to conform to the date of Landlord's
tender of possession of the Premises to Tenant, in the condition required by
Paragraph 5.A of the Work Letter Agreement, and Tenant shall not be obligated to
pay Monthly Rent or other sums due Landlord hereunder until possession of the
Premises is tendered to Tenant as provided therein. If the Commencement Date is
delayed beyond the anticipated Commencement Date for any reason other than a
delay by Tenant, Landlord shall use all reasonable efforts to accommodate
occupancy in that portion of the second floor of the Premises which is ready for
occupancy which occupancy shall be on all terms and conditions set forth herein,
except for the payment of Monthly Rent and Additional Rent.
B. Early Entry. Tenant will be permitted access to the Premises
-----------
prior to the Commencement Date for the purpose of fixturing or any other purpose
permitted by Landlord. Such early entry shall be at Tenant's sole risk and
subject to all the terms and provisions hereof, except for the payment of
Monthly Rent and Additional Rent. Landlord shall have the right to impose such
reasonable additional conditions on Tenant's early entry as Landlord shall deem
appropriate, and shall further have the right to require that Tenant execute an
early entry agreement containing such conditions prior to Tenant's early entry.
C. Termination. Either party, at its option, may terminate this
-----------
Lease by giving written notice of its election to terminate to the other party
if the Commencement Date has not occurred on or before September 1, 1995,
-----------------
through no fault of the terminating party and provided that the party seeking to
terminate this Lease has used its best efforts to perform the obligations of
such party which are required to be performed in advance of the Commencement
Date.
5. Rent.
----
A. Base Monthly Rent. Tenant shall pay to Landlord, in lawful money
-----------------
of the United States, for each calendar month of the Term, commencing on the day
fifteen (15) days after the Commencement Date (the "Rent Start Date"), Base
Monthly Rent in the amount set forth below, in advance, on the first day of each
calendar month, without abatement, deduction, claim, offset, prior notice or
demand. Additionally, Tenant shall pay, as and with the Base Monthly Rent, the
estimated monthly Additional Rent as set forth in Paragraph 5.B herein, as
adjusted from time to time hereunder. Tenant shall deposit with Landlord upon
mutual execution of this Lease the sum of Forty Thousand Eight Hundred Twenty
-----------------------------------
and no/100ths Dollars ($40,820.00) to be applied to the Base Monthly Rent for
- ---------------------
the first month for which it is due. Tenant shall pay the Base Monthly Rent on
the amount and for the months set forth below, and otherwise as provided in this
Paragraph 5.A:
Base Monthly Rent Months 01 - 24 $40,820.00
Months 25 - 48 $43,420.00
Months 49 - 60 $46,020.00
B. Additional Rent. All monies required to be paid by Tenant under
---------------
this Lease, including, without limitation, Real Property Taxes pursuant to
Paragraph 15., Outside Area Expenses
3
<PAGE>
pursuant to Paragraph 17., insurance premiums pursuant to Paragraph 21., and any
association fee shall be deemed Additional Rent.
C. Prorations. If the Commencement Date is not the first (1st) day
----------
of a month, or if the termination date of this Lease is not the last day of a
month, a prorated installment of Monthly Rent based on a thirty (30) day month
shall be paid for the fractional month during which the Lease commences or
terminates.
6. Late Payment Charges.
--------------------
Tenant acknowledges that late payment by Tenant to Landlord of Rent
and other charges provided for under this Lease will cause Landlord to incur
costs not contemplated by this Lease, the exact amount of such costs being
extremely difficult or impracticable to fix. Therefore, if any installment of
Rent or any other charge due from Tenant is not received by Landlord within five
(5) days after such amount shall be due and after Landlord has made a reasonable
effort to contact Tenant regarding such late payment, Tenant shall pay to
Landlord an additional sum equal to five percent (5%) of the amount overdue as a
late charge for every month or portion thereof that the Rent or other charges
remain unpaid. The parties agree that this late charge represents a fair and
reasonable estimate of the costs that Landlord will incur by reason of the late
payment by Tenant.
Initials:
- --------
_________________________________ ____________________________________
Landlord Tenant
7. Security Deposit.
----------------
Tenant shall deposit with Landlord upon execution the sum of Forty Six
---------
Thousand Twenty and no/100/th/ Dollars ($46,020.00) as the Security Deposit for
- ------------------------------ ---------
the full and faithful performance of every provision of this Lease to be
performed by Tenant. If Tenant commits an event of default as defined in
Paragraph 26 hereof, with respect to any provision of this Lease, and after the
period to cure the default has elapsed, Landlord may apply all or any part of
the Security Deposit for the payment of any rent or other sum in default, the
repair of such damage to the Premises or the payment of any other amount which
Landlord may spend or become obligated to spend by reason of Tenant's default or
to compensate Landlord for any other loss or damage which Landlord may suffer by
reason of Tenant's default to the full extent permitted by law. If any portion
of the Security Deposit is so applied, Tenant shall, within ten (10) days after
written demand therefor, deposit cash with Landlord in an amount sufficient to
restore the Security Deposit to its original amount. Landlord shall not be
required to keep the Security Deposit separate from its general funds, however,
Tenant shall be entitled to interest on the Security Deposit. If Tenant is not
otherwise in default pursuant to Paragraph 14 herein, so much of the Security
Deposit as has not been properly applied hereunder, including interest, shall be
returned to Tenant within thirty (30) days of termination of the Lease.
8. Holding Over.
------------
If Tenant remains in possession of all or any part of the Premises
after the expiration of the Term, with the express or implied consent of
Landlord, such tenancy shall be month-to-month only and shall not constitute a
renewal or extension for any further term. If Tenant remains in possession
either with or without Landlord's consent, Base Monthly Rent shall be increased
to an amount equal to one hundred twenty-five percent (125%) of
4
<PAGE>
the Base Monthly Rent payable during the last month of the Term, and any other
sums due under this Lease shall be payable in the amount and at the times
specified in this Lease. Such month-to-month tenancy shall be subject to every
other term, condition, and covenant contained herein. If Tenant fails to
surrender the Premises upon the expiration of the Term despite demand to do so
by Landlord, Tenant shall indemnify and hold Landlord harmless from all loss or
liability, including without limitation any claim made by a succeeding tenant,
resulting from Tenant's failure to surrender.
9. Tenant Improvements.
-------------------
Landlord agrees to construct such Tenant Improvements pursuant to the
terms of Exhibits "C" and "C-1" herein.
10. Condition of Premises.
---------------------
Landlord represents and warrants that, as of the Commencement Date,
the Premises and all elements of the Premises, including the sidewalks,
driveways, parking lot, mechanical, electrical, plumbing, truck doors, roof and
roofing system (including roof membrane) will be in good operating condition and
repair. Any damage to the Premises caused by Tenant's move-in shall be repaired
or corrected by Tenant, at its expense. Tenant acknowledges that neither
Landlord nor its Agents have made any representations or warranties as to the
suitability or fitness of the Premises for the conduct of Tenant's business or
for any other purpose, nor has Landlord or its Agents agreed to undertake any
Alterations or construct any Tenant Improvements to the Premises except as
expressly provided in this Lease. If Tenant fails to submit a punchlist to
Landlord within forty-five (45) days of occupancy or lease commencement,
whichever is sooner, then it shall be deemed that there are no Tenant
Improvement items needing additional work or repair, other than as may be
required because of latent defects or conditions which were not reasonably
discoverable by Tenant. Landlord's contractor shall complete all reasonable
punchlist items within forty-five (45) days after the walk-through inspection or
as soon as practicable thereafter. Upon completion of such punchlist items,
Tenant shall approve such completed items in writing to Landlord. If Tenant
fails to approve such items within fourteen (14) days of written notice of
completion, such items shall be deemed approved by Tenant.
11. Use of the Premises.
-------------------
A. Tenant's Use. Tenant shall use the Premises solely for
------------
office/R&D, light manufacturing, test & assembly, engineering, distribution &
storage and shall not use the Premises for any other purpose without obtaining
the prior written consent of Landlord. Tenant shall have the exclusive use of
all Outside Areas on the Property, subject only to the reasonable requirements
of Landlord to perform Landlord's obligations, or exercise the rights reserved
to Landlord, hereunder.
B. Compliance.
----------
(i) The parties acknowledge that the Premises consist, in part, of
the existing Building which may not comply with legal and other requirements
which would be applicable to buildings newly-constructed as of the date of this
Lease. Subject to that limitation, Landlord represents and warrants that to the
best of his knowledge, as of the Commencement Date, no condition on, in or about
the Premises or the Property, or any improvements thereon, shall violate any
requirements of covenants, conditions, restrictions and encumbrances ("CC&R's"),
insurance underwriter's requirements, or any rules, regulations, statutes,
ordinances, laws or building codes, (collectively, "Laws") applicable thereto,
including current building code requirements for seismic and structural
strength, the Americans with Disabilities Act of 1990, as amended, or Title 24.
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Tenant shall not use the Premises or suffer or permit anything to
be done by any agent, employee, contractor or invitee of Tenant, in or about the
Premises which will in any way conflict with any law, statute, zoning
restriction, ordinance or governmental law, rule, regulation or requirement of
public authorities now in force or which may hereafter be in force, or relating
to or affecting the condition, use or occupancy of the Premises. Tenant shall
not commit any public or private nuisance or any other act or thing which might
or would disturb the quiet enjoyment of any occupant of nearby property. Tenant
shall place no loads upon the floors, walls or ceilings in excess of the maximum
designed load determined by Landlord or which endanger the structure; nor place
any harmful liquids in the drainage systems; nor dump or store waste materials
or refuse or allow such to remain outside the Building proper, except in the
enclosed trash areas provided. Tenant shall not store or permit to be stored or
otherwise placed any other material of any nature whatsoever outside the
Building. If applicable Laws, CC&R's or insurance underwriter's requirements
require the construction of any improvement on, in or about the Premises which
would properly be capitalized under generally acceptable accounting principles
(a "Capital Improvement"), except as provided below, Landlord shall construct
the Capital Improvement and, provided that the cost of such Capital Improvement
is properly reimbursable by Tenant hereunder, Tenant shall pay to Landlord, with
each monthly installment of Base Rent coming due after completion of the Capital
Improvement in question and receipt of Landlord's statement of the cost
therefor, an amount equal to the cost of such Capital Improvement amortized over
its useful life (as reasonably determined by the manufacturer or supplier of the
item in question, where applicable in equal monthly installments, until the
earlier of the expiration of the term of this Lease or the end of the useful
life of the Capital Improvement. If applicable Laws, CC&R's or insurance
underwriter's requirements require the construction of any Capital Improvement
as the result of a particular or unique use of the Premises made by Tenant,
Tenant shall construct such Capital Improvement at its sole cost. Tenant shall
not be required to construct or pay the cost of complying with any CC&R's,
insurance underwriter's requirements or Laws regarding the presence of hazardous
or toxic materials, unless the hazardous or toxic materials in question were
stored, used or disposed of by Tenant, its agents, employees or contractors on
or about the Premises.
(ii) In particular, Tenant, at its sole cost, shall comply with all
laws relating to the storage, use and disposal of hazardous, toxic or
radioactive matter by Tenant, its agents, employees or contractors, including
those materials identified in Sections 66680 through 66685 of Title 22 of the
California Code of Regulations, Division 4, Chapter 30 as they may be amended
from time to time (collectively "Toxic Materials"). If Tenant does store, use or
dispose of any Toxic Materials, Tenant shall notify Landlord in writing at least
ten (10) days prior to their first appearance on the Premises. Tenant shall be
solely responsible for and shall defend, indemnify and hold Landlord and its
Agents harmless from and against all claims, costs and liabilities, including
attorneys' fees and costs, arising out of or in connection with its storage, use
and disposal of Toxic Materials by Tenant, its agents, employees or contractors.
Tenant shall further be solely responsible for and shall defend, indemnify and
hold Landlord and its Agents harmless from and against all claims, costs, and
liabilities, including attorneys' fees and costs, arising out of or in
connection with the removal, clean-up and restoration work and materials
necessary to comply with the requirements of the governmental agency having
jurisdiction over the removal or remediation of the materials involved, and
return the Premises and any other property of whatever nature to their condition
existing prior to the appearance of the Toxic Materials on the Premises. If any
governmental agency or the beneficiary of any deed of trust covering the
Property requires any testing of the Premises or the
6
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Property, including the soil or groundwater of the Property, to ascertain
whether there has been any release of Toxic Materials in, on or about the
Premises or the Property, Landlord shall have the right to install monitoring
wells on or about the Outside Area and to perform such other tests and
investigations of the Premises and the Property for such purpose. Tenant shall
reimburse Landlord as Additional Rent for the reasonable cost of such tests and
investigations and of the installation, maintenance, repair and replacement of
such monitoring wells or other measuring devices if the results of such tests
and investigations disclose the existence of facts which give rise to the
liability of Tenant pursuant to the indemnity provisions of this Paragraph
11.B(ii). Tenant's obligations hereunder shall survive the termination of this
Lease. Landlord represents and warrants that to the best of his knowledge it has
provided true, accurate and complete copies of all reports, studies, assessments
and other materials or correspondence provided to Landlord or prepared by any
third party in connection with the investigation of the Property for the
presence of Toxic Materials.
Landlord shall hold Tenant harmless from and against all claims,
costs, and liabilities, including attorneys' fees and costs, arising out of or
in connection with the presence of any Toxic Materials on or about the Property,
from any source other than those Toxic Materials for which Tenant or Tenant's
agents are responsible hereunder.
12. Quiet Enjoyment.
---------------
Landlord covenants that Tenant, upon performing the terms, conditions
and covenants of this Lease, shall have quiet and peaceful possession of the
Premises as against any person claiming the same by, through or under Landlord.
13. Alterations.
-----------
After the Commencement Date, Tenant shall not make or permit any
Alterations in, on or about the Premises, except for non structural Alterations
not exceeding Twenty-Five Thousand Dollars ($25,000.00) in cost, without the
prior written consent of Landlord, and according to plans and specifications
approved in writing by Landlord, which consent shall not be unreasonably
withheld. Notwithstanding the foregoing Tenant shall not, without the prior
written consent of Landlord, make any:
(i) Alterations to the exterior of the Building;
(ii) Alterations to and penetrations of the roof of the Building
(provided that Tenant shall be entitled to install such satellite dishes or
antennae the placement of which on the roof is reasonably necessary in the
conduct of Tenant's business in the Premises, subject to the reasonable
requirements of Landlord; and
(iii) Alterations visible from outside the Premises, including
Common Area, to which Landlord may withhold Landlord's consent on wholly
aesthetic grounds. All Alterations shall be installed at Tenant's sole expense,
in compliance with all applicable laws and the CC&R's, by a licensed contractor,
shall be done in a good and workmanlike manner conforming in quality and design
with the Premises existing as of the Commencement Date. All Alterations, trade
fixtures and Tenant's Personal Property installed in the Premises at Tenant's
expense ("Tenant's Property") shall at all times remain Tenant's Property and
Tenant shall be entitled to all depreciation, amortization and other tax
benefits with respect thereto. Except for Alterations which cannot be removed
without injury to the Premises, at any time Tenant may remove Tenant's Property
from the Premises, provided Tenant repairs all damage caused by such removal. At
the time that Landlord consents to any proposed
7
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Alteration, and otherwise, within fifteen (15) days of written request, Landlord
shall advise Tenant in writing whether it will require Tenant to remove any
Alterations from the Premises upon termination of the Lease. If Landlord fails
to so advise Tenant at the time that Landlord consents to any proposed
Alteration, or in response to a written request, Landlord shall be deemed to
have consented to the Alterations in question remaining in the Premises upon
termination of the Lease. Tenant shall not be liable for removal of any approved
alterations which enhance the structural integrity and future use of the
building. Notwithstanding any other provision of this Lease, Tenant shall be
solely responsible for the maintenance and repair of any and all Alterations
made by Tenant to the Premises. Tenant shall give Landlord written notice of
Tenant's intention to perform work on the Premises which might result in any
claim of lien at least twenty (20) days prior to the commencement of such work
to enable Landlord to post and record a Notice of Nonresponsibility or other
notice deemed proper before the commencement of any such work.
14. Surrender of the Premises.
-------------------------
Upon the expiration or earlier termination of the Term, Tenant shall
surrender the Premises to Landlord in its condition existing as of the
Commencement Date, normal wear and tear and fire or other casualty, or other
condition which is not the obligation of Tenant to correct, excepted, with all
interior walls repaired and repainted if marked or damaged, all carpets
shampooed and cleaned, the HVAC equipment serviced and repaired by a reputable
and licensed service firm, all floors cleaned and waxed, all broken, marred or
nonconforming acoustical ceiling tiles replaced, all windows washed, the
plumbing and electrical systems and lighting in good order and repair, including
replacement of any burned out or broken light bulbs or ballasts, the lawn and
shrubs in good condition including the replacement of any dead or damaged
plantings, and the sidewalk, driveways and parking areas in good order,
condition and repair, all to the reasonable satisfaction of Landlord. Tenant
shall remove from the Premises all of Tenant's Alterations required to be
removed pursuant to Paragraph 13., and all Tenant's Personal Property and repair
any damage and perform any restoration work caused by such removal. Subject to
the provisions of Paragraph 13 above, Landlord shall notify Tenant of the items
to be removed and/or restored within one hundred (100) days prior to the
expiration of the lease term. If Tenant fails to remove such Alterations and
Tenant's Personal Property, and such failure continues after the termination of
this Lease, Landlord may retain such property and all rights of Tenant with
respect to it shall cease, or Landlord may place all or any portion of such
property in public storage for Tenant's account. Tenant shall be liable to
Landlord for costs of removal of any such Alterations and Tenant's Personal
Property and storage and transportation costs of same, and the cost of repairing
and restoring the Premises, together with interest at the Interest Rate from the
date of expenditure by Landlord. If the Premises are not so surrendered at the
termination of this Lease, Tenant shall indemnify Landlord and its Agents
against all loss or liability, including attorneys' fees and costs resulting
from delay by Tenant in so surrendering the Premises.
Normal wear and tear, for the purposes of this Lease, shall be
construed to mean wear and tear caused to the Premises by a natural aging
process which occurs in spite of prudent application of reasonable standards for
maintenance, repair and janitorial practices. It is not intended, nor shall it
be construed, to include items of neglected or deferred maintenance which would
have or should have been attended to during the Term of the Lease if reasonable
standards had been applied to properly maintain and keep the Premises at all
times in good condition and repair.
8
<PAGE>
15. Real Property Taxes.
-------------------
A. Payment by Tenant. On or before April 1 and December 1 of each
-----------------
calendar year during the Term, Tenant shall pay to Landlord, as Additional Rent,
all Real Property Taxes and Assessment District taxes as set forth on the County
assessor's tax statement for the Premises. Landlord shall give Tenant at least
fifteen (15) days' prior written notice of the amount so due, including a copy
of the tax statement. Upon Landlord's receipt of the Real Property Tax payment
from Tenant, Landlord shall pay the taxes to the County. If Tenant fails to pay
Tenant's Percentage of the Real Property Taxes on or before April 1 and December
1, respectively, Tenant shall pay to Landlord any penalty incurred by such late
payment. Tenant shall pay Tenant's Percentage of any Real Property Tax not
included within the County tax assessor's tax statement within ten (10) days
after being billed for same by Landlord. The foregoing dates for payment are
based on the dates currently established by the County as the dates on which
Real Property Takes become delinquent if not paid. If such delinquency dates
change, the dates on which Tenant must pay such taxes shall be at least ten (10)
days prior to the delinquency dates. Notwithstanding the foregoing, at any time,
upon prior written notice to Tenant, Landlord shall have the right to require
that Tenant pay one-twelfth (1/12th) of the Real Property Taxes payments to
Landlord directly, on the first (1st) day of each calendar month. Assessments,
taxes, fees, levies and charges may be imposed by governmental agencies for such
purposes as fire protection, street, sidewalk, road, utility construction and
maintenance, refuse removal and for other governmental services which may
formerly have been provided without charge to property owners or occupants. It
is the intention of the parties that all new and increased assessments, taxes,
fees, levies and charges are to be included within the definition of Real
Property Taxes for purposes of this Lease.
B. Taxes on Tenant Improvements and Personal Property. Tenant shall
--------------------------------------------------
pay any increase in Real Property Taxes resulting from any and all Alterations
and Tenant Improvements of any kind whatsoever placed in, on or about the
Premises for the benefit of, at the request of, or by Tenant. Tenant shall pay
prior to delinquency all taxes assessed or levied against Tenant's Personal
Property in, on or about the Premises or elsewhere. When possible, Tenant shall
cause its Personal Property to be assessed and billed separately from the real
or personal property of Landlord.
C. Proration. Tenant's liability to pay Real Property Taxes shall be
---------
prorated on the basis of a 365-day year to account for any fractional portion of
a fiscal tax year included at the commencement or expiration of the Term. With
respect to any assessments which may be levied against or upon the Premises, or
which under the laws then in force may be evidenced by improvements or other
bonds or may be paid in annual installments, only the amount of such annual
installment (with appropriate proration for any partial year) and interest due
thereon shall be included within the computation of the annual Real Property
Taxes levied against the Premises.
16. Utilities and Services.
----------------------
Tenant shall be responsible for and shall pay promptly all charges for
water, gas, electricity, computer and telephone cabling and equipment, refuse
pickup, janitorial service and all other utilities, materials and services
furnished directly to or used by Tenant in, on or about the Premises during the
Term, together with any taxes thereon. Tenant shall be responsible for all costs
related to excessive intentional or unintentional use of water as determined by
Landlord. Landlord shall not be liable in damages or otherwise for any failure
or interruption of any utility service or other service furnished to the
Premises, except
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<PAGE>
that resulting from the negligence or willful misconduct of Landlord, or
Landlord's Agents. In addition, Tenant shall not be entitled to any abatement or
reduction of Rent by reason of such failure or interruption, no eviction of
Tenant shall result from such failure or interruption and Tenant shall not be
relieved from the performance of any covenant or agreement in this Lease because
of such failure or interruption except to the extent attributable to the
negligence or willful misconduct of Landlord, or Landlord's Agents.
17. Repair and Maintenance.
----------------------
A. Building.
--------
(i) Landlord's Obligations. Landlord shall keep in good
----------------------
order, condition and repair the structural parts of the Building, which
structural parts include only the roof, the roof surface membrane (to be
reimbursed by Tenant, except as otherwise provided herein), exterior walls,
foundation and subflooring of the Building, except for any damage thereto caused
by the negligence or willful acts or omissions of Tenant or of Tenant's agents,
employees or invitees, or by reason of the failure of Tenant to perform or
comply with any terms in this Lease, or caused by Alterations made by Tenant or
by Tenant's agents, employees or contractors. Except as otherwise reasonably
apparent to Landlord, or part of the regularly scheduled repair or maintenance
of the Property, it is an express condition precedent to all obligations of
Landlord to repair and maintain that Tenant shall have notified Landlord of the
need for such repairs or maintenance.
(ii) Tenant's Obligations. Tenant shall at all times and at
--------------------
its own expense clean, keep and maintain in good order, condition and repair
every part of the Premises which is not within Landlord's obligation pursuant to
Paragraph 17.A.(i), except for any damage thereto caused by the negligence or
willful acts or omissions of Landlord or Landlord's Agents. Tenant's repair and
maintenance obligations shall include, all plumbing and sewage facilities within
the Premises, fixtures, interior walls and ceiling, floors, windows, doors,
entrances, plateglass, showcases, skylights, all electrical facilities and
equipment, including lighting fixtures, lamps, fans and any exhaust equipment
and systems, any automatic fire extinguisher equipment within the Premises,
electrical motors and all other appliances and equipment of every kind and
nature located in, upon or about the Premises. Landlord will obtain HVAC systems
preventive maintenance contracts with quarterly service in accordance with
manufacturer recommendations, which shall be subject to the reasonable approval
of Landlord and paid for by Tenant, and which shall provide for and include
replacement of filters, oiling and lubricating of machinery, parts replacement,
adjustment of drive belts, oil changes and other preventive maintenance
including annual maintenance of duct work, interior unit drains and caulking at
sheet metal and recaulking of jacks and vents. Tenant shall have the benefit of
all warranties available to Landlord regarding the equipment in such HVAC
systems. The cost of any repair or replacement of Capital Equipment in or on the
Premises, including but not limited to the roof and HVAC equipment, shall be
amortized over the useful life of the Equipment, as established by the
manufacturer or supplier of such an item, but in no event to exceed fifteen (15)
years. Such amortization shall be based on the Tenant paying for a pro rata
share of such cost by taking the remaining Lease Term and dividing it by the
useful life, but in no case shall this ratio exceed 100%. If Tenant extends this
Lease, it will reimburse Landlord for any unamortized portion of this cost
during that extension, and any other portions of the Premises to be maintained
by Tenant.
Notwithstanding the foregoing, Tenant shall have no obligation to
perform any item of repair or maintenance, or to pay
10
<PAGE>
any cost as part of Outside Area Expenses, as defined below, or otherwise, which
is: (i) necessitated by the acts or omissions of Landlord or Landlord's Agents;
(ii) occasioned by fire, acts of God or other casualty; (iii) required as a
consequence of any construction defect in the Premises; (iv) reimbursable by
third parties; or (v) properly treated as a Capital Improvement (except as
provided below).
B. Outside Area.
------------
(i) Landlord's Obligations. Landlord shall maintain the
----------------------
Outside Area including those portions of the Building within the Outside Area,
including the roof (subject to Tenant's obligation to pay for annual roof
inspection and repair as set forth in Paragraph 17.B.(ii), and exterior walls
(excluding the doors, ceiling and plateglass). Provided Landlord maintains the
Property in a condition comparable to similarly situated buildings in the
vicinity of the Premises, the manner in which the Outside Area shall be
maintained and the expenditures therefor shall be at the sole discretion of
Landlord. As required to perform the obligations of Landlord hereunder, or in
the exercise of the rights reserved to Landlord, Landlord shall at all times
have exclusive control of the Outside Area and may at any time temporarily close
any part thereof, exclude and restrain anyone from any part thereof, except the
bona fide customers, employees and invitees of Tenant who use the Outside Area
in accordance with the rules and regulations as Landlord may from time to time
promulgate, and may change the configuration or location of the Outside Area. In
exercising any such rights, Landlord shall make a reasonable effort to minimize
any disruption of Tenant's business.
(ii) Tenant to Pay Outside Area Expenses. Tenant shall pay, as
-----------------------------------
Additional Rent, Tenant's Percentage of all reasonable costs and expenses paid
or incurred by Landlord during the Term in maintaining, repairing and replacing
the Outside Area, including annual roof inspections and preventive maintenance
work on the roof, and a reasonable management fee for Landlord's property
manager which management fee shall be $0.02/square foot/month subject to annual
CPI adjustments during the term of the Lease (the "Outside Area Expenses").
Landlord shall provide Tenant a reasonably detailed Budget summary of the costs
which constitute Outside Area Expenses on an annual basis, together with copies
of invoices for the costs incurred. If any Outside Area Expense would properly
be considered a Capital Improvement, Landlord shall construct the item in
question, and, provided that the cost of such Capital Improvement is properly
reimbursable by Tenant hereunder, Tenant shall pay to Landlord, with each
monthly installment of Base Rent coming due after completion of the Capital
Improvement in question and receipt of Landlord's statement of the cost
therefor, an amount equal to the cost of such Capital Improvement amortized over
its useful life (as reasonably determined by the manufacturer or supplier of the
item in question, where applicable) in equal monthly installments, until the
earlier of the expiration of the term of this Lease or the end of the useful
life of the Capital Improvement.
(iii) Monthly Payments. From and after the Rent Start Date,
----------------
Tenant shall pay to Landlord on the first day of each calendar month of the Term
a monthly amount based upon the Budget estimated by Landlord for the Outside
Area Expenses. The foregoing estimated monthly charge may be adjusted by
Landlord at the end of any calendar quarter on the basis of Landlord's
experience and reasonably anticipated costs. Any such adjustment shall be
effective as of the calendar month next succeeding receipt by Tenant of written
notice of such adjustment provided Tenant has received at least thirty (30)
days' notice of the adjustment before it is due. Within one hundred twenty (120)
days following the end of each calendar year Landlord shall furnish Tenant a
statement of the actual Outside Area Expenses
11
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("Actual Expenses") for the calendar year and the payments made by Tenant with
respect to such period. If Tenant's payments for the Outside Area Expenses do
not equal the amount of the Actual Expenses, Tenant shall pay Landlord the
deficiency within thirty (30) days after receipt of such statement. If Tenant's
payments exceed the Actual Expenses, Landlord shall either offset the excess
against the Outside Area Expenses next thereafter to become due to Landlord, or
shall refund the amount of the overpayments to Tenant, in cash, as Landlord
shall elect. There shall be appropriate adjustments of the Outside Area Expenses
as of the Commencement Date and expiration of the Term. Landlord shall make the
books and records concerning the calculation of Outside Area Expenses available
to Tenant for inspection during normal business hours at a location reasonably
convenient to the Premises. If Tenant's review of those books and records
indicates that the charge for Outside Area Expenses requested by Landlord
exceeds the actual amount due, Landlord shall promptly reimburse to Tenant any
overcharge.
C. Compliance with Governmental Regulations. Subject to Paragraph
----------------------------------------
11.B above, Tenant shall comply with, including the making by Tenant of any
Alteration to the Premises, all present and future regulations, rules, laws,
ordinances, and requirements of all governmental authorities (including, without
limitation, state, municipal, county and federal governments and their
departments, bureaus, boards and officials) arising from the use or occupancy
of, or applicable to, the Premises or privileges appurtenant to or in connection
with the enjoyment of the Premises. Any such capital expenditures shall be
amortized over its useful life, and Tenant shall pay in monthly installments
during each year of the lease term that portion of such amortized expenditure
that is allocable to such year.
18. Liens.
-----
Tenant shall keep the Building and the Property free from any liens
arising out of any work performed, materials furnished or obligations incurred
by or on behalf of Tenant and hereby indemnifies and holds Landlord and its
Agents harmless from all liability and cost, including attorneys' fees and
costs, in connection with or arising out of any such lien or claim of lien.
Tenant shall cause any such lien imposed to be released of record by payment or
posting of a proper bond acceptable to Landlord within ten (10) days after
written request by Landlord. Tenant shall give Landlord written notice of
Tenant's intention to perform work on the Premises which might result in any
claim of lien at least ten (10) days prior to the commencement of such work to
enable Landlord to post and record a Notice of Nonresponsibility. If Tenant
fails to so remove any such lien within the prescribed ten (10) day period, then
Landlord may do so at Tenant's expense and Tenant shall reimburse Landlord as
Additional Rent for such amounts upon demand. Such reimbursement shall include
all costs incurred by Landlord including Landlord's reasonable attorneys' fees
with interest thereon at the Interest Rate.
19. Landlord's Right to Enter the Premises.
--------------------------------------
Tenant shall permit Landlord and its Agents to enter the Premises at
all reasonable times with reasonable notice, except for emergencies in which
case no notice shall be required, to inspect the same, to post Notices of
Nonresponsibility and similar notices and "For Sale" signs, to show the Premises
to interested parties such as prospective lenders and purchasers, to make
necessary repairs, to discharge Tenant's obligations hereunder when Tenant has
failed to do so within a reasonable time after written notice from Landlord, and
at any reasonable time within one hundred eighty (180) days prior to the
expiration of the Term, to place upon the Premises ordinary "For Lease" signs
and to show the Premises to prospective tenants. The above rights are subject
12
<PAGE>
to reasonable security regulations of Tenant and to the requirement that
Landlord shall at all times act in a manner to cause the least possible
interference with Tenant's business.
20. Signs.
-----
Tenant shall have the right to erect and maintain a Tenant
identification sign in, on or about the Building, Outside Area or the Premises
or other advertising material that is visible from the exterior of the Building
with Landlord's consent, which shall not be unreasonably withheld. The size,
design, color and other physical aspects of the Tenant identification sign shall
be subject to the Landlord's written approval prior to installation, which shall
not be unreasonably withheld, and any appropriate municipal or other
governmental approvals. The cost of the sign, its installation, maintenance and
removal expense shall be at Tenant's sole expense. If Tenant fails to maintain
its sign, or, if Tenant fails to remove its sign upon termination of this Lease,
Landlord may do so at Tenant's expense and Tenant's reimbursement to Landlord
for such amounts shall be deemed Additional Rent.
21. Insurance.
---------
A. Indemnification. Tenant hereby agrees to defend, indemnify and
---------------
hold harmless Landlord and its Agents from and against any and all damage, loss,
liability or expense including attorneys' fees and legal costs suffered
directly, or by reason of any claim, suit or judgment brought by or in favor of
any person or persons for damage, loss or expense due to, but not limited to,
bodily injury and property damage sustained by such person or persons which
arises out of, is occasioned by or in any way attributable to the use or
occupancy of the Premises or any part thereof by Tenant, the acts or omissions
of the Tenant, its agents, employees or any contractors or invitees brought onto
the Premises by the Tenant, except to the extent caused by the negligence or
willful misconduct of Landlord or its Agents. Tenant agrees that the obligations
assumed herein shall survive this Lease.
Landlord shall indemnify and hold harmless Tenant from all damages,
liabilities, claims, judgments, actions, attorneys' fees, consultants' fees,
cost and expenses arising from the negligence or willful misconduct of Landlord
or its employees, agents, contractors or invitees, or the breach of Landlord's
obligations or representations under this Lease.
B. Tenant's Insurance. Tenant agrees to maintain in full force and
------------------
effect at all times during the Term, at its own expense, for the protection of
Tenant and Landlord, as their interests may appear, policies of insurance issued
by a responsible carrier or carriers acceptable to Landlord which afford the
following coverages:
(i) Commercial general liability insurance in an amount not
less than Three Million and no/100ths Dollars ($3,000,000.00) combined single
limit for both bodily injury and property damage which includes blanket
contractual liability broad form property damage, personal injury, completed
operations, products liability, and fire damage legal (in an amount not less
than Fifty Thousand and no/100ths Dollars ($50,000.00), naming Landlord and its
Agents as additional Insureds.
(ii) "Special Risk" property insurance (including, without
limitation, vandalism, malicious mischief, inflation endorsement, and sprinkler
leakage endorsement) on Tenant's Personal Property located on or in the
Premises. Such insurance shall be in the full amount of the replacement cost, as
the same may from time to time increase as a result of inflation or otherwise,
and shall be in a form providing
13
<PAGE>
coverage comparable to the coverage provided the standard ISO All-Risk form. As
long as this Lease is in effect, the proceeds of such policy shall be used for
the repair or replacement of such items so insured. Landlord shall have no
interest in the insurance upon Tenant's Personal Property.
(iii) Boiler and machinery insurance, including but not limited
to, steam pipes, pressure pipes, condensation return pipes and other pressure
vessels and HVAC equipment, including miscellaneous electrical apparatus, in an
amount satisfactory to Landlord.
C. Premises Insurance. During the Term Landlord shall maintain
------------------
"Special Risk" property insurance (including inflation endorsement, sprinkler
leakage endorsement, earthquake and flood coverage) on the Premises, excluding
coverage of all Tenant's Personal Property on or in the Premises, but including
the Building and any Tenant Improvements. Such insurance shall also include
insurance against loss of rents on a "Special Risk" basis, including earthquake
and flood, in an amount equal to the Monthly Rent and Additional Rent, and any
other sums payable under the Lease, for a period of at least twelve (12) months
commencing on the date of loss. Such insurance shall name Landlord and its
Agents as named insureds and include a lender's loss payable endorsement in
favor of Landlord's lender (Form 438 BFU Endorsement). Subject to the remaining
provisions of this Lease, Tenant shall reimburse Landlord for the costs of such
policy, annually, or upon such other periodic basis as Landlord shall elect,
within fifteen (15) days of the date of receipt of a statement for the same, as
Additional Rent. If the insurance premiums are increased after the Commencement
Date, Tenant shall pay such increase within fifteen (15) days of notice of such
increase.
Nothing herein will require Tenant to reimburse to Landlord that
portion of insurance premiums attributable to earthquake coverage which exceeds,
in any one year, a commercially reasonable amount. The parties agree, without
limitation, that, if insurance premiums attributable to earthquake coverage
exceed three (3) times the premiums payable for casualty insurance, such cost
will be deemed in excess of a commercially reasonable amount and providing the
lien holder has waived the requirement for such coverage.
D. Increased Coverage. Upon demand, Tenant shall provide Landlord,
------------------
at Tenant's expense, with such increased amount of existing insurance, and such
other insurance as the holder of a first deed of trust on the Property may
reasonably require to afford Landlord and Landlord's lender adequate protection.
E. Co-Insurer. If, on account of the failure of Tenant to comply
----------
with the foregoing provisions, Landlord is adjudged a co-insurer by its
insurance carrier, then, any loss or damage Landlord shall sustain by reason
thereof, including attorneys' fees and costs, shall be borne by Tenant and shall
be immediately paid by Tenant upon receipt of a bill therefor and evidence of
such loss.
F. Insurance Requirements. All such insurance shall be in a form
----------------------
satisfactory to Landlord and shall be carried with companies that have a general
policy holder's rating of not less than "A" and a financial rating of not less
than Class "X" in the most current edition of Best's Insurance Reports; shall
------------------------
provide that such policies shall not be subject to material alteration or
cancellation except after at least thirty (30) days' prior written notice to
Landlord; and shall be primary as to Landlord. The policy or policies, or duly
executed certificates for them, together with satisfactory evidence of payment
of the premium thereon shall be deposited with Landlord
14
<PAGE>
prior to the Commencement Date, and upon renewal of such policies, not less than
thirty (30) days prior to the expiration of the term of such coverage. If Tenant
fails to procure and maintain the insurance required hereunder, Landlord may,
but shall not be required to, order such insurance at Tenant's expense and
Tenant shall reimburse Landlord. Such reimbursement shall include all costs
incurred by Landlord including Landlord's reasonable attorneys' fees, with
interest thereon at the Interest Rate.
G. Landlord's Disclaimer. Landlord and its Agents shall not be
---------------------
liable for any loss or damage to persons or property resulting from fire,
explosion, falling plaster, glass, tile or sheetrock, steam, gas, electricity,
water or rain which may leak from any part of the Premises, or from the pipes,
appliances or plumbing works therein or from the roof, street or subsurface or
whatsoever, unless caused by or due to the negligence or willful acts of
Landlord, or Landlord's Agents. Landlord and its Agents shall not be liable for
any latent defect in the Premises. Tenant shall give prompt written notice to
Landlord in case of a casualty, accident or repair needed in the Premises.
22. Waiver of Subrogation.
---------------------
Landlord and Tenant each hereby waive all rights of recovery against
the other on account of loss and damage occasioned to such waiving party for its
property or the property of others under its control to the extent that such
loss or damage is insured against under any insurance policies which may be in
force at the time of such loss or damage. Tenant and Landlord shall, upon
obtaining policies of insurance required hereunder, give notice to the insurance
carrier that the foregoing mutual waiver of subrogation is contained in this
Lease and Tenant and Landlord shall cause each insurance policy obtained by such
party to provide that the insurance company waives all right of recovery by way
of subrogation against either Landlord or Tenant in connection with any damage
covered by such policy.
23. Damage or Destruction.
---------------------
A. Landlord's Obligation to Rebuild. If the Premises are damaged or
--------------------------------
destroyed, Landlord shall promptly and diligently repair the Premises unless it
has the right to terminate this Lease as provided herein and it elects to so
terminate.
B. Right to Terminate. Landlord shall have the right to terminate
------------------
this Lease in the event any of the following events occurs:
(i) Insurance proceeds are not available to pay one hundred
percent (100%) of the cost of such repair, excluding the deductible;
(ii) The Premises cannot, with reasonable diligence, be fully
repaired by Landlord within one hundred twenty (120) days after the date of the
damage or destruction; or
(iii) The Premises cannot be safely repaired because of the
presence of hazardous factors, including, but not limited to, earthquake faults,
radiation, chemical waste and other similar dangers.
If Landlord elects to terminate this Lease, Landlord may give
Tenant written notice of its election to terminate within sixty (60) days after
such damage or destruction, and this Lease shall terminate thirty (30) days
after the date Tenant receives such notice. If Landlord elects not to terminate
the Lease, subject to Tenant's termination right set forth below,
15
<PAGE>
Landlord shall promptly commence the process of obtaining necessary permits and
approvals and repair of the Premises as soon as practicable, and this Lease will
continue in full force and effect. All insurance proceeds from insurance under
Paragraph 21., excluding proceeds for Tenant's Personal Property, shall be
disbursed and paid to Landlord. Tenant shall not be obligated to pay any such
deductible if Landlord elects to terminate the lease due to casualty not caused
by Tenant, its subtenants or their respective agents, employees, contractors or
invitees. In no case shall the total deductible for casualty insurance or the
amount of deductible paid by Tenant for any casualty, except for earthquake,
exceed fifteen thousand dollars ($15,000). The total deductible amount for any
earthquake casualty shall not exceed ten percent (10%) of the then current
replacement cost of the improvements to be restored, and Tenant shall be
obligated to pay up to one-half (5%) of this amount.
Tenant shall have the right to terminate this Lease, if the
Premises cannot, with reasonable diligence, be fully repaired within one hundred
ninety-five (195) days from the date of damage or destruction, or if the
estimate of the time required for such repair indicates that the repair will
require in excess of one hundred ninety-five (195) days from the date of the
damage or destruction. The determination of the estimated repair period shall be
made by Landlord in its good faith business judgment within thirty (30) days
after such damage or destruction. Landlord shall deliver written notice of the
repair period to Tenant after such determination has been made and Tenant shall
exercise its right to terminate this Lease, if at all, within ten (10) days of
receipt of such notice from Landlord.
C. Limited Obligation to Repair. Landlord's obligation, should it
----------------------------
elect or be obligated to repair or rebuild, shall be limited to the basic
Premises, the Tenant Improvements or the basic Building as they exist as of the
Commencement Date, subject to any changes in applicable Laws, as the case may
be, and Tenant shall, at Tenant's expense, replace or fully repair all Tenant's
Personal Property and any Alterations Installed by Tenant and existing at the
time of such damage or destruction, as necessary for the conduct of Tenant's
business.
D. Abatement of Rent. Rent shall be temporarily abated
-----------------
proportionately, but only to the extent of any proceeds received by Landlord
from rental abatement insurance described in Paragraph 21.C., during any period
when, by reason of such damage or destruction, Landlord and Tenant reasonably
determine that there is substantial interference with Tenant's use of the
Building, having regard to the extent to which Tenant may be required to
discontinue Tenant's use of the Building. Such abatement shall commence upon
such damage or destruction and end upon substantial completion by Landlord of
the repair or reconstruction which Landlord is obligated or undertakes to do.
Tenant shall not be entitled to any compensation or damages from Landlord for
loss of the use of the Premises, damage to Tenant's Personal Property or any
inconvenience occasioned by such damage, repair or restoration.
E. Damage Near End of Term. Anything herein to the contrary
-----------------------
notwithstanding, if the Premises are destroyed or damaged during the last twelve
(12) months of the Term, and the cost of repairing the damage or destruction
exceeds ten percent (10%) of the replacement cost of the entire Premises, then
Landlord and Tenant may elect to cancel and terminate this Lease as of the date
of the occurrence of such damage. If Landlord and Tenant do not elect to so
terminate this Lease, the repair of such damage shall be governed by Paragraphs
23.A. and 23.B.
16
<PAGE>
24. Condemnation.
------------
If title to all of the Premises or so much thereof is taken for any
public or quasi-public use under any statute or by right of eminent domain so
that reconstruction of the Premises will not, in Landlord's and Tenant's mutual
opinion, result in the Premises being reasonably suitable for Tenant's continued
occupancy for the uses and purposes permitted by this Lease, this Lease shall
terminate as of the date that possession of the Premises or part thereof be
taken and rent shall be adjusted to the date of termination. A sale by Landlord
to any authority having the power of eminent domain, either under threat of
condemnation or while condemnation proceedings are pending, shall be deemed a
taking under the power of eminent domain for all purposes of this paragraph.
If any part of the Premises is taken and such partial taking renders
the Premises unsuitable for Tenant's business as reasonably determined by
Tenant, Tenant shall have the right to terminate this Lease, which termination
shall be effective on the date set forth in Tenant's termination notice and rent
shall be adjusted to the date of termination.
If any part of the Premises is taken and the remaining part is
reasonably suitable for Tenant's continued occupancy for the purposes and uses
permitted by this Lease, this Lease shall, as to the part so taken, terminate as
of the date that possession of such part of the Premises is taken and the Rent
and other sums payable hereunder shall be reduced in the same proportion that
Tenant's use of Premises is reduced. If the parties disagree as to the amount of
Rent reduction, the matter shall be resolved by arbitration. Each party hereby
waives the provisions of Section 1265.130 of the California Code of Civil
Procedure allowing either party to petition the Superior Court to terminate this
Lease in the event of a partial taking of the Building or Premises.
No award for any partial or entire taking shall be apportioned. Tenant
assigns to Landlord its interest in any award which may be made in such taking
or condemnation, together with any and all rights of Tenant arising in or to the
same or any part thereof. Nothing contained herein shall be deemed to give
Landlord any interest in or require Tenant to assign to Landlord any separate
award made to Tenant for the taking of Tenant's Personal Property, for the
interruption of Tenant's business, or its moving costs, or for the loss of its
goodwill.
25. Assignment and Subletting.
-------------------------
A. Landlord's Consent. Tenant shall not enter into a Sublet without
------------------
Landlord's prior written consent, which consent shall not be unreasonably
withheld. Any attempted or purported Sublet without Landlord's prior written
consent shall be void and confer no rights upon any third person and, at
Landlord's election, shall terminate this Lease. Each Sublessee shall agree in
writing, for the benefit of Landlord, to assume, to be bound by, and to perform
the terms, conditions and covenants of this Lease to be performed by Tenant.
Notwithstanding anything contained herein, Tenant shall not be released from
personal liability for the performance of each term, condition and covenant of
this Lease by reason of Landlord's consent to a Sublet unless Landlord
specifically grants such release in writing. Consent by Landlord to any Sublet
shall not be deemed a consent to any subsequent Sublet.
B. Information to be Furnished. If Tenant desires at any time to
---------------------------
Sublet the Premises or any portion thereof, it shall first notify Landlord of
its desire to do so and shall submit in writing to Landlord: (i) the name of the
proposed Subtenant; (ii) the nature of the proposed Subtenant's business to be
carried on
17
<PAGE>
in the Premises; (iii) the terms and provisions of the proposed Sublet and a
copy of the proposed Sublet form containing a description of the subject
premises; and (iv) such financial information, including financial statements,
as Landlord may reasonably request concerning the proposed Subtenant.
C. Landlord's Alternatives. At any time within ten (10) days after
-----------------------
Landlord's receipt of the information specified in Paragraph 25.B., Landlord
may, by written notice to Tenant, elect: (i) to consent to the Sublet by Tenant;
or (ii) to refuse its consent to the Sublet.
If Landlord consents to the Sublet, Tenant may thereafter enter
into a valid Sublet or portion thereof, upon the terms and conditions and with
the proposed Subtenant set forth in the information furnished by Tenant to
Landlord pursuant to Paragraph 25.B. Landlord and Tenant shall split any profit
50/50 derived from any Sublet after deduction for reasonable costs of such
Sublet including brokerage commissions, legal fees, and the costs of any
Alteration(s) made by Tenant to the portion of the Premises which is Sublet
pursuant to Paragraph 13 herein.
D. Proration. If a portion of the Premises is Sublet, the pro rata
---------
share of the Rent attributable to such partial area of the Premises shall be
determined by Landlord by dividing the Rent payable by Tenant hereunder by the
total leasable square footage of the Premises and multiplying the resulting
quotient (the per square foot rent) by the number of square feet of the Premises
which are Sublet appropriately adjusted, as necessary, for sublet areas which
are warehouse spaces as opposed to those that are office spaces.
E. Assignment and Exempt Sublets. Notwithstanding the above,
-----------------------------
Landlord's consent shall not be required for an Assignment or a Sublet of this
Lease, to an exempt subsidiary, affiliate or parent corporation of Tenant, or a
corporation into which Tenant merges or consolidates, if Tenant gives Landlord
prior written notice of the name of any such Sublessee or Assignee, and if the
Sublessee or Assignee assumes, in writing, all of Tenant's obligations under the
Lease. An assignment or other transfer of this Lease to a purchaser of all or
substantially all of the assets of Tenant shall be deemed a Sublet requiring
Landlord's prior written consent.
26. Default.
-------
A. Tenant's Default. An Event of Default under this Lease by Tenant
----------------
shall exist if any of the following occurs:
(i) If Tenant fails to pay Rent or any other sum required to
be paid hereunder within fourteen (14) days after receipt of written notice;
provided, however, that Tenant may cure such default at any time prior to a
termination of this Lease by Landlord by paying all Rent and other expenses or
charges then due together with interest at the Interest Rate from the due date
through the date of payment; or
(ii) If Tenant fails to perform any term, covenant or
condition of this Lease except those requiring the payment of money, and Tenant
fails to cure such breach within twenty (20) days after written notice from
Landlord where such breach could reasonably be cured within such twenty (20) day
period; provided, however, that where such failure could not reasonably be cured
within the twenty (20) day period, that Tenant shall not be in default if it
commences such performance within the twenty (20) day period and diligently
thereafter prosecutes the same to completion; or
(iii) If Tenant assigns its assets for the benefit of its
creditors; or
18
<PAGE>
(iv) If the sequestration or attachment of or execution on any
material part of Tenant's Personal Property essential to the conduct of Tenant's
business occurs, and Tenant fails to obtain a return or release of such Personal
Property within thirty (30) days thereafter, or prior to sale pursuant to such
sequestration, attachment or levy, whichever is earlier; or
(v) If a court makes or enters any decree or order other than
under the bankruptcy laws of the United States adjudging Tenant to be insolvent;
or approving as properly filed a petition seeking reorganization of Tenant; or
directing the winding up or liquidation of Tenant and such decree or order shall
have continued for a period of thirty (30) days.
B. Remedies. Upon an Event of Default, Landlord shall have the
--------
following remedies, in addition to all other rights and remedies provided by law
or otherwise provided in this Lease, to which Landlord may resort cumulatively
or in the alternative:
(i) Landlord may continue this Lease in full force and
effect, and this Lease shall continue in full force and effect as long as
Landlord does not terminate this Lease, arid Landlord shall have the right to
collect Rent when due.
(ii) Landlord may terminate Tenant's right to possession of
the Premises at any time by giving written notice to that effect, and relet the
Premises or any part thereof. Tenant shall be liable immediately to Landlord for
all costs Landlord incurs in reletting the Premises or any part thereof,
including, without limitation, broker's commissions, expenses of cleaning and
redecorating the Premises required by the reletting and like costs. Reletting
may be for a period shorter or longer than the remaining term of this Lease. No
act by Landlord other than giving written notice to Tenant shall terminate this
Lease. Acts of maintenance, efforts to relet the Premises or the appointment of
a receiver on Landlord's initiative to protect Landlord's interest under this
Lease shall not constitute a termination of Tenant's right to possession. On
termination, Landlord has the right to remove all Tenant's Personal Property and
store same at Tenant's cost and to recover from Tenant as damages:
(a) The worth at the time of award of unpaid Rent and
other sums due and payable which had been earned at the time of termination;
plus
(b) The worth at the time of award of the amount by
which the unpaid Rent and other sums due and payable which would have been
payable after termination until the time of award exceeds the amount of such
Rent loss that Tenant proves could have been reasonably avoided; plus
(c) The worth at the time of award of the amount by
which the unpaid Rent and other sums due and payable for the balance or the Term
after the time of award exceeds the amount of such Rent loss that Tenant proves
could be reasonably avoided; plus
(d) Any other amount which is necessary to compensate
Landlord for all the detriment proximately caused by Tenant's failure to perform
Tenant's obligations under this Lease, or which, in the ordinary course of
things, would be likely to result therefrom, including, without limitation, any
costs or expenses incurred by Landlord: (i) in retaking possession of the
Premises; (ii) in maintaining, repairing, preserving, restoring, replacing,
cleaning, altering or rehabilitating the Premises or any portion thereof,
including such acts for reletting to a new tenant or tenants; (iii) for leasing
commissions; or (iv) for any other costs necessary or appropriate to relet the
Premises; plus
19
<PAGE>
(e) At Landlord's election, such other amounts in
addition to or in lieu of the foregoing as may be permitted from time to time by
the laws of the State of California.
The "worth at the time of award" of the amounts referred
to in Paragraphs 26.B.(ii)(a) and 26.B.(ii)(b) is computed by allowing interest
at the Interest Rate on the unpaid rent and other sums due and payable from the
termination date through the date of award. The "worth at the time of award" of
the amount referred to in Paragraph 26.B.(ii)(c) is computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus one percent (1%). Tenant waives redemption or relief from
forfeiture under California Code of Civil Procedure Sections 1174 and 1179, or
under any other present or future law, in the event Tenant is evicted or
Landlord takes possession of the Premises be reason of any default of Tenant
hereunder.
(iii) Landlord may, with or without terminating this Lease, re-
enter the Premises and remove all persons and property from the Premises; such
property may be removed and stored in a public warehouse or elsewhere at the
cost of and for the account of Tenant. No re-entry or taking possession of the
Premises by Landlord pursuant to this paragraph shall be construed as an
election to terminate this Lease unless a written notice of such intention is
given to Tenant.
C. Landlord's Default. Except as reasonably apparent to Landlord, or
------------------
part of the regularly scheduled repair or maintenance of the Property, Landlord
shall not be deemed to be in default in the performance of any obligation
required to be performed by it hereunder unless and until it has failed to
perform such obligation within thirty (30) days after receipt of written notice
by Tenant to Landlord specifying the nature of Landlord's obligation is such
that more than thirty (30) days are required for its performance, then Landlord
shall not be deemed to be in default if it shall commence such performance
within such thirty (30) day period and thereafter diligently prosecute the same
to completion.
27. Subordination.
-------------
This Lease is subject and subordinate to all ground and underlying
leases and any first mortgages and first deeds of trust (collectively
"Encumbrances") which now affect the Building or the Property, and to all
renewals, modifications, consolidations, replacements and extensions thereof;
provided, however, if the holder or holders of any such Encumbrance ("Holder")
shall require that this Lease be prior and superior thereto, within seven (7)
days of written request of Landlord to Tenant, Tenant shall execute, have
acknowledged and deliver any and all documents or instruments, in the form
presented to Tenant, which Landlord or Holder deems necessary or desirable for
such purposes. Landlord shall have the right to cause this Lease to be and
become and remain subject and subordinate to any and all Encumbrances which are
now or may hereafter be executed covering the Premises or any renewals,
modifications, consolidations, replacements or extensions thereof, for the full
amount of all advances made or to be made thereunder and without regard to the
time or character of such advances, together with interest thereon and subject
to all the terms and provisions thereof; provided only, that in the event of
termination of any such lease or upon the foreclosure of any such mortgage or
deed of trust, so long as Tenant is not in default, Holder agrees to recognize
Tenant's rights under this Lease so long as Tenant shall pay the Rent and
observe and perform all the provisions of this Lease to be observed and
performed by Tenant. Within ten (10) days after Landlord's written request,
20
<PAGE>
Tenant shall execute any and all documents required by Landlord or the Holder
required to effectuate such subordination to make this Lease subordinate to any
lien of the Encumbrance. If Tenant fails to do so, it shall be deemed that this
Lease is subordinated.
Notwithstanding anything to the contrary set forth in this paragraph,
Tenant hereby attorns and agrees to attorn to any entity purchasing or otherwise
acquiring the Premises at any sale or other proceeding or pursuant to the
exercise of any other rights, powers or remedies under such Encumbrance.
Promptly following the date of this Lease, Landlord shall deliver to
Tenant a recognition agreement in form reasonably acceptable to Tenant, whereby
the holder of any deed of trust or other similar security instrument affecting
the Property, shall agree to recognize the tenancy of Tenant on all the terms
and conditions set forth herein, so long as there shall be no Event of Default
by Tenant hereunder.
28. Notices.
-------
Any notice or demand required or desired to be given under this Lease
shall be in writing and shall be personally served or in lieu of personal
service may be given by mail. If given by mail, such notice shall be deemed to
have been given when seventy-two (72) hours have elapsed from the time when such
notice was deposited in the United States mail, registered or certified, and
postage prepaid, addressed to the party to be served. At the date of execution
of this Lease, the addresses of Landlord and Tenant are as set forth in
Paragraph 1. After the Commencement Date, the address of Tenant shall be the
address of the Premises. Either party may change its address by giving notice
of same in accordance with this paragraph.
29. Attorneys' Fees.
---------------
If either party brings any action or legal proceeding for damages for
an alleged breach of any provision of this Lease, to recover rent, or other sums
due, to terminate the tenancy of the Premises or to enforce, protect or
establish any term, condition or covenant of this Lease or right of either
party, the prevailing party shall be entitled to recover as a part of such
action or proceedings, or in a separate action brought for that purpose,
reasonable attorneys' fees and costs.
30. Estoppel Certificates.
---------------------
Tenant shall within seven (7) days following written request by
Landlord,
(i) Execute and deliver to Landlord any documents, including estoppel
certificates, in the form prepared by Landlord (a) certifying that this Lease is
unmodified and in full force and effect or, if modified, stating the nature of
such modification and certifying that this Lease, as so modified, is in full
force and effect and the date to which the Rent and other charges are paid in
advance, if any, and (b) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord, or, if there are
uncured defaults on the part of Landlord, stating the nature of such uncured
defaults, and (c) evidencing the status of the Lease as may be required either
by a lender making a loan to Landlord to be secured by deed of trust or mortgage
covering the Premises or a purchaser of the Premises from Landlord. Tenant's
failure to deliver an estoppel certificate within seven (7) days after delivery
of Landlord's written request therefor shall be conclusive upon Tenant (a) that
this Lease is in full force and effect, without modification except as may be
represented by Landlord, (b) that there are now no uncured defaults in
Landlord's performance and (c) that no Rent has been paid in advance.
21
<PAGE>
If Tenant fails to so deliver a requested estoppel certificate within
the prescribed time, it shall be deemed that the Lease is unmodified and in full
force and effect except as represented by Landlord.
(ii) Deliver to Landlord the current financial statements of Tenant,
and financial statements of the two (2) years prior to the current financial
statements year, with an opinion of a certified public accountant, including a
balance sheet and profit and loss statement for the most recent prior year, all
prepared in accordance with generally accepted accounting principles
consistently applied.
31. Transfer of the Premises by Landlord.
------------------------------------
In the event of any conveyance of the Premises and assignment by
Landlord of this Lease, Landlord shall be and is hereby entirely released from
all liability under any and all of its covenants and obligations contained in or
derived from this Lease occurring after the date of such conveyance and
assignment, and Tenant agrees to attorn to such transferee provided such
transferee assumes Landlord's obligations under this Lease.
32. Landlord's Right to Perform Tenant's Covenants.
----------------------------------------------
If Tenant shall commit an Event of Default, Landlord may, but shall
not be obligated to and without waiving or releasing Tenant from any obligation
of Tenant under this Lease, make such payment or perform such other act to the
extent Landlord may deem desirable, and in connection therewith, pay expenses
and employ counsel. All sums so paid by Landlord and all penalties, interest and
costs in connection therewith shall be due and payable by Tenant on the next day
after any such payment by Landlord, together with interest thereon at the
Interest Rate from such date to the date of payment by, Tenant to Landlord, plus
collection costs and attorneys' fees. Landlord shall have the same rights and
remedies for the nonpayment thereof as in the case of default in the payment of
Rent.
If Landlord fails to perform any obligation of Landlord hereunder with
respect to the repair or maintenance of the Premises, the Outside Area or any
other portion of the Property within thirty (30) days of written notice from
Tenant, or such shorter time as may be required in an emergency, whether or not
written notice shall be provided, Tenant shall be entitled to perform such
obligation and Landlord shall reimburse to Tenant the reasonable cost of such
performance promptly following receipt of written notice from Tenant describing
the work performed and the cost incurred.
33. Tenant's Remedy.
---------------
If, as a consequence of a default by Landlord under this Lease, Tenant
recovers a money judgment against Landlord, such judgment shall be satisfied
from insurance and/or out of the proceeds of sale received upon execution of
such judgment and levied thereon against the right, title and interest of
Landlord in the Premises and out of Rent or other income from such property
receivable by Landlord or out of consideration received by Landlord from the
sale or other disposition of all or any part of Landlord's right, title or
interest in the Premises, and neither Landlord nor its Agents shall be liable
for any deficiency.
34. Mortgagee Protection.
--------------------
If Landlord defaults under this Lease, Tenant will notify any
beneficiary of a deed of trust or mortgagee of a mortgage covering the Premises
whose address has been furnished to Tenant in writing, and offer such
beneficiary or mortgagee a
22
<PAGE>
reasonable opportunity to cure the default, including time to obtain possession
of the Premises by power of sale or a judicial foreclosure, if such should prove
necessary to effect a cure, and provided that such attempt to cure by any such
beneficiary or mortgagee shall not limit the remedies otherwise available to
Tenant as a result of the default of Landlord.
35. Brokers.
-------
Landlord and Tenant each warrant and represent that they have had no
dealings with any real estate broker or agent in connection with the negotiation
of this Lease except for CPS Realty Group (representing Landlord exclusively)
and Cooper/Brady (representing Tenant exclusively).
36. Acceptance.
----------
This Lease shall only become effective and binding upon full execution
hereof by Landlord and delivery of a signed copy to Tenant. Neither party shall
record this Lease nor a short form memorandum thereof.
37. Modifications for Lender.
------------------------
If, in connection with obtaining financing for the Premises or any
portion thereof, Landlord's lender shall request reasonable modification to this
Lease as a condition to such financing, Tenant shall not unreasonably withhold,
delay or defer its consent thereto, provided such modifications do not
materially adversely affect Tenant's rights hereunder.
38. Parking.
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Tenant shall have the right to park in 100% of the Property's parking
facilities, which provides parking spaces at a rate of 4 parking spaces per
1,000 usable square feet in the Property, and which will be provided without
charge.
39. General.
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A. Captions. The captions and headings used in this Lease are for the
--------
purpose of convenience only and shall not be construed to limit or extend the
meaning of any part of this Lease.
B. Executed Copy. Any fully executed copy of this Lease shall be
-------------
deemed an original for all purposes.
C. Time. Time is of the essence for the performance of each term,
----
condition and covenant of this Lease.
D. Separability. If one or more of the provisions contained herein,
------------
except for the payment of Rent, is for any reason held invalid, illegal or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provision of this Lease, but this Lease shall be
construed as if such invalid, illegal or unenforceable provision had not been
contained herein.
E. Choice of Law. This Lease shall be construed and enforced in
-------------
accordance with the laws of the State of California.
F. Gender; Singular, Plural. When the context of this Lease
------------------------
requires, the neuter gender includes the masculine, the feminine, a partnership
or corporation or joint venture, and the singular includes the plural.
23
<PAGE>
G. Binding Effect. The covenants and agreement contained in this
--------------
Lease shall be binding on the parties hereto and on their respective successors
and assigns to the extent this Lease is assignable.
H. Waiver. The waiver by Landlord of any breach of any term,
------
condition or covenant, of this Lease shall not be deemed to be a waiver of such
provision or any subsequent breach of the same or any other term, condition or
covenant of this Lease. The subsequent acceptance of Rent hereunder by Landlord
shall not be deemed to be a waiver of any preceding breach at the time of
acceptance of such payment. No covenant, term or condition of this Lease shall
be deemed to have been waived by Landlord unless such waiver is in writing
signed by Landlord.
I. Entire Agreement. This Lease is the entire agreement between the
----------------
parties, and there are no agreements or representations between the parties
except as expressed herein. Except as otherwise provided herein, no subsequent
change or addition to this Lease shall be binding unless in writing and signed
by the parties hereto.
J. Authority. If Tenant is a corporation or a partnership, each
---------
individual executing this Lease on behalf of said corporation or partnership, as
the case may be, represents and warrants that he is duly authorized to execute
and deliver this Lease on behalf of said entity in accordance with its corporate
bylaws, statement of partnership or certificate of limited partnership, as the
case may be, and that this Lease is binding upon said entity in accordance with
its terms. Landlord, at its option, may require a copy of such written
authorization to enter into this Lease.
K. Exhibits. All exhibits, amendments, riders and addendum attached
--------
hereto are hereby incorporated herein and made a part hereof.
L. Lease Summary. The Lease Summary attached to this Lease is
-------------
intended to provide general information only. In the event of any inconsistency
between the Lease Summary and the specific provisions of this Lease, the
specific provisions of this Lease shall prevail.
M. Joint and Several Liability. The obligations of the parties
---------------------------
hereunder, and each individual entity, partnership, corporation or person
constituting a party, shall be joint and several.
40. Option to Renew.
---------------
A. Grant of Option. Landlord hereby grants to Tenant two (2)
---------------
option(s) (the "Option(s)") to extend the term of this Lease, each for an
additional term of two (2) years, commencing when the then-existing term
expires, upon the terms and conditions set forth in this Paragraph.
B. Exercise of Option. Tenant may exercise such option by giving
------------------
Landlord written notice (the "Exercise Notice") of its intention not less than
six (6) month prior to the expiration of the then-existing term of this Lease.
C. Extended Term Rent. If this Option is exercised, the Base Monthly
------------------
Rent for the Premises shall be adjusted to an amount not less than the rent
payable for the month immediately preceding the commencement dates of the term
of the Option(s) or equal to ninety-seven and one-half percent (97-1/2%) of the
then current fair market monthly rent ("Fair Market Rent"), whichever is
greater, for the Premises as of the commencement date of the applicable extended
term as determined by the agreement of the
24
<PAGE>
parties. The Fair Market Rent for the Premises shall not include the value, if
any, attributable to Alterations to the Premises made at the cost of Tenant. If
the parties are unable to agree on the Fair Market Rent for the Premises within
sixty (60) days after the Exercise Notice, Tenant shall be entitled to require
the Fair Market Rent to be determined by arbitration, as set forth below. All
other terms and conditions contained in the Lease shall remain in full force and
effect and shall apply during the Option term.
D. Arbitration.
-----------
(i) Promptly following notice to Landlord from Tenant, each
party shall appoint a qualified, licensed real estate appraiser experienced in
appraising office space in San Jose, California to act as an arbitrator. The two
(2) appraisers so appointed shall determine the Fair Market Rent pursuant to the
terms and conditions of this Lease within sixty (60) days of Tenant's initial
notice, and they shall notify the parties of that determination in writing.
(ii) If the two (2) appraisers do not agree on the Fair Market
Rent, they shall appoint a third, similarly qualified appraiser. Within thirty
(30) days of his appointment, the third appraiser shall select, from the
proposals submitted by the first two appraisers, the proposal that most closely
approximates the third appraiser's determination of Fair Market Rent, and that
figure shall be deemed the Fair Market Rent for purposes of this Lease. The
third appraiser shall have no right to compromise or modify either of the
proposals submitted by the first two appraisers.
(iii) Each party shall pay all charges and expenses of the
appraiser appointed by that party, and one-half of any charges and expenses
incurred by the third appraiser.
(iv) If either party fails to select an appraiser as provided
herein, or if either of the appraisers fails to present a determination within
the required time period, the determination presented by the appraiser appointed
by the other party shall be considered final and binding upon both parties.
41. Approvals.
---------
Whenever the Lease requires an approval, consent, designation,
determination or judgment by either Landlord or Tenant, such approval, consent,
designation, determination or judgment shall not be unreasonably withheld or
delayed.
42. Reasonable Expenditures.
-----------------------
Any expenditure by a party permitted or required under the Lease, for
which such party is entitled to demand and does demand reimbursement from the
other party, shall be limited to the fair market value of the goods and services
involved, shall be reasonably incurred, and shall be substantiated by
documentary evidence available for inspection and review by the other party or
its representative during normal business hours.
25
<PAGE>
THIS LEASE is effective as of the date the last signatory necessary to
execute the Lease shall have executed this Lease.
TENANT:
JT Storage, Inc., a Delaware corporation
By: /s/ David B. Pearl
-------------------
Its: President
------------------
LANDLORD:
The Cilker Revocable Trust of
October 9, 1990
By: /s/ William H. Cilker
----------------------
William H. Cilker
By: /s/ Leila A. Cilker
----------------------
Leila A. Cilker
By: /s/ Marian C.Armstrong
-----------------------
Marian C.Armstrong
By: /s/ Tom Claiborne Polk
-----------------------
Tom Claiborne Polk, an unmarried man
The undersigned spouse of Marian C. Armstrong consents to the terms of the
preceding Lease agreement:
/s/ James D. Armstrong, Sr.
- ---------------------------
<PAGE>
EXHIBIT B
THE PROPERTY
------------
LEGAL DESCRIPTION: APN 097-07-045
All that certain real property situate in the City of San Jose, County of Santa
Clara, State of California, described as follows:
PARCEL ONE:
- ----------
All of Lot 5, as shown upon that certain Map entitled, "TRACT NO. 75441",
recorded March 7, 1984 in Book 525 of Maps at Pages 45 and 46, and the
Certificate of Correction, recorded August 8, 1985 in Book J 422, Page 1784,
Official Records, Santa Clara County.
RESERVING THEREFROM as appurtenant to Lot 6, an easement for the purpose of
vehicular and pedestrian ingress and egress over the following described parcel:
Being a strip of land 13 feet in width, the easterly and southerly line of which
is described as follows:
Beginning at the southeasterly corner of Lot 5 as said lot is shown on Tract
7544 recorded in Book 525 of Maps, Pages 45 and 46, Santa Clara County Records,
said point being on the northerly Right of Way line of Tasman Drive, as shown on
said Tract Map:
Thence northwesterly along the easterly lot line of Lot 5, as said lot is shown
on aforesaid Tract Map, North 30(degrees) 31' West, 194.18 feet:
Thence northeasterly North 36(degrees) 23' 34" East, 33.70 feet to the terminus
of said strip of land, said terminus being or the northerly lot line of Lot 8,
as said lot is shown on aforesaid Tract Map.
PARCEL TWO:
- ----------
TOGETHER WITH and as appurtenant to Lot 5, an easement for the purpose of
vehicular and pedestrian ingress and egress over the following described parcel:
Being a strip of land 13 feet in width, the Northwesterly and Westerly line of
which is described as follows:
Beginning at the most northerly corner of Lot 8 as said Lot is shown on Tract
7544 recorded in Book 525 of Maps at Pages 45 and 46, Santa Clara County
recorded said point being on the Westerly right of way line of Zanker Road as
shown on said Tract Map.
Thence Southwesterly along the Northwesterly lot line of Lot 8 as shown on
aforesaid Tract Map South 36(degrees) 23' 34" West, 1220.80 feet to the most
Westerly corner of Lot 8:
3
<PAGE>
Thence Southeasterly along the Southwesterly lot line of aforesaid Lot 8, South
30 (degrees) 31' 20" East, 194.18 feet to the terminus of said strip of land,
said terminus being on the Northerly right of way line of Tasman Drive as shown
on aforesaid Tract Map.
4
<PAGE>
PARCEL THREE:
- ------------
TOGETHER WITH and as appurtenant to Lot 5, an easement for the purpose of
vehicular and pedestrian ingress and egress over the following described parcel:
Being a strip of land 13 feet in width, the Southeasterly line of which is
described as follows:
Beginning on the Southeasterly corner of Lot 7 as said lot is shown on Tract
7544 recorded in Book 525 of Maps Pages 45 and 46 Santa Clara County Records,
said point being on the Westerly right of way line of Zanker Road as shown on
said Tract Map;
Thence Southwesterly along the Southeasterly lot line of Lot 7 as said lot is
shown on aforesaid Tract Map South 36(degrees) 23' 39" West, 466.10 feet to the
terminus of said strip of land, said terminus being the most Southwesterly
corner of Lot 7.
PARCEL FOUR:
- -----------
TOGETHER WITH and as appurtenant to Lot 5, an easement for the purpose of
vehicular and pedestrian ingress and egress over the following described parcel:
Being a strip of land 13 feet in width, the Southeasterly line of which is
described as follows:
Beginning at the most easterly corner of Lot 6 as said lot is shown on Tract
7544 recorded in Book 525 of Maps pages 45 and 46 Santa Clara County Records,
said point being on the northerly lot line of Lot 8 as said lot is shown on said
Tract Map;
Thence southwesterly along the southeasterly lot line of Lot 6 as said lot is
shown on aforesaid Tract Map South 36(degrees) 23' 34" West, 721.00 feet to the
terminus of said strip of land, said terminus being the most southerly corner of
said Lot 6.
<PAGE>
EXHIBIT C
---------
WORK LETTER AGREEMENT
---------------------
This Work Letter Agreement ("Work Letter") is entered into as of June __,
1995 by and between THE CILKER REVOCABLE TRUST OF OCTOBER 9, 1990 ("Landlord"),
and JT STORAGE, INC., a Delaware corporation ("Tenant"), in connection with that
certain Commercial Lease (the "Lease") of even date herewith.
In consideration of the mutual covenants contained herein, Landlord and
Tenant hereby agree as follows:
1. ARCHITECT.
---------
A. The parties hereby approve the retention by Landlord of HPC
Architecture (the "Architect") in connection with the design and construction of
the Tenant Improvements, as defined below.
2. PREPARATION OF SPACE PLANS, CONSTRUCTION DRAWINGS.
-------------------------------------------------
A. Approval of Space Plans. Landlord and Tenant hereby approve the space
-----------------------
plan prepared by the Architect as of June 7, 1995 and attached hereto as Exhibit
C-1 (the "Space Plan").
B. Preparation of Construction Drawings. Based on the approved Space
-------------------------------------
Plan, the Architect shall prepare and submit to Landlord and Tenant complete
architectural plans, drawings and specifications for the Tenant Improvements
(collectively, the "Construction Drawings"). Both Landlord and Tenant agree
that the mechanical, electrical, and plumbing improvements will be excluded from
the Architect's Construction Drawings and will be constructed on a design build
basis. Within three (3) days of receipt of the Construction Drawings: (i)
Landlord and Tenant shall notify the Architect in writing of their approval of
the Construction Drawings, or, (ii) if Landlord or Tenant disapproves of any
portion of the Construction Drawings, Landlord and/or Tenant shall notify the
Architect in writing of such disapproval and the specific reasons therefor. The
Architect shall make any changes requested by Landlord and Tenant which are
necessary in order to make the Final Plans and Specifications consistent with
the approved Preliminary Plans and Specifications. Upon approval by both
parties, the Construction Drawings may be attached as Exhibit C-2.
3. SELECTION OF GENERAL CONTRACTOR.
-------------------------------
A. Bids and Selection of General Contractor and Subcontractors. The
-----------------------------------------------------------
parties hereby approve the retention of San Jose Construction Company, Inc. as
the general contractor (the "General Contractor") for the construction of the
Tenant Improvements, on terms and conditions to be approved by both parties,
which terms shall include a maximum payment for overhead and profit to the
General Contractor of two and one-half percent (2-1/2%) of the Approved Tenant
Improvement Cost, as defined below. General Contractor, shall solicit bids from
at least three (3) qualified, licensed subcontractors for certain Major
Subcontracts, as defined below, in each case approved by Landlord and Tenant.
For purposes of the preceding sentence, Major Subcontracts shall mean the
following: drywall, paint and carpet. Each final bid from the prospective
subcontractors shall include a guaranteed maximum contract price (including
materials and labor supplied in connection with the Tenant Improvements). All
bids
1
<PAGE>
shall be subject to the prior review and written approval of Tenant and
Landlord, such approval or disapproval to be provided by Tenant to Landlord
within three (3) business days after receipt of preliminary and final bids by
Tenant. Landlord and Tenant shall attempt to revise the prospective bids so that
a mutually acceptable bid has been received within no more than five (5)
business days after the initial notice of disapproval from Tenant. The sum of
(i) the approved bids, (ii) the design-build costs, incurred for mechanical,
electrical and plumbing improvements, (iii) the compensation payable to the
General Contractor pursuant to this Paragraph 3.A, and (iv) the additional costs
of constructing the Tenant Improvements as reviewed and approved by Landlord and
Tenant shall be referred to herein as the Approved Tenant Improvement Cost.
B Form of Construction Contract. The proposed form of construction
-----------------------------
contract between Landlord and the General Contractor shall provide, among other
things, that Tenant is the third-party beneficiary thereof, that all change
orders are to be signed by Tenant, that all payments to contractor(s) shall be
subject to a standard retention of ten percent (10%) (and the subcontracts shall
so be provided) and that the General Contractor and all subcontractors shall
carry insurance pursuant to the requirements set forth below. Within five (5)
days after execution, Landlord shall deliver to Tenant a copy of the
construction contract between Landlord and the General Contractor.
C. Insurance. Landlord shall require all contractors to obtain and
---------
maintain the following insurance policies during the construction of the Tenant
Improvements, as applicable: (i) Comprehensive general liability (including
products/completed operations), with limits of not less than $500,000/$500,000
bodily injury and $500,000 property damage or $500,000 combined single limit,
with JT Storage, Inc. and Landlord named as an additional insured; (ii) Umbrella
liability (including products/completed operations), with limits of not less,
than $1,000,000, with JT Storage, Inc. and Landlord named as additional insured;
(iii) Automobile liability, with limits of not less than $500,000/$500,000
bodily injury and $250,000 property damage; and (iv) Worker's compensation
(including employer's liability) insurance in compliance with law.
All such policies (except worker's compensation) shall provide that twenty (20)
days' prior notice of cancellation or reduction in coverage or limits shall be
delivered to Tenant. A certificate evidencing such insurance shall be
delivered, prior to commencement of construction of the Tenant Improvements, to
Tenant. Landlord shall not permit the General Contractor or any subcontractor
to commence construction of any part of the Tenant Improvements until it has
provided Tenant with certificates of insurance evidencing such insurance
coverage.
D. Permits. Landlord shall submit the Construction Drawings to all
-------
governmental agencies and authorities whose review and/or approval thereof is
required and shall use its best efforts to procure all permits, consents and
approvals required tinder applicable laws, ordinances, codes, rules and
regulations ("Permits"). If Landlord is unable to procure the Permits within
sixty (60) days after the date of execution hereof, Landlord shall be entitled
to terminate the Lease within ten (10) days thereafter by written notice to
Tenant.
4. CONSTRUCTION OF TENANT IMPROVEMENTS.
-----------------------------------
A. Landlord shall cause the Tenant Improvements to be constructed in
accordance with the Construction Drawings and this Work Letter, in a first-class
manner, and under competent supervision. All materials and equipment utilized
in the Tenant Improvements shall be new, first-class and of the type and quality
supervision. All materials and equipment utilized in the Tenant Improvements
shall be new, first-class and of the type and quality
2
<PAGE>
customary in first-class R&D/Light Manufacturing buildings in the vicinity of
the Premises. The Tenant Improvements, and the construction thereof, shall
comply with all applicable laws, codes, ordinances, rules and regulations.
5. CONSTRUCTION SCHEDULE.
---------------------
A. Landlord shall use all reasonable efforts to substantially complete the
Tenant Improvements on or before July 1, 1995 (the "Anticipated Commencement
Date"). The Commencement Date shall occur on the date that Landlord has
"substantially completed" the Tenant Improvements, which shall be deemed to
occur when all the following have been completed: (i) the Architect has
certified to Tenant that the Tenant Improvements have been constructed in
accordance with the Construction Drawings; (ii) there remains no incomplete or
defective item of Tenant Improvements that would adversely affect Tenant's
intended use of the Premises; (iii) Landlord has delivered legal possession of
the Premises and the Tenant Improvements, in the condition required in the
Lease, to Tenant; and (iv) Landlord has obtained all approvals and permits from
the appropriate governmental authorities required for the legal occupancy of the
Premises and the Tenant Improvements for Tenant's intended use, including a
certificate of occupancy for the Shell Building and the Tenant Improvements.
Landlord shall provide written notice of the impending Commencement Date no
later than fifteen (15) days before the actual Commencement Date.
B. Any Tenant Improvement Costs related to demolition and Landlord's
construction management shall be borne by Landlord.
6. COST OF TENANT IMPROVEMENTS.
---------------------------
A. Tenant Improvement Allowance. Landlord shall contribute up to Three
----------------------------
Hundred Ninety Thousand Dollars ($390,000) (the "Tenant Improvement Allowance")
to the actual cost of constructing the Tenant Improvements (the "Tenant
Improvement Cost"). In addition, at the request of Tenant, Landlord shall
contribute an additional amount of up to One Hundred Forty Thousand Dollars
($140,000) (the "Additional Tenant Improvement Allowance") to the Tenant
Improvement Cost. Tenant shall pay the cost of constructing the Tenant
Improvements up to a maximum amount equal to the difference between the Approved
Tenant Improvement Cost and the sum of the Tenant Improvement Allowance, and so
much of the Additional Tenant Improvement Allowance as Tenant requests Landlord
to provide ("Tenant's Contribution") in accordance with the provisions of
Paragraph 9 hereof. Tenant shall reimburse to Landlord the entire Additional
Tenant Improvement Allowance either: (i) within thirty (30) days of substantial
completion of the Tenant Improvements and following receipt of a statement from
Landlord setting forth in reasonable detail the application of the Additional
Tenant Improvement Allowance, or, (ii) through an increase in Base Monthly Rent
equal to Twenty-One and 25/100 Dollars ($21.25) for each One Thousand Dollars
($1,000) of the Additional Tenant Improvement Allowance applied as set forth
herein.
B. Tenant Improvement Cost. The Tenant Improvement Cost shall include,
-----------------------
but not be limited to, the following:
(1) all costs of preliminary and final architectural and engineering
plans and specifications for the Tenant Improvements, and engineering costs
associated with completion of the State of California energy utilization
calculations under Title 29 legislation;
3
<PAGE>
(2) all costs of interior design and finish schedule plans and
specifications including the General Contractor's as-built drawings;
(3) all direct and indirect costs of procuring and installing Tenant
Improvements in the Premises, including the approved construction fee for
overhead and profit payable to the General Contractor, and the cost of general
conditions to be provided by the General Contractor; and
(4) all fees payable to the Architect and Landlord's engineering firm,
if required by Landlord and Tenant to re-design any portion of the Tenant
Improvements following Tenant's and Landlord's approval of the Construction
Drawings.
In no event will the Tenant Improvement Costs include, nor will the
Tenant Improvement Allowance or the Additional Tenant Improvement Allowance be
applied to the cost of procuring, constructing or installing in the Premises any
of Tenant's personal property, including voice and data equipment and cabling.
C. Exclusions from Tenant Improvements Cost. Notwithstanding anything to
----------------------------------------
the contrary contained in the Lease or this Work Letter, the cost of
constructing the Tenant Improvements shall not include the following:
(1) Costs attributable to (A) work to be performed at the cost of
Landlord or any other party, including the previous tenant, which work will
consist of demolition of certain existing interior improvements; (B)
improvements installed outside the demising walls of the Premises unless (1)
necessitated by Tenant Improvements made inside the demising walls of the
Premises; or (2) requested by Tenant or as shown in the Construction Drawings;
and (C) improvements installed "off-site" (such as streets, curbs, gutters,
traffic lights, lights for parking and street lighting);
(2) Costs for improvements which are not shown on or described in the
Construction Drawings unless otherwise approved by Tenant;
(3) Costs incurred to remove Hazardous Materials from the Property or
the surrounding area unless the presence of such materials was caused by Tenant
or its agents, contractors, employees or invitees in violation of Hazardous
Materials laws;
(4) Attorneys' fees incurred in connection with negotiation of
construction contracts, and attorneys' fees, experts' fees and other costs of
legal and arbitration proceedings to resolve construction disputes with third
parties;
(5) Loan fees, mortgage brokerage fees, interest and other costs of
financing construction costs;
(6) Costs incurred as a consequence of delay (unless the delay is
caused by Tenant) or construction defects;
(7) Costs recoverable by Landlord upon account of warranties and
insurance;
(8) Restoration costs as a consequence of casualties;
(9) Penalties and late charges attributable to the failure to pay
construction costs, except to the extent such penalties and late charges arise
due to delays caused by Tenant, its agents, contractors, employees or invitees;
(10) Any construction management or supervision fee otherwise charged
by Landlord in connection with its construction of improvements to a particular
premises; and
(11) Tenant's space planner.
4
<PAGE>
7. CHANGE ORDERS.
-------------
Tenant shall have the right to make reasonable changes in the Construction
Drawings, subject to the conditions set forth in this Paragraph 7. Before
approval of any change in the Construction Drawings, Landlord shall advise
Tenant in writing of (i) the estimated cost of any such change; and (ii) the
additional time, if any, that such change would add to the time required for
substantial completion (as defined above) of the Tenant Improvements. If Tenant
objects to such cost and/or delay, Tenant shall have the right to withdraw the
request for such change. If Tenant approves such cost and delay, then Tenant
shall give its approval in writing; thereafter, Tenant's responsibility (if any)
for any such cost or delay shall be limited to the amount which it so approved.
Change orders shall not be subject to a Landlord mark-up fee unless they
necessitate cost for overtime.
8. TENANT DELAY.
------------
If any failure by Tenant to perform any obligations hereunder delays the
Commencement Date of the Lease beyond the date on which the Commencement Date
would have occurred but for such delay, including Tenant's request for items
which have been identified as long-lead time items to be included in the Tenant
Improvements (a "Tenant Delay"), the Commencement Date shall be deemed to occur
on the date on which it would have occurred but for such Tenant Delay.
9. PAYMENT OF TENANT IMPROVEMENT COSTS.
-----------------------------------
Within thirty (30) days after substantial completion of the Tenant
Improvements, Landlord shall provide Tenant with a detailed statement of the
Tenant Improvement Cost, such statement to be accompanied by invoices and other
appropriate evidence of payment from Landlord or its General Contractor: (i) if
the Tenant Improvement Cost exceeds the Tenant Improvement Allowance, and so
much of the Additional. Tenant Improvement Allowance as has been drawn down at
the request of Tenant, Tenant shall either pay the difference to Landlord within
thirty (30) days after Tenant's receipt of the statement, or through an increase
in Base Monthly Rent equal to Twenty-One and 25/100 Dollars ($21.25) for each
One Thousand Dollars ($1,000) of the Additional Tenant Improvement Allowance
applied as set forth in Paragraph 6.A.
No payment by Tenant pursuant to this Paragraph shall constitute a waiver
by Tenant of any right of Tenant to contest the amount of the Tenant Improvement
Cost. Notwithstanding any provision in this Work Letter to the contrary, Tenant
shall have no obligation to pay any cost which is excluded from the definition
of Tenant Improvement cost by Paragraph 6.C., and shall have no obligation to
pay any portion of the Tenant Improvement Cost that exceeds the Approved Tenant
Improvement Cost unless Tenant has approved in writing such excess amount.
10. PUNCHLIST AND CORRECTION OF DEFECTS.
-----------------------------------
Not later than five (5) days before the Anticipated Commencement Date,
Landlord and Tenant shall conduct a walk-through of the Premises and mutually
prepare a written punch1ist setting forth any defective item of construction.
Landlord shall cause all defects, errors or omissions listed in the punchlist to
be corrected within forty-five (45) days after receipt thereof; or as soon as
practicable thereafter. Notwithstanding anything to the contrary contained in
the Lease, Tenant's acceptance of the Premises or submission of a punchlist
shall not be deemed a waiver of Tenant's right to have defects in the Tenant
Improvements or the Premises repaired at no cost to Tenant. Landlord also
hereby assigns to Tenant all warranties related to the improvements with respect
to the Premises, including warranties which would reduce Tenant's maintenance
obligations under the Lease, and shall cooperate with Tenant to enforce all such
warranties.
5
<PAGE>
11. MISCELLANEOUS.
-------------
(A) Time is of the Essence. Time is of the essence of each and every
----------------------
provision of this Work Letter.
(B) Definitions. All terms capitalized herein and not otherwise defined
-----------
shall have the meanings set forth in the Lease.
(C) Incorporation in the Lease. The provisions of this Work Letter shall
--------------------------
be incorporated into and constitute a part of the Lease.
(D) Approvals. Except as expressly provided otherwise, whenever the
---------
approval of a party is required hereunder, such approval shall not be
unreasonably withheld or delayed.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Work Letter as of
the date first above written.
TENANT:
JT Storage, Inc., a Delaware corporation
By: /s/ David B. Pearl
----------------------------
Its: President
---------------------------
LANDLORD:
The Cilker Revocable Trust
of October 9, 1990
By: /s/ William H. Cilker
----------------------------
William H. Cilker
By: /s/ Leila A. Cilker
----------------------------
Leila A. Cilker
By: /s/ Marian C. Armstrong
----------------------------
Marian C. Armstrong
By: /s/ Tom Claiborne Polk
----------------------------
Tom Claiborne Polk, an umarried man
7
<PAGE>
EXHIBIT "C-1" TO BE INSERTED
SPACE PLAN
Dated June 7, 1995
This plan is to substantially conform to the Preliminary layout
dated June 7, 1995 by HPC Architecture.
------------
EXHIBIT C-1
<PAGE>
COMMENCEMENT DATE MEMORANDUM
----------------------------
LANDLORD: THE CILKER REVOCABLE TRUST OF OCTOBER 9, 1990
---------------------------------------------
TENANT: JT STORAGE, INC.
---------------
LEASE DATE:_________________________
PREMISES: 166 BAYPOINTE PARKWAY
---------------------
SAN JOSE, CALIFORNIA
--------------------
Pursuant to Paragraph 4.A. of the above referenced Lease, the
Commencement Date is hereby established as ________________, 1995.
LANDLORD
--------
THE CILKER REVOCABLE TRUST OF OCTOBER 9, 1990
---------------------------------------------
By: ____________________________________
William H. Cilker
Its:____________________________________
TENANT
------
JT STORAGE, INC.
By: ____________________________________
Its:____________________________________
Exhibit D
<PAGE>
June 23, 1998
Cilker Revocable Trust of October 9, 1990
1631 Willow Street, Suite 225
San Jose, CA 95125
Re: Request for Consent to an Assignment of Lease Regarding
166 Baypoint Parkway
San Jose, CA 95132
----------------------------------------
Dear Sirs:
This letter constitutes a request for your consent to an assignment of a
portion of the interest of JTS Corporation, a Delaware corporation ("JTS"),
---
under the lease, dated June 15, 1995 ("Lease"), between JT Storage and the
-----
Cilker Revocable Trust of October 9, 1990 ("Cilker Trust") which Lease concerns
------------
property commonly known as 166 Baypoint Parkway, San Jose, California. JTS
intends to assign a portion of its interest in the Lease to Optical Networks,
Inc., a California corporation ("ONI").
---
Therefore, in accordance with the requirements of Paragraph 25.B of the
Lease, JTS is furnishing you with the following information:
(i) Name of proposed Assignee: Optical Networks, Inc.
(ii) Nature of proposed Assignee's business to be carried on in
the Premises: office, engineering, research and development
and light manufacturing (primarily final assembly and
testing) all with respect to Assignee's design and building
of optical networking systems.
(iii) Copy of draft Assignment of Lease is included. Assignee
shall pay Landlord the Base Rent sum of $1.70 psf/month NNN
for 25 months as Consideration for this Assignment. The
amortization of the Additional Tenant Improvement Allowance
will be paid by Assignor under the Master Lease for the
Assigned and Retained Portion of the Premises. The
Consideration shall be paid by Assignee to Landlord in equal
monthly
<PAGE>
June 23, 1998
Page 2
installments beginning July 18, 1998. Notwithstanding the
foregoing, Assignee shall receive a credit to reimburse
Assignee for the sum of the following: (a) the real estate
commission in connection with the assignment, (b) the cost
of alterations to be paid for by Assignee to create the
separation of the Assigned Portion of the Premises from the
Premises, and (c) Assignee's attorneys fees in connection
with the assignment transaction (collective, the "Credit").
------
This Credit shall be applied by Assignee to the initial
installments of the Consideration, not to exceed Eighty
Four cents ($0.84) per square foot per month until Assignee
is reimbursed for the total amount of the Credit. Each
month as Landlord receives payment of the Consideration
from Assignee, Landlord agrees to pay to Assignor a portion
of said Consideration ("Profit Portion") which is
--------------
calculated as 50% of the Consideration after reducing said
consideration by the sum of the following amounts: (a) the
Credit, (b) the Base Rent for the Assigned Portion of the
Premises.
We hope to consummate the assignment in a short period of time. Accordingly,
your prompt consent would be appreciated. Thank you in advance for your
assistance.
Sincerely,
JTS Corporation
By: /s/
-------------------------------
Its: President
-----------------------------
By: /s/
-------------------------------
Its: Chairman
------------------------------
cc: Optical Networks, Inc.
2
<PAGE>
EXHIBIT 10.08
AGREEMENT
Recitals
Section 1. Right of First Refusal
Section 2. "Default" under the Lease
Section 3. Cooperation
Section 4. Successors and Assigns
Section 5. Governing Law
_________________________
This agreement ("Agreement") is made and entered into as of June 23, 1998
---------
between JTS CORPORATION, a Delaware corporation ("Assignor"), and OPTICAL
--------
NETWORKS, INC., a California corporation ("Assignee").
--------
Recitals
--------
A. The Cilker Revocable Trust of October 9, 1990 ("Landlord"), as
--------
Landlord, and Assignor, as Tenant, executed a lease dated June 15, 1995
("Lease"), pursuant to which Landlord leased to Tenant and Tenant leased from
-----
Landlord certain properties identified in Paragraph 2 of the lease and other
Lease provisions cross-referenced in such Paragraph 2. For a term of five (5)
years commencing on August 18, 1995 and ending on August 17, 2000 subject to
earlier termination as provided in the Lease.
B. Assignor and Assignee entered into an assignment of lease, dated as of
the same date as this Agreement ("Assignment of Lease"), whereby Assignor
-------------------
assigned to Assignee that portion of the "Premises" (as such term is defined in
the Lease) which is identified on Exhibit B to the Assignment of Lease
("Assigned Portion of the Premises"), and whereby Assignee accepted the
--------------------------------
assignment of the Assigned Portion of the Premises from Assignor and assumed
obligations under the Lease.
C. Assignor retained the balance of the Premises ("Retained Portion of the
-----------------------
Premises").
- --------
D. By means of the Assignment of Lease, Assignor will assign to Assignee
the two (2) options to extend the term of the Lease, in accordance with
Paragraph 40 ("Option to Renew") of the Lease ("Retained Portion Extension
--------------- --------------------------
Options"), providing Assignee assumes 100% assignment of the Premises.
- -------
1
<PAGE>
E. Assignor and Assignee desire to evidence in writing certain
understandings and agreements they have reached regarding the Assigned and the
Retained Portions of the Premises as well as the Extension Options.
Therefore, for good and valuable consideration, the receipt and adequacy of
which are acknowledged, Assignor and Assignee agree as follows:
Section 1. Right of First Refusal.
If either party desire to "Sublet" (as such term is defined in Paragraph
3.M. of the Lease), part or all of the Assigned or Retained Portions of the
Premises, then the party desiring to Sublet ("Sublet Party") shall deliver a
written notice to the other party ("Non-Sublet Party") describing in reasonable
----------------
detail the terms and conditions of the proposed Sublet ("Proposed Terms"). The
--------------
Non-Sublet Party shall have fifteen (15) business days after receipt of the
written notice to deliver to the Sublet party a written response stating the
Non-Sublet Party's desire to accept the Sublet on the Proposed Terms. If such
an affirmative writing is delivered within fifteen (15) business days, the
parties will cooperate fully to attempt to obtain the consent of "Landlord" (as
such term is defined in the Lease) to such Sublet to the Non-Sublet Party. If
such consent is obtained, the parties shall take all reasonable and expeditious
action to enter an agreement covering such Sublet. If an affirmative writing is
not delivered to the Sublet Party by the Non-Sublet Party within fifteen (15)
business days, then the Sublet Party shall be free, for a period of one hundred
twenty (120) days, to make such Sublet to a third party as long as such Sublet
is not on better terms with respect to such third party than would have been the
case with respect to the Non-Sublet Party if it had obtained the Sublet on the
Proposed Terms.
Section 2. "Default" Under the Lease.
Should either party to this Agreement become aware of any event, fact or
circumstance that would or does constitute an "Event of Default" under the Lease
(as such term is defined in Paragraph 26 of the Lease), then such party shall
immediately notify the other party in writing (providing all details of the
default that the first party possesses) with respect to such event, fact or
circumstance. The party whose actions, omissions or circumstances have or will
give rise to such Event of Default ("Defaulting Party") shall promptly notify
----------------
the other party ("Non-Defaulting Party") in writing whether such Defaulting
--------------------
Party will take necessary steps to avoid or cure such Event of Default. In the
event the Defaulting Party will not take such necessary steps, then the Non-
Defaulting Party shall have the option to take such necessary steps, if
possible. If the Non-Defaulting Party delivers a writing to the Defaulting
Party stating the Non-Defaulting Party's desire to take such necessary steps,
then the Defaulting Party shall immediately take all commercially reasonable
steps to assign and transfer to the Non-Defaulting Party all rights in, under
and with respect to the Lease in exchange for no consideration other than the
Non-Defaulting Party's reasonable good faith efforts to attempt to avoid or cure
the Event of Default in question. Furthermore, in this situation both parties
will make all commercially reasonable efforts to embody in a written agreement
their respective obligations on an expedited basis.
2
<PAGE>
Section 3. Cooperation.
The parties hereto will cooperate fully with each other, make all
reasonable, good faith commercial efforts and take all reasonable actions to
achieve and bring about, on a prompt basis, the goals and objectives set forth
in this Agreement.
Section 4. Successors and Assigns.
This Agreement shall be binding and inure to the benefit of the parties to
it, their heirs, executors, administrators, successors in interest, and assigns.
Section 5. Governing Law.
This Agreement shall be governed by and construed in accordance with
California law.
The parties have executed this Agreement as of the date first above
written.
ASSIGNOR:
- --------
JTS CORPORATION
a Delaware corporation
By: /s/
---------------------------------
Its: President
--------------------------------
By: /s/
---------------------------------
Its: Chairman
--------------------------------
ASSIGNEE:
- --------
OPTICAL NETWORKS, INC.
a California corporation
By: /s/ Hugh C. Martin
---------------------------------
Its: President
--------------------------------
By: /s/ Terrence J. Schmid
---------------------------------
Its: CFO
--------------------------------
3
<PAGE>
EXHIBIT 10.09
AMENDMENT TO LEASE
This AMENDMENT TO LEASE (this "Agreement") is made and entered in to as of May
21, 1999 by and between Optical Networks, Incorporated ("Tenant") and Cilker
Revocable Trust of October 9, 1990 ("Landlord) and effective May 1, 1999.
RECITALS
- --------
A. The Cilker Revocable Trust of October 9, 1990 ("Landlord"), as Landlord, and
JT Storage, Inc. ("JTS"), as tenant, executed a lease dated June 15, 1995 (the
"Lease"), a copy of which is attached hereto as Exhibit "A", pursuant to which
-------------
Landlord leased to JTS, and JTS leased from Landlord certain properties
identified in Paragraph 2 of the Lease and other provisions cross-referenced in
such Paragraph 2 ("Premises").
B. By means of certain ASSIGNMENT OF LEASE, a copy of which is attached hereto
as Exhibit "B" ("Assignment of Lease"), JTS assigned to Tenant the portion of
-----------
the premises identified in the Lease Assignment Exhibit "B" without any cross or
diagonal hatching (the "Original First Level Space").
C. Landlord desires that Tenant expand, and Tenant desires to expand, the Lease
Assignment to include that portion of the first level of the Premises not
currently occupied by Tenant pursuant to the Lease Assignment (the "Additional
First Level Space") as well as the entire second level of the Premises (Exhibit
--------
"B" Second Level).
- ----
Therefore, for good and valuable consideration, the receipt and adequacy of
which are acknowledged, Landlord and Tenant agree as follows:
1. First Level. The Lease Assignment is expanded to include the Additional
-----------
First Level Space. The terms and conditions of the Lease Assignment for the
Additional First Level Space shall be in all respects identical to the terms and
conditions for the Original First Level Space pursuant to the Lease Assignment,
including Base Rent of $1.70 psf/month NNN.
II. Second Level. The Lease Assignment is also expanded to include the Second
------------
Level Space. The terms and conditions for the Second Level Space shall be in all
respects identical to the terms and conditions for the Original First Level
Space and the Additional First Level Space, except that, in lieu of Base Rent,
upon execution of the Investment Representation Letter attached hereto as
Exhibit C by Landlord, Tenant shall issue Fifty Thousand (50,000) shares of its
- ---------
Series E Preferred Stock to Landlord.
III. Term. The term of the Lease covering the Original First Level Space, the
----
Additional First Level Space and the Second Level Space (collectively, the
"Tenant Premises) shall terminate on August 17, 2000 unless earlier terminated
in accordance with the terms of the Lease or the Lease Assignment.
<PAGE>
IV. Renewal Option.
---------------
a) Landlord hereby grants to Tenant two (2) option(s) [the "Option(s)"]
to extend the term of the Lease, each for an additional term of two (2)
years, commencing when the then-existing term expires, upon the terms and
conditions set forth in this Section.
b) Exercise of Option. Tenant may exercise such option by giving Landlord
written notice (the "Exercise Notice") of its intention not less than six
(6) months prior to the expiration of the then-existing term of the Lease.
c) Extended Term Rent. If this Option is exercised, the Base Rent per sq.
ft. for the Tenant Premises shall be adjusted to an amount not less than
the Base Rent payable for the month immediately preceding the commencement
date of the term of the Option(s) or equal to ninety-seven and one-half
percent (97 1/2%) of the then current fair market monthly rent ("Fair
Market Rent"), whichever is greater, for the Tenant Premises as of the
commencement date of the applicable extended term as determined by the
agreement of the parties; provided however, that the base rent per sq. ft.
----------------
for the Second Level Space shall be treated as identical to, and shall be
payable on the same terms as, the Base Rent for the remainder of the Tenant
Premises. The Fair Market Rent for the Tenant Premises shall not include
the value, if any, attributable to Alterations to the Premises made at the
cost of Tenant*. The total rent shall include the Base Rent plus the
Additional rent. If the parties are unable to agree on the Fair Market Rent
for the Tenant Premises within sixty (60) days after the Exercise notice,
Tenant shall be entitled to require the Fair Market Rent be determined by
arbitration, as set forth below. All other terms and conditions of the
Lease shall remain in full force and effect and shall apply during the
Option term.
* The total rent shall include the base rent plus the additional rent.
** d) Arbitration.
(i) Promptly following notice to Landlord from Tenant, each party
shall appoint a qualified, licensed real estate appraiser experienced
in appraising office space in San Jose, California to act as an
arbitrator. The two (2) appraises so appointed shall determine the
Fair Market Rent pursuant to the terms and conditions of the Lease
within sixty (60) days of Tenant's initial notice, and they shall
notify the parties of the determination in writing.
(ii) If the two (2) appraises do not agree on the Fair Market Rent,
they shall appoint a third, similarly qualified appraiser. Within
thirty (30) days of his appointment, the third appraiser shall select,
from the proposals submitted by the first two appraisers, the proposal
that most closely approximates the third appraiser's determination of
Fair Market Rent, and that figure shall be deemed the Fair Market Rent
for purposes of the Lease. The third appraiser shall have no right to
compromise or modify either of the proposals submitted by the first
two appraisers.
(iii) Each party shall pay all charges and expenses of the appraiser
appointed by that party, and one-half of any charges and expenses
incurred by the third appraiser.
(iv) If either party to select an appraiser as provided herein, or if
either of the appraisers fails to present a determination within the
required time period, the
** The combined areas of the First Level Space and Second Level Space shall be
increased from 52,000 to 53,012 sq.ft. which is the area measured to the
outside of the outer walls as per BOMA standards as adopted by AIA.
<PAGE>
determination presented by the appraiser appointed by the other
party shall be considered final and binding upon both parties.
VI. Successors and Assigns. This Agreement shall be binding and inure to the
----------------------
benefit of the parties to it, their heirs, executors, administrators, successors
in interest, and assigns.
VII. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with California law.
The parties have executed this Agreement as of the date first above written.
LANDLORD: TENANT:
CILKER REVOCABLE TRUST OF OPTICAL NETWORKS, INCORPORATED
OCTOBER 9, 1990
By: /s/ William H. Cilker By: /s/ Terrence J. Schmid
---------------------------- --------------------------
Name: William H. Cilker Name: Terrence J. Schmid
Title: CFO
V. The subleasing conditions will be modified to read: Lessee shall pay to
--------------------------------------------------
Lessor, as additional rent hereunder, 50% of the excess of each such payment of
rent or additional consideration by Lessee after deducting Lessee's reasonable
cost for marketing and reasonable real estate commission to be mutually agreed
upon and applicable only to the increase portion of the rent.
<PAGE>
EXHIBIT 10.10
RECEIVED JAN 14 2000
Peery/Arrillaga
January 5, 2000
Mr. Terrence J. Schmid
Optical Networks, Inc.
166 Baypointe Parkway
San Jose, CA 95134
RE: COMMENCEMENT OF LEASE
Gentlemen:
This letter will confirm our agreement relative to the Commencement Date of the
Lease Agreement dated September 29, 1999 by and between the John Arrillaga
Survivor's Trust and the Richard T. Peery Separate Property Trust, as Landlord,
and Optical Networks, Inc., a California corporation, as Tenant, for
approximately 58,780+ square feet of space located at 105 E. Tasman Drive, San
Jose, California,
Notwithstanding anything to the contrary contained in said Lease Agreement, it
is agreed that said Lease shall commence effective January 1, 2000 and terminate
seven years later on December 31, 2006. Because of the change in Commencement
Date, your Basic Monthly Rent Schedule as shown in Paragraph 43 of the Lease
shall be changed as follows:
Total Rent No. of Rent Due
Period Per Month Mos. for Period
01/01/00-12/31/00 $118,959.52 12 $1,427,5114.24
01/01/01-12/31/01 $124,837.52 12 $ 1,498,050-24
01/01/02-12/31/02 $130,715.52 12 $ 1,568,586.24
01/01/03-12/31/03 $136,593.52 12 $ 1,639,122.24
01/01/04-12/31/04 $142,471.53 12 $ 1,709,658.36
01/01/05-12/31/05 $148,349.53 12 $ 1,780,194.36
01/01/06-12/31/06 $154,227.53 12 $ 1,850,730.36
---------------------------
84 $11,473,856.04 Aggregate
=============-----====================
Please execute this letter in the space provided below, indicating your
agreement with the foregoing, and return all copies to us for our execution,
together with your check in the
Initial:
<PAGE>
amount of $118,959.52 representing the prorated Basic Rent for the month of
January, 2000. We will return a fully executed original of this document for
your records.
Respectfully yours,
PEERY/ARRELLAGA
By /s/ John Arrillaga
------------------------------
John Arrillaga
AGREEMENT:
OPTICAL NETWORKS, INC.
By: /s/ Terry Schmid
------------------------------
Terrence J. Schmid
Title: CFO
-----------------------------
Initial: /s/TJS /s/ JA
-------------------
<PAGE>
BLDG: Baypointe 4
OWNER: 1
PROP: 0007
UNIT: 1
TENANT: OPTIO2
LEASE: 0007-OPTI02-01
LEASE AGREEMENT
THIS LEASE, made this____ 29th day of September, 1999 between JOHN ARRILLAGA,
Trustee, or his Successor Trustee, UTA dated 7/20/77 (JOHN ARRILLAGA SURVIVOR'S
TRUST) as amended, mid RICHARD T. PEERY; Trustee, or his Successor Trustee, UTA
dated 7/20/77 (RICHARD T. PEERY SEPARATE PROPERTY TRUST) as amended, hereinafter
called Landlord and Optical Networks, inc. a California corporation, hereinafter
called Tenant.
WITNESSETH:
Landlord hereby leases to Tenant and Tenant hereby hires and takes from
Landlord those certain premises (the "Premises") outlined in red on Exhibit "N',
attached hereto and incorporated herein by this reference thereto more
particularly described as follows:
All of that certain 58,780+ square foot, one-story building located at 105 E.
Tasman Drive, San Jose, California 95134. Said Premises is more particularly
shown within the area outlined in Red on Exhibit A attached hereto. The entire
----------
parcel, of which the Premises is a part, and exclusive parking appurtenant
thereto, is shown within the area outlined in Green on Exhibit A attached. The
----------
Premises shall be improved by Landlord as shown on Exhibit B to be attached
----------
hereto, and is leased on an "as-is" basis, in its present condition, and in the
configuration as shown in Red on Exhibit B to be attached hereto.
----------
The word "Premises" as used throughout this lease is hereby defined to include
the nonexclusive use of landscaped areas, sidewalks and driveways in front of or
adjacent to the Premises, and the nonexclusive use of the area directly
underneath or over such sidewalks and driveways. The gross leasable area of the
building shall be measured from outside of exterior walls to outside of exterior
walls, and shall include any atriums, covered entrances or egresses and covered
loading areas. Said letting and hiring is upon and subject to the terms,
covenants and conditions hereinafter set forth and Tenant covenants as a
material part of the consideration for this Lease to perform and observe each
and all of said terms, covenants and conditions. This Lease is made upon the
conditions of such performance and observance.
1. USE Tenant shall use the Premises only in conformance with applicable
governmental laws, regulations, rules and ordinances for the purpose of general
office, light manufacturing, research and development, and storage and other
uses necessary for Tenant to conduct Tenant's business, provided that such uses
shall be in accordance with all applicable governmental laws and ordinances, and
for no other purpose. Tenant shall not do or permit to be done in or about the
Premises nor bring or keep or permit to be brought or kept in or about the
Premises anything which is prohibited by or will in any way increase the
existing rate of (or otherwise affect) fire or any insurance covering the
Premises or any part thereof, or any of its contents, or will cause a
cancellation of any insurance covering the Premises or any part thereof, or any
of its contents. Tenant shall not do or permit to be done anything in, on or
about the Premises which will in any way obstruct or interfere with the rights
of other tenants or occupants of the Premises or neighboring premises or injure
or annoy them, or use or allow the Premises to be used for any improper,
immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or
permit any nuisance in, on or about the Premises. No sale by auction shall be
permitted on the Promises. Tenant shall not place any loads upon the floors,
walls, or coiling which endanger the structure, or place any harmful fluids or
other materials in the drainage system of the building, or overload existing
electrical or other mechanical systems. No waste materials or refuse shall be
<PAGE>
dumped upon or permitted to remain upon any part of the Promises or outside of
the building in which the Premises are a part, except in trash containers placed
inside exterior enclosures designated by Landlord for that purpose or inside of
the building proper where designated by Landlord. No materials, supplies,
equipment, finished products or semifinished products, raw materials or articles
of any nature shall be stored upon or permitted to remain outside the Premises.
Tenant shall not place anything or allow anything to be placed near the glass of
any window, door partition or wall which may appear unsightly from outside the
Premises. No loudspeaker or other device, system or apparatus which can be heard
outside the Premises shall be used in or at the Premises without the prior
written consent of Landlord. Tenant shall not commit or suffer to be committed
any waste in or upon the Premises. Tenant shall indemnity, defend and hold
Landlord harmless against any loss, expense, damage, reasonable attorneys' fees,
or liability arising out of failure of Tenant to comply with any applicable law.
Tenant shall comply with any covenant, condition, or restriction ("CCR's")
affecting the Promises. The provisions of this paragraph are for the benefit of
Landlord only and shall not be construed to be for the benefit of any tenant or
occupant of the Premises.
2. TERM *
A. The term of this Lease shall be for a period of SEVEN (7) years (unless
sooner terminated as hereinafter provided) and, subject to Paragraphs 2B and 3,
shall commence on the 1st day of January, 2000.
B. Possession of the Promises shall be deemed tendered and the term of the
Lease shall commence when the first of the following occurs:
(a) One day after a Certificate of Occupancy is granted by the proper
governmental agency, or, if the governmental agency having jurisdiction over the
area in which the Premises are situated does not issue certificates of
occupancy, then the same number of days after certification by Landlord's
architect or contractor that Landlord's construction work has been completed; or
(b) Upon the occupancy of the Premises by any of Tenant's operating
personnel: or
(c) When the Tenants have been substantially completed for Tenant's use and
occupancy, in accordance and compliance with Exhibit B of this Lease Agreement;
or
(d) As otherwise agreed in writing.
*it is agreed in the event said Lease commences on a date other than the first
day of the month the term of the Lease will be extended to account for the
number of days in the partial month at the Basic Rent during the resulting
partial month will be prorated for the number of days in the partial month) at
the Basic Rent rate scheduled for the projected commencement date as shown in
Paragraph 39.
- -Within thirty (30) days after receipt of Landlord's reconciliation, Tenant
shall have the right at Tenant's sole expense, to audit, at a mutually
convenient time at Landlord's office, Landlord's records relating to the
foregoing expenses. Such audit must be conducted' by Tenant or an independent
nationally recognized accounting firm that is not being compensated by Tenant or
other third party on a audit reveals that contingency fee basis. Landlord shall
be provided a complete copy of said audit at no expense to Landlord. if such
Landlord has overcharged Tenant and the audit is not challenged by Landlord, the
amount overcharged shall be credited to Tenant's account within thirty (30) days
after the audit is concluded.
3. Possession. if Landlord, for any reason whatsoever, cannot deliver
possession of said premises to Tenant at the commencement of the said term, as
herainbefore specified, this Lease shall not be void or voidable; no obligation
of Tenant shall be affected thereby: nor shall Landlord of Landlord's agents be
liable to Tenant for any loss or damage resulting therefrom; but in that event
the commencement and termination dates of the Lease, and all other dates
affected thereby shall be revised to conform to the date of Landlords delivery
of possession, as specified in Paragraph 2B, above. The above is, however,
subject to the provision that the period of delay of delivery of the Premises
shall not exceed 60 days from the commencement date herein (except those delays
Caused Acts Of God, strikes, war; utilities, governmental bodies, weather,
unavailable materials, and delays beyond Landlord's control shall be excluded in
calculating such period) in which instance Tenant at its option, may, by written
notice to Landlord, terminate this Lease.
4. RENT
<PAGE>
A. Basic Rent. Tenant agrees to pay to Landlord at such place as Landlord may
designate without deduction, offset, prior notice, agrees to accept as Basic
Rent for the leased Premises the total sum of ELEVEN MiLLiON THREE HUNDRED FIFTY
----------------------------------
SiX THOUSAND TWO ($11,356,296.00) in lawful money of the United States of
- -----------------
America, payable as follows:
See Paragraph 39 for Basic Rent Schedule
E. Fixed Management Fee. Beginning with the Commencement Date of the Term
--------------------
of this Lease, Tenant shall pay to Landlord, in addition to the Basic Rent and
Additional Rent, a fixed monthly management fee ("Management Fee") equal to 2%
-----------
of the Basic Rent due for each month during the Lease Term.
- ------
or more frequently if Landlord elects to do so at Landlord's sole and absolute
discretion
B. Time for Payment. Full monthly rent is due in advance on the first
day of each calendar month. in the event that the term of this Lease commences
on a date other than the first day of a calendar month, on the date of
commencement of the term hereof Tenant shall pay to Landlord as rent for the
period from such date of commencement to the first day of the next succeeding
calendar month that proportion of the monthly rent hereunder which the number of
days between such date of commencement and the first day of the next succeeding
calendar month bears to thirty (30). in the event that the term of this Lease
for any reason ends on a date other than the last day of a calendar month, on
the first day of the last calendar month of the term hereof Tenant shall pay to
Landlord as rent for the period from said first day of said last calendar month
to and including the last day of the term hereof that proportion of the monthly
rent hereunder which the number of days between said first day of said last
calendar month and the last day of the term hereof bears to thirty (30).
C. Late Charge. Notwithstanding any other provision of this Lease, if
Tenant is in default in the payment of rental as set forth in this Paragraph 4
when due, or any part thereof, Tenant agrees to pay Landlord, in addition to the
delinquent rental due, a late charge for each rental payment in default ten (10)
days. Said late charge shall equal ten percent (10%) of each rental payment so
in default.
D. Additional Rent. Beginning with the commencement date of the term of
this Lease, Tenant shall pay to Landlord or to Landlord's designated agent in
addition to the Basic Rent and as Additional Rent the following:
(a) All Taxes relating to the Premises as set forth in Paragraph 9,
and
(b) All insurance premiums and deductibles relating to the Premises,
asset forth in Paragraph 12, and
(c) All charges, costs and expenses, which Tenant is required to pay
hereunder, together with all interest and penalties, costs and expenses
including reasonable attorneys' fees and legal expenses, that may accrue
thereto in the event of Tenant's failure to pay such amounts, and all
damages, reasonable costs and expenses which Landlord may incur by reason
of default of Tenant or failure on Tenant's part art to comply with the
terms of this Lease. in the event of nonpayment by Tenant of Additional
Rent, Landlord shall have all the rights and remedies with respect thereto
as Landlord has for nonpayment of rent.
The Additional Rent due hereunder shall be paid to Landlord or Landlord's agent
(1) within five days for taxes and insurance and within thirty (30) days for all
other Additional Rent items after presentation of invoice from Landlord or
Landlord's agent setting forth such Additional Rent and/or (ii) at the option of
Landlord, Tenant shall pay to Landlord monthly, in advance, Tenant's prorata
share of an amount estimated by Landlord to be Landlord's approximate average
monthly expenditure for such Additional Rent items, which estimated amount shall
be reconciled at the end of each calendar year as compared to Landlord's actual
expenditure for said Additional Rent items, with Tenant paying to Landlord, upon
demand, any amount of actual expenses expended by Landlord in excess of said
estimated amount, or Landlord crediting to Tenant (providing Tenant is not in
default in the performance of any of the terms, covenants or conditions of this
Lease) any amount of estimated payments made by Tenant in excess of Landlord's
actual expenditures for said Additional Rent items. The respective obligations
of Landlord and Tenant under this paragraph shall survive the expiration or
other termination of the term of this Lease, and if the term hereof shall expire
or shall otherwise terminate on a day other than the last day of
<PAGE>
a calendar year, the actual Additional Rent incurred for the calendar year in
which the term hereof expires or otherwise terminates shall be determined and
settled on the basis of the statement of actual Additional Rent for such
calendar year and shall be prorated in the proportion which the number of days
in such calendar year preceding such expiration or termination bears to 365.
F. Place of Payment of Rent and Additional Rent. All Basic Rent
hereunder and all payments hereunder for Additional Rent shall be paid to
Landlord at the office of Landlord at Peery/Arrillaga, File 1504. Box 60000, San
Francisco.; CA 94160 or to such other person or to such other place as Landlord
may from time to time designate in writing.
*G. Security Deposit. Concurrently with Tenant's execution of this Lease,
Tenant shall deposit with Landlord the sum of THREE HUNDRED FiVE THOUSAND SiX
HUNDRED FiFTY SiX AND N0/100 Dollars ($ 305,656.00). Said sum shall be held by
Landlord as a Security Deposit for the faithful performance by Tenant of all of
the terms, covenants, and conditions of this Lease to be kept and performed by
Tenant during the term hereof, if Tenant defaults with respect to any provision
of this Lease, including, but not limited to, the provisions relating to the
payment of rent and any of the monetary sums due herewith, Landlord may (but
shall not be required to) use, apply or retain all or any part of this Security
Deposit for the payment of any other amount which Landlord may spend by reason
of Tenant's default or to compensate Landlord for any other loss or damage which
Landlord may suffer by reason of Tenant's default. if any portion of said
Deposit is so used or applied, Tenant shall, within ten (10) days after written
demand therefor, deposit cash with Landlord in the amount sufficient to restore
the Security Deposit to its original amount. Tenant's 'failure to do so shall be
a material breach of this Lease. Landlord shall not be required to keep this
Security Deposit separate from its general funds, and Tenant shall not be
entitled to interest on such Deposit. if Tenant fully and faithfully performs
every provision of this Lease to be performed by it, the Security Deposit or any
balance thereof shall be returned to Tenant (or at Landlord's option, to the
last assignee of Tenant's interest hereunder) at the expiration of the Lease
term and after Tenant has vacated the Premises. in the event of termination of
Landlord's interest in this Lease, Landlord shall transfer said Deposit to
Landlord's successor in interest whereupon Tenant agrees to release Landlord
from liability for the return of such Deposit or the accounting therefor.
* $152,828.00 Cash due upon Lease execution. initials:
$152,828.00 Promissory Note due January 1, 2000. initials:
5. ACCEPTANCE AND SURRENDER OF PREMISES. By entry hereunder, Tenant accepts
the Premises as being in good and sanitary order, condition and repair and
accepts the building and improvements included in the Premises in their present
condition and without representation or warranty by Landlord as to the condition
of such building or as to the use or occupancy which may be made thereof. Any
exceptions to the foregoing must be by written agreement executed by Landlord
and Tenant. Tenant agrees on the last day of the Lease term, or on the sooner
termination of this Lease, to surrender the Premises promptly and peaceably to
Landlord in good condition and repair (damage by Acts of God, fire, normal wear
and tear excepted), with all interior walls painted, or cleaned so that they
appear freshly painted, and repaired and replaced, if damaged; all floors
cleaned and waxed; all carpets cleaned and shampooed; all broken, marred or
nonconforming accoustical coiling tiles replaced; all windows washed; the
airconditioning and heating systems serviced by a reputable and licensed service
firm and in good operating condition and repair; the plumbing and electrical
systems and lighting in good order and repair, including replacement of any
burned out or broken light bulbs or ballasts; the lawn and shrubs in good
condition including the replacement of any dead or damaged plantings; the
sidewalk, driveways and parking areas in good order, condition and repair;
together with all alterations, additions, and improvements which may have been
made in, to, or on the Premises (except moveable trade fixtures installed at the
expense of Tenant) except that Tenant shall ascertain from Landlord within
thirty (30) days before the end of the term of this Lease whether Landlord
desires to have the Premises or any part or parts thereof restored to their
condition and configuration as when the Premises were delivered to Tenant and if
' Landlord shall so desire, then Tenant shall restore said Premises or such part
or parts thereof before the end of this Lease at Tenant's sole cost and expense.
Tenant, on or before the end of the
<PAGE>
term or sooner termination of this Lease, shall remove all of Tenant's personal
property and trade fixtures from the Premises, and all property not so removed
on or before the end of the term or sooner termination of this Lease shall be
deemed abandoned by Tenant and title to same shall thereupon pass to Landlord
without compensation to Tenant. Landlord may, upon termination of this Lease,
remove all moveable furniture and equipment so abandoned by Tenant, at Tenant's
sole cost, and repair any damage caused by such removal at Tenant's sole cost.
if the Premises be not surrendered at the end of the term or sooner termination
of this Lease, Tenant shall indemnify Landlord against loss or liability
resulting from the delay by Tenant in so surrendering the Premises including,
without limitation, any claims made by any succeeding tenant founded on such
delay. Nothing contained herein shall be construed as an extension of the term
hereof or as a consent of Landlord to any holding over by Tenant. The voluntary
or other surrender of this Lease or the Premises by Tenant or a mutual
cancellation of this Lease shall not work as a merger and, at the option of
Landlord, shall either terminate all or any existing subleases or subtenancies
or operate as an assignment to Landlord of all or any such subleases or
subtenancies.
6. ALTERATIONS AND ADDITIONS. Tenant shall not make, or suffer to be made, any
alteration or addition to the Premises, or any part thereof, without the written
consent of Landlord first had and obtained by Tenant (such consent not to be
unreasonably withhold), but at the cost of Tenant, and any addition to, or
alteration of, the Premises, except moveable furniture and trade fixtures, shall
at once become a part of the Premises and belong to Landlord. Landlord reserves
the right to approve all contractors and mechanics proposed by Tenant to make
such alterations and additions. Tenant shall retain title to all moveable
furniture and trade fixtures placed in the Premises. All heating, lighting,
electrical, airconditioning, floor and ceiling partitioning, drapery, carpeting,
and floor installations made by Tenant, together with all property that has
become an integral part of the Premises, shall not be deemed trade fixtures.
Tenant agrees that it will not proceed to make such alteration or additions,
without having obtained consent from Landlord to do so, and until five (5) days
from the receipt of such consent, in order that Landlord may post appropriate
notices to avoid any liability to contractors or material suppliers for payment
for Tenant's improvements. Tenant will at all times permit such notices to be
posted and to remain posted until the completion of work. Tenant shall, if
required by Landlord, secure at Tenant's own cost and expense, a completion and
lien indemnity bond, satisfactory to Landlord, for such work. Tenant further
covenants and agrees that any mechanic's lien filed against the Premises for
work claimed to have been done for, or materials claimed to have been furnished
to Tenant, will be discharged by Tenant, by bond or otherwise, within ten (10)
days after the filing thereof, at the cost and expense of Tenant. Any exceptions
to the foregoing must be made in writing and executed by both Landlord and
---
Tenant.
7 TENANT MAINTENANCE: Tenant shall at its sole cost and expense, keep and
maintain the Premises (including appurtenances) and every part thereof in a,
high standard of maintenance and repair, or replacement, and in good and
sanitary condition. Tenant's maintenance and repair responsibilities herein
referred to include, but are not limited to, janitorization, all windows
(interior and exterior), window frames, plate glass and glazing (destroyed by
accident or act of third parties), truck doors, plumbing systems (such as water
and drain lines, sinks, toilets, faucets, drains, showers and water fountains),
electrical systems (such as panels, conduits, outlets, lighting fixtures, lamps,
bulbs, tubes and ballasts), heating and airconditioning systems (such as
compressors, fans, air handlers, ducts, mixing boxes, thermostats, time clocks,
boilers, heaters, supply and return grills), structural elements and exterior
surfaces of the building, store fronts, roofs, downspouts, all interior
improvements within the premises including but not limited to wall coverings,
window coverings, carpet, floor coverings, partitioning, ceilings, doors (both
interior and exterior), including closing mechanisms, latches, locks, skylights
(if any), automatic fire extinguishing systems, and elevators and all other
interior improvements of any nature whatsoever, and all exterior improvements
including but not limited to landscaping, sidewalks, driveways, parking lots
including striping and sealing, sprinkler systems, lighting, ponds, fountains,
waterways, and drains. Tenant agrees to provide carpet shields under all rolling
chairs or to otherwise be responsible for wear and tear of the carpet caused by
such rolling chairs if such wear and tear exceeds that caused by normal foot
traffic in surrounding areas. Areas of excessive wear shall be replaced at
Tenant's sole expense upon Lease termination. Tenant hereby waives all rights
under, and benefits of, Subsection 1 of Section 1932 and Section 1941 and 1942
of the California Civil Code and under any similar law, statute or ordinance now
or hereafter in
<PAGE>
effect. in the event any of the above maintenance responsibilities apply to any
other tenant(s) of Landlord where there is common usage with other tenant(s),
such maintenance responsibilities and charges shall be allocated to the [eased
Premises by square footage or other equitable basis as calculated and determined
by Landlord.
8. UTILITIES. Tenant shall pay promptly, as ' the same become due, all charges
for water, gas, electricity, telephone, telex and other electronic communication
service, sewer service, waste pick-up and any other utilities, materials or
services furnished directly to or used by Tenant on or about the Premises during
the term of this Lease, including, without limitation, any temporary or
permanent utility surcharge or other exactions whether or not hereinafter
imposed. in the event the above charges apply to any other tenant(s) of Landlord
where there is common usage with other tenant(s), such charges shall be
allocated to the, leased Premises by square footage or other equitable basis as
calculated and determined by Landlord. Landlord shall not be liable for and
Tenant shall not be entitled to any abatement or reduction of rent by reason of
any interruption or failure of utility services to the Premises when such
interruption or failure is caused by accident, breakage, repair, strikes,
lockouts, or other labor disturbances or labor disputes of any nature, or by any
other cause, similar or dissimilar, beyond the reasonable control of Landlord .
9. TAXES. As Additional Rent and in accordance with Paragraph 4D of this
Lease, Tenant shall pay to Landlord, or if Landlord so directs, directly to the
Collector, all Real Property Taxes relating to the Promises. in the event the
Premises leased hereunder consist of only a portion of the entire tax parcel,
Tenant shall pay to Landlord Tenant's proportionate share of such real estate
taxes allocated to the leased Premises by square footage or other reasonable
basis as calculated and determined by Landlord. if the tax billing pertains 100%
to the leased Premises, and Landlord chooses to have Tenant pay said real estate
taxes directly to the Tax Collector, then in such event it shall be the
responsibility of Tenant to obtain the tax and assessment bills and pay, prior
to delinquency, the applicable real property taxes and assessments pertaining to
the leased Premises, and failure to receive a bill for taxes and/or assessments
shall not provide a basis for cancellation of or nonresponsibility for payment
of penalties for nonpayment or late payment by Tenant. The term "Real Property
Taxes", as used herein, shall mean (i) all taxes, assessments, levies and other
charges of any kind or nature whatsoever, general and special, foreseen and
unforeseen (including all installments of principal and interest required to pay
any general or special assessments for public improvements and any increases
resulting from reassessments caused by any change in ownership of the Premises)
now or hereafter imposed by any governmental or quasi-governmental authority or
special district having the direct or indirect power to tax or levy assessments,
which are levied or assessed against, or with respect to the value, occupancy or
use of, all or any portion of the Premises (as now constructed or as may at any
time hereafter be constructed, altered, or otherwise changed) or Landlord's
interest therein; any improvements located within the Premises (regardless of
ownership); the fixtures, equipment and other property of Landlord, real or
personal, that are an integral part of and located in the Premises; or parking
areas, public utilities, or energy within the Premises; (ii) all charges, levies
or fees imposed by reason of environmental regulation or other governmental
control of the Premises; and (iii) all costs and fees (including reasonable
attorneys' fees) incurred by Landlord in reasonably contesting any Real Property
Tax and in negotiating with public authorities as to any Real Property Tax. If
at any time during the term of this Lease the taxation or assessment of the
Premises prevailing as of the commencement date of this Lease shall be altered
so that in lieu of or in addition to any Real Property Tax described above there
shall be levied, assessed or imposed (whether by reason of a change in the
method of taxation or assessment, creation of a now tax or charge, or any other
cause) an alternate or additional tax or charge (i) on the value, use or
occupancy of the Promises or Landlord's interest therein or (ii) on or measured
by the gross receipts, income or rentals from the Premises, on Landlord's
business of leasing the Premises, or computed in any manner with respect to the
operation of the Premises, then any such tax or charge, however designated,
shall be included within the meaning of the term "Real Property Taxes" for
purposes of this Lease. If any Real Property Tax is based upon property or rents
unrelated to ft Promises, then only that part of such Real Property Tax that is
fairly allocable to the Promise; shall be included within the meaning of the
term "Real Property Taxes". Notwithstanding the foregoing, the term "Real
Property Taxes" shall not include estate, inheritance, gift or franchise taxes
of Landlord or the federal or state net income tax imposed on Landlord's income
from all sources.
<PAGE>
The term "Real Estate Taxes" shall also include supplemental taxes related to
the period of Tenant's Lease Term whenever levied, including any such taxes that
may be levied after the Lease Term has expired.
B. Taxes On Tenants Property. Tenant shall be liable for and shall pay
ten days before delinquency, taxes levied against any personal property or trade
fixtures placed by Tenant in or about the Promises. it any such taxes on
Tenant's personal property or trade fixtures are levied against Landlord or
Landlord's property or if the assessed value of the Premises is increased by the
inclusion therein of a value placed upon such personal property or trade
fixtures of Tenant and if Landlord, after written notice to Tenant, pays the
taxes based on such increased assessment, which Landlord shall have the right to
do regardless of the validity thereof, but only under proper protest if
requested by Tenant, Tenant shall upon demand. as the case may be, repay to
Landlord the taxes so levied against Landlord, or the proportion of such taxes
resulting from such increase in the assessment; provided that in any such event
Tenant shall have the right in the name of Landlord and with Landlord's full
cooperation, to bring suit in any court of competent jurisdiction to recover the
amount of such taxes so paid under protest, and any amount so recovered shall
belong to Tenant.
10. LIABILITY INSURANCE. Tenant, at Tenant's expense, agrees to keep in force
during the term of this Lease a policy of commercial general liability insurance
with combined single limit coverage of not less than Two Million Dollars
($2,000,000) per occurrence) for bodily injury and property damage occurring in,
on or about the Premises, including parking and landscaped areas. Such insurance
shall be primary and noncontributory as respects any insurance carried by
Landlord. The policy or policies effecting such insurance shall name Landlord as
additional insureds, and shall insure any liability of Landlord, contingent or
otherwise, as respects acts or omissions of Tenant its agents, employees or
invitees or otherwise by any conduct or transactions of any of said persons in
or about or concerning the Premises, including any failure of Tenant to observe
or perform any of its obligations hereunder; shall be issued by an insurance
company admitted to transact business in the State of California; and shall
provide that the insurance effected thereby shall not be canceled, except upon
thirty (30) days' prior written notice to Landlord. A Certificate of Insurance
of said policy shall be delivered to Landlord. if. during the term of this
Lease, in the considered opinion of Landlord's Lender, insurance advisor, or
counsel, the amount of insurance described in this Paragraph 10 is not adequate,
Tenant agrees to increase said coverage to such reasonable amount as Landlord's
Lender, insurance advisor, or counsel shall deem adequate.
11. TENANT'S PERSONAL PROPERTY INSURANCE AND WORKMAN'S COMPENSATION INSURANCE.
Tenant shall maintain a policy or policies of fire and property damage insurance
in "all risk* form with a sprinkler leakage endorsement insuring the personal
property inventory, trade fixtures, and leasehold improvements within the leased
Premises for the full replacement value thereof. The proceeds from any of such
policies shall be used for the repair or replacement of such items so insured.
Tenant shall also maintain a policy or policies of workman's compensation
insurance and any other employee benefit insurance sufficient to comply with the
laws.
12. PROPERTY INSURANCE. Tenant shall pay to Landlord Tenant's proportionate
share (allocated to the leased Premises by square footage or other equitable
basis as calculated and determined by Landlord) of the deductibles on insurance
claims and the cost of, policy or Policies of insurance covering loss or damage
to the Premises (excluding routine and incidental damage or destruction caused
by accidents or vandalism for which Tenant is responsible under Paragraph 7) in
the amount of the full replacement value thereof, providing protection against
those perils included within the classification of 'all risks" insurance and
flood and/or earthquake insurance, 0 available, plus a policy of rental income
insurance in the amount of one hundred (100%) percent of twelve (12) months
Basic Rent, plus sums paid as Additional Rent. if such insurance cost 13
increased due to Tenant's use of the Premises, Tenant agrees to pay to Landlord
the full -cost of such increase. Tenant shall have no interest in nor any right
to the proceeds of any insurance procured by Landlord for the Premises.
Landlord and Tenant do each hereby respectively release the other, to the extent
of insurance coverage of the releasing party from any liability for loss or
damage caused by fire or any of the extended coverage casualties included in the
releasing party's insurance policies, irrespective of the cause of such fire or
casualty; provided, however, that if the insurance policy of either releasing
party prohibits such waiver,
<PAGE>
then this waiver shall not take effect until consent to such waiver is obtained.
If such waiver is so prohibited, the insured Party affected shall promptly
notify the other party thereof.
13. INDEMNIFICATION. Landlord shall not be liable to Tenant and Tenant hereby
waives all claims against Landlord or any injury to or death of any person or
damage to or destruction of property in or about the Premises by or from any
cause whatsoever, including, without limitation, gas, fire, oil, electricity or
leakage of any character from the root, walls, basement or other portion of the
Premises but excluding, however, in negligence of Landlord, its agents,
servants, employees. invitees, or contractors of which negligence Landlord has
knowledge and reasonable time to correct. Except as to injury to persons or
damage to property, the negligence of Landlord Tenant shall hold Landlord
harmless from and defend Landlord against any and all expenses, including
reasonable attorneys' fees, in connection therewith? arising out or any injury
to or death of any person or do or destruction of property occurring in, on or
about the Promises, or any part thereof, from any cause whatsoever.
14. COMPLIANCE. Tenant, at its sole cost and expense, shall promptly comply
with all statutes, ordinances and governmental rules, regulations of
requirements now or hereafter in effect, with the requirements of any board of
fire underwriters or other similar body now or hereafter constituted; and with
any direction or occupancy certificate be issued pursuant to law by any public
officer, provided, however, that no such failure shall be deemed a breach of the
provisions if Tenant, immediately upon notification, commences to remedy or
rectify said failure. The judgment of any court of competent jurisdiction or the
admission of Tenant in any action against Tenant, whether Landlord be a party
thereto or not, that Tenant has violated any such law, statute, ordinance or
governmental rule, regulation, requirement, direction or provision, shall be
conclusive of that fact as between Landlord and Tenant. Tenant shall, at its
sole cost and expense. comply with any and all requirements pertaining to said
Premises, of any insurance organization or company, necessary for the
maintenance of reasonable fire and public liability insurance covering
requirements pertaining to said Premises, all any insurance organization or
company, necessary for the maintenance of reasonable fire and public liability
insurance covering requirements pertaining to said Premises.
15. LIENS. Tenant shall keep the Promises free from any liens arising out of
any work performed, materials furnished or obligation incurred by Tenant. in the
event that Tenant shall not, within ten (10) days following the imposition of
such lien, cause the same to be released of record, Landlord shall have. in
addition to all other remedies provided herein and by law, the right, but no
obligation, to cause the same to be released by such means as it shall deem
proper, including payment of the claim giving rise to such lien. All sums paid
by Landlord for such purpose, and all expenses incurred by it in connection
therewith, shall be payable to Landlord by Tenant on demand with interest at the
prime rate of interest as quoted by the Bank of America.
16. ASSIGNMENT AND SUBLETTING. Tenant shall not assign, transfer, or
hypothecate the leasehold estate under this Lease, or any interest therein and
shall not sublet the Premises, or any part thereof, or any right or privilege
appurtenant thereto, or suffer any other person or entity to occupy or lease the
Premises, or any portion thereof, without, in each case, the prior written
consent of Landlord which consent will not be unreasonably withheld. As a
condition for granting this consent to any assignment, transfer, or subletting,
Landlord shall require Tenant to pay to Landlord, as Additional Rent, all rents
and/or additional consideration due. Tenant from its assignees, transferees, or
subtenants in excess of the Rent payable by Tenant to Landlord hereunder for the
assigned, transferred and/or subleased space. Tenant shall, by thirty (30) days
written notice, advise, Landlord of its intent to assign or transfer Tenant's
interest in the Lease or sublet the Premises or any portion thereof for any part
of the term hereof. Within thirty (30) days after receipt of said written
notice, Landlord may, in its sole discretion, elect to terminate this Lease as
to the portion of the Premises described in Tenant's notice on the date
specified in Tenant's notice by giving written notice of such election to
terminate. If no such notice to terminate is given to Tenant within said thirty
(30) day period, Tenant may proceed to locate an acceptable sublessee, assignee.
or other transferee for presentment to Landlord for Landlords approval, all in
accordance with the terms, covenants, and conditions of this paragraph 16. if
Tenant intends to sublet the entire Premises and Landlord elects to terminate
this Lease, this Lease shall be terminated on the date specified in Tenant's
notice. if, however, this Lease shall terminate pursuant to the foregoing with
respect to less than all the Premises, the rent, as defined
<PAGE>
and reserved hereinabove shall be adjusted on a pro rata basis to the number of
square feet retained by Tenant, and this Lease as so amended shall continue in
full force and effect. In the event Tenant is allowed to assign, transfer or
sublet the whole or any part of the Premises, with the prior written consent of
Landlord, no assignee, transferee or subtenant shall assign or transfer this
Lease, either in whole or in part, or sublet the whole or any part of the
Premises, without also having obtained the prior written consent of Landlord. A
consent of Landlord to one assignment, transfer, hypothecation, subletting,
occupation or use by any other person shall not release Tenant from any of
Tenant's obligations hereunder or be deemed to be a consent to any subsequent
similar or dissimilar assignment, transfer, hypothecation, subletting.
occupation or use by any other person. Any such assignment, transfer,
hypothecation. subletting, occupation or use without such consent shall be void
and shall constitute a breach of this Lease by Tenant and shall, at the option
of Landlord exercised by written notice to Tenant, terminate this Lease. The
leasehold estate under this Lease shall not, nor shall any interest therein, be
assignable for any purpose by operation of law without the written consent of
Landlord. As a condition to its consent, Landlord may require Tenant to pay all
expenses in connection with the assignment, and Landlord shall require Tenant's
assignee or transferee (or other assignees or transferees) to assume in writing
all of the obligations under this Lease and for Tenant to remain liable to
Landlord under the Lease.
17. SUBORDINATION AND MORTGAGES. In the event Landlord's title or leasehold
interest is now or hereafter encumbered by a deed of trust, upon the interest of
Landlord in the land and buildings in which the demised Premises are located, to
secure a loan from a lender (hereinafter referred to as "Lender") to Landlord,
Tenant shall, at the request of Landlord or Lender, execute in writing an
agreement subordinating its rights under this Lease to the lien of such deed of
trust, or, if so requested, agreeing that the lien of Lendees deed of trust
shall be or remain subject and subordinate to the rights of Tenant under this
Lease. Notwithstanding any such subordination, Tenant's possession under this
Lease shall not be disturbed if Tenant is not in default and so long as Tenant
shall pay all rent and observe and perform all of the provisions set forth in
this Lease.
18. ENTRY BY LANDLORD. Landlord reserves, and shall at all reasonable times
after at least 24 hours notice (except in emergencies), have, the right to enter
the Premises to inspect them; to perform any services to be provided by Landlord
hereunder; to make repairs or provide any services to a contiguous tenant(s); to
submit the Premises to prospective purchasers, mortgagers or tenants; to post
notices of nonresponsibility, and to alter, improve or repair the Premises or
other parts of the building, all without abatement of rent, and may erect
scaffolding and other necessary structures in or through the Premises where
reasonably required by the character of the work to be performed; provided,
however that the business of Tenant shall be interfered with to the least extent
that is reasonably practical. Any entry to the Premises by Landlord for the
purposes provided for herein shall not under any circumstances be construed or
deemed to be a forcible or unlawful entry into or a detainer of the Premises or
an eviction, actual or constructive, of Tenant from the Premises or any portion
thereof.
19. BANKRUPTCY AND DEFAULT. The commencement of a bankruptcy action or
liquidation action or reorganization action or insolvency action or an
assignment of or by Tenant for the benefit of creditors, or any similar action
undertaken by Tenant, or the insolvency of Tenant, shall, at Landlord's option,
constitute a breach of this Lease by Tenant. if the trustee or receiver
appointed to serve during a bankruptcy, liquidation, reorganization, insolvency
or similar action elects to reject Tenant's unexpired Lease, the trustee or
receiver shall notify Landlord in writing of its election within thirty (30)
days after an order for relief in a liquidation action or within thirty (30)
days after the commencement of any action. Within thirty (30) days after court
approval of the assumption of this Lease, the trustee or receiver shall cure (or
provide adequate assurance to the reasonable satisfaction of Landlord that the
trustee or receiver shall cure) any and all previous defaults under the
unexpired Lease and shall compensate Landlord for all actual pecuniary loss and
shall provide adequate assurance of future performance undersold Lease to the
reasonable satisfaction of Landlord. Adequate assurance of future performance,
as used herein, includes, but shall not be limited to: (i) assurance of source
and payment of rent, and other consideration due under this Lease; (11)
assurance that the assumption or assignment of this Lease will not breach
substantially any provision, such as radius, location, use, & exclusivity
provision, in any agreement relating to the above described Promises. Nothing
contained in this
<PAGE>
section shall affect the existing right of Landlord to refuse to accept an
assignment upon commencement of or in connection with a bankruptcy, liquidation,
reorganizition or insolvency action or an assignment of Tenant for the benefit
of creditors or other similar act. Nothing contained in this Lease shall be
construed as giving or granting or creating an equity in the demised Premises to
Tenant. In no event shall the leasehold estate under this Lease, or any interest
therein, be assigned by voluntary or involuntary bankruptcy proceeding without
the prior written consent of Landlord. In no event shall this Lease or any
rights or privileges hereunder be an asset of Tenant under any bankruptcy,
insolvency or reorganization proceedings. The failure to perform or honor any
covenant, condition or representation made under this Lease shall constitute a
default hereunder by Tenant upon expiration of the appropriate grace period
hereinafter provided. Tenant shall have a period of five (5) days from the date
of written notice from Landlord within which to cure any default in the payment
of rental or adjustment thereto. Tenant shall have a period of "days from the
date of written notice from Landlord within which to cure any other default
under this Lease. Upon an uncured default of this Lease by Tenant, Landlord
shall have the following rights and remedies in addition to any other rights or
remedies available to Landlord at law or in equity:
(a) The rights and remedies provided for by California Civil Code Section
1951.2, including but not limited to, recovery of the worth at the time of award
of the amount by which the unpaid rent for the balance of the term after the
time of award exceeds the amount of rental loss for the same period that Tenant
proves could be reasonably avoided, as computed pursuant to subsection (b) of
said Section 1951.2. Any proof by Tenant under subparagraphs (2) and (3) of
Section 1951.2 of the California Civil Code of the amount of rental loss that
could be reasonably avoided shall be made in the following manner: Landlord and
Tenant shall each select a licensed real estate broker in the business of
renting property of the same type and use as the Promises and in the same
geographic vicinity. Such two real estate brokers shall select a third licensed
real estate broker, and the three licensed real estate brokers so selected shall
determine the amount of the rental loss that could be reasonably avoided from
the balance of the term of this Lease after the time of award. The decision of
the majority of said licensed real estate brokers shall be final and binding
upon the parties hereto.
(b) The rights and remedies provided by California Civil Code Section which
allows Landlord to continue the Lease in effect and to enforce all of its rights
and remedies under this Lease, including the right to recover rent as it becomes
due, for so long as Landlord does not terminate Tenant's right to possession,,
acts of maintenance or preservation, efforts to relet the Premises, or the
appointment of a receiver upon Landlord's initiative to protect its interest
under this Lease shall not constitute a termination of Tenant's right to
possession.
(c) The right to terminate this Lease by giving notice to Tenant in
accordance with applicable law.
(d) The right and power; provided however, that if the nature of Tenant's
failure is such that more than thirty (30) days is reasonably required to cure
the same, Tenant shall not be in default so long as Tenant commences performance
within such thirty (30) day period and thereafter prosecutes the same to
completion, to enter the Premises and remove therefrom all persons and property,
to store such property in a public warehouse or elsewhere at the cost of and for
the account of Tenant, and to sell such property and apply such proceeds
therefrom pursuant to applicable California law. Landlord, may from time to
time, sublet the Promises or any part thereof for such term or terms (which may
extend beyond the term of this Lease) and at such rent and such other terms as
Landlord in its reasonable sole discretion may deem advisable, with the right to
make alterations and repairs to the Premises. Upon each subletting, (i) Tenant
shall be immediately liable to pay Landlord, in addition to indebtedness other
than rent due hereunder, the reasonable cost of such subletting, including, but
not limited to, reasonable attorneys' fees, and any real estate commissions
actually paid, and the cost of such reasonable alterations and repairs incurred
by Landlord and the amount, if any, by which the rent hereunder for the period
of such subletting (to the extent such period does not exceed the term hereof)
exceeds the amount to be paid as rent for the Premises for such period or (ii)
at the option of Landlord, rents received from such subletting shall be applied
first to payment of indebtedness other than rent due hereunder from Tenant to
Landlord; second, to the payment of any costs of such subletting and of such
alterations and repairs; third to payment of rent due and unpaid hereunder; and
the residue, if any, shall be held by Landlord and applied in payment of future
rent as the same becomes due hereunder. it Tenant has been credited with any
rent to be received by such subletting under option (i) and such rent shall not
be promptly paid to Landlord by the subtenant(s), or if such rental received
from such subletting under option (ii) during any month
<PAGE>
be less than that to be paid during that month by Tenant hereunder, Tenant shall
pay any such deficiency to Landlord. Such deficiency shall be calculated and
paid monthly. No taking possession of the Premises by Landlord, shall be
construed as an election on its part to terminate this Lease unless a written
notice of such intention be given to Tenant. Notwithstanding any such subletting
without termination, Landlord may at any time hereafter elect to terminate this
Lease for such previous breach.
(e) The right to have a receiver appointed for Tenant upon application by
Landlord, to take possession of the Premises and to apply any rental collected
from the Premises and to exercise all other rights and remedies granted to
Landlord pursuant to subparagraph d. above.
20. ABANDONMENT. Tenant shall not vacate or abandon the Premises at any time
during the term of this Lease and if Tenant shall abandon, vacate or surrender
said Promises, or be dispossessed by the process of law, or otherwise, any
personal property belonging to Tenant and left on the Premises shill be deemed
to be abandoned, at the option of Landlord, except such property as may be
mortgaged to Landlord.
21. DESTRUCTION. In the event the Premises are destroyed in whole or in part
from any cause, except for routine maintenance and repairs and incidental damage
and destruction caused from vandalism and accidents for which Tenant is
responsible under Paragraph 7. Landlord may, at it option:
(a) Rebuild or restore the Premises to their condition prior to the damage
or destruction, or
(b) Terminate this Lease (providing that the Premises is damaged to the
extent of 33 1/3% of the replacement cost).
If Landlord does not give Tenant notice in writing within thirty (30) days
from the destruction of the Premises of its election to either rebuild and
restore them, or to terminate this Lease, Landlord shall be deemed to have
elected to rebuild or restore them, in which event Landlord agrees, at its
expense, promptly to rebuild or restore the Premises to their condition prior to
the damage or destruction. Tenant shall be entitled to a reduction in rent while
such repair is being made in the proportion that the area of the Premises
rendered untenantable by such damage bears to the total area of the Premises. If
Landlord does not complete the rebuilding or restoration within one hundred
eighty (180) days following the date of destruction (such period of time to be
extended for delays caused by the fault or neglect of Tenant or because of Acts
of God, acts of public agencies, labor disputes, strikes, fires, freight
embargos, rainy or stormy weather, inability to obtain materials, supplies or
fuels, acts of contractors or subcontractors, or delay of the contractors or
subcontractors due to such causes, or other contingencies beyond the control of
Landlord), then Tenant shall have the right to terminate this Lease by giving
fifteen (15) days prior written notice CD to Landlord. Notwithstanding anything
herein to the contrary, Landlord's obligation to rebuild or restore shall be
limited to the building and interior improvements" constructed by Landlord as
they existed as of the commencement date of the Lease and shall not include
restoration of Tenant's trade fixtures, equipment, merchandise, or any
improvements, alterations or additions made by Tenant to the Premises, which
Tenant shall forthwith replace or fully repair at Tenant's sole cost and expense
provided this Lease is not cancelled according to the provisions above. Unless
this Lease is terminated pursuant to the foregoing provisions, this Lease shall
remain in full force and effect. Tenant hereby expressly waives the provisions
of Section 1932, Subdivision 2, in Section 1933, Subdivision 4 of the California
Civil Code. In the event that the building in which the Promises are situated is
damaged or destroyed to the extent of not less than 331/3% of the replacement
cost thereof, Landlord may elect to terminate this Lease, whether the Premises
be injured or not. Notwithstanding anything to the contrary herein, Landlord May
terminate this Lease in the event of an uninsured event or if insurance proceeds
are insufficient to cover one hundred percent of the rebuilding costs net of the
deductible subject however, to Tenant's right to cover 100% of the deficit
amount necessary to cover 100% of said costs.
22. EMINENT DOMAIN. If all or any part of the Premises shall be taken by any
public or quasi-public authority under the power of eminent domain or conveyance
in lieu thereof, this Lease shall terminate as to any portion of the Premises so
taken or conveyed on the date when title vests in the condemnor, and Landlord
shall be entitled to any and all payment, income, rent, award, or any interest
therein whatsoever which may be paid or made in connection with such taking or
conveyance, and Tenant shall have no claim against Landlord or otherwise for the
value of any unexpired term of this Lease. Notwithstanding the foregoing
paragraph, any compensation
<PAGE>
specifically awarded Tenant for loss of business, Tenant's personal property,
moving cost or loss of goodwill, shall be and remain the property of Tenant. if
any action or proceeding is commenced for such taking of the Premises or any
part thereof, or if Landlord is advised in writing by any entity or body having
the right or power of condemnation of its intention to condemn the premises or
any portion thereof, then Landlord shall have the right to terminate this Lease
by giving Tenant written notice thereof within sixty (60) days of the date of
receipt of said written advice, or commencement of said action or proceeding, or
taking conveyance, which termination shall take place as of the first to occur
of the last day of the calendar month next following the month in which such
notice is given or the date on which title to the Premises shall vest in the
condemnor. In the event of such a partial taking or conveyance of the Premises,
if the portion of the Premises taken or conveyed is so substantial that the
Tenant can no longer reasonably conduct its business, Tenant shall have the
privilege of terminating this Lease within sixty (60) days from the date of such
taking or conveyance, upon written notice to Landlord of its intention so to do,
and upon giving of such notice this Lease shall terminate on the last day of the
calendar month next following the month in which such notice is given, upon
payment by Tenant of the rent from the date of such taking or conveyance to the
date of termination. If a portion of the Premises be taken by condemnation or
conveyance in lieu thereof and neither Landlord nor Tenant shall terminate this
Lease as provided herein, this Lease shall continue in full force and effect as
to the part of the Promises not so taken or conveyed, and the rent herein shall
be apportioned as of the date of such taking or conveyance so that thereafter
the rent to be paid by Tenant shall be in the ratio that the area of the portion
of the Premises not so taken or conveyed bears to the total area of the Premises
prior to such taking fee.
23. EMINENT DOMAIN. In the event of a sale or conveyance of the Premises or any
interest therein, by any owner of the revision then constituting Landlord, the
transferor shall thereby be released from any further liability upon any of the
terms, covenants or conditions (express or Implied) herein contained In favor of
Tenant, and In such event, Insofar as such transfer Is concerned, Tenant agrees
to look solely to the responsibility of the successor In Interest of such
transferor In and to the Premises and this Lease. This Lease shall not be
affected by any such sale or conveyance, and Tenant agrees to afforn to the
successor In Interest of such transferor.
24. ATTORNMENT TO LENDER OR THIRD PARTY. In the event the Interest of Landlord
In the land and buildings in which the leased Premises are located (whether such
Interest of Landlord is a fee title Interest or a leasehold interest) Is
encumbered by deed of trust, and such interest Is acquired by the lender or any
third party through judicial foreclosure or by exercise of a power of sale at
private trustee's foreclosure sale, Tenant hereby agrees to afforn to the
purchaser at any such foreclosure sale and to recognize such purchaser as the
Landlord under this Lease. In the event the lien of the deed of trust securing
the loan from a Lender to Landlord Is prior and paramount to the Lease, this
Lease shall nonetheless continue In full force and effect for the remainder of
the unexpired term hereof, at the same rental herein reserved and upon all the
other terms, conditions and covenants herein contained.
25. HOLDING OVER. Any holding over by Tenant after expiration or other
termination of the term of this Lease with the written consent of Landlord
delivered to Tenant shall not constitute a renewal or extension of the Lease or
give Tenant any rights In or to the leased Premises except as expressly provided
In this Lease. Any holding over after the expiration or other termination of the
term of this Lease, with the consent of Landlord, shall be construed to be a
tenancy from month to month, on the same terms and conditions herein specified
Insofar as applicable except that the monthly Basic Rent shall be increased to
an amount equal to one hundred fifty (150%) percent of the monthly Basic Rent
required during the last month of the Lease term.
26. CERTIFICATE OF ESTOPPEL. Tenant shall at any time upon not less than ten
(10) days prior written notice to Landlord execute, acknowledge and deliver to
Landlord a statement In writing (i) certifying that this Lease Is unmodified and
In full force and affect (or, if modified, stating the nature of such
modification and certifying that this Lease, as so modified, Is In full force
and effect) and the date to which the rent and other charges are paid in
advance, if any, and (ii) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord hereunder, or specifying
such defaults, if any, are claimed. Any such statement may be conclusively
relied upon by any prospective purchaser or encumbrance of the Premises.
Tenant's failure to deliver such statement within such time shall be conclusive
upon Tenant that this Lease
<PAGE>
is in full force and effect, without modification except as may be represented
by Landlord: that there are no uncured defaults In Landlord's performance, and
that not more than one month's rent has been paid in advance.
27. CONSTRUCTION CHANGES. It is understood that the description of the Promises
and the location of ductwork, plumbing and other facilities therein are subject
to such minor changes as Landlord or Landlord's architect determines to be
desirable in the course of construction of the Premises, and no such changes
shall affect this Lease or entitle Tenant to any reduction of rent hereunder or
result in any liability of Landlord to Tenant. Landlord does not guarantee the
accuracy of any drawings supplied to Tenant and verification of the accuracy of
such drawings rests with Tenant.
28. RIGHT OF LANDLORD TO PERFORM. All terms, covenants and conditions of this
Lease to be performed or observed by Tenant shall be performed or observed by
Tenant at Tenant's sole cost and expense and without any reduction of rent. If
Tenant shall fall to pay any sum of money, or other rent, required to be paid by
It hereunder or shall fail to perform any other term or covenant hereunder on
its part to be performed, and such failure shall continue for his (6) days after
written notice thereof by Landlord, Landlord, without waiving or releasing
Tenant from any obligation of Tenant hereunder, may, but shall not be obliged
to, make any such payment or perform any such other term or covenant on Tenant's
part to be performed. All sums so paid by Landlord and all necessary costs of
such performance by Landlord together with Interest thereon at the rate of the
prime rate of interest per annum as quoted by the Bank of America from the date
of such payment on performance by Landlord, shall be paid (and Tenant covenants
to make such payment) to Landlord on demand by Landlord, and Landlord shall have
(In addition to any other right or remedy of Landlord) the same rights and
remedies in the event of nonpayment by Tenant as In the case of failure by
Tenant In the payment of rent hereunder.
29. ATTORNEYS' FEES.
A. In the event that either Landlord or Tenant should bring suit for
the possession of the Promises, for the recovery of any sum due under this
Lease, or because of the breach of any provision of this Lease, or for any other
relief against the other party hereunder, then all costs and expenses, including
reasonable attorneys' fees incurred by the prevailing party therein shall be
paid by the other party, which obligation on the part of the other party shall
be deemed to have accrued on the date of the commencement of such action and
shall be enforceable whether or not the action is prosecuted to judgment.
30. WAIVER. The waiver by either party of the other party's failure to perform
or observe any term, covenant or condition herein contained to be performed or
observed by such waiving party shall not be deemed to be a waiver of such term,
covenant or condition or of any subsequent failure of the party failing to
perform or observe the same or any other such term, covenant or condition
therein contained, and no custom or practice which may develop between the
parties hereto during the term hereof shall be deemed a waiver of, or in anyway
affect, the right of either party to insist upon performance and observance by
the other party in strict accordance with the terms hereof.
31. NOTICES. All notices, demands, requests, advices or designations which
maybe or are required to be given by either party to the other hereunder shall
be in writing. All notices, demands, requests, advices or designations by
Landlord to Tenant shall be sufficiently given, made or delivered if personally
served on Tenant by leaving the same at the Premises of if sent by United Stated
certified or registered mail, postage prepaid, addressed to Tenant at the
Premises. All notices, demands, requests, advices or designations by Tenant to
Landlord shall be sent by United States certified or registered mail, postage
prepaid, addressed to Landlord at its offices at Peery/Arrillaga, 2560 Mission
College Blvd., Suite 101, Santa Clara, CA.__Each notice, request, demand, advice
or designation referred to in this. paragraph shall be deemed received on the
date of the personal service or mailing thereof in the manner herein provided,
as the case may be.
32. EXAMINATION OF LEASE. Submission of this instrument for examination or
signature by Tenant does not constitute a reservation of or option for a lease,
and this instrument is not effective as a lease or otherwise until its execution
and delivery by both Landlord and Tenant.
<PAGE>
33. DEFAULT BY LANDLORD. Landlord shall not be in default unless Landlord
falls to perform obligations required of Landlord within a reasonable time, but
in no event earlier than (30) days after written notice by Tenant to Landlord
and to the holder of any first mortgage or deed of trust covering the Premises
whose name and address shall have heretofore been furnished to Tenant in
writing, specifying wherein Landlord has failed to perform such obligations;
provided, however, that if the nature of Landlord's obligations is such that
more than thirty (30) days are required for performance, then Landlord shall not
be in default if Landlord commences performance within such thirty (30) day
period and thereafter diligently prosecutes the same to completion.
34. CORPORATE AUTHORITY. If Tenant is a corporation (or a partnership), each
individual executing this Lease on behalf of said corporation (or partnership)
represents and warrants that he is duly authorized to execute and deliver this
Lease on behalf of said corporation (or partnership) in accordance with the by-
laws of said corporation (or partnership in accordance with the partnership
agreement) and that this Lease is binding upon said corporation (or partnership)
in accordance with its terms. if Tenant is a corporation, Tenant shall, within
thirty (30) days after execution of this Lease, deliver to Landlord a certified
copy of the resolution of the Board of Directors of said corporation authorizing
or ratifying the execution of this Lease.
36. LIMITATION OF LIABILITY. In consideration of the benefits accruing
hereunder. Tenant and all successors and assigns covenant and agree that, in the
event of any actual or alleged failure, breach or default hereunder by
Landlord:(a) the sole and exclusive remedy shall be against Landlord's interest
in the Premises leased herein;(b) no partner of Landlord shall be sued or named
as a party in any suit or action (except as may be necessary to secure
jurisdiction of the partnership);(c) no service of process shall be made against
any partner of Landlord (except as may be necessary to secure jurisdiction of
the partnership); (d) no partner of Landlord shall be required to answer or
otherwise plead to any service of process; (e) no judgment will be taken against
any partner of Landlord; (f) any judgment taken against any partner of Landlord
may be vacated and set aside at any time without hearing; (g) no writ of
execution will ever by levied against the assets of any partner of Landlord; (h)
these covenants and agreements are enforceable both by Landlord and also by any
partner of Landlord. Tenant agrees that each of the foregoing covenants and
agreements shall be applicable to any covenant or agreement either expressly
contained in this Lease or imposed by statute or at common law.
Initials: /s/ JA
-------------
Initials: /s/ TJS JA
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37. SIGNS. No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed or printed or affixed on or to any part of the outside of
the Premises or any exterior windows of the Premises without the written consent
of Landlord first had and obtained and Landlord shall have the right to remove
any such sign, placard, picture, advertisement, name or notice without notice to
and at the expense of Tenant. if Tenant is allowed to print or affix or in any
way place a sign in, on, or about the Premises, upon expiration or other sooner
termination of this Lease, Tenant at Tenant's sole cost and expense shall both
remove such sign and repair all damage in such a manner as to restore all
aspects of the appearance of the Premises to the condition prior to the
placement of said sign. All approved signs or lettering on outside doors shall
be printed, painted, affixed or inscribed at the expense of Tenant by a person
approved of by Landlord. Tenant shall not place anything or allow anything to
be placed near the glass of any window, door partition or wall which may appear
unsightly from outside the Premises.
38. MISCELLANEOUS AND GENERAL PROVISIONS.
A. Use of Building Name. Tenant shall not, without the written
consent of Landlord, use the name of the building for any purpose other than as
the address of the business conducted by Tenant in the Premises.
<PAGE>
B. Choice of Law, Severability. This Lease shall in all respects be
governed by and construed in accordance with the laws of the State of
California. If any provision of this Lease shall be invalid, unenforceable or
ineffective for any reason whatsoever, all other provisions hereof shall be and
remain in full force and effect. Definition of Terms. The term "Premises"
includes the space leased hereby and any improvements now or hereafter installed
therein or attached thereto. The term "Landlord" or any pronoun used in place
thereof includes the plural as well as the singular and the successors and
assigns of Landlord. The term "Tenant" or any pronoun used in place thereof
includes the plural as well as the singular and individuals, firms,
associations, partnerships and corporations, and their and each of their
respective heirs, executors, administrators, successors and permitted assigns,
according to the context hereof, and the provisions of this Lease shall inure to
the benefit of and bind such heirs, executors, administrators, successors and
permitted assigns. The term "person" includes the plural as well as the singular
and individuals, firms, associations, partnerships and corporations. Words used
in any gender include other genders. if there be more than one Tenant the
obligations of Tenant hereunder are joint and several. The paragraph headings of
this Lease are for convenience of reference only and shall have no effect upon
the construction or interpretation of any provision hereof.
D. Time of Essence. Time is of the essence of this Lease and of each and
all of its provisions.
E. Quitclaim. At the expiration or earlier termination of this Lease,
Tenant shall execute, acknowledge and deliver to Landlord, within ten (10) days
after written demand from Landlord to Tenant, any quitclaim deed or other
document required by any reputable title company, licensed to operate in the
State of California, to remove the cloud or encumbrance created by this Lease
from the real property of which Tenant's Premises are a part.
F. Incorporation of Prior Agreements; Amendments. This instrument along
with any exhibits and attachments hereto constitutes the entire agreement
between Landlord and Tenant relative to the Premises and this agreement and the
exhibits and attachments may be altered, amended or revoked only by an
instrument in writing signed by both Landlord and Tenant. Landlord and Tenant
agree hereby that all prior or contemporaneous oral agreements between and among
themselves and their agents or representatives relative to the leasing of the
Premises are merged in or revoked by this agreement.
G. Recording. Neither Landlord nor Tenant shall record this Lease or a
short form memorandum hereof without the consent of the other.
H. Amendments for Financing. Tenant further agrees to execute any
amendments required by a lender to enable Landlord to obtain financing, so long
as Tenants rights hereunder are not substantially affected.
I. Additional Paragraphs. Paragraphs 39 through 51 are added hereto and
are included as a part of this lease.
K. Diminution of Light. Air or View. Tenant covenants and agrees that no
diminution or shutting off of light, air or view by any structure which may be
hereafter erected (whether or not by Landlord) shall in any way affect his
Lease, entitle Tenant to any reduction of rent hereunder or result in any
liability of Landlord to Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this
Lease as of the day and year last written below.
LANDLORD:
JOHN ARRILLAGA SURVIVOR'S TRUST
By John Arrillaga, Trustee
/s/ John Arrillaga
- ----------------------------------
RICHARD T. PEERY SEPARATE PROPERTY TRUST
By: /s/ Jason Peery
---------------
Richard T. Peery, Trustee, Jason Peery Trustee Special Trustee
<PAGE>
TENANT:
OPTICAL NETWORKS, INC.
a California corporation
By: /s/ Terry Schmid
---------------------
Title: CFO
------------------
Type or Print Name: Terrence J. Schmid
------------------
Date: 10/14/99
--------------------------------
Paragraphs 39 through 51 to Lease Agreement dated September 29, 1999, By and
Between the John Arrillaga Survivor's Trust and the Richard T. Peery Separate
Property Trust, as Landlord, and Optical Networks, Inc., a California
corporation, as Tenant for 58,780+ Square Feet of Space Located at 105 E. Tasman
Drive, San Jose, California.
39. BASIC RENT: In accordance with Paragraph 4A herein, the total aggregate sum
------------
of ELEVEN MILLION FOUR HUNDRED SEVENTY THREE THOUSAND EIGHT HUNDRED FIFTY SIX
AND 04/100 DOLLARS ($11,473,856.04), shall be payable as follows:
On January 1, 2000, the sum of ONE HUNDRED EIGHTEEN THOUSAND NINE HUNDRED FIFTY
NINE AND 52/100 DOLLARS ($118,959.52) shall be due, and a like sum due on the
first day of each month thereafter, through and including December 1, 2000.
On January 1, 2001, the sum of ONE HUNDRED TWENTY FOUR THOUSAND EIGHT HUNDRED
THIRTY SEVEN AND 52/100 DOLLARS ($124,837.52) shall be due, and a like sum due
on the first day of each month thereafter, through and including December 1,
2001.
On January 1, 2002, the sum of ONE HUNDRED THIRTY THOUSAND SEVEN HUNDRED FIFTEEN
AND 52/100 DOLLARS ($130,715.52) shall be due, and a We sum due on the first
day of each month thereafter, through and including December 1, 2002.
On January 1, 2003, the sum of ONE HUNDRED THIRTY SIX THOUSAND FIVE HUNDRED
NINETY THREE AND 52/100 DOLLARS ($136,593.52) shall be due, and a like sum due
on the first day of each month thereafter, through and including December 1,
2003.
On January 1, 2004, the sum of ONE HUNDRED FORTY TWO THOUSAND FOUR HUNDRED
SEVENTY ONE AND 53/100 DOLLARS ($142,471.53) shall be due, and a like sum due on
the first day of each month thereafter, through and including December 1, 2004.
On January 1, 2005, the sum of ONE HUNDRED FORTY EIGHT THOUSAND THREE HUNDRED
FORTY NINE AND 53/100 DOLLARS ($148,349.53) shall be due, and a like sum due on
the first day of each month thereafter, through and including December 1, 20(75.
On January 1, 2006, the sum of ONE HUNDRED FIFTY FOUR THOUSAND TWO HUNDRED
TWENTY SEVEN AND 53/100 DOLLARS ($154,227.53.00) shall be due, and sum due on
the first day of each month thereafter, through and including December 1,, 2006;
or until the entire aggregate sum of ELEVEN MILLION FOUR HUNDRED SEVENTY THREE
THOUSAND EIGHT HUNDRED FIFTY SIX AND 04/100 DOLLARS ($11,473,856.(4) has been
paid.
40. "AS IS" BASIS: Subject only to Paragraph 41 and to Landlord making the
-------------
improvements shown on Exhibit B to be attached hereto, it is hereby agreed that
---------
the Premises lease hereunder is leased strictly on an "as-is" basis and in its
present condition, and in the configuration as shown on Exhibit B to be
attached hereto, and by reference made a part hereof Except as noted herein, it
is specifically agreed between the parties that after Landlord makes the
interior improvements as shown on Exhibit B, Landlord shall not be required to
----------
make, nor be
<PAGE>
responsible for any cost, in connection with any repair, restoration, and/or
improvement to the Premises in order for this Lease to commence, or thereafter,
throughout the Term of this Lease. Notwithstanding anything to the contrary
within this Lease, Landlord makes no warranty or representation of any kind or
nature whatsoever as to the condition or repair of the Premises, nor as to the
use or occupancy which may be made thereof.
41. TENANT INTERIOR IMPROVEMENTS: Landlord shall, at its sole cost and expense,
------------------------------
construct certain interior improvements (the "Tenant Improvements") in the
Premises, as shown on Exhibit B to be attached to the Lease and Landlord agrees
to deliver the Premises leased hereunder to Tenant, at Landlord's expense, in
the configuration shown in Red on Exhibit B to be attached hereto.
----------
Notwithstanding anything to the contrary above, it is specifically understood,
and agreed that Landlord shall be required to furnish only a standard air
conditioning/heating system, normal electrical outlets, standard fire sprinkler
systems, standard bathroom, standard lobby, 2" x 4' suspended acoustical tile
drop ceiling throughout the entire space leased, carpeting and/or vinylcoated
floor tile, and standard office partitions and doors, as shown on Exhibit B to
----------
b- attached hereto; provided however, that any special HVAC and/or plumbing
and/or electrical requirements over and above that normally supplied by Landlord
shall be 100 percent the responsibility of and be paid for 100 percent by
Tenant.
It is further agreed that Tenant shall famish Landlord with Tenant's required
specifications and a preliminary space plan showing the layout of the
improvements to be constructed in the Premises by November 11, 1999. At that
time, Landlord shall have the final interior plans drawn by Landlord's
architect. All of the plans and specifications shall be Exhibit B to this Lease.
--
If said preliminary plans and specifications for any items affecting the
interior improvements to be constructed in the building are not received by
Landlord for Landlord's approval (which approval shall not be unreasonably
withheld) by November 11, 1999, then it is agreed that, notwithstanding anything
to the contrary in this Lease, this Lease and Tenant's obligation to perform all
terms, covenants and conditions of this Lease shall commence January 1, 2000
regardless of whether or not the building and interior improvements are
completed on January 1, 2000, and Landlord shall complete construction of the
interior improvements as soon as reasonably possible thereafter.
Notwithstanding anything to the contrary, it is agreed that in the event Tenant
makes changes, additions, or modifications to the plans and specifications to be
constructed by Landlord as set forth herein, or improvements are installed for
Tenant in excess of those to be provided Tenant by Landlord as set forth on
Exhibit B. any increased cost(s) resulting from said changes, additions, and/or
modifications and/or improvements in excess of those to be provided Tenant shall
be contracted for with Landlord and paid for one hundred percent (100%) by
Tenant.
The interior shall be constructed in accordance with Exhibit B of the Lease, it
being agreed, however, that if the interior improvements constructed by Landlord
relating thereto, do not conform exactly to the plans and specifications as set
forth in the Lease, and the general appearance, structural integrity, and
Tenant's uses and occupancy of the Premises and interior improvements relating
thereto are not materially or unreasonably affected by such deviation, it is
agreed that the commencement date of the Lease, and Tenant's obligation to pay
rental, shall not be affected, and Tenant hereby agrees, in such event, to
accept the Premises and interior improvements as constructed by Landlord.
Tenant shall have thirty (30) days after the Commencement Date to provide
Landlord with a "punch list" pertaining to Landlord's work with respect to
Tenant's interior improvements. As soon as reasonably possible thereafter,
Landlord, or one of Landlord's representatives (if so approved by Landlord), and
Tenant shall conduct a joint walk-through of the Premises (if Landlord so
requires), and inspect such Tenant Improvements, using their best efforts to
agree on the incomplete or defective construction related to the Tenant
Improvements installed by Landlord. After such inspection has been completed,
Landlord shall prepare, and both parties shall sign, a list of all "punch list"
<PAGE>
items which the parties reasonably agree are to be corrected by Landlord (but
which shall exclude any damage or defects caused by Tenant, its employees,
agents or parties Tenant has contracted with to work on the Premises). Landlord
shall have thirty (30) days thereafter (or longer if necessary, provided
Landlord is diligently pursuing the completion of the same) to complete, at
Landlord's expense, the repairs on the "punch list" without the Commencement
Date of the Lease and Tenant's obligation to pay Rental thereunder being
affected. This Paragraph shall be of no force and effect if Tenant shall fail to
give any such notice to Landlord within thirty (30) days after the Commencement
Date of this Lease.
42. ASSESSMENT CREDITS: The demised property herein may be subject to a special
------------------
assessment levied by the City of San Jose as part of an Improvement District. As
a part of said special assessment proceedings (if any), additional bonds were
or may be sold and assessments were or may be levied to provide for
construction contingencies and reserve funds. Interest shall be earned on such
funds created for contingencies and on reserve funds which will be credited for
the benefit of said assessment district. To the extent surpluses are created in
said district through unused contingency funds, interest earnings or reserve
funds, such surpluses shall be deemed the property of Landlord. Notwithstanding
that such surpluses may be credited on assessments otherwise due against the
Leased Premises, Tenant shall pay to Landlord, as additional rent if, and at the
time of any such credit of surpluses, an amount equal to all such surpluses so
credited. For example: if (i) the property is subject to an annual assessment of
$ 1,000.00, and (ii) a surplus of $200.00 is credited towards the current year's
assessment which reduces the assessment amount shown on the property tax bill
from $1,000.00 to $800.00, Tenant shall, upon receipt of notice from Landlord,
pay to Landlord said $200.00 credit as Additional Rent.
43. ASSIGNMENT AND SUBLETTING (CONTINUED)
-------------------------------------
A. Notwithstanding anything to the contrary in Paragraph 16 of this Lease,
provided Tenant is not in default of any of the provisions of this Lease,
Landlord agrees not to exercise its right to terminate this Lease as a result of
a request by Tenant to sublease all or a portion of the Premises.
B. In addition to and notwithstanding anything to the contrary in Paragraph 16
of this Lease, Landlord hereby agrees to consent to Tenant's assigning or
subletting said Lease to: (i) any parent or subsidiary corporation, affiliate,
or corporation with which Tenant merges or consolidates, provided that the net
worth of said parent or subsidiary corporation, affiliate, or said corporation
has a net worth equal to or greater than the net worth of Tenant (a) at the time
of Lease execution or (b) at the time of such assignment, merger, or
consolidation (whichever is greater); or (ii) any third party or entity to whom
Tenant sells all or substantially all of its assets including a sale of Tenant's
stock through a private offering or an initial public offering; provided, that
the net worth of the resulting or acquiring corporation has a net worth after
the merger, consolidation or acquisition equal to or greater than the net worth
of Tenant (a) at the time of Lease execution or (b) at the time of such merger,
consolidation or acquisition (whichever is greater). No such assignment or
subletting will release the Tenant from its liability and responsibility under
this Lease to the extent Tenant continues in existence following such
transaction. Notwithstanding the above, Tenant shall be required to (a) give
Landlord written notice prior to such assignment or subletting to any party as
described in (i) and (ii) above, (b) execute Landlord's consent document
prepared by Landlord reflecting the assignment or subletting and (c) pay
Landlord's costs for processing said Consent prior to the effective date of said
assignment or sublease.
C. Notwithstanding the foregoing, Landlord and Tenant agree that it shall not
be unreasonable for Landlord to refuse to consent to a proposed assignment,
sublease or other transfer ("Proposed Transfer") if the Premises or another
portion of the Property would become subject to additional or different
Government Requirements as a direct or indirect consequence of the Proposed
Transfer and/or the Proposed Transferee's use and occupancy of the Premises and
the Property, unless Landlord is indemnified by Tenant and (i) Subtenant or (ii)
Assignee, in form and substance satisfactory to Landlord's counsel from and
against any and all costs, expenses, obligations and liability arising out of
the Proposed Transfer and/or the Proposed Transferee's use and occupancy of the
Premises and the Property.
D. Any and all sublease agreement(s) between Tenant and any and all
subtenant(s) (which agreements must be consented to by Landlord, pursuant to the
requirements of this Lease) shall contain the following language:
"If Landlord and Tenant jointly and voluntarily elect, for any reason
whatsoever, to terminate the Master Lease prior to the scheduled Master Lease
termination date, then this
<PAGE>
Sublease (if then still in effect) shall terminate concurrently with the
termination of the Master Lease. Subtenant expressly acknowledges and agrees
that (1) the voluntary termination of the Master Lease by Landlord and Tenant
and the resulting termination of this Sublease shall not give Subtenant any
right or power to make any legal or equitable claim against Landlord, including
without limitation any claim for interference with contract or interference with
prospective economic advantage, and (2) Subtenant hereby waives any and all
rights it may have under law or at equity against Landlord to challenge such an
early termination of the Sublease, and unconditionally releases and relieves
Landlord, and its officers, directors, employees and agents, from any and all
claims, demands, and/or causes of action whatsoever (collectively, 'Claims),
whether such matters are known or unknown, latent or apparent, suspected or
unsuspected, foreseeable or unforeseeable, which Subtenant may have arising out
of or in connection with any such early termination of this Sublease. Subtenant
knowingly and intentionally waives any and all protection which is or may be
given by Section 1542 of the California Civil Code which provides as follows: '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 debtor.
The term of this Sublease is therefore subject to early termination. Subtenants
initials here below evidence (a) Subtenant's on of and agreement to this early
termination provision, (b) Subtenant's acknowledgment that, in determining the
net benefits to be derived by Subtenant under the terms of this Sublease,
Subtenant has anticipated the potential for early termination, and (c)
Subtenant's agreement to the general waiver and release of Claims above.
Initials:
Subtenant __________
Tenant ____________
44. BANKRUPTCY AND DEFAULT: Paragraph 19 is modified to provide that with
------------------------
respect to non-monetary defaults not involving Tenant's failure to pay Basic
Rent or Additional Rent, Tenant shall not be in default of any non-monetary
obligation if (i) more than thirty (30) days is required to cure such non-
monetary default, and (ii) Tenant commences cure of such default as soon as
reasonably practicable after receiving written notice of such default from
Landlord and thereafter continuously and with due diligence prosecutes such cure
to completion.
45. ABANDONMENT: Paragraph 20 is modified to provide that Tenant shall not be
-------------
in default under the Lease if it leaves all or any part of Premises vacant so
long as (i) Tenant is performing all of its other obligations under the Lease
including the obligation to pay Basic Rent and Additional Rent (ii) Tenant
provides on-site security during normal business hours for those parts of the
Premises left vacant, (iii) such vacancy does not materially and adversely
affect the validity or coverage of any policy of insurance carried by Landlord
with respect to the Premises, and (iv) the utilities and heating and ventilation
system are operated and maintained to the extent necessary to prevent damage to
the Premises or its systems.
46. HAZARDOUS MATERIALS: Landlord and Tenant agree as follows with respect to
-------------------
the existence or use of "Hazardous Materials" (as defined herein) on, in, under
or about the Premises and real property located beneath said Premises, which
includes the entire parcel of land on which the Premises are located as shown in
Green on Exhibit A attached hereto (hereinafter collectively referred to as the
"Property"):
A. As used herein, the term "Hazardous Materials" shall mean any material,
waste, chemical, mixture or byproduct which is or hereafter is defined, listed
or designated under Environmental Laws (defined below) as a pollutant, or as a
contaminant, or as a toxic or hazardous substance, waste or material, or any
other unwholesome, hazardous, toxic, biohazardous, or radioactive material,
waste, chemical, mixture or byproduct, or which is listed, regulated or
restricted by any Environmental Law (including, without limitation, petroleum
hydrocarbons or any distillates or derivatives or fractions thereof,
polychlorinated, biphenyls, or asbestos). As used herein, the term
"Environmental Laws" shall mean any applicable Federal, State of California or
local government law (including common law), statute, regulation, rule,
ordinance, permit, license,
<PAGE>
order, requirement, agreement, or approval, or any determination, judgment,
directive, or order of any executive or judicial authority at any level of
Federal, State of California or local government (whether now existing or
subsequently adopted or promulgated) relating to pollution or the protection of
-----------
the environment, ecology, natural resources, or public health and safety.
B. Tenant shall obtain Landlord's written consent, which may be withheld in
Landlord's discretion, prior to the occurrence of any Tenant's Hazardous
Materials Activities (defined below); provided, however, that Landlord's consent
shall not be required for normal use in compliance with applicable Environmental
Laws of customary household and office supplies (Tenant shall first provide
Landlord with a list of said materials use), such as mild cleaners, lubricants
and copier toner. As used herein, the term "Tenant's Hazardous Materials
Activities" shall mean any and all use, handling, generation, storage, disposal,
treatment, transportation, release, discharge, or emission of any Hazardous
Materials on, in, beneath, to, from, at or about the Property, in connection
with Tenant's use of the Property, or by Tenant or by any of Tenant's agents,
employees, contractors, vendors, invitees, visitors or its future subtenants or
assignees. Tenant agrees that any and all Tenant's Hazardous Materials
Activities shall be conducted in strict, full compliance with applicable
Environmental Laws at Tenant's expense, and shall not result in any
contamination of the Property or the environment. Tenant agrees to provide
Landlord with prompt written notice of any spill or release of Hazardous
Materials at the Property during the term of the Lease of which Tenant becomes
aware, and further agrees to provide Landlord with prompt written notice of any
violation of Environmental Laws in connection with Tenant's Hazardous Materials
Activities of which Tenant becomes aware. If Tenant's Hazardous Materials
Activities involve Hazardous Materials other than normal use of customary
household and office supplies, Tenant also agrees at Tenant's expense: (i) to
install such Hazardous Materials monitoring, storage and containment devices as
Landlord reasonably deems necessary (Landlord shall have no obligation to
evaluate the need for any such installation or to require any such
installation); (ii) provide Landlord with a written inventory of such Hazardous
Materials, including an update of same each year upon the anniversary date of
the Commencement Date of the Lease ("Anniversary Date"); and (iii) on each
Anniversary Date, to retain a qualified environmental consultant, acceptable to
Landlord, to evaluate whether Tenant is in compliance with all applicable
Environmental Laws with respect to Tenant's Hazardous Materials Activities.
Tenant, at its expense, shall submit to Landlord a report from such
environmental consultant which discusses the environmental consultant's findings
within two (2) months of each Anniversary Date. Tenant, at its expense, shall
promptly undertake and complete any and all steps necessary, and in full
compliance with applicable Environmental Laws, to fully correct any and all
problems or deficiencies identified by the environmental promptly provide
Landlord with documentation of all such corrections.
C. Prior to termination or expiration of the Lease, Tenant, at its expense,
shall (i) properly remove from the Property all Hazardous Materials which come
to be located at the Property in connection with Tenant's Hazardous Materials
Activities, and (ii) fully comply with and complete all facility closure
requirements of applicable Environmental Laws regarding Tenant's Hazardous
Materials Activities, including but not limited to (x) properly restoring and
repairing the Property to the extent damaged by such closure activities, and (y)
obtaining from the local Fire Department or other appropriate governmental
authority with jurisdiction a written concurrence that closure has been
completed in compliance with applicable Environmental Laws. Tenant shall
promptly provide Landlord with copies of any claims, notices, work plans, data
and reports prepared, received or submitted in connection with any such closure
activities.
D. If Landlord, in its sole discretion, believes that the Property has become
contaminated as a result of Tenant's Hazardous Materials Activities, Landlord in
addition to any other rights it may have under this Lease or under Environmental
Laws or other laws, may enter upon the Property and conduct inspection, sampling
and analysis, including but not limited to obtaining and analyzing samples of
soil and groundwater, for the purpose of determining the nature and extent of
such contamination. Tenant shall promptly reimburse Landlord for the costs of
such an investigation, including but not limited to reasonable attorneys' fees
Landlord incurs with respect to such investigation, that discloses Hazardous
Materials contamination for which Tenant is liable under this Lease.
Notwithstanding the above, Landlord may, at its option and in its sole and
absolute discretion, choose to perform remediation and obtain reimbursement for
cleanup costs as set forth herein from Tenant. Any cleanup costs incurred by
Landlord as the result of
<PAGE>
Tenant's Hazardous Materials Activities shall be reimbursed by Tenant within
thirty (30) days of presentation of written documentation of the expense to
Tenant by Landlord. Such reimbursable costs shall include, but not be limited
to, any reasonable consultant and attorney fees incurred by Landlord. Tenant
shall take all actions necessary to preserve any claims, it has against third
parties, including, but not limited to, its insurers, for claims related to its
operation, management of Hazardous Materials or contamination of the Property.
Except as may be required of Tenant by applicable Environmental Laws, Tenant
shall not perform any sampling, testing, or drilling to identify the presence of
any Hazardous Materials at the Property, without Landlord's prior written
consent which may be withheld in Landlord's discretion. Tenant shall promptly
provide Landlord with copies of any claims, notices, work plans, data and
reports prepared, received or submitted in connection with any sampling, testing
or drilling performed pursuant to the preceding sentence.
E. Tenant shall indemnify, defend (with legal counsel acceptable to Landlord,
whose consent shall not unreasonably be withheld) and hold harmless Landlord,
its employees, assigns, successors, successors-in-interest, agents and
representatives from and against any and all claims (including but not limited
to third party claims from a private party or a government authority),
liabilities, obligations, losses, causes of action, demands, governmental
proceedings or directives, fines, penalties, expenses, costs (including but not
limited to reasonable attorneys', consultants' and other experts' fees and
costs), and damages, which arise from or relate to: (i) Tenant's Hazardous
Materials Activities; (ii) any Hazardous Materials contamination caused by
Tenant prior to the Commencement Date of the Lease; or (iii) the breach of any
obligation of Tenant under this Paragraph 46 (collectively, "Tenant's
Environmental Indemnification"). Tenant's Environmental Indemnification shall
include but is not limited to the obligation to promptly and fully reimburse
Landlord for losses in or reductions to rental income, and diminution in fair
market value of the Property. Tenant's Environmental Indemnification shall
further include but is not limited to the obligation to diligently and properly
implement to completion, at Tenant's expense, any and all environmental
investigation, removal, remediation, monitoring, reporting, closure activities,
or other environmental response action (collectively, "Response Actions").
Tenant shall promptly provide Landlord with copies of any claims, notices, work
plans, data and reports prepared, received or submitted in connection with any
Response Actions.
It is agreed that the Tenant's responsibilities related to Hazardous Materials
will survive the expiration or termination of this Lease and that Landlord may
obtain specific performance of Tenant's responsibilities under this Paragraph
46.
47. CONSENT: Whenever the consent of one party to the other is required
hereunder, such consent shall not be unreasonably withheld.
48. AUTHORITY TO EXECUTE. The parties executing this Lease Agreement hereby
----------------------
warrant and represent that they are properly authorized to execute this Lease
Agreement and bind the parties on behalf of whom they execute this Lease
Agreement and to all of the terms, covenants and conditions of this Lease
Agreement as they relate to the respective parties hereto.
Page 13 Initial:
/s/ TJS/JA
- --------------
49. ADDRESS FOR LEASED PREMISES: It is understood that (i) the current address
-------------------
for the building in which the Premises are located is 105 E. Tasman Drive, San
Jose, California, and that (ii) the address for the Premises may be changed by
the City of San Jose (the "City") upon issuance of a building permit for the
Interior Improvements as defined herein. In the event the address assigned to
the Premises is changed by the City, said Lease shall thereafter be amended to
reflect the assigned address for the Premises leased hereunder.
<PAGE>
50. SUBORDINATION AND MORTGAGES: Paragraph 17 is modified to provide that
-----------------------------
provided Tenant is not in default in the terms of this Lease, this Lease shall
not be subordinate to a mortgage or deed of trust unless the Lender holding such
mortgage or deed of trust enters into a written subordination, non-disturbance
and attornment agreement in which the Lender agrees that notwithstanding any
subordination of this Lease to such Lender's mortgage or deed of trust, (i) such
Lender shall recognize all of Tenant's rights under this Lease, and (ii) in the
event of a foreclosure, this Lease shall not be terminated so long as Tenant is
not in default of its obligations under this Lease, but shall continue in effect
and Tenant and such Lender (or any party acquiring the Premises through such
foreclosure) shall each be bound to perform the respective obligations of Tenant
and Landlord with respect to the Premises arising after such foreclosure.
51. ASSIGNMENT OF WARRANTIES: During the Term of the Lease, Landlord hereby
--------------------------
assigns to Tenant all of Landlord's Contractor's warranties and shall cooperate
with Tenant in enforcing any of such warranties except that Landlord shall not
be required to pay any legal fees or incur any expenses in this regard.
<PAGE>
EXHIBIT 10.12
December 12, 1997
Mr. Hugh C. Martin
660 Milverton Road
Los Altos, CA 94022
Dear Hugh:
On behalf of Optical Networks, Inc., I am pleased to offer you the position of
President and Chief Executive Officer of the Company. In this position, you
will report to, as well as be a member of, the Board of Directors.
You will receive a starting base salary of $16,667 per month, which is
equivalent to $200,000 per year, subject to federal, state and other applicable
taxes and payable monthly. Your base salary will be reviewed on an annual basis
by the Board of Directors or its Compensation Committee.
You will be eligible to earn an annual performance bonus of up to 25% of your
base salary. For 1998, your bonus will be guaranteed at $50,000 and paid
monthly. The details of this bonus for future years, as well as additional
incentives for 1998 will be jointly worked out between you and the Board and
agreed to within 60 days of your joining the Company.
At the Company's Board of Directors meeting following the start of your
employment, the Board will grant you a stock award to purchase an amount of
common stock equal to 8 1/2% of the Company's total capital stock, post
financing, calculated on a fully diluted basis (the "Standard Shares"). The
purchase price for the Standard Shares will be the then-current fair market
value of the Company Common Stock, which is anticipated to be $.04. This stock
award will be evidenced by a Restricted Stock Purchase Agreement, the form of
which shall be provided to you prior to your employment. The Standard Shares
shall be subject to the right of repurchase, at the original purchase price,
which shall lapse as follows: the Company's repurchase right will lapse with
respect to twenty-five percent (25%) of the Standard Shares twelve (12) months
from the commencement date of your employment with the Company and will lapse at
a rate of 1/48th of the Standard Shares each month thereafter. You will have
the right to make an election under Section 83(b) of the Internal Revenue Code
in conjunction with the purchase of the Standard Shares.
<PAGE>
Offer letter
Hugh C. Martin
Page 2
Also at the Company's Board of Directors meeting following the start of your
employment, the Board will grant you a stock award to purchase an amount of
common stock equal to 1 1/2% of the Company's total capital stock, post
financing, calculated on a fully diluted basis (the "Incentive Bonus Shares").
The purchase price for the Incentive Bonus Shares will be the then-current fair
market value of the Company Common Stock, which is anticipated to be $.04. This
stock award will also be evidenced by a Restricted Stock Purchase Agreement, the
form of which shall be provided to you prior to your employment. The Incentive
Bonus Shares shall be subject to the right of repurchase, at the original
purchase price, which shall lapse as follows: the Company's repurchase right
will lapse with respect to fifty percent (50%) of the Incentive Bonus Shares
upon the attainment of 1998 milestones and will lapse with respect to the
remaining fifty percent (50%) upon the attainment of 1999 milestones, provided
that you remain employed by the company at the time such milestones are
achieved.. The applicable milestones will be agreed to between you and the Board
of Directors as part of your planning cycle. You will have the right to make an
election under Section 83(b) of the Internal Revenue Code in conjunction with
the purchase of the Incentive Bonus Shares.
In the event that the Company is acquired by, or merged into another company (a
"Transaction"), the Company will waive the Company's right of repurchase with
respect to fifty percent (50%) of the Standard Shares and Incentive Bonus Shares
which were subject to the Company's repurchase right as of the effective date of
the Transaction.
You shall have the right to purchase the Standard Shares and Incentive Bonus
Shares either by cash payment or with a promissory note, which shall bear
interest at the lowest legal rate (the "Note"). The Note shall be in a form and
on terms, which are acceptable to the Company and to you. The Note will be that
which is attached to this letter. At your option, subject to California
Corporation Code, section 500, the Note may be repaid with shares of the
Company's common stock, which have a fair market value equal to the outstanding
payments which are due at the time of payment.
As a condition of your employment, you will be required to sign Optical
Network's Proprietary Information Agreement.
The benefits package offered to you by the Company, which may be change from
time to time as changed with respect to other employees, is summarized below.
Medical Insurance: The Company will pay the full cost of enrolling you and your
dependents in the group medical plan which is currently with the Aetna Life
Insurance Company.
<PAGE>
Offer letter
Hugh C. Martin
Page 3
Dental Insurance: The Company will pay the full cost of dental coverage for you
and your dependents.
Term Life Insurance: Term life insurance is offered to each employee in the
amount of one year's salary.
Vacation: You will be entitled to 15 days of paid vacation per year. This will
accrue from the start of your employment and you will be eligible to take
vacation after six months of employment.
Workman's Compensation, Disability Insurance, and Social Security Payments:
State and Federally mandated insurance premiums are paid by the Company with
customary withholding from the employee's gross salary.
Sick Leave: Sick leave is paid for days actual sick, up to a maximum of 10 days
per year.
Optical Networks Profit Sharing and 401k Savings Plan: The profit sharing is an
arbitrary year-end tax deferred bonus (subject to Optical Networks profits). The
401k plan enables you to defer paying tax on contributions to the 401k up to the
prescribed limit (currently $8,996) and an Optical Networks matching
contribution of up to 2% of your salary. Should you elect to participate in
these plans the amount of tax deferred income would be counted as part of your
total compensation.
This is an offer for "at will" employment, and does not constitute an offer or
guarantee of employment for any period of time: Your employment and compensation
can be terminated at any time (either by you unilaterally, or by the Company
unilaterally, in each case without notice) for any or no reason, subject to the
terms hereof, and your rights to compensation and benefits thereunder would
terminate as well. This letter constitutes the full and entire understanding
and agreement between the parties with respect to the subject matter hereof, and
supersedes any prior discussions and letters, with the exceptions of (I) your
restricted stock purchase agreement which will define the terms of your stock
purchase, (II) the employee Proprietary Information Agreement, and (III) the
provisions of the benefits plans, which govern the benefit described above.
This offer is contingent on satisfactory reference checks and obtaining venture
capital funding, and is effective through December, 17, 1997. It will expire if
not accepted in writing by that date.
<PAGE>
I would like to add, Hugh, that the Board of Optical Networks considers that you
would be a most valuable addition to our staff. Your proven management ability
and track record in assessing markets I believe can make a significant impact at
this time on the growth and success of Optical Networks. We look forward to you
becoming CEO of Optical Networks, and believe that this position will offer you
both a demanding set of responsibilities and an outstanding opportunity for
substantial personal rewards.
Sincerely,
/s/ Joseph Goodman
Joseph Goodman
Chairman of the Board
/s/ James S. Tyler
James S. Tyler
President & CEO
Agreed to and Accepted by: : /s/ Hugh C. Martin Date: 12/16/97
------------------------------- -----------
Start Date: 1/5/98
--------
<PAGE>
EXHIBIT 10.13
February 4, 1998
Terrence J. Schmid
10 Avocet Drive, #206
Redwood Shores, CA 94065
Dear Terry:
On behalf of Optical Networks, Inc., I am pleased to offer you the position of
Vice President of Finance and Administration and Chief Financial Officer of the
Company. In this position, you will report to the President and CEO, Hugh
Martin.
You will receive a starting base salary of $11,667 per month, which is
equivalent to $140,000 per year, subject to federal, state and other applicable
taxes and payable monthly.
You will be eligible to earn an annual performance bonus of up to 15% of your
base salary. For 1998, your bonus will be guaranteed at $20,000 and paid
monthly.
At the Company's Board of Directors meeting following the start of your
employment, the Board will grant you a stock award to purchase 400,000 shares of
the Company's capital stock (the "Shares"). The purchase price for the Shares
will be the then-current fair market value of the Company Common Stock, which is
anticipated to be $0.10. This stock award will be evidenced by a Restricted
Stock Purchase Agreement, the form of which shall be provided to you prior to
your employment. The Shares shall be subject to the right of repurchase, at the
original purchase price, which shall lapse as follows: the Company'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 with the Company and
will lapse at a rate of 1/48th of the Shares each month thereafter. You will
have the right to make an election under Section 83(b) of the Internal Revenue
Code in conjunction with the purchase of the Shares.
In the event that the Company is acquired by or merged into another company (a
"Transaction"), the Company will waive the Company's right of repurchase with
respect to fifty percent (50%) of the Shares which were subject to the Company's
repurchase right as of the effective date of the Transaction.
<PAGE>
February 4, 1998
Terrence J. Schmid
Page 2
You shall have the right to purchase the Shares either by cash payment or with a
promissory note, which shall bear interest at the lowest legal rate (the
"Note"). The Note shall be in a form and on terms, which are acceptable to the
Company and to you. The Note will be that which is attached to this letter. At
your option, subject to California Corporation Code, section 500, the Note may
be repaid with shares of the Company's common stock, which have a fair market
value equal to the outstanding payments which are due at the time of payment.
As a condition of your employment, you will be required to sign Optical
Networks' Proprietary Information Agreement.
The benefits package offered to you by the Company is summarized below:
Medical Insurance: The Company will pay the full cost of enrolling you in the
group medical plan which is currently with the Aetna Life Insurance Company.
Dental Insurance: The Company will pay the full cost of dental coverage for you.
Term Life Insurance: Term life insurance is offered to each employee in the
amount on one year's salary.
Vacation: You will be entitled to 15 days of paid vacation per year. This will
accrue from the start of your employment and you will be eligible to take
vacation after six months of employment.
Workman's Compensation, Disability Insurance, and Social Security Payments:
State and Federally mandated insurance premiums are paid by the Company with
customary withholding from the employee's gross salary.
Sick Leave: Sick leave is paid for days actual sick, up to a maximum of 10 days
per year.
This is an offer for "at will" employment, and does not constitute an offer or
guarantee of employment for any period of time. Your employment and
compensation can be terminated at any time (either by you unilaterally, or by
the Company unilaterally, in each case without notice) for any or no reason,
subject to the terms hereof, and your rights to compensation and benefits
thereunder would terminate as well. This letter constitutes the full and entire
understanding and agreement between the parties with respect to the subject
matter hereof, and supersedes any prior discussions and letters, with the
exceptions of (I) your restricted stock purchase agreement which will define the
terms of your stock purchase, (II) the employee Proprietary Information
Agreement, and (III) the provisions of the benefits plans, which govern the
benefits described above.
This offer is contingent on satisfactory reference checks and is effective
through February 6, 1998. It will expire if not accepted in writing by that
date.
<PAGE>
February 4, 1998
Terrence J. Schmid
Page 3
I would like to add, Terry, that both the Board of Optical Networks and I
consider that you would be a most valuable addition to our staff. We look
forward to you becoming CFO of Optical Networks, and believe that this position
will offer you both a demanding set of responsibilities and an outstanding
opportunity for substantial personal rewards.
Sincerely,
/s/ Hugh C. Martin
Hugh C. Martin
President and CEO
Agreed to and Accepted by: /s/ Terrence J. Schmid Date: 2/4/98
---------------------------- --------------
Start Date: 2/16/98
--------------------
<PAGE>
EXHIBIT 10.14
June 1, 1998
Hon Wah Chin
3281 Greer Rd.
Palo Alto, CA 94303
Dear Hon,
On behalf of Optical Networks, Incorporated, I am pleased to offer you the
position of Vice President and Chief Technology Officer of ONI. In this
position, you will report to the President and CEO, Hugh Martin.
You will receive a starting base salary of $13,333 per month, which is
equivalent to $160,000 per year, subject to federal, state and other applicable
taxes and payable monthly.
You will be eligible to earn an annual performance bonus. For 1998, this bonus
will be $40,000, paid on two installments, $20,000 upon starting, and $20,000
after 6 months of employment. In addition, the company will provide you with a
$5,000 credit to purchase any personal computer for your home through ONI from
Dell Computer. Any tax implications of this purchase will be covered by the
company.
At the Company's Board of Directors meeting following the start of your
employment, the Board will grant you a stock award to purchase 168,500 shares of
the Company's capital stock (the "Shares"). The purchase price for the Shares
will be the then current fair market value of the Company Common Stock, which is
anticipated to be $0.36. This stock award will be evidenced by a Restricted
Stock Purchase Agreement, the form of which shall be provided to you prior to
your employment.
You shall have the right to purchase the Shares either by cash payment or with a
promissory note, which shall bear interest at the lowest legal rate (the
"Note"). The Note shall be in a form and on terms, which are acceptable to the
Company and to you. At your option, subject to California Corporation Code,
section 500, the Note may be repaid with shares of the Company's common stock,
which have a fair market value equal to the outstanding payments which are due
at the time of payment.
<PAGE>
The Shares shall be subject to a right of repurchase in favor of the Company, at
the original purchase price, which shall lapse as follows: the Company'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 with the
Company and will lapse at a rate of 1/48th of the Shares each month thereafter.
You will have the right to make an election under Section 83(b) of the Internal
Revenue Code in conjunction with the purchase of the Shares.
In the event of (a) 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 shareholders of
the Company or their relative stock holdings), (b) a merger in which the Company
is the surviving corporation but after which the shareholders of the Company
immediately prior to such merger cease to own shares or other equity interests
in the Company representing at least fifty percent (50%) of the voting power of
all securities of the Company, or (c) the sale of all or substantially all of
the assets of the Company (any and all of which are referred to as a
"Transaction"), the Company will (i) waive the Company's right of repurchase
with respect to fifty percent (50%) of the Shares which were subject to the
Company's repurchase right as of the effective date of the Transaction, and (ii)
waive similar rights of repurchase or other vesting requirements with respect to
fifty percent (50%) of any other securities of the Company that may, in the
future, be granted or sold to you by the Company and that remain subject to such
similar rights of repurchase or vesting requirements as of the effective date of
the Transaction.
In the event of any actual or "involuntary" termination of your employment by
the Company without cause, (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 without cause, and (B) with respect to a given equity grant,
provided that there has not been, and will not be, any waiver of repurchase
rights or other vesting requirements pursuant to the preceding paragraph, the
Company 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 the Company for six months following the date of such termination
without cause. 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 the Company and such action is not reversed in
full by the
<PAGE>
Company 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 the Company's current offices, and/or (iv) the
terms of this offer letter are not assumed in full by any acquiror or other
successor to the Company, 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.
Other changes in the Company's management or reporting structure, or changes in
your position's title, shall not constitute an "involuntary" termination.
As a condition of your employment, you will be required to sign Optical
Networks' Proprietary Information Agreement. You must also provide on your
first day of employment your proof of right to work in the United States. If
you have any questions on either of these two areas, please contact Lisa Blos-
Johnson, VP of Human Resources, at (650) 845-5319.
You will also receive the benefits that the company offers to its employees.
The company currently provides health insurance, dental insurance, life
insurance, disability insurance, a vision plan, a Section 125 program and a 401K
plan. Included in our benefits program is our vacation and holiday policy. We
will be offering you 15 days of vacation per year, 10 company holidays and up to
a maximum of 10 sick days per year.
Due to your individual circumstances we are comfortable with dual employment for
a period of time to help bridge your upcoming stock option vesting date. This
accommodation is made with the explicit understanding that there will be a
waiver signed by you in regards to intellectual property that protects ONI.
This is an offer for "at will" employment, and does not constitute an offer or
guarantee of employment for any period of time. Your employment and
compensation can be terminated at any time (either by you unilaterally, or by
the Company unilaterally, in each case without notice) for any or no reason,
subject to the terms hereof, and your rights to compensation and benefits
thereunder would terminate as well. This letter constitutes the full and entire
understanding and agreement between the parties with respect to the subject
matter hereof, and supersedes any prior discussions and letters, with the
exceptions of (I) your restricted stock purchase agreement which will define the
terms of your stock purchase, (II) the employee Proprietary Information
Agreement, and (III) the provisions of the benefits plans, which govern the
benefits described above.
This offer is contingent on satisfactory reference checks and is effective
through June 1, 1998. It will expire if not accepted in writing by that date.
<PAGE>
I would like to add, Hon, that both the Board of Optical Networks and I consider
that you would be a most valuable addition to our staff. We look forward to you
becoming CTO of Optical Networks, and believe that this position will offer you
both a demanding set of responsibilities and an outstanding opportunity for
substantial personal rewards.
Sincerely,
/s/ Hugh C. Martin
Hugh C. Martin
President and CEO
Agreed and Accepted by: /s/ Hon Wah Chin Date: 6/2/98
-------------------------------- ---------------
Start Date: 6/23/98
-----------------------
<PAGE>
EXHIBIT 10.15
August 17, 1998
Rusty Cumpston
3732 Woodshadow Lane
Addison, TX 75244
Dear Rusty:
On behalf of Optical Networks Incorporated, I am pleased to offer you a position
of Vice President of Engineering. You will be reporting directly to Hugh
Martin.
You will receive a salary of $175,000 annually, paid in equal increments on a
bi-weekly basis. This offer includes a one-time hire on bonus of $45,000 which
will be paid to you within your first 30 days of employment with ONI. We will
also be offering you an annual bonus of $40,000 (guaranteed for the first year
only) which will be scheduled for payment on your first anniversary with ONI.
We are willing to let you take a loan against this bonus if you purchase a home
in the area and need to use this bonus for part of the down payment. Please
note, however, that this loan will be fully recoverable by ONI if you are to
leave our employment for any reason within the first 12 months.
We will also be granting you a stock option of 125,000 shares of common stock
with an option price of $0.36 per share. This stock option must be approved by
our Board of Directors, which will vote on this in the next board meeting after
your start date. The option will vest over a four-year period with the first
25% vesting upon the first anniversary of your start date and the remainder
vesting at 1/48th of the shares for each month thereafter.
We will be offering you our standard relocation package and temporary housing
for the first 60 days of employment at Oakwood Corporate Housing. Please
contact me for further explanation of these two benefits.
We have also agreed to 2 round trip tickets between San Jose, CA and Addison, TX
to help in aiding the sale of your home there.
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. Please read through your employee
handbook closely for clarification on each of these important policies.
<PAGE>
Rusty Cumpston
August 17, 1998
Page 2
Your employment with ONI is for an indefinite term. In other words, the
employment relationship is "at will," and you have the right to terminate that
employment relationship at any time for any reason. Also, although I hope that
you will remain with us and be successful here, ONI 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 ONI. This paragraph contains the entire agreement between
you and ONI regarding the right and ability of either you or ONI to terminate
your employment with ONI.
Your employment is also conditioned upon your agreement and execution of ONI's
attached Invention, Assignment and Confidentiality Agreement. You must also
provide proof of your ability to legally work within the United States on your
first day of employment with ONI.
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
August 27, 1998 this offer will terminate.
ONI 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,
/s/ Lisa Blos-Johnson
Lisa Blos-Johnson
Vice President of Human Resources
Optical Networks Incorporated
/s/ Rusty Cumpston 9/28/98
- ----------------------------
Employee Acceptance/Start Date
<PAGE>
EXHIBIT 10.16
September 10, 1999
Michael Dillon
12261 Country Squire Lane
Saratoga, CA 95070
Dear Mike,
On behalf of Optical Networks Incorporated, I am pleased to offer you a position
as our Vice President, General Counsel. You will be reporting directly to Hugh
Martin, CEO.
You will receive a salary of $200,000 annually, paid in equal increments on a
twice monthly basis. Additionally, we have agreed to provide to you during your
first 12 months of employment with us a severance package in the event your
employment is terminated by us for reasons other than gross negligence or
criminal misconduct or if you are subject to a significant reduction in your
responsibilities with the Company or compensation provided hereunder. This
package will include 6 months of then current salary, benefits and vesting of
options and will be payable upon termination.
This offer also includes a one-time hire-on bonus of $50,000. Payment of this
bonus will be within the first 30 days of your employment here at Optical
Networks. This hiring bonus will considered [SIC] income and will be subject to
normal withholding tax. Please note that should you voluntarily terminate your
employment with Optical Networks within twelve months of your date of hire, you
agree by signing this employment offer to repay Optical Network all hire on
bonus dollars on a pro-rated basis. Furthermore, by signing this employment
offer you authorize Optical Networks to deduct the amount of this bonus from
your final paycheck and agree to repay Optical Networks any amount not covered
by the final paycheck within 15 days of your termination date.
We will also be granting you a stock option of 150,000 shares of common stock.
This stock option must be approved by our Board of Directors, which will vote on
this in the next board-meeting after your start date.
<PAGE>
We have also agreed to issue you an option for an additional 10,000 shares which
will be fully vested upon your start date and are not subject to a right of
repurchase by the Company.
The shares will be immediately exercisable either by cash payment or with a
promissory note, which shall bear interest at the lowest legal rate (the
"Note"). The Note shall be in a form and on terms, which are acceptable to the
Company and to you. At your option, subject to California Corporation Code;
section 500, the Note may be repaid with shares of the Company's common stock,
which have a fair market value equal to the outstanding payments which are due
at the time of payment.
The grant of 150,000 shares shall be subject to aright of repurchase in favor of
the Company, at the original purchase price, which shall lapse as follows: the
Company'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
with the Company and will lapse at a rate of 1/48/th/ of the shares each month
thereafter. You will have the right to make an election under Section 83(b) of
the Internal Revenue Code in conjunction with the purchase of the shares.
In the event of (a) 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 re-incorporation of the Company in a different jurisdiction, or
other transaction in which there is no substantial change in the shareholders of
the Company or their relative stock holdings), (b) a merger in which the Company
is the surviving corporation but after which the shareholders of the Company
immediately prior to such merger cease to own shares or other equity interests
in the Company representing at least twenty five percent (25%) of the voting
power of all securities of the Company, or (c) the sale of all or substantially
all of the assets of the Company (any and all of which are referred to as a
"Transaction"), the Company will (i) waive the Company's right of repurchase
with respect to twenty five percent (25%) of the shares which were subject to
the Company's repurchase right as of the effective date of the Transaction, and
(ii) waive similar rights of repurchase or other vesting requirements with
respect to twenty five (25%) of any other securities of the Company that may, in
the future, be granted or sold to you by the Company and that remain subject to
such similar rights of repurchase or vesting requirements as of the effective
date of the Transaction.
<PAGE>
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 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. The only accommodation we are willing to
make to the above paragraph is discussed in the second paragraph regarding the
severance agreement during your first 12 months of employment with us.
Your employment is also conditioned upon your agreement and execution of Optical
Networks' attached Invention, Assignment and Confidentiality Agreement. You
must also provide proof of your ability to legally work within the United States
on your first day of employment with Optical Networks.
This offer is also contingent upon your ability to pass our security background
check.
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
September 17, 1999 this offer will terminate.
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,
/s/ Lisa Blos-Johnson
Lisa Blos-Johnson
Vice President of Human Resources
Optical Networks Incorporated
/s/ Michael Dillon (week of 10/4/99)
- -----------------------------------
Employee Acceptance/Start Date
<PAGE>
EXHIBIT 10.17
[LOGO OF OPTICAL NETWORKS]
February 29, 2000
Robert Jandro
20365 N. Dover Ct.
Barrington, IL 60010
Dear Robert:
On behalf of Optical Networks Incorporated, I am pleased to offer you a position
as our Executive Vice President Worldwide Sales and Marketing. You will be
reporting directly to Hugh Martin, President and CEO.
You will receive a base salary of $295,000 annually, paid in equal increments on
a twice monthly basis. As part of the sales organization you qualify for a
sales incentive bonus of $200,000 as part of Optical Networks Sales Incentive
Plan which is attached. The first six months of this bonus program will be
considered non-recoverable. We also agree to put in place a severance clause of
six months of your base salary ($295,000) only with no stock vesting to be only
valid for the first twelve months of your employment with us.
Your relocation package that will cover the following expenses:
- Reasonable moving costs
- Two house hunting trips for your entire family
- Three months of temporary living housing and rental car
- Loan origination fees on the purchase of your California home of no
more than 2 points
- Moving allowance of 1% of California home value.
Please note that should you voluntarily terminate your employment with Optical
Networks within twelve months of your date of hire, you agree by signing this
employment offer to repay Optical Network all hire on and relocation dollars on
a pro-rated basis. Furthermore, by signing this employment offer you authorize
Optical Networks to deduct the amount of this bonus from your final paycheck and
agree to repay Optical Networks any amount not covered by the final paycheck
within 15 days of your termination date.
We will also be granting you a stock option of 900,000 shares of common stock.
The price on this option will be $3.20 per share. This stock option must be
approved by our Board of Directors, which will vote on this
<PAGE>
in the next board meeting after your start date. The option Will vest over a
four-year period with the first 12.5% vesting upon the six-month anniversary of
your start date and the remainder vesting at 1/48/th/ of the shares for each
month thereafter.
The shares will be immediately exercisable either by cash payment or with a
promissory note, which shall bear interest at the lowest legal rate (the
"Note"). The Note shall be in a form and on terms, which are acceptable to the
Company and to you. At your option, subject to California Corporation Code,
section 500, the Note may be repaid with shares of the Company's common stock,
which have a fair market value equal to the outstanding payments which are due
at the time of payment;
The grant of 900,000 shares shall be subject to a right of repurchase in favor
of the Company, at the original purchase price, which shall lapse as follows:
the Company's repurchase right will lapse with respect to twelve and a half
(12.5%) of the shares six (6) months from the commencement date of your
employment with the Company and will lapse at a rate of 1/48/th/ of the shares
each month thereafter. You will have the right to make an election under Section
83(b) of the Internal Revenue Code in conjunction with the purchase of the
shares.
In the event of (a) 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 re-incorporation of the Company in a different jurisdiction, or
other transaction in which there is no substantial change in the shareholders of
the Company or their relative stock holdings), (b) a merger in which the Company
is the surviving corporation but after which the shareholders of the Company
immediately prior to such merger cease to own shares or other equity interests
in the Company representing at least fifty percent (50%) of the voting power of
all securities of the Company, or (C) the sale of all or substantially all of
the assets of the Company (any and all of which are referred to as a
"Transaction"), the Company will (i) waive the Company's right of repurchase
with respect to twenty-five percent (25%) of the shares which were subject to
the Company's repurchase right as of the effective date of the Transaction, and
(ii) waive similar rights of repurchase or other vesting requirements with
respect to twenty-five percent (25%) of any other securities of the Company that
may, in the future, be granted or sold to you by the Company and that remain
subject to such similar rights of repurchase or vesting requirements as of the
effective date of the Transaction.
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.
<PAGE>
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 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. You
must also provide proof of our ability to legally work within the United States
on your first day of employment with Optical Networks.
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
March 1, 2000 this offer will terminate. This offer is also conditional upon
your ability to terminate your employment from Oracle and start your employment
with us on March 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,
/s/ Lisa Bios-Johnson
Lisa Bios-Johnson ______________________________
Vice President of Human Resources Employee Acceptance/Start Date
Optical Networks Incorporated
<PAGE>
EXHIBIT 10.18
February 9, 2000
Andrew Page
126 Commonwealth Ave., Apt. 5
Boston, MA 02116
Dear Andrew,
On behalf of Optical Networks Incorporated, I am pleased to offer you a position
as our Vice President, Corporate Development. You will be reporting directly to
Terry Schmid, CFO.
You will receive a salary of $300,000 annually, paid in equal increments on a
twice monthly basis. This offer also includes a one-time hire on bonus of
$30,000. We will also be reimbursing you for all reasonable costs associated
with your relocation to California. Additionally we will be supplying 60 days
of temporary housing and rental car. Please note that should you voluntarily
terminate your employment with Optical Networks within twelve months of your
date of hire, you agree by signing this employment offer to repay Optical
Networks all hire on and relocation dollars on a pro-rated basis. Furthermore,
by signing this employment offer you authorize Optical Networks to deduct the
amount of this bonus from your final paycheck and agree to repay Optical
Networks any amount not covered by the final paycheck within 15 days of your
termination date.
We will be granting you a stock option of 150,000 shares of common stock. This
stock option must be approved by our Board of Directors, which will vote on this
in the next board meeting after your start date. The option will vest over a
four-year period with the first 25% vesting upon the six-month anniversary of
your start date and the remainder vesting at 1/42/th/ of the shares for each
month thereafter.
The shares will be immediately exercisable either by cash payment or with a
promissory note, which shall bear interest at the lowest legal rate (the
"Note"). The Note shall be in a form and on terms, which are acceptable to the
Company and to you. At your option, subject to California Corporation Code,
section 500, the Note may be repaid with shares of the Company's common stock,
which have a fair market value equal to the outstanding payments which are due
at the time of payment.
<PAGE>
The grant of 150,000 shares shall be subject to a right of repurchase in favor
of the Company, at the original purchase price, which shall lapse as follows:
the Company's repurchase right will lapse with respect to twenty-five percent
(25%) of the shares six (6) months from the commencement date of your employment
with the Company and will lapse at a rate of 1/42th of the shares each month
thereafter. You will have the right to make an election under Section 83(b) of
the Internal Revenue Code in conjunction with the purchase of the shares.
In the event of (a) 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 re-incorporation of the Company in a different jurisdiction, or
other transaction in which there is no substantial change in the shareholders of
the Company or their relative stock holdings), (b) a merger in which the Company
is the surviving corporation but after which the shareholders of the Company
immediately prior to such merger cease to own shares or other equity interests
in the Company representing at least twenty-five percent (25%) of the voting
power of all securities of the Company, or (c) the sale of all or substantially
all of the assets of the Company (any and all of which are referred to as a
"Transaction"), the Company will (i) waive the Company's right of repurchase
with respect to fifty percent (50%) of the shares which were subject to the
Company's repurchase right as of the effective date of the Transaction, and (ii)
waive similar rights of repurchase or other vesting requirements with respect to
fifty percent (50%) of any other securities of the Company that may, in the
future, be granted or sold to you by the Company and that remain subject to such
similar rights of repurchase or vesting requirements as of the effective date of
the Transaction.
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 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
<PAGE>
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. You
must also provide proof of our ability to legally work within the United States
on your first day of employment with Optical Networks. This offer is also
contingent upon your passing Optical Networks' security background check.
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
February 16, 2000 this offer will terminate.
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,
Lisa Blos-Johnson ______________________________
Vice President of Human Resources Employee Acceptance/Start Date
Optical Networks Incorporated
<PAGE>
EXHIBIT 10.19
OPTICAL NETWORKS, INCORPORATED
SERIES E PREFERRED STOCK PURCHASE AGREEMENT
This Series E Preferred Stock Purchase Agreement (the "Agreement") is made
---------
effective as of December 23, 1998, between Optical Networks, Incorporated, a
California corporation (the "Company"), with its principal office at 166-B
-------
Baypointe Parkway, San Jose, California 95134-1621 and the parties listed on the
Schedule of Investors attached to this Agreement as Exhibit A (each hereafter
---------
individually referred to as an "Investor" and collectively referred to as the
--------
"Investors").
- ----------
ARTICLE 1
AUTHORIZATION AND SALE OF THE SHARES
------------------------------------
1.1 Authorization. The Company will have authorized before the Closing
-------------
(as defined below) the sale and issuance of up to 6,850,000 shares of the
Company's Series E Preferred Stock (the "Series E Preferred"), having the
------------------
rights, preferences, privileges, and restrictions as set forth in the Company's
Fourth Amended and Restated Articles of Incorporation in the form attached
hereto as Exhibit B (the "Restated Articles").
--------- -----------------
1.2 Sale of the Series E Preferred Shares. Subject to the terms and
-------------------------------------
conditions hereof at the Closing, the Company shall sell and issue to each
Investor, and each Investor shall purchase from the Company, at a per share
purchase price of $3.65, the number of shares of Series E Preferred set forth
beside such Investor's name on Exhibit A. The shares of Series E Stock
---------
purchased and sold pursuant to this Agreement will be hereinafter referred to as
the "Shares," the shares of Common Stock issuable upon conversion of the Shares
------
will be hereinafter referred to as the "Conversion Shares" and the Shares and/or
-----------------
the outstanding Conversion Shares will be collectively hereinafter referred to
as the "Securities."
----------
ARTICLE 2
CLOSINGS; DELIVERIES
--------------------
2.1 Closing. Subject to the terms and conditions of this Agreement, the
-------
purchase and sale of the Series E Preferred hereunder shall take place at a
closing (the "Closing") to be held at the offices of Fenwick & West LLP, Two
-------
Palo Alto Square, Palo Alto, California at 10:00 a.m. on December 23, 1998, or
at such other place or time upon which the Company and Investors who have agreed
to purchase a majority of the Shares listed on Exhibit A may mutually agree in
writing. The date of the Closing is referred to as the "Closing Date."
------------
-1-
<PAGE>
2.2 Additional Closing(s).
---------------------
(a) Conditions of Additional Closing(s). At any time and from
-----------------------------------
time to time, but no later than January 15, 1999 (the "Additional Closing
------------------
Period"), the Company may, at one or more additional closings (each an
- ------
"Additional Closing"), without obtaining the signature, consent or permission of
------------------
any of the Investors, offer and sell to other investors ("New Investors"), at a
-------------
price of $3.65 per share, up to that number of shares of Series E Stock that is
equal to 6,850,000 shares of Series E Stock less the number of shares of Series
E Stock actually issued and sold by the Company at the Closing. New Investors
may include persons or entities who are already Investors under this Agreement.
(b) Amendments. The Company and the New Investors purchasing
----------
Series E Stock at each Additional Closing will execute counterpart signature
pages to this Agreement and the Rights Agreement (as defined in Article 6.8),
and such New Investors will, upon delivery to the Company of such signature
pages, become parties to, and bound by, this Agreement and the Rights Agreement,
each to the same extent as if they had been Investors at the Closing.
Immediately after each Additional Closing, Exhibit A to this Agreement will be
amended to list the New Investors purchasing shares of Series E Stock hereunder
and the number of shares of Series E Stock purchased by each New Investor under
this Agreement at each such Additional Closing. The Company will promptly
furnish to each Investor copies of the amendments to Exhibit A referred to in
the preceding sentence.
(c) Status of New Investors. Upon the completion of each
-----------------------
Additional Closing as provided in this Article 2, each New Investor will be
deemed to be an "Investor" for all purposes of this Agreement and the Rights
Agreement.
2.3 Deliveries. At the Closing and each Additional Closing, the Company
----------
shall deliver to each Investor a stock certificate or certificates representing
the number of Shares that such Investor has agreed to purchase hereunder as
shown on Exhibit A, against payment of the purchase price therefor, by delivery
to the Company of (i) a check payable to the Company or (ii) a wire transfer to
the bank account of the Company.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
Except as set forth on the "Schedule of Exceptions" attached hereto as
----------------------
Exhibit C (specifically identifying the relevant Section(s) hereof), the Company
- ---------
hereby represents and warrants to the Investors as follows:
3.1 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. 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. The Company is
-2-
<PAGE>
not qualified to do business as a foreign corporation in any jurisdiction. Such
qualification is not presently required in any jurisdiction where a failure to
so qualify would have a material adverse effect on the Company.
3.2 Articles and Bylaws. The Company has made available to the Investors
-------------------
true, correct, and complete copies of the Company's articles of incorporation,
as amended, dated December ___, 1998 and the Company's bylaws, as amended, dated
January 12, 1998.
3.3 Corporate Power. The Company has all requisite corporate power to
---------------
execute and deliver this Agreement and the Rights Agreement (defined below), to
sell and issue the Shares hereunder, to issue the Conversion Shares, and to
carry out and perform its obligations under the terms of this Agreement and the
Rights Agreement.
3.4 Subsidiaries. The Company has no subsidiaries and does not otherwise
------------
own or control, directly or indirectly, any other corporation, partnership,
joint venture, association, or other similar business entity.
3.5 Capitalization. The capitalization of the Company will, upon the
--------------
filing of the Restated Articles, consist of the following:
(a) Preferred Stock. A total of 30,040,000 authorized shares of
---------------
preferred stock (the "Preferred Stock"), consisting of 19,840,000 shares
---------------
designated as Series B Preferred Stock ("Series B Preferred"), of which
------------------
18,596,631 shares will be issued and outstanding, 2,050,000 shares designated as
Series C Preferred Stock ("Series C Preferred"), all of which will be issued and
------------------
outstanding, 1,300,000 shares designated Series D Preferred Stock ("Series D
--------
Preferred"), of which 1,242,287 shares will be issued and outstanding, and
- ---------
6,850,000 shares designated Series E Preferred Stock, none of which will be
issued and outstanding. Upon the Closing, the rights, preferences and
privileges of the Series B Preferred, the Series C Preferred, the Series D
Preferred and the Series E Preferred will be as stated in the Restated Articles
and as provided by law. As of the Closing, (i) each three shares of issued and
outstanding Series B Stock will be convertible into one share of Common Stock,
(ii) each three shares of issued and outstanding Series C Preferred will be
convertible into one share of Common Stock, (iii) each share of issued and
outstanding Series D Preferred will be convertible into one share of Common
Stock, and (iv) each share of issued and outstanding Series E Preferred will be
convertible into one share of Common Stock in all cases pursuant to, and subject
to, the terms set forth in the Restated Articles.
(b) Common Stock. A total of 28,000,000 authorized shares of Common
------------
Stock, of which 4,500,312 shares will be issued and outstanding.
(c) Options, Warrants, Reserved Shares. Except for (i) 22,222 shares
----------------------------------
of Common Stock issuable to Venture Lending & Leasing, Inc. ("VLLI"), in respect
----
of Section 4.2(c) of that certain warrant issued to VLLI on January 30, 1997 and
36,144 shares of Common Stock issuable to VLLI in respect of Section 4.2(c) of
that certain warrant also issued to VLLI on January 30, 1997 (the "VLLI
----
Warrants"), copies of which have been made available to the
- --------
-3-
<PAGE>
Investors and their counsel, (ii) the conversion privileges of the Series B
Preferred, the Series C Preferred, the Series D Preferred and the Series E
Preferred, (iii) up to 748,665 shares of Common Stock reserved for issuance
under the Company's 1997 Stock Option Plan and 2,432,401 shares of Common Stock
reserved for issuance under the Company's 1998 Equity Incentive Plan of which
1,222,945 shares are subject to outstanding grants, (iv) the right of first
offer provided in Section 3 of that certain Investors' Rights Agreement of even
date herewith between the Company and the Investors in Exhibit A thereto (the
"Rights Agreement"), and (v) the right of first refusal in Section 8.7 of the
----------------
Bylaws of the Company with respect to transfers of shares of the Company's
capital stock, there are no other options, warrants, conversion privileges, or
preemptive or other rights or agreements presently outstanding to purchase or
otherwise acquire any authorized but unissued shares of the capital stock or
other securities of the Company.
(d) The outstanding shares of the capital stock of the Company have
been duly authorized and validly issued, and are fully paid and nonassessable
and have been issued in compliance with all applicable federal and state
securities laws.
(e) Other than as contemplated in Article 9 of that certain Series D
Preferred Stock Purchase Agreement of the Company dated April 1, 1998 and
Section 1.4 of the Rights Agreement, the Company is not a party or subject to
any agreement or understanding, and, to the best of the Company's knowledge,
there is no agreement or understanding between any persons and/or entities,
which affects or relates to the voting or giving of written consents with
respect to any security or by a director of the Company.
3.6 Authorization. All corporate action on the part of the Company, its
-------------
directors, and its shareholders necessary for the authorization, execution,
delivery, and performance of this Agreement and the Rights Agreement by the
Company, the authorization, sale, issuance, and delivery of the Shares (and,
except for issuance and delivery thereof, the Conversion Shares), and the
performance of all of the Company's obligations hereunder (except for the
performance of its covenants to be performed subsequent to each Closing) will
have been taken prior to the Closing. This Agreement and the Rights Agreement
(as such may be amended under Article 2.2) 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 Company has reserved up to 6,850,000 shares of Series E
Preferred for issuance hereunder and up to 6,850,000 shares of Common Stock for
issuance upon conversion of the Shares. The Shares, when issued in accordance
with this Agreement, will be duly authorized, validly issued, fully paid, and
nonassessable, and will have the rights, preferences, privileges, and
restrictions as set forth in the Restated Articles. The Conversion Shares have
been, and at all times will be, duly and validly reserved and, when issued in
accordance with this Agreement and the Company's articles of incorporation, will
be duly authorized, validly issued, fully paid, and nonassessable. The
Securities, when issued, will be free of any liens or encumbrances created by
the Company; provided, however, that the
-4-
<PAGE>
Securities will be subject to restrictions on transfer under federal and state
securities laws and as set forth in the Restated Articles, Bylaws, the Rights
Agreement and herein. Based in part upon the representations and warranties of
the Investors in this Agreement, the Securities will be issued in compliance
with all applicable federal and state securities laws.
3.7 Material Agreements; Certain Actions.
------------------------------------
(a) Except for agreements explicitly contemplated hereby, the Rights
Agreement, and as identified in Section 3.7 of the Schedule of Exceptions, there
are no agreements or other understandings between the Company and any of its
officers, directors, affiliates, or any affiliate thereof.
(b) Except for agreements and other documents identified in Section
3.7 of the Schedule of Exceptions, there are no agreements, understandings,
instruments, contracts, judgments, orders, writs or decrees to which the Company
is a party or by which it is bound that provide for or include (i) obligations
(contingent or otherwise) of, or payments to the Company in excess of, $5,000,
other than in the ordinary course of business, (ii) the license of any patent,
copyright, trade secret or other proprietary right to or from the Company, (iii)
provisions restricting the development, manufacture or distribution of the
Company's products or services, or (iv) indemnification by the Company with
respect to infringements of proprietary rights. For the purposes of subsection
3.7(b)(i), all obligations of, or payments by, the Company to the same person or
entity (including persons or entities the Company has reason to believe are
affiliated therewith) shall be aggregated for the purpose of meeting the
individual minimum dollar amounts specified in such subsection.
(c) Except as identified in Section 3.7 of the Schedule of Exceptions,
the Company has not (i) declared or paid any dividends or authorized or made any
distribution upon or with respect to any class or series of its capital stock,
(ii) made any loans or advances to any person, other than ordinary advances for
travel expenses, or (iii) sold, exchanged or otherwise disposed of any material
portion of its assets or rights, other than in the ordinary course of business.
(d) The Company has not agreed to any oral modifications to any of the
Company's material agreements.
3.8 Financial Statements. The Company has delivered to the Investors its
--------------------
unaudited financial statements (balance sheet and profit and loss statement)
(collectively, the "Financial Statements") as at, and for the period commencing
--------------------
on the date of incorporation of the Company and ended on, November 30, 1998 (the
"Balance Sheet Date"). The Financial Statements have been prepared in
------------------
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods indicated and with each other, except for the
omission of notes thereto required by generally accepted accounting principles.
The Financial Statements fairly present the financial condition and operating
results of the Company as of the dates, and for the periods, indicated therein,
subject to normal year-end audit adjustments. 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
-5-
<PAGE>
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 the Balance Sheet Date 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. Except as disclosed in the
Financial Statements, the Company is not a guarantor or indemnitor of any
indebtedness of any other person, firm or corporation. The Company maintains and
will continue to maintain a standard system of accounting established and
administered in accordance with generally accepted accounting principles.
3.9 Changes. Since the Balance Sheet Date, there has not been:
-------
(a) any change in the assets, liabilities, financial condition or
operating results of the Company from those reflected in the Financial
Statements, except changes in the ordinary course of business that have not
been, in the aggregate, materially adverse;
(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the assets, properties, financial
condition, operating results or business of the Company (as such business is
presently conducted and as it is presently proposed to be conducted);
(c) any waiver by the Company of a valuable right or of a material
debt owed to it;
(d) any satisfaction or discharge of any lien, claim or encumbrance or
payment of any obligation by the Company, except in the ordinary course of
business and that is not material to the assets, properties, financial
condition, operating results or business of the Company (as such business is
presently conducted and is presently proposed to be conducted);
(e) any material change or amendment to a material contract or
arrangement by which the Company or any of its assets or properties is bound or
subject, except for changes or amendments which are expressly provided for by
this Agreement or the Rights Agreement or are disclosed in the Schedule of
Exceptions;
(f) any material change in any compensation arrangement or agreement
with any employee;
(g) any sale, assignment or transfer (excluding licenses) of any
patents, trademarks, copyrights, trade secrets or other intangible assets;
(h) any resignation or termination of employment of any key officer of
the Company; and the Company, to the best of its knowledge, does not know of the
impending resignation or termination of employment of any such officer;
(i) receipt of notice that there has been a loss of, or material order
cancellation by, any major customer of the Company;
-6-
<PAGE>
(j) any mortgage, pledge, transfer of a security interest in, or lien,
created by the Company, with respect to any of its material properties or
assets, except liens for taxes not yet due or payable;
(k) any loans or guarantees made by the Company to or for the benefit
of its employees, officers or directors, or any members of their immediate
families, other than travel advances and other advances made in the ordinary
course of its business; or
(l) any declaration, setting aside or payment or other distribution in
respect of any of the Company's capital stock, or any direct or indirect
redemption, purchase or other acquisition of any of such stock by the Company.
3.10 Title to Properties and Assets. The Company owns no real property
------------------------------
and, except as identified in Section 3.10 of the Schedule of Exceptions, has no
leasehold interests. The Company has good and marketable title to all its
properties and assets, in each case subject to no mortgage, pledge, lien, lease,
conditional sale agreement, security interest, encumbrance, or charge, other
than (i) the lien of current taxes not yet due and payable, and (ii) possible
minor liens and encumbrances which have risen in the ordinary course of business
and which do not, in any case or in the aggregate, materially detract from the
value of the property subject thereto or materially impair the operations of the
Company.
3.11 Intellectual Property. As licensee under that certain License
---------------------
Agreement by and between the Company and Optivision, Inc. dated as of October
29, 1997 (the "Optivision License Agreement"), the Company has sufficient rights
----------------------------
to use, free and clear of all liens, charges, claims, and restrictions, all
patents, trademarks, service marks, trade names, copyrights, licenses, and other
intellectual property rights necessary to its business as now conducted and as
presently proposed to be conducted, without any infringement of the rights of
others, subject to the understandings described on Section 3.11 of the Schedule
of Exceptions. A true and correct copy of the Optivision License Agreement has
been made available for inspection by the Investors and their legal counsel.
The Company has not received any communications alleging that the Company has
violated or, by conducting its business as proposed, would violate any of the
patents, trademarks, service marks, trade names, copyrights or trade secrets or
other proprietary rights of any other person or entity. The Company is not
aware that any of its employees is obligated under any contract (including
licenses, covenants or commitments of any nature) or other agreement, or subject
to any judgment, decree or order of any court or administrative agency, that
would interfere with the use of his best efforts to promote the interests of the
Company or that would conflict with the Company's business as now conducted and
as presently proposed to be conducted. Neither the execution nor delivery of
this Agreement, nor the carrying on of the Company's business by the employees
of the Company, nor the conduct of the Company's business as proposed, will, to
the Company's knowledge, conflict with or result in a breach of the terms,
conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which any of such employees is now obligated. The
Company does not believe it is or will be necessary to utilize any inventions of
any of its employees (or people it currently intends to hire) made prior to
their employment by the Company or Optivision.
-7-
<PAGE>
3.12 Compliance with Other Instruments. The Company is not in violation of
---------------------------------
any term of its articles of incorporation or bylaws, or in any material respect
of any term or provision of any mortgage, indebtedness, indenture, contract,
agreement, instrument, judgment, or decree, and to the best of its knowledge, is
not in material violation of any order, statute, rule, or regulation applicable
to the Company. The execution, delivery, and performance of and compliance with
this Agreement and the Rights Agreement, and the issuance of the Securities,
have not resulted and will not result in (i) any violation of, or conflict with,
or constitute a default under, any such term or result in the creation of any
mortgage, pledge, lien, encumbrance, or charge upon any of the properties or
assets of the Company, or (ii) 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.
3.13 Litigation. There are no actions, suits, proceedings or
----------
investigations pending against the Company or its properties (or, to the
knowledge of the Company, against any of the Company's officers or key
employees), or by the Company, or which the Company proposes to initiate before
any court or governmental agency (nor, to the best of the Company's knowledge,
is there any basis therefor or threat thereof).
3.14 Registration Rights. Except as set forth in the documents listed in
-------------------
Section 3.14 of the Schedule of Exceptions, the Company is not under any
obligation to register (as defined in Section 2.1 of the Rights Agreement) any
of its presently outstanding securities or any of its securities which may
hereafter be issued.
3.15 Governmental Consent. 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 the offer, sale, or issuance of the Securities, or the
consummation of any other transaction contemplated hereby, except (i) filing of
the Restated Articles with the California Secretary of State, and (ii)
qualification (or taking such action as may be necessary to secure an exemption
from qualification, if available) of the offer and sale of the Securities 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.
3.16 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' fees or agents' commissions or any similar
charges in connection with this Agreement or any transaction contemplated
hereby.
3.17 Disclosure. No representation or warranty of the Company contained in
----------
this Agreement or in the exhibits or schedules attached hereto or in any written
statement or certificate furnished or to be furnished to the Investors pursuant
hereto or in connection with the transactions contemplated hereby, when read
together, contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained herein or
therein not misleading in light of the circumstances under which they were made.
-8-
<PAGE>
There is no fact known to the Company which materially adversely affects the
business, operations, affairs, or condition of the Company, or any of its
properties or assets, which has not been set forth in this Agreement or in the
exhibits or schedules attached hereto or in any such written statement.
3.18 Taxes. All tax returns and reports of the Company required by law to
-----
be filed have been duly filed, and all taxes, assessments, fees, and other
governmental charges upon the Company, upon any of its properties, assets,
income, or franchises, which are due and payable have been paid, other than
those presently payable without penalty or interest. The Company has not
elected pursuant to the Internal Revenue Code of 1986, as amended (the "Code"),
to be treated as a Subchapter S corporation or a collapsible corporation
pursuant to Section 1362(a) or Section 341(f) of the Code, nor has it made any
other elections pursuant to the Code (other than elections that relate solely to
methods of accounting, depreciation or amortization) that would have a material
adverse effect on the Company, its financial condition, its business as
presently conducted or as presently proposed to be conducted or any of its
properties or material assets. The Company has never had any tax deficiency
proposed or assessed against it and has not executed any waiver of any statute
of limitations on the assessment or collection of any tax or governmental
charge. None of the Company's federal income tax returns and none of its state
income or franchise tax or sales or use tax returns has ever been audited by
governmental authorities. Since the date of the Financial Statements, the
Company has made adequate provisions on its books of account for all taxes,
assessments and governmental charges with respect to its business, properties
and operations for such period. The Company has withheld or collected from each
payment made to each of its employees, the amount of all taxes (including, but
not limited to, federal income taxes, Federal Insurance Contribution Act taxes
and Federal Unemployment Tax Act taxes) required to be withheld or collected
therefrom, and has paid the same to the proper tax receiving officers or
authorized depositaries.
3.19 Employees. To the best of the Company's knowledge, no employee of the
---------
Company is a party to any agreement with any previous employer that in any way
adversely affects his performance of his duties as an employee of the Company or
is a party to or threatened by any litigation concerning any patents,
trademarks, trade secrets, and the like. The Company does not have any
collective bargaining agreements covering any of its employees. The Company has
no employee benefit plans or agreements with respect to profit-sharing or
pension benefits. Each of the Company's employees, officers and directors has
entered into the Company's standard proprietary information agreement in the
form provided to the Investors or their legal counsel, and the Company, after
reasonable investigation, is not aware that any of its employees, officers or
consultants are in violation thereof. The Company is not aware that any officer
or key employee, or that any group of key employees, intends to terminate their
employment with the Company, nor does the Company have a present intention to
terminate the employment of any of the foregoing. The employment of each
officer and employee of the Company is terminable at will by the Company or by
such officer or employee.
3.20 Securities Act. Subject to the accuracy of the Investors'
--------------
representations in Article 4 hereof, the offer, sale, and issuance of the
Securities in conformity with the terms of
-9-
<PAGE>
this Agreement, constitute transactions exempt from the registration
requirements of Section 5 of the Securities Act of 1933, as amended (the
"Securities Act").
--------------
3.21 Permits. The Company has all franchises, permits, licenses, and any
-------
similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects, or financial condition of the Company, and the
Company believes it can obtain, without undue burden or expense, any similar
authority for the conduct of its business as planned to be conducted. The
Company is not in default in any material respect under any of such franchises,
permits, licenses, or other similar authority.
3.22 Related-Party Transactions. Except as provided in Section 3.22 of the
---------------------------
Schedule of Exceptions, no employee, officer, or director of the Company or
member of his or her immediate family is indebted to the Company, nor is the
Company indebted (or committed to make loans or extend or guarantee credit) to
any of them. Except as provided in Section 3.22 of the Schedule of Exceptions,
to the best of the Company's knowledge, (i) none of such persons has any direct
or indirect ownership interest in any firm or corporation with which the Company
is affiliated or with which the Company has a business relationship, or any firm
or corporation that competes with the Company, except that employees, officers,
or directors of the Company and members of their immediate families may own
stock in publicly traded companies that may compete with the Company, and (ii)
no member of the immediate family of any officer or director of the Company is
directly or indirectly interested in any material contract with the Company.
3.23 ERISA Plans. The Company does not have any Employee Pension Benefit
-----------
Plan as defined in Section 3 of the Employee Retirement Income Security Act of
1974, as amended.
3.24 Insurance. The Company has in full force and effect fire and casualty
---------
insurance policies, with extended coverage, sufficient in amount (subject to
reasonable deductibles) to allow it to replace any of its properties that might
be damaged or destroyed.
3.25 Real Property Holding Company. The Company is not a real property
-----------------------------
holding company within the meaning of Section 897(c)(2) of the Code.
3.26 Year 2000 Compatibility. To the Company's knowledge, without the
-----------------------
Company having conducted any special investigation thereof, software sold,
marketed or otherwise used or distributed by the Company shall not fail to
perform any function specified in the product specifications therefor, or
otherwise be adversely affected in any material respect, solely as a result of
the date change from December 31, 1999 to January 1, 2000, including without
limitation, date data century recognition, calculations which accommodate same
century and multi-century formulas and date values, and date data interface
values which reflect the correct century.
-10-
<PAGE>
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE INVESTORS
-----------------------------------------------
Each Investor hereby, severally and not jointly, represents and warrants to
the Company with respect to the purchase of the Shares as follows:
4.1 Experience. Such Investor has substantial experience in evaluating
----------
and investing in private placement transactions of securities in companies
similar to the Company so that such Investor is capable of evaluating the merits
and risks of such Investor's investment in the Company and has the capacity to
protect such Investor's own interests.
4.2 Investor Qualifications. Such Investor is an "accredited investor"
-----------------------
within the meaning of Rule 501(a) of Regulation D promulgated pursuant to 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. Such Investor, by reason of its
business or financial experience or the business or financial experience of its
professional advisors who are unaffiliated with the Company or any affiliate or
selling agent of the Company, directly or indirectly, has the capacity to
protect its own interests in connection with the purchase of the Shares.
4.3 Investment. Such Investor is acquiring the Securities for investment
----------
for such Investor's own account, not as a nominee or agent, and not with the
view to, or for resale in connection with, any distribution thereof. Such
Investor understands that the Securities 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 such
Investor's representations as expressed herein.
4.4 Rule 144. Such Investor acknowledges that the Securities must be held
--------
indefinitely unless subsequently registered under the Securities Act or an
exemption from such registration is available. Such Investor is aware of the
provisions of Rule 144 promulgated under the Securities Act which permit limited
resale 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" (as provided by Rule 144(f)) and (v) the number of shares
being sold during any three-month period not exceeding specified limitations.
4.5 No Public Market. Such Investor 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 Securities.
-11-
<PAGE>
4.6 Access to Data. Such Investor 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 such Investor or its representatives. Any questions raised by such Investor
or its representatives were answered to the satisfaction of such Investor or its
representatives. Such Investor 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. Such Investor's decision to enter into the transaction
contemplated hereby is based in part on the answers to such questions as such
Investor and its representatives have raised and on such Investor'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 Article 3 of this Agreement or
the right of such Investor to rely thereon.
4.7 Authorization. This Agreement and the Rights Agreement, when executed
-------------
and delivered by such Investor, will constitute valid and legally binding
obligations of such Investor, 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.
4.8 Brokers or Finders. The Company has not incurred, and will not incur,
------------------
directly or indirectly, as a result of any action taken by such Investor, any
liability for brokerage or finders' fees or agents' commissions or any similar
charges in connection with this agreement or any transaction contemplated
hereby.
4.9 Tax Consequences. Such Investor 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. Such
Investor is relying solely on such advisors and not on any statements or
representations of the Company or any of its agents and understands that such
Investor (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.
-12-
<PAGE>
ARTICLE 5
RESTRICTIONS ON TRANSFER
------------------------
5.1 Restrictions on Transfer. The Securities shall not be sold, assigned,
------------------------
transferred, or pledged except upon the conditions specified in this Article,
the Restated Articles, and the Company's Bylaws, which conditions provide a
right of first offer in favor of the Company and are intended to, among other
things, ensure compliance with the provisions of the Securities Act of 1933, as
amended (the "Securities Act"). Any proposed transferee of the Securities held
--------------
by such Investor must agree (prior to transfer) to take and hold such securities
subject to the provisions and upon the conditions specified in this Article.
5.2 Restrictive Legend. Each stock certificate representing (i) the
------------------
Securities, or (ii) any other securities issued in respect of the Securities
upon any stock split, stock dividend, merger, consolidation, recapitalization,
or similar event (collectively the "Restricted Securities"), 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 ARE
SUBJECT TO A RIGHT OF FIRST OFFER IN FAVOR OF THE COMPANY AND 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 CORPORATION, THAT
AN EXEMPTION THEREFROM IS AVAILABLE.
COPIES OF THE AGREEMENTS COVERING THE PURCHASE OF THESE SECURITIES AND
RESTRICTING THEIR TRANSFER, THE AMENDED AND RESTATED ARTICLES OF
INCORPORATION OF THE COMPANY CONTAINING SUCH RESTRICTIONS, AND THE
COMPANY'S BYLAWS IMPOSING A RIGHT OF FIRST OFFER IN FAVOR OF THE
COMPANY, MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE
HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE
CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION.
Each Investor and holder of any Securities consents to the Company making a
notation on its records and giving instructions to any transfer agent of the
Securities in order to implement the restrictions on transfer described in this
Section.
-13-
<PAGE>
5.3 Notice of Proposed Transfers. Prior to any proposed transfer of any
----------------------------
Restricted Securities, 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
5.2.
ARTICLE 6
CONDITIONS TO CLOSING OF THE INVESTORS
--------------------------------------
Each Investor's obligation to enter into the transactions contemplated
hereby at the Closing is subject to the fulfillment on or prior to the Closing
Date of the following conditions:
6.1 Representations and Warranties. The representations and warranties
------------------------------
made by the Company in Article 3 shall have been true and correct when made, and
shall be true and correct as of the Closing Date.
6.2 Covenants. All covenants, agreements, and conditions contained in
---------
this Agreement to be performed by the Company on or prior to the Closing shall
have been performed or complied with in all respects.
6.3 Compliance Certificate. The Company shall have delivered to the
----------------------
Investors a Compliance Certificate in substantially the form attached hereto as
Exhibit D, executed by an officer of the Company, dated as of the Closing Date,
- ---------
and certifying to the fulfillment of the conditions specified in Sections 6.1
and 6.2.
6.4 Opinion of Company's Counsel. Fenwick & West LLP, counsel for the
----------------------------
Company, shall have delivered to the Investors an opinion in substantially the
form attached hereto as Exhibit E, dated as of the Closing Date.
---------
6.5 Securities Exemptions. The offer and sale of the Shares to the
---------------------
Investors pursuant to this Agreement shall be exempt from the registration
requirements of the Securities Act, the qualification requirements of the
California Corporate Securities Law of 1968, as amended (the "Law") and the
---
registration and/or qualification requirements of all other applicable state
securities laws.
6.6 Restated Articles. The Restated Articles shall have been filed with
-----------------
and accepted by the California Secretary of State.
-14-
<PAGE>
6.7 Proceedings and Documents. All corporate and other proceedings in
-------------------------
connection with the transactions contemplated at the Closing and all documents
incident thereto shall be reasonably satisfactory in form and substance to the
Investors and their counsel, and the Investors shall have received all such
counterpart originals and certified or other copies of such documents as they
may reasonably request. Such documents shall include the following:
(a) Certified Charter Documents. A copy of the Restated Articles and
---------------------------
the Bylaws of the Company (as amended through the date of the Closing),
certified by the Secretary of the Company as true and correct copies thereof as
of the Closing.
(b) Corporate Actions. A copy of the resolutions of the Board of
-----------------
Directors and, if required, the shareholders of the Company evidencing the
approval of the Restated Articles, the approval of this Agreement and the Rights
Agreement and the issuance of the Shares and the other matters contemplated
hereby.
(c) Secretary's Certificate. A certificate of the Secretary or other
-----------------------
officer of the Company certifying as true and correct the documents referred to
in subsections (a) and (b) above and certifying the names of the officers of the
Company authorized to sign this Agreement, the Rights Agreement and the
certificates evidencing the Shares.
6.8 Investors' Rights Agreement. The Company each Investor, and holders
---------------------------
of a majority of the Series B Stock, Series C Stock, Series D Stock and/or
Conversion Stock representing or convertible into a majority of all Registrable
Securities under the Company's existing Investors' Rights Agreement dated April
1, 1998 by and among the Company and the persons and an entities listed on
Exhibit A thereto and Venture Lending and Leasing, Inc. (the "Prior Rights
------------
Agreement") shall have executed and delivered the Restated and Amended
- ---------
Investors' Rights Agreement in the form attached to this Agreement as Exhibit F
---------
(the "Rights Agreement").
----------------
6.9 Existing Refusal Rights. The right of first offer provided in the
-----------------------
Prior Rights Agreement as it applies to the issuance and sale of the Shares
shall have been waived and released in writing or shall have been satisfied.
6.10 Minimum Shares Purchased. A minimum of 3,972,602 shares of Series E
------------------------
Preferred shall be purchased by the Investors at the Closing for a minimum
aggregate purchase price of $14,500,000.
6.11 Board of Directors. As of the Closing, the Board of Directors shall
------------------
consist of Joseph W. Goodman, Kevin R. Compton, Jonathan D. Feiber, James F.
Jordan, Hugh C. Martin and Eric Young.
-15-
<PAGE>
ARTICLE 7
CONDITIONS TO CLOSING OF THE COMPANY
------------------------------------
The Company's obligation to enter into the transactions contemplated hereby
at each closing is subject to the fulfillment on or prior to the Closing Date of
the following conditions:
7.1 Representations and Warranties. The representations and warranties
------------------------------
made by each Investor in Article 4 shall have been true and correct when made,
and shall be true and correct as of the Closing Date.
7.2 Securities Exemptions. The offer and sale of the Shares to the
---------------------
Investors pursuant to this Agreement shall be exempt from the registration
requirements of the Securities Act, the qualification requirements of the
California Corporate Securities Law of 1968, as amended, and the registration
and/or qualification requirements of all other applicable state securities laws.
7.3 Restated Articles. The Restated Articles shall have been filed with
-----------------
and accepted by the California Secretary of State.
7.4 Proceedings and Documents. All corporate and other proceedings in
-------------------------
connection with the transactions contemplated at the Closing and all documents
incident thereto shall be reasonably satisfactory in form and substance to the
Company and to the Company's legal counsel, and the Company shall have received
all such counterpart originals and certified or other copies of such documents
as it may reasonably request.
7.5 Investors' Rights Agreement. The Company, each Investor, and holders
---------------------------
of a majority of the Series B Stock, Series C Stock, Series D Stock and/or
Conversion Stock representing or convertible into a majority of all Registrable
Securities under the Prior Rights Agreement shall have executed and delivered
the Rights Agreement.
7.6 Existing Refusal Rights. The right of first offer provided in the
-----------------------
Prior Rights Agreement as it applies to the issuance and sale of the Shares
shall have been waived and released in writing or shall have been satisfied.
7.7 Minimum Shares Purchased. A minimum of 3,972,602 shares of Series E
------------------------
Preferred shall be purchased by the Investors at the Closing for a maximum
aggregate purchase price of $14,500,000.
ARTICLE 8
ADDITIONAL COVENANTS
--------------------
8.1 Employee Proprietary Information Agreements. The Company hereby
-------------------------------------------
covenants and agrees that it will cause each of the Company's employees to
execute proprietary
-16-
<PAGE>
information and invention assignment agreements in the Company's standard form,
which has been provided to the Investors and their counsel or a form
substantially similar thereto.
8.2 Stock Vesting. Unless otherwise approved by the Board of Directors,
-------------
the Company hereby covenants and agrees that all future equity and option
issuances to officers, directors and employees shall be subject to a four year
vesting requirement, which shall also provide that no vesting shall occur until
a minimum of six months shall have passed from the vesting commencement date.
8.3 Indemnification Agreements. The Company shall enter into
--------------------------
Indemnification Agreements in the form provided to the Investors and their
counsel, or a substantially similar form, with the directors and executive
officers of the Company on or as promptly as possible after the date hereof.
ARTICLE 9
GENERAL PROVISIONS
------------------
9.1 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.
9.2 Survival. The representations, warranties, and covenants of the
--------
parties made herein shall survive the Closing and any Additional Closings and
shall in no way be affected by any investigation of the subject matter thereof
made by or on behalf of the parties.
9.3 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 an Investor to purchase Shares shall not
be assignable without the written consent of the Company.
9.4 Entire Agreement; Amendment and Waiver. This agreement and the other
--------------------------------------
documents delivered pursuant hereto 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 an
Investor and the Company and the holders of Shares and/or Conversion Shares
representing at least a majority of the aggregate number of shares of Common
Stock into which the Purchased Shares then are convertible and/or have been
converted (excluding any of such shares that have been sold to the public or
pursuant to SEC Rule 144). Any amendment or waiver effected in accordance with
this Section shall be binding upon each holder of any Purchased Shares and/or
Conversion Shares at the time outstanding, each future holder of such
securities, and the Company; provided, however, that no condition set forth in
-------- -------
Article 6 may be waived with respect to any Investor who does not consent
thereto; and provided further, that New
-------- -------
-17-
<PAGE>
Investors may become parties to this Agreement in accordance with Article 2.2
without any amendment of this Agreement or any consent or approval of any
Investor.
9.5 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 an Investor, at its address set forth on Exhibit A, or at
such other address as such Investor shall have furnished to the Company in
writing, and another copy to special counsel to the Investors, Steven E.
Bochner, Esq. of Wilson Sonsini Goodrich & Rosati, P.C., 650 Page Mill Road,
Palo Alto, California 94304, or (ii) if to any other holder of any Securities,
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 Securities 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
Investors, and another copy to the Company's legal counsel to the attention of
Mark C. Stevens, Esq. of Fenwick & West LLP, Two Palo Alto Square, Palo Alto,
California 94306.
9.6 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.
9.7 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.
9.8 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 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.
-18-
<PAGE>
9.9 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.
9.10 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.
9.11 Legal Expenses. The Company shall pay at the Closing in connection
--------------
with this Agreement and the issuance of the Shares, the legal fees and out-of-
pocket expenses of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
special counsel to the Investors, with respect thereto, such fees and expenses
not to exceed $10,000.
[REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
-19-
<PAGE>
9.12 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 instrument.
Executed effective as of the date first set forth above.
OPTICAL NETWORKS, INCORPORATED
By: /s/ Terrence J. Schmid
-----------------------------
Name: Terrence J. Schmid
---------------------------
Title: CFO
--------------------------
INVESTORS:
* * *
<PAGE>
EXHIBIT 10.20
OPTICAL NETWORKS, INCORPORATED
SERIES F PREFERRED STOCK PURCHASE AGREEMENT
This Series F Preferred Stock Purchase Agreement (the "Agreement") is made
---------
effective as of September 2, 1999, between Optical Networks, Incorporated, a
California corporation (the "Company"), with its principal office at 166-B
-------
Baypointe Parkway, San Jose, California 95134 and the parties listed on the
Schedule of Investors attached to this Agreement as Exhibit A (each hereafter
---------
individually referred to as an "Investor" and collectively referred to as the
--------
"Investors").
---------
ARTICLE 1
AUTHORIZATION AND SALE OF THE SHARES
------------------------------------
1.1 Authorization. The Company will have authorized before the Closing
-------------
(as defined below) the sale and issuance of up to 4,124,800 shares of the
Company's Series F Preferred Stock (the "Series F Preferred"), having the
------------------
rights, preferences, privileges, and restrictions as set forth in the Company's
Amended and Restated Articles of Incorporation in the form attached hereto as
Exhibit B (the "Restated Articles").
- --------- -----------------
1.2 Sale of the Series F Preferred Shares. Subject to the terms and
-------------------------------------
conditions hereof at the Closing, the Company shall sell and issue to each
Investor, and each Investor shall purchase from the Company, at a per share
purchase price of $3.6366, the number of shares of Series F Preferred set forth
beside such Investor's name on Exhibit A. The shares of Series F Preferred
---------
purchased and sold pursuant to this Agreement will be hereinafter referred to as
the "Shares," the shares of Common Stock issuable upon conversion of the Shares
------
will be hereinafter referred to as the "Conversion Shares" and the Shares and/or
-----------------
the outstanding Conversion Shares will be collectively hereinafter referred to
as the "Securities."
----------
ARTICLE 2
CLOSINGS; DELIVERIES
--------------------
2.1 Closing. Subject to the terms and conditions of this Agreement, the
-------
purchase and sale of the Series F Preferred hereunder shall take place at a
closing (the "Closing") to be held at the offices of Fenwick & West LLP, Two
-------
Palo Alto Square, Palo Alto, California at 10:00 a.m. on September 2, 1999, or
at such other place or time upon which the Company and Investors who have agreed
to purchase a majority of the Shares listed on Exhibit A may mutually agree in
---------
writing. The date of the Closing is referred to as the "Closing Date."
------------
<PAGE>
2.2 Additional Closing(s).
---------------------
(a) Conditions of Additional Closing(s). At any time and from time to
-----------------------------------
time, but no later than October 2, 1999 (the "Additional Closing Period"), the
-------------------------
Company may, at one or more additional closings (each an "Additional Closing"),
------------------
without obtaining the signature, consent or permission of any of the Investors,
offer and sell to other investors ("New Investors"), at a price of $3.6366 per
-------------
share, up to that number of shares of Series F Stock that is equal to 4,124,800
shares of Series F Stock less the number of shares of Series F Stock actually
issued and sold by the Company at the Closing. New Investors may include persons
or entities who are already Investors under this Agreement.
(b) Amendments. The Company and the New Investors purchasing Series F
----------
Stock at each Additional Closing will execute counterpart signature pages to
this Agreement and the Rights Agreement (as defined in Article 6.8), and such
New Investors will, upon delivery to the Company of such signature pages, become
parties to, and bound by, this Agreement and the Rights Agreement, each to the
same extent as if they had been Investors at the Closing. Immediately after
each Additional Closing, Exhibit A to this Agreement will be amended to list the
---------
New Investors purchasing shares of Series F Stock hereunder and the number of
shares of Series F Stock purchased by each New Investor under this Agreement at
each such Additional Closing. The Company will promptly furnish to each
Investor copies of the amendments to Exhibit A referred to in the preceding
---------
sentence.
(c) Status of New Investors. Upon the completion of each Additional
-----------------------
Closing as provided in this Article 2, each New Investor will be deemed to be an
"Investor" for all purposes of this Agreement and the Rights Agreement.
2.3 Deliveries. At the Closing and each Additional Closing, the Company
----------
shall deliver to each Investor a stock certificate or certificates representing
the number of Shares that such Investor has agreed to purchase hereunder as
shown on Exhibit A, against payment of the purchase price therefor, by delivery
---------
to the Company of (i) a check payable to the Company or (ii) a wire transfer to
the bank account of the Company.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
Except as set forth on the "Schedule of Exceptions" attached hereto as
----------------------
Exhibit C (specifically identifying the relevant Section(s) hereof), the Company
- ---------
hereby represents and warrants to the Investors as follows:
3.1 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. 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. The Company is not
qualified to do business as a foreign corporation in any jurisdiction. Such
qualification is not
<PAGE>
presently required in any jurisdiction where a failure to so qualify would have
a material adverse effect on the Company.
3.2 Articles and Bylaws. The Company has made available to the Investors
-------------------
true, correct, and complete copies of the Restated Articles and the Company's
bylaws, as amended, dated January 12, 1998 (the "Bylaws").
------
3.3 Corporate Power. The Company has all requisite corporate power to
---------------
execute and deliver this Agreement and the Rights Agreement, to sell and issue
the Shares hereunder, to issue the Conversion Shares, and to carry out and
perform its obligations under the terms of this Agreement and the Rights
Agreement.
3.4 Subsidiaries. The Company has no subsidiaries and does not otherwise
------------
own or control, directly or indirectly, any other corporation, partnership,
joint venture, association, or other similar business entity.
3.5 Capitalization. The capitalization of the Company will, upon the
--------------
filing of the Restated Articles, consist of the following:
(a) Preferred Stock. A total of 35,043,350 authorized shares of
---------------
preferred stock (the "Preferred Stock"), consisting of 13,226,675 shares
---------------
designated as Series B Preferred Stock ("Series B Preferred"), of which
------------------
12,397,755 shares will be issued and outstanding, 1,366,675 shares designated as
Series C Preferred Stock ("Series C Preferred"), of which 1,366,666 shares will
------------------
be issued and outstanding, 2,600,000 shares designated Series D Preferred Stock
("Series D Preferred"), of which 2,484,574 shares will be issued and
------------------
outstanding, 13,700,000 shares designated as Series E Preferred Stock ("Series E
--------
Preferred"), of which 13,142,012 shares will be issued and outstanding, and
- ---------
4,150,000 shares designated Series F Preferred, none of which will be issued and
outstanding. Upon the Closing, the rights, preferences and privileges of the
Series B Preferred, the Series C Preferred, the Series D Preferred, the Series E
Preferred and the Series F Preferred will be as stated in the Restated Articles
and as provided by law. As of the Closing each share of issued and outstanding
Series B Preferred, Series C Preferred, Series D Preferred, Series E Preferred
and Series F Preferred will be convertible into one share of Common Stock in all
cases pursuant to, and subject to, the terms set forth in the Restated Articles.
(b) Common Stock. A total of 64,956,650 authorized shares of Common
------------
Stock, of which 11,989,312 shares will be issued and outstanding.
(c) Options, Warrants, Reserved Shares. Except for (i) 44,445 shares
----------------------------------
of Common Stock issuable to Venture Lending & Leasing, Inc. ("VLLI"), in respect
----
of Section 4.2(c) of that certain warrant issued to VLLI on January 30, 1997,
72,289 shares of Common Stock issuable to VLLI in respect of Section 4.2(c) of
that certain warrant also issued to VLLI on January 30, 1997 and 138,963 shares
of Series B Preferred Stock issuable to Comdisco, Inc. pursuant to an Master
Lease Agreement dated February 10, 1999 by and between the Company and Comdisco,
Inc. ("Comdisco") and the related Warrant Agreement No. 1 to Purchase Shares
<PAGE>
of Series B Preferred Stock dated as of February 10, 1999, Warrant Agreement No.
2 to Purchase Shares of Series B Preferred Stock dated as of February 10, 1999,
Warrant Agreement No. 3 to Purchase Shares of Series B Preferred Stock dated as
of February 10, 1999, copies of which have been made available to the Investors
and their counsel, (ii) the conversion privileges of the Series B Preferred, the
Series C Preferred, the Series D Preferred, the Series E Preferred and the
Series F Preferred, (iii) up to 328,372 shares of Common Stock reserved for
issuance under the Company's 1997 Stock Option Plan and 9,417,536 shares of
Common Stock reserved for issuance under the Company's 1998 Equity Incentive
Plan of which 8,831,408 shares are subject to outstanding grants, (iv) the right
of first offer provided in Section 3 of the Rights Agreement between the Company
and the Investors in Exhibit A thereto (the "Rights Agreement"), and (v) the
--------- ----------------
right of first refusal in Section 8.7 of the Bylaws with respect to transfers of
shares of the Company's capital stock, there are no other options, warrants,
conversion privileges, or preemptive or other rights or agreements presently
outstanding to purchase or otherwise acquire any authorized but unissued shares
of the capital stock or other securities of the Company.
(d) The outstanding shares of the capital stock of the Company have
been duly authorized and validly issued, and are fully paid and nonassessable
and have been issued in compliance with all applicable federal and state
securities laws.
(e) Other than as contemplated in Article 9 of that certain Series D
Preferred Stock Purchase Agreement of the Company dated April 1, 1998 and
Section 1.4 of the Rights Agreement, the Company is not a party or subject to
any agreement or understanding, and, to the best of the Company's knowledge,
there is no agreement or understanding between any persons and/or entities,
which affects or relates to the voting or giving of written consents with
respect to any security or by a director of the Company.
3.6 Authorization. All corporate action on the part of the Company, its
-------------
directors, and its shareholders necessary for the authorization, execution,
delivery, and performance of this Agreement and the Rights Agreement by the
Company, the authorization, sale, issuance, and delivery of the Shares (and,
except for issuance and delivery thereof, the Conversion Shares), and the
performance of all of the Company's obligations hereunder (except for the
performance of its covenants to be performed subsequent to each Closing) will
have been taken prior to the Closing. This Agreement and the Rights Agreement
(as such may be amended under Article 2.2) 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 Company has reserved up to 4,124,800 shares of Series F
Preferred for issuance hereunder and up to 4,124,800 shares of Common Stock for
issuance upon conversion of the Shares. The Shares, when issued in accordance
with this Agreement, will be duly authorized, validly issued, fully paid, and
nonassessable, and will have the rights, preferences, privileges, and
restrictions as set forth in the Restated Articles. The Conversion Shares have
been, and at all times will be, duly and validly reserved and, when issued in
accordance with this Agreement and the Restated Articles, will be duly
authorized, validly
<PAGE>
issued, fully paid, and nonassessable. The Securities, when issued, will be free
of any liens or encumbrances created by the Company; provided, however, that the
Securities will be subject to restrictions on transfer under federal and state
securities laws and as set forth in the Restated Articles, the Bylaws, the
Rights Agreement and herein. Based in part upon the representations and
warranties of the Investors in this Agreement, the Securities will be issued in
compliance with all applicable federal and state securities laws.
3.7 Material Agreements; Certain Actions.
------------------------------------
(a) Except for agreements explicitly contemplated hereby, the Rights
Agreement, and as identified in Section 3.7 of the Schedule of Exceptions, there
are no agreements or other understandings between the Company and any of its
officers, directors, affiliates, or any affiliate thereof.
(b) Except for agreements and other documents identified in Section
3.7 of the Schedule of Exceptions, there are no agreements, understandings,
instruments, contracts, judgments, orders, writs or decrees to which the Company
is a party or by which it is bound that provide for or include (i) obligations
(contingent or otherwise) of, or payments to the Company in excess of, $5,000,
other than in the ordinary course of business, (ii) the license of any patent,
copyright, trade secret or other proprietary right to or from the Company, (iii)
provisions restricting the development, manufacture or distribution of the
Company's products or services, or (iv) indemnification by the Company with
respect to infringements of proprietary rights. For the purposes of subsection
3.7(b)(i), all obligations of, or payments by, the Company to the same person or
entity (including persons or entities the Company has reason to believe are
affiliated therewith) shall be aggregated for the purpose of meeting the
individual minimum dollar amounts specified in such subsection.
(c) Except as identified in Section 3.7 of the Schedule of Exceptions,
the Company has not (i) declared or paid any dividends or authorized or made any
distribution upon or with respect to any class or series of its capital stock,
(ii) made any loans or advances to any person, other than ordinary advances for
travel expenses, or (iii) sold, exchanged or otherwise disposed of any material
portion of its assets or rights, other than in the ordinary course of business.
(d) The Company has not agreed to any oral modifications to any of the
Company's material agreements.
3.8 Financial Statements. The Company has delivered to the Investors its
--------------------
unaudited financial statements (balance sheet and profit and loss statement)
(collectively, the "Financial Statements") as at, and for the period commencing
--------------------
on the date of incorporation of the Company and ended on, June 30, 1999 (the
"Balance Sheet Date"). The Financial Statements have been prepared in
- -------------------
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods indicated and with each other, except for the
omission of notes thereto required by generally accepted accounting principles.
The Financial Statements fairly present the financial condition and operating
results of the Company as of the dates, and for the periods, indicated therein,
subject to normal year-end audit adjustments. The Company has no
<PAGE>
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 the
Balance Sheet Date 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. Except as disclosed in the Financial Statements, the
Company is not a guarantor or indemnitor of any indebtedness of any other
person, firm or corporation. The Company maintains and will continue to maintain
a standard system of accounting established and administered in accordance with
generally accepted accounting principles.
3.9 Changes. Since the Balance Sheet Date, there has not been:
-------
(a) any change in the assets, liabilities, financial condition or
operating results of the Company from those reflected in the Financial
Statements, except changes in the ordinary course of business that have not
been, in the aggregate, materially adverse;
(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the assets, properties, financial
condition, operating results or business of the Company (as such business is
presently conducted and as it is presently proposed to be conducted);
(c) any waiver by the Company of a valuable right or of a material
debt owed to it;
(d) any satisfaction or discharge of any lien, claim or encumbrance or
payment of any obligation by the Company, except in the ordinary course of
business and that is not material to the assets, properties, financial
condition, operating results or business of the Company (as such business is
presently conducted and is presently proposed to be conducted);
(e) any material change or amendment to a material contract or
arrangement by which the Company or any of its assets or properties is bound or
subject, except for changes or amendments which are expressly provided for by
this Agreement or the Rights Agreement or are disclosed in the Schedule of
Exceptions;
(f) any material change in any compensation arrangement or agreement
with any employee;
(g) any sale, assignment or transfer (excluding licenses) of any
patents, trademarks, copyrights, trade secrets or other intangible assets;
(h) any resignation or termination of employment of any key officer of
the Company; and the Company, to the best of its knowledge, does not know of the
impending resignation or termination of employment of any such officer;
<PAGE>
(i) receipt of notice that there has been a loss of, or material order
cancellation by, any major customer of the Company;
(j) any mortgage, pledge, transfer of a security interest in, or lien,
created by the Company, with respect to any of its material properties or
assets, except liens for taxes not yet due or payable;
(k) any loans or guarantees made by the Company to or for the benefit
of its employees, officers or directors, or any members of their immediate
families, other than travel advances and other advances made in the ordinary
course of its business; or
(l) any declaration, setting aside or payment or other distribution in
respect of any of the Company's capital stock, or any direct or indirect
redemption, purchase or other acquisition of any of such stock by the Company.
3.10 Title to Properties and Assets. The Company owns no real property
------------------------------
and, except as identified in Section 3.10 of the Schedule of Exceptions, has no
leasehold interests. The Company has good and marketable title to all its
properties and assets, in each case subject to no mortgage, pledge, lien, lease,
conditional sale agreement, security interest, encumbrance, or charge, other
than (i) the lien of current taxes not yet due and payable, and (ii) possible
minor liens and encumbrances which have risen in the ordinary course of business
and which do not, in any case or in the aggregate, materially detract from the
value of the property subject thereto or materially impair the operations of the
Company.
3.11 Intellectual Property. As licensee under that certain License
---------------------
Agreement by and between the Company and Optivision, Inc. dated as of October
29, 1997 (the "Optivision License Agreement"), the Company has sufficient rights
----------------------------
to use, free and clear of all liens, charges, claims, and restrictions, all
patents, trademarks, service marks, trade names, copyrights, licenses, and other
intellectual property rights necessary to its business as now conducted and as
presently proposed to be conducted, without any infringement of the rights of
others, subject to the understandings described on Section 3.11 of the Schedule
of Exceptions. A true and correct copy of the Optivision License Agreement has
been made available for inspection by the Investors and their legal counsel.
The Company has not received any communications alleging that the Company has
violated or, by conducting its business as proposed, would violate any of the
patents, trademarks, service marks, trade names, copyrights or trade secrets or
other proprietary rights of any other person or entity. The Company is not
aware that any of its employees is obligated under any contract (including
licenses, covenants or commitments of any nature) or other agreement, or subject
to any judgment, decree or order of any court or administrative agency, that
would interfere with the use of his best efforts to promote the interests of the
Company or that would conflict with the Company's business as now conducted and
as presently proposed to be conducted. Neither the execution nor delivery of
this Agreement, nor the carrying on of the Company's business by the employees
of the Company, nor the conduct of the Company's business as proposed, will, to
the Company's knowledge, conflict with or result in a breach of the terms,
conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which any of such employees is now obligated. The
Company does not believe it is or will be necessary to utilize any inventions of
<PAGE>
any of its employees (or people it currently intends to hire) made prior to
their employment by the Company or Optivision.
3.12 Compliance with Other Instruments. The Company is not in violation of
---------------------------------
any term of its Restated Articles or Bylaws, or in any material respect of any
term or provision of any mortgage, indebtedness, indenture, contract, agreement,
instrument, judgment, or decree, and to the best of its knowledge, is not in
material violation of any order, statute, rule, or regulation applicable to the
Company. The execution, delivery, and performance of and compliance with this
Agreement and the Rights Agreement, and the issuance of the Securities, have not
resulted and will not result in (i) any violation of, or conflict with, or
constitute a default under, any such term or result in the creation of any
mortgage, pledge, lien, encumbrance, or charge upon any of the properties or
assets of the Company, or (ii) 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.
3.13 Litigation. There are no actions, suits, proceedings or
----------
investigations pending against the Company or its properties (or, to the
knowledge of the Company, against any of the Company's officers or key
employees), or by the Company, or which the Company proposes to initiate before
any court or governmental agency (nor, to the best of the Company's knowledge,
is there any basis therefor or threat thereof).
3.14 Registration Rights. Except as set forth in the documents listed in
-------------------
Section 3.14 of the Schedule of Exceptions, the Company is not under any
obligation to register (as defined in Section 2.1 of the Rights Agreement) any
of its presently outstanding securities or any of its securities which may
hereafter be issued.
3.15 Governmental Consent. 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 the offer, sale, or issuance of the Securities, or the
consummation of any other transaction contemplated hereby, except (i) filing of
the Restated Articles with the California Secretary of State, and (ii)
qualification (or taking such action as may be necessary to secure an exemption
from qualification, if available) of the offer and sale of the Securities 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.
3.16 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' fees or agents' commissions or any similar
charges in connection with this Agreement or any transaction contemplated
hereby.
3.17 Disclosure. No representation or warranty of the Company contained in
----------
this Agreement or in the exhibits or schedules attached hereto or in any written
statement or certificate furnished or to be furnished to the Investors pursuant
hereto or in connection with the transactions contemplated hereby, when read
together, contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained
<PAGE>
herein or therein not misleading in light of the circumstances under which they
were made. There is no fact known to the Company which materially adversely
affects the business, operations, affairs, or condition of the Company, or any
of its properties or assets, which has not been set forth in this Agreement or
in the exhibits or schedules attached hereto or in any such written statement.
3.18 Taxes. All tax returns and reports of the Company required by law to
-----
be filed have been duly filed, and all taxes, assessments, fees, and other
governmental charges upon the Company, upon any of its properties, assets,
income, or franchises, which are due and payable have been paid, other than
those presently payable without penalty or interest. The Company has not
elected pursuant to the Internal Revenue Code of 1986, as amended (the "Code"),
----
to be treated as a Subchapter S corporation or a collapsible corporation
pursuant to Section 1362(a) or Section 341(f) of the Code, nor has it made any
other elections pursuant to the Code (other than elections that relate solely to
methods of accounting, depreciation or amortization) that would have a material
adverse effect on the Company, its financial condition, its business as
presently conducted or as presently proposed to be conducted or any of its
properties or material assets. The Company has never had any tax deficiency
proposed or assessed against it and has not executed any waiver of any statute
of limitations on the assessment or collection of any tax or governmental
charge. None of the Company's federal income tax returns and none of its state
income or franchise tax or sales or use tax returns has ever been audited by
governmental authorities. Since the date of the Financial Statements, the
Company has made adequate provisions on its books of account for all taxes,
assessments and governmental charges with respect to its business, properties
and operations for such period. The Company has withheld or collected from each
payment made to each of its employees, the amount of all taxes (including, but
not limited to, federal income taxes, Federal Insurance Contribution Act taxes
and Federal Unemployment Tax Act taxes) required to be withheld or collected
therefrom, and has paid the same to the proper tax receiving officers or
authorized depositaries.
3.19 Employees. To the best of the Company's knowledge, no employee of the
---------
Company is a party to any agreement with any previous employer that in any way
adversely affects his performance of his duties as an employee of the Company or
is a party to or threatened by any litigation concerning any patents,
trademarks, trade secrets, and the like. The Company does not have any
collective bargaining agreements covering any of its employees. The Company has
no employee benefit plans or agreements with respect to profit-sharing or
pension benefits. Each of the Company's employees, officers and directors has
entered into the Company's standard proprietary information agreement in the
form provided to the Investors or their legal counsel, and the Company, after
reasonable investigation, is not aware that any of its employees, officers or
consultants are in violation thereof. The Company is not aware that any officer
or key employee, or that any group of key employees, intends to terminate their
employment with the Company, nor does the Company have a present intention to
terminate the employment of any of the foregoing. The employment of each
officer and employee of the Company is terminable at will by the Company or by
such officer or employee.
3.20 Securities Act. Subject to the accuracy of the Investors'
--------------
representations in Article 4 hereof, the offer, sale, and issuance of the
Securities in conformity with the terms of
<PAGE>
this Agreement, constitute transactions exempt from the registration
requirements of Section 5 of the Securities Act of 1933, as amended (the
"Securities Act").
--------------
3.21 Permits. The Company has all franchises, permits, licenses, and any
-------
similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects, or financial condition of the Company, and the
Company believes it can obtain, without undue burden or expense, any similar
authority for the conduct of its business as planned to be conducted. The
Company is not in default in any material respect under any of such franchises,
permits, licenses, or other similar authority.
3.22 Related-Party Transactions. Except as provided in Section 3.22 of the
---------------------------
Schedule of Exceptions, no employee, officer, or director of the Company or
member of his or her immediate family is indebted to the Company, nor is the
Company indebted (or committed to make loans or extend or guarantee credit) to
any of them. Except as provided in Section 3.22 of the Schedule of Exceptions,
to the best of the Company's knowledge, (i) none of such persons has any direct
or indirect ownership interest in any firm or corporation with which the Company
is affiliated or with which the Company has a business relationship, or any firm
or corporation that competes with the Company, except that employees, officers,
or directors of the Company and members of their immediate families may own
stock in publicly traded companies that may compete with the Company, and (ii)
no member of the immediate family of any officer or director of the Company is
directly or indirectly interested in any material contract with the Company.
3.23 ERISA Plans. The Company does not have any Employee Pension Benefit
-----------
Plan as defined in Section 3 of the Employee Retirement Income Security Act of
1974, as amended.
3.24 Insurance. The Company has in full force and effect fire and casualty
---------
insurance policies, with extended coverage, sufficient in amount (subject to
reasonable deductibles) to allow it to replace any of its properties that might
be damaged or destroyed.
3.25 Real Property Holding Company. The Company is not a real property
-----------------------------
holding company within the meaning of Section 897(c)(2) of the Code.
3.26 Year 2000 Compatibility. Software sold, marketed or otherwise used or
-----------------------
distributed by the Company shall not fail to perform any function specified in
the product specifications therefor, or otherwise be adversely affected in any
material respect, solely as a result of the date change from December 31, 1999
to January 1, 2000, including without limitation, date data century recognition,
calculations which accommodate same century and multi-century formulas and date
values, and date data interface values which reflect the correct century.
<PAGE>
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE INVESTORS
-----------------------------------------------
Each Investor hereby, severally and not jointly, represents and warrants to
the Company with respect to the purchase of the Shares as follows:
4.1 Experience. Such Investor has substantial experience in evaluating
----------
and investing in private placement transactions of securities in companies
similar to the Company so that such Investor is capable of evaluating the merits
and risks of such Investor's investment in the Company and has the capacity to
protect such Investor's own interests.
4.2 Investor Qualifications. Such Investor is an "accredited investor"
-----------------------
within the meaning of Rule 501(a) of Regulation D promulgated pursuant to 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. Such Investor, by reason of its
business or financial experience or the business or financial experience of its
professional advisors who are unaffiliated with the Company or any affiliate or
selling agent of the Company, directly or indirectly, has the capacity to
protect its own interests in connection with the purchase of the Shares.
4.3 Investment. Such Investor is acquiring the Securities for investment
----------
for such Investor's own account, not as a nominee or agent, and not with the
view to, or for resale in connection with, any distribution thereof. Such
Investor understands that the Securities 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 such
Investor's representations as expressed herein.
4.4 Rule 144. Such Investor acknowledges that the Securities must be held
--------
indefinitely unless subsequently registered under the Securities Act or an
exemption from such registration is available. Such Investor is aware of the
provisions of Rule 144 promulgated under the Securities Act which permit limited
resale 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" (as provided by Rule 144(f)) and (v) the number of shares
being sold during any three-month period not exceeding specified limitations.
4.5 No Public Market. Such Investor 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 Securities.
4.6 Access to Data. Such Investor and its representatives, if any, has
--------------
had an opportunity to ask questions of, and receive, answers from,
representatives of the Company
<PAGE>
concerning the Company and the terms and the conditions of this transaction, as
well as to obtain any information requested by such Investor or its
representatives. Any questions raised by such Investor or its representatives
were answered to the satisfaction of such Investor or its representatives. Such
Investor 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. Such Investor's decision to enter into the transaction
contemplated hereby is based in part on the answers to such questions as such
Investor and its representatives have raised and on such Investor'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 Article 3 of this Agreement or
the right of such Investor to rely thereon.
4.7 Authorization. This Agreement and the Rights Agreement, when executed
-------------
and delivered by such Investor, will constitute valid and legally binding
obligations of such Investor, 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.
4.8 Brokers or Finders. The Company has not incurred, and will not incur,
------------------
directly or indirectly, as a result of any action taken by such Investor, any
liability for brokerage or finders' fees or agents' commissions or any similar
charges in connection with this agreement or any transaction contemplated
hereby.
4.9 Tax Consequences. Such Investor 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. Such
Investor is relying solely on such advisors and not on any statements or
representations of the Company or any of its agents and understands that such
Investor (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.
ARTICLE 5
RESTRICTIONS ON TRANSFER
------------------------
5.1 Restrictions on Transfer. The Securities shall not be sold, assigned,
------------------------
transferred, or pledged except upon the conditions specified in this Article,
the Restated Articles, and the Bylaws, which conditions provide a right of first
offer in favor of the Company and are intended to, among other things, ensure
compliance with the provisions of the Securities Act of 1933, as amended (the
"Securities Act"). Any proposed transferee of the Securities held by such
--------------
Investor must agree (prior to transfer) to take and hold such securities subject
to the provisions and upon the conditions specified in this Article.
<PAGE>
5.2 Restrictive Legend. Each stock certificate representing (i) the
------------------
Securities, or (ii) any other securities issued in respect of the Securities
upon any stock split, stock dividend, merger, consolidation, recapitalization,
or similar event (collectively the "Restricted Securities"), 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 ARE SUBJECT TO A RIGHT OF
FIRST OFFER IN FAVOR OF THE COMPANY AND 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 CORPORATION, THAT AN EXEMPTION THEREFROM IS AVAILABLE.
COPIES OF THE AGREEMENTS COVERING THE PURCHASE OF THESE SECURITIES AND
RESTRICTING THEIR TRANSFER, THE AMENDED AND RESTATED ARTICLES OF
INCORPORATION OF THE COMPANY CONTAINING SUCH RESTRICTIONS, AND THE
COMPANY'S BYLAWS IMPOSING A RIGHT OF FIRST OFFER IN FAVOR OF THE COMPANY,
MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD
OF THIS CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT THE PRINCIPAL
EXECUTIVE OFFICES OF THE CORPORATION.
Each Investor and holder of any Securities consents to the Company making a
notation on its records and giving instructions to any transfer agent of the
Securities in order to implement the restrictions on transfer described in this
Section.
5.3 Notice of Proposed Transfers. Prior to any proposed transfer of any
----------------------------
Restricted Securities, 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. Notwithstanding anything to the contrary contained herein, no
such registration statement or opinion of counsel shall be necessary for a
transfer (i) without consideration by a non-"affiliate" (as defined in the
Securities Act) Investor which is (A) a partnership to its partners or former
partners in accordance with partnership interests, (B) a
<PAGE>
corporation to its shareholders in accordance with their interest in the
corporation, (C) a limited liability company to its members or former members in
accordance with their interest in the limited liability company, or (D) a
natural person to the Investor's immediate family member or trust for the
benefit of such individual Investor or (ii) with or without consideration by a
non-"affiliate" (as defined in the Securities Act) Investor which is an entity
to an "affiliate" (as defined in the Securities Act) of such Investor, provided
that such affiliate is an "accredited investor" (as defined in Regulation D
promulgated under the Securities Act); provided that in each case the transferee
will be subject to the terms of this Agreement to the same extent as if such
transferee were an original Investor hereunder. Each stock certificate
evidencing the Restricted Securities so transferred shall bear the appropriate
restrictive legends set forth in Section 5.2.
ARTICLE 6
CONDITIONS TO CLOSING OF THE INVESTORS
--------------------------------------
Each Investor's obligation to enter into the transactions contemplated
hereby at the Closing is subject to the fulfillment on or prior to the Closing
Date of the following conditions:
6.1 Representations and Warranties. The representations and warranties
------------------------------
made by the Company in Article 3 shall have been true and correct when made, and
shall be true and correct as of the Closing Date.
6.2 Covenants. All covenants, agreements, and conditions contained in
---------
this Agreement to be performed by the Company on or prior to the Closing shall
have been performed or complied with in all respects.
6.3 Compliance Certificate. The Company shall have delivered to the
----------------------
Investors a Compliance Certificate in substantially the form attached hereto as
Exhibit D, executed by an officer of the Company, dated as of the Closing Date,
- ---------
and certifying to the fulfillment of the conditions specified in Sections 6.1
and 6.2.
6.4 Opinion of Company's Counsel. Fenwick & West LLP, counsel for the
----------------------------
Company, shall have delivered to the Investors an opinion in substantially the
form attached hereto as Exhibit E, dated as of the Closing Date.
---------
6.5 Securities Exemptions. The offer and sale of the Shares to the
---------------------
Investors pursuant to this Agreement shall be exempt from the registration
requirements of the Securities Act, the qualification requirements of the
California Corporate Securities Law of 1968, as amended (the "California
----------
Securities Law") and the registration and/or qualification requirements of all
- --------------
other applicable state securities laws.
6.6 Restated Articles. The Restated Articles shall have been filed with
-----------------
and accepted by the California Secretary of State.
<PAGE>
6.7 Proceedings and Documents. All corporate and other proceedings in
-------------------------
connection with the transactions contemplated at the Closing and all documents
incident thereto shall be reasonably satisfactory in form and substance to the
Investors and their counsel, and the Investors shall have received all such
counterpart originals and certified or other copies of such documents as they
may reasonably request. Such documents shall include the following:
(a) Certified Charter Documents. A copy of the Restated Articles and
---------------------------
the Bylaws (as amended through the date of the Closing), certified by the
Secretary of the Company as true and correct copies thereof as of the Closing.
(b) Corporate Actions. A copy of the resolutions of the Board of
-----------------
Directors and, if required, the shareholders of the Company evidencing the
approval of the Restated Articles, the approval of this Agreement and the Rights
Agreement and the issuance of the Shares and the other matters contemplated
hereby.
(c) Secretary's Certificate. A certificate of the Secretary or other
-----------------------
officer of the Company certifying as true and correct the documents referred to
in subsections (a) and (b) above and certifying the names of the officers of the
Company authorized to sign this Agreement, the Rights Agreement and the
certificates evidencing the Shares.
6.8 Investors' Rights Agreement. The Company each Investor, and holders
---------------------------
of a majority of the Series B Preferred, Series C Preferred, Series D Preferred,
Series E Preferred and/or Conversion Stock representing or convertible into a
majority of all Registrable Securities under the Company's existing Investors'
Rights Agreement dated December 23, 1998 by and among the Company and the
persons and entities listed on Exhibit A thereto and Venture Lending and
---------
Leasing, Inc. (the "Prior Rights Agreement") shall have executed and delivered
----------------------
the Restated and Amended Investors' Rights Agreement in the form attached to
this Agreement as Exhibit F (the "Rights Agreement").
--------- ----------------
6.9 Existing Refusal Rights. The right of first offer provided in the
-----------------------
Prior Rights Agreement as it applies to the issuance and sale of the Shares
shall have been waived and released in writing or shall have been satisfied.
ARTICLE 7
CONDITIONS TO CLOSING OF THE COMPANY
------------------------------------
The Company's obligation to enter into the transactions contemplated hereby
at each closing is subject to the fulfillment on or prior to the Closing Date of
the following conditions:
7.1 Representations and Warranties. The representations and warranties
------------------------------
made by each Investor in Article 4 shall have been true and correct when made,
and shall be true and correct as of the Closing Date.
7.2 Securities Exemptions. The offer and sale of the Shares to the
---------------------
Investors pursuant to this Agreement shall be exempt from the registration
requirements of the Securities Act, the
<PAGE>
qualification requirements of the California Securities Law, and the
registration and/or qualification requirements of all other applicable state
securities laws.
7.3 Restated Articles. The Restated Articles shall have been filed with
-----------------
and accepted by the California Secretary of State.
7.4 Proceedings and Documents. All corporate and other proceedings in
-------------------------
connection with the transactions contemplated at the Closing and all documents
incident thereto shall be reasonably satisfactory in form and substance to the
Company and to the Company's legal counsel, and the Company shall have received
all such counterpart originals and certified or other copies of such documents
as it may reasonably request.
7.5 Investors' Rights Agreement. The Company, each Investor, and holders
---------------------------
of a majority of the Series B Preferred, Series C Preferred, Series D Preferred,
Series E Preferred and/or Conversion Stock representing or convertible into a
majority of all Registrable Securities under the Prior Rights Agreement shall
have executed and delivered the Rights Agreement.
7.6 Existing Refusal Rights. The right of first offer provided in the
-----------------------
Prior Rights Agreement as it applies to the issuance and sale of the Shares
shall have been waived and released in writing or shall have been satisfied.
7.7 Minimum Shares Purchased. A minimum of 2,062,366 shares of Series F
------------------------
Preferred shall be purchased by the Investors at the Closing for a minimum
aggregate purchase price of $7,500,000.20.
ARTICLE 8
ADDITIONAL COVENANTS
--------------------
8.1 Employee Proprietary Information Agreements. The Company hereby
-------------------------------------------
covenants and agrees that it will cause each of the Company's employees to
execute proprietary information and invention assignment agreements in the
Company's standard form, which has been provided to the Investors and their
counsel or a form substantially similar thereto.
8.2 Stock Vesting. Unless otherwise approved by the Board of Directors,
-------------
the Company hereby covenants and agrees that all future equity and option
issuances to officers, directors and employees shall be subject to a four year
vesting requirement, which shall also provide that no vesting shall occur until
a minimum of six months shall have passed from the vesting commencement date.
8.3 Indemnification Agreements. The Company shall enter into
--------------------------
Indemnification Agreements in the form provided to the Investors and their
counsel, or a substantially similar form, with the directors and executive
officers of the Company on or as promptly as possible after the date hereof.
<PAGE>
8.4 Board Observer. The Company will permit a single representative (the
--------------
"Representative") designated by Fidelity Investors II Limited Partnership and
--------------
Fidelity International Limited (collectively, "Fidelity") reasonably acceptable
--------
to the Company's Board of Directors (the "Board") to attend all meetings of the
-----
Board (whether in person, telephonic or other) in a non-voting, observer
capacity and shall provide to Fidelity or the Representative, concurrently with
the members of the Company's Board of Directors, notice of such meeting and a
copy of all materials provided to such members; provided that the Board may
exclude the Representative from any portion of any meeting and may redact from
any of such materials for or as to which the Board determines in its reasonable
discretion that (i) the subject matter of such portion of the meeting or such
portion of the materials involves matters for which a conflict of interest
exists between the Company and Fidelity or their portfolio companies, or (ii)
such exclusion or redaction is necessary to preserve the attorney-client
privilege; and provided further that Fidelity and the Representative shall
execute a confidentiality agreement substantially in the form attached hereto as
Exhibit G. The board observation right of Fidelity under this Section 8.4 shall
- ---------
terminate and be of no further force or effect upon the earliest to occur of (i)
the effective date of the initial public offering of the Company's securities or
(ii) the first date upon which Fidelity, together with any affiliates of
Fidelity, no longer holds at least fifty percent (50%) of the Securities
purchased by Fidelity pursuant to this Agreement.
ARTICLE 9
GENERAL PROVISIONS
------------------
9.1 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.
9.2 Survival. The representations, warranties, and covenants of the
--------
parties made herein shall survive the Closing and any Additional Closings and
shall in no way be affected by any investigation of the subject matter thereof
made by or on behalf of the parties.
9.3 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 an Investor to purchase Shares shall not
be assignable without the written consent of the Company.
9.4 Entire Agreement; Amendment and Waiver. This agreement and the other
--------------------------------------
documents delivered pursuant hereto 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 an
Investor and the Company and the holders of Shares and/or Conversion Shares
representing at least a majority of the aggregate number of shares of Common
Stock into which the Purchased Shares then are convertible and/or have been
converted (excluding any of
<PAGE>
such shares that have been sold to the public or pursuant to SEC Rule 144). Any
amendment or waiver effected in accordance with this Section shall be binding
upon each holder of any Purchased Shares and/or Conversion Shares at the time
outstanding, each future holder of such securities, and the Company; provided,
--------
however, that no condition set forth in Article 6 may be waived with respect to
- -------
any Investor who does not consent thereto; and provided further, that New
Investors may become parties to this Agreement in accordance with Article 2.2
without any amendment of this Agreement or any consent or approval of any
Investor.
9.5 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 an Investor, at its address set forth on Exhibit A, or at
---------
such other address as such Investor shall have furnished to the Company in
writing, and another copy to special counsel to the Investors, Sullivan &
Worcester LLP, One Post Office Square, Boston, Massachusetts 02109, or (ii) if
to any other holder of any Securities, 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
Securities 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 Investors, and another copy to the Company's
legal counsel to the attention of Richard L. Dickson, Esq. of Fenwick & West
LLP, Two Palo Alto Square, Palo Alto, California 94306.
9.6 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.
9.7 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.
9.8 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 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
<PAGE>
RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH
QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT.
9.9 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.
9.10 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.
9.11 Legal Expenses. The Company shall pay at the Closing in connection
--------------
with this Agreement and the issuance of the Shares, the legal fees and out-of-
pocket expenses of Sullivan & Worcester LLP, special counsel to the Investors,
with respect thereto, such fees and expenses not to exceed $10,000.
[REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
<PAGE>
9.12 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 instrument.
Executed effective as of the date first set forth above.
Optical Networks, Incorporated
By: /s/ Terrence J. Schmid
-----------------------------
Name: Terrence J. Schmid
---------------------------
Title: CFO
--------------------------
INVESTORS:
* * *
<PAGE>
EXHIBIT 10.21
OPTICAL NETWORKS, INCORPORATED
SERIES G PREFERRED STOCK PURCHASE AGREEMENT
This Series G Preferred Stock Purchase Agreement (the "Agreement") is made
---------
effective as of December 22, 1999, between Optical Networks, Incorporated, a
California corporation (the "Company"), with its principal office at 166-B
-------
Baypointe Parkway, San Jose, California 95134 and the parties listed on the
Schedule of Investors attached to this Agreement as Exhibit A (each hereafter
---------
individually referred to as an "Investor" and collectively referred to as the
--------
"Investors").
---------
ARTICLE 1
AUTHORIZATION AND SALE OF THE SHARES
------------------------------------
1.1 Authorization. The Company will have authorized before the Closing
-------------
(as defined below) the sale and issuance of up to 6,500,000 shares of the
Company's Series G Preferred Stock (the "Series G Preferred"), having the
------------------
rights, preferences, privileges, and restrictions as set forth in the Company's
Amended and Restated Articles of Incorporation in the form attached hereto as
Exhibit B (the "Restated Articles").
- --------- -----------------
1.2 Sale of the Series G Preferred Shares. Subject to the terms and
-------------------------------------
conditions hereof at the Closing, the Company shall sell and issue to each
Investor, and each Investor shall purchase from the Company, at a per share
purchase price of $12.635, the number of shares of Series G Preferred set forth
beside such Investor's name on Exhibit A. The shares of Series G Preferred
---------
purchased and sold pursuant to this Agreement will be hereinafter referred to as
the "Shares," the shares of Common Stock issuable upon conversion of the Shares
------
will be hereinafter referred to as the "Conversion Shares" and the Shares and/or
-----------------
the outstanding Conversion Shares will be collectively hereinafter referred to
as the "Securities."
----------
ARTICLE 2
CLOSINGS; DELIVERIES
--------------------
2.1 Closing. Subject to the terms and conditions of this Agreement, the
-------
purchase and sale of the Series G Preferred hereunder shall take place at a
closing (the "Closing") to be held at the offices of Fenwick & West LLP, Two
-------
Palo Alto Square, Palo Alto, California at 10:00 a.m. on December 22, 1999, or
at such other place or time upon which the Company and Investors who have agreed
to purchase a majority of the Shares listed on Exhibit A may mutually agree in
---------
writing. The date of the Closing is referred to as the "Closing Date."
------------
2.2 Additional Closing(s).
---------------------
(a) Conditions of Additional Closing(s). At any time and from time to
-----------------------------------
time, but no later than December 31, 1999 (the "Additional Closing Period"), the
-------------------------
Company may, at
1
<PAGE>
one or more additional closings (each an "Additional Closing"), without
------------------
obtaining the signature, consent or permission of any of the Investors, offer
and sell to other investors ("New Investors"), at a price of $12.635 per share,
-------------
up to that number of shares of Series G Stock that is equal to 6,500,000 shares
of Series G Stock less the number of shares of Series G Stock actually issued
and sold by the Company at the Closing. New Investors may include persons or
entities who are already Investors under this Agreement.
(b) Amendments. The Company and the New Investors purchasing Series G
----------
Stock at each Additional Closing will execute counterpart signature pages to
this Agreement and the Rights Agreement (as defined in Article 6.8), and such
New Investors will, upon delivery to the Company of such signature pages, become
parties to, and bound by, this Agreement and the Rights Agreement, each to the
same extent as if they had been Investors at the Closing. Immediately after
each Additional Closing, Exhibit A to this Agreement will be amended to list the
---------
New Investors purchasing shares of Series G Stock hereunder and the number of
shares of Series G Stock purchased by each New Investor under this Agreement at
each such Additional Closing. The Company will promptly furnish to each
Investor copies of the amendments to Exhibit A referred to in the preceding
---------
sentence.
(c) Status of New Investors. Upon the completion of each Additional
-----------------------
Closing as provided in this Article 2, each New Investor will be deemed to be an
"Investor" for all purposes of this Agreement and the Rights Agreement.
2.3 Deliveries. At the Closing and each Additional Closing, the Company
----------
shall deliver to each Investor a stock certificate or certificates representing
the number of Shares that such Investor has agreed to purchase hereunder as
shown on Exhibit A, against payment of the purchase price therefor, by delivery
---------
to the Company of (i) a check payable to the Company or (ii) a wire transfer to
the bank account of the Company.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
Except as set forth on the "Schedule of Exceptions" attached hereto as
----------------------
Exhibit C (specifically identifying the relevant Section(s) hereof), the Company
- ---------
hereby represents and warrants to the Investors as follows:
3.1 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. 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. The Company is not
qualified to do business as a foreign corporation in any jurisdiction. Such
qualification is not presently required in any jurisdiction where a failure to
so qualify would have a material adverse effect on the Company.
2
<PAGE>
3.2 Articles and Bylaws. The Company has made available to the Investors
-------------------
true, correct, and complete copies of the Restated Articles and the Company's
bylaws, as amended, dated January 12, 1998 (the "Bylaws").
------
3.3 Corporate Power. The Company has all requisite corporate power to
---------------
execute and deliver this Agreement and the Rights Agreement, to sell and issue
the Shares hereunder, to issue the Conversion Shares, and to carry out and
perform its obligations under the terms of this Agreement and the Rights
Agreement (described below).
3.4 Subsidiaries. The Company has no subsidiaries and does not otherwise
------------
own or control, directly or indirectly, any other corporation, partnership,
joint venture, association, or other similar business entity.
3.5 Capitalization. The capitalization of the Company will, upon the
--------------
filing of the Restated Articles, consist of the following:
(a) Preferred Stock. A total of 40,154,704 authorized shares of
---------------
preferred stock (the "Preferred Stock"), consisting of 12,536,718 shares
---------------
designated as Series B Preferred Stock ("Series B Preferred"), of which
------------------
12,397,755 shares will be issued and outstanding, 1,366,666 shares designated as
Series C Preferred Stock ("Series C Preferred"), of which 1,366,666 shares will
------------------
be issued and outstanding, 2,484,574 shares designated Series D Preferred Stock
("Series D Preferred"), of which 2,484,574 shares will be issued and
------------------
outstanding, 13,142,012 shares designated as Series E Preferred Stock ("Series E
--------
Preferred"), of which 13,142,012 shares will be issued and outstanding,
- ---------
4,124,734 shares designated Series F Preferred, 4,124,734 of which will be
issued and outstanding and 6,500,000 shares designated Series G Preferred, none
of which will be issued and outstanding. Upon the Closing, the rights,
preferences and privileges of the Series B Preferred, the Series C Preferred,
the Series D Preferred, the Series E Preferred, the Series F Preferred and the
Series G Preferred will be as stated in the Restated Articles and as provided by
law. As of the Closing each share of issued and outstanding Series B Preferred,
Series C Preferred, Series D Preferred, Series E Preferred, Series F Preferred
and Series G Preferred will be convertible into one share of Common Stock in all
cases pursuant to, and subject to, the terms set forth in the Restated Articles.
(b) Common Stock. A total of 79,845,296 authorized shares of Common
------------
Stock, of which 15,637,195 shares will be issued and outstanding.
(c) Options, Warrants, Reserved Shares. Except for (i) 44,445 shares
----------------------------------
of Common Stock issuable to Venture Lending & Leasing, Inc. ("VLLI"), in respect
----
of Section 4.2(c) of that certain warrant issued to VLLI on January 30, 1997,
72,289 shares of Common Stock issuable to VLLI in respect of Section 4.2(c) of
that certain warrant also issued to VLLI on January 30, 1997 and 138,963 shares
of Series B Preferred Stock issuable to Comdisco, Inc. pursuant to an Master
Lease Agreement dated February 10, 1999 by and between the Company and Comdisco,
Inc. ("Comdisco") and the related Warrant Agreement No. 1 to Purchase Shares of
Series B Preferred Stock dated as of February 10, 1999, Warrant Agreement No. 2
to Purchase Shares of Series B Preferred Stock dated as of February 10, 1999,
Warrant Agreement No. 3 to Purchase Shares of Series B Preferred Stock dated as
of February 10, 1999, 250,000 shares of Common Stock issuable to COLT Telecom
Group plc ("COLT"), in respect of that certain
----
3
<PAGE>
warrant issued to COLT on December 8, 1999, copies of which have been made
available to the Investors and their counsel, (ii) the conversion privileges of
the Series B Preferred, the Series C Preferred, the Series D Preferred, the
Series E Preferred, the Series F Preferred and the Series G Preferred, (iii) up
to 194,637 shares of Common Stock reserved for issuance under the Company's 1997
Stock Option Plan, 11,703,802 shares of Common Stock reserved for issuance under
the Company's 1998 Equity Incentive Plan of which 7,948,783 shares are subject
to outstanding grants, and 2,100,000 shares of Common Stock reserved for
issuance under the Company's 1999 Equity Incentive Plan of which 673,000 are
subject to outstanding grants (iv) the right of first offer provided in Section
3 of the Rights Agreement between the Company and the Investors in Exhibit A
---------
thereto (the "Rights Agreement"), and (v) the right of first refusal in Section
----------------
8.7 of the Bylaws with respect to transfers of shares of the Company's capital
stock, there are no other options, warrants, conversion privileges, or
preemptive or other rights or agreements presently outstanding to purchase or
otherwise acquire any authorized but unissued shares of the capital stock or
other securities of the Company.
(d) The outstanding shares of the capital stock of the Company have
been duly authorized and validly issued, and are fully paid and nonassessable
and have been issued in compliance with all applicable federal and state
securities laws.
(e) Other than as contemplated in Article 9 of that certain Series D
Preferred Stock Purchase Agreement of the Company dated April 1, 1998 and
Section 1.4 of the Rights Agreement, the Company is not a party or subject to
any agreement or understanding, and, to the best of the Company's knowledge,
there is no agreement or understanding between any persons and/or entities,
which affects or relates to the voting or giving of written consents with
respect to any security or by a director of the Company.
3.6 Authorization. All corporate action on the part of the Company, its
-------------
directors, and its shareholders necessary for the authorization, execution,
delivery, and performance of this Agreement and the Rights Agreement by the
Company, the authorization, sale, issuance, and delivery of the Shares (and,
except for issuance and delivery thereof, the Conversion Shares), and the
performance of all of the Company's obligations hereunder (except for the
performance of its covenants to be performed subsequent to each Closing) will
have been taken prior to the Closing. This Agreement and the Rights Agreement
(as such may be amended under Article 2.2) 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 Company has reserved up to 6,500,000 shares of Series G
Preferred for issuance hereunder and up to 6,500,000 shares of Common Stock for
issuance upon conversion of the Shares. The Shares, when issued in accordance
with this Agreement, will be duly authorized, validly issued, fully paid, and
nonassessable, and will have the rights, preferences, privileges, and
restrictions as set forth in the Restated Articles. The Conversion Shares have
been, and at all times will be, duly and validly reserved and, when issued in
accordance with this Agreement and the Restated Articles, will be duly
authorized, validly issued, fully paid, and nonassessable. The Securities, when
issued, will be free of any liens or encumbrances created by the Company;
provided, however, that the Securities will be subject to
4
<PAGE>
restrictions on transfer under federal and state securities laws and as set
forth in the Restated Articles, the Bylaws, the Rights Agreement and herein.
Based in part upon the representations and warranties of the Investors in this
Agreement, the Securities will be issued in compliance with all applicable
federal and state securities laws.
3.7 Material Agreements; Certain Actions.
------------------------------------
(a) Except for agreements explicitly contemplated hereby, the Rights
Agreement, and as identified in Section 3.7 of the Schedule of Exceptions, there
are no agreements or other understandings between the Company and any of its
officers, directors, affiliates, or any affiliate thereof.
(b) Except for agreements and other documents identified in Section
3.7 of the Schedule of Exceptions, there are no agreements, understandings,
instruments, contracts, judgments, orders, writs or decrees to which the Company
is a party or by which it is bound that provide for or include (i) obligations
(contingent or otherwise) of, or payments to the Company in excess of, $5,000,
other than in the ordinary course of business, (ii) the license of any patent,
copyright, trade secret or other proprietary right to or from the Company, (iii)
provisions restricting the development, manufacture or distribution of the
Company's products or services, or (iv) indemnification by the Company with
respect to infringements of proprietary rights. For the purposes of subsection
3.7(b)(i), all obligations of, or payments by, the Company to the same person or
entity (including persons or entities the Company has reason to believe are
affiliated therewith) shall be aggregated for the purpose of meeting the
individual minimum dollar amounts specified in such subsection.
(c) Except as identified in Section 3.7 of the Schedule of Exceptions,
the Company has not (i) declared or paid any dividends or authorized or made any
distribution upon or with respect to any class or series of its capital stock,
(ii) made any loans or advances to any person, other than ordinary advances for
travel expenses, or (iii) sold, exchanged or otherwise disposed of any material
portion of its assets or rights, other than in the ordinary course of business.
(d) The Company has not agreed to any oral modifications to any of the
Company's material agreements.
3.8 Financial Statements. The Company has delivered to the Investors its
--------------------
unaudited financial statements (balance sheet and profit and loss statement)
(collectively, the "Financial Statements") as at, and for the period commencing
--------------------
on the date of incorporation of the Company and ended on, October 31, 1999 (the
"Balance Sheet Date"). The Financial Statements have been prepared in
------------------
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods indicated and with each other, except for the
omission of notes thereto required by generally accepted accounting principles.
The Financial Statements fairly present the financial condition and operating
results of the Company as of the dates, and for the periods, indicated therein,
subject to normal year-end audit adjustments. 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
5
<PAGE>
the Financial Statements, (ii) liabilities that have been incurred by the
Company since the Balance Sheet Date 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. Except as disclosed in the Financial
Statements, the Company is not a guarantor or indemnitor of any indebtedness of
any other person, firm or corporation. The Company maintains and will continue
to maintain a standard system of accounting established and administered in
accordance with generally accepted accounting principles.
3.9 Changes. Since the Balance Sheet Date, there has not been:
-------
(a) any change in the assets, liabilities, financial condition or
operating results of the Company from those reflected in the Financial
Statements, except changes in the ordinary course of business that have not
been, in the aggregate, materially adverse;
(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the assets, properties, financial
condition, operating results or business of the Company (as such business is
presently conducted and as it is presently proposed to be conducted);
(c) any waiver by the Company of a valuable right or of a material
debt owed to it;
(d) any satisfaction or discharge of any lien, claim or encumbrance or
payment of any obligation by the Company, except in the ordinary course of
business and that is not material to the assets, properties, financial
condition, operating results or business of the Company (as such business is
presently conducted and is presently proposed to be conducted);
(e) any material change or amendment to a material contract or
arrangement by which the Company or any of its assets or properties is bound or
subject, except for changes or amendments which are expressly provided for by
this Agreement or the Rights Agreement or are disclosed in the Schedule of
Exceptions;
(f) any material change in any compensation arrangement or agreement
with any employee;
(g) any sale, assignment or transfer (excluding licenses) of any
patents, trademarks, copyrights, trade secrets or other intangible assets;
(h) any resignation or termination of employment of any key officer of
the Company; and the Company, to the best of its knowledge, does not know of the
impending resignation or termination of employment of any such officer;
(i) receipt of notice that there has been a loss of, or material order
cancellation by, any major customer of the Company;
(j) any mortgage, pledge, transfer of a security interest in, or lien,
created by the Company, with respect to any of its material properties or
assets, except liens for taxes not yet due or payable;
6
<PAGE>
(k) any loans or guarantees made by the Company to or for the benefit
of its employees, officers or directors, or any members of their immediate
families, other than travel advances and other advances made in the ordinary
course of its business; or
(l) any declaration, setting aside or payment or other distribution in
respect of any of the Company's capital stock, or any direct or indirect
redemption, purchase or other acquisition of any of such stock by the Company.
3.10 Title to Properties and Assets. The Company owns no real property
------------------------------
and, except as identified in Section 3.10 of the Schedule of Exceptions, has no
leasehold interests. The Company has good and marketable title to all its
properties and assets, in each case subject to no mortgage, pledge, lien, lease,
conditional sale agreement, security interest, encumbrance, or charge, other
than (i) the lien of current taxes not yet due and payable, and (ii) possible
minor liens and encumbrances which have risen in the ordinary course of business
and which do not, in any case or in the aggregate, materially detract from the
value of the property subject thereto or materially impair the operations of the
Company.
3.11 Intellectual Property. As licensee under that certain License
---------------------
Agreement by and between the Company and Optivision, Inc. dated as of October
29, 1997 (the "Optivision License Agreement"), the Company has sufficient rights
----------------------------
to use, free and clear of all liens, charges, claims, and restrictions, all
patents, trademarks, service marks, trade names, copyrights, licenses, and other
intellectual property rights necessary to its business as now conducted and as
presently proposed to be conducted, without any infringement of the rights of
others, subject to the understandings described on Section 3.11 of the Schedule
of Exceptions. A true and correct copy of the Optivision License Agreement has
been made available for inspection by the Investors and their legal counsel.
The Company has not received any communications alleging that the Company has
violated or, by conducting its business as proposed, would violate any of the
patents, trademarks, service marks, trade names, copyrights or trade secrets or
other proprietary rights of any other person or entity. The Company is not
aware that any of its employees is obligated under any contract (including
licenses, covenants or commitments of any nature) or other agreement, or subject
to any judgment, decree or order of any court or administrative agency, that
would interfere with the use of his best efforts to promote the interests of the
Company or that would conflict with the Company's business as now conducted and
as presently proposed to be conducted. Neither the execution nor delivery of
this Agreement, nor the carrying on of the Company's business by the employees
of the Company, nor the conduct of the Company's business as proposed, will, to
the Company's knowledge, conflict with or result in a breach of the terms,
conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which any of such employees is now obligated. The
Company does not believe it is or will be necessary to utilize any inventions of
any of its employees (or people it currently intends to hire) made prior to
their employment by the Company or Optivision.
3.12 Compliance with Other Instruments. The Company is not in violation
---------------------------------
of any term of its Restated Articles or Bylaws, or in any material respect of
any term or provision of any mortgage, indebtedness, indenture, contract,
agreement, instrument, judgment, or decree, and to the best of its knowledge, is
not in material violation of any order, statute, rule, or regulation applicable
to the Company. The execution, delivery, and performance of and compliance with
7
<PAGE>
this Agreement and the Rights Agreement, and the issuance of the Securities,
have not resulted and will not result in (i) any violation of, or conflict with,
or constitute a default under, any such term or result in the creation of any
mortgage, pledge, lien, encumbrance, or charge upon any of the properties or
assets of the Company, or (ii) 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.
3.13 Litigation. There are no actions, suits, proceedings or
----------
investigations pending against the Company or its properties (or, to the
knowledge of the Company, against any of the Company's officers or key
employees), or by the Company, or which the Company proposes to initiate before
any court or governmental agency (nor, to the best of the Company's knowledge,
is there any basis therefor or threat thereof).
3.14 Registration Rights. Except as set forth in the documents listed in
-------------------
Section 3.14 of the Schedule of Exceptions, the Company is not under any
obligation to register (as defined in Section 2.1 of the Rights Agreement) any
of its presently outstanding securities or any of its securities which may
hereafter be issued.
3.15 Governmental Consent. 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 the offer, sale, or issuance of the Securities, or the
consummation of any other transaction contemplated hereby, except (i) filing of
the Restated Articles with the California Secretary of State, and (ii)
qualification (or taking such action as may be necessary to secure an exemption
from qualification, if available) of the offer and sale of the Securities 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.
3.16 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' fees or agents' commissions or any
similar charges in connection with this Agreement or any transaction
contemplated hereby.
3.17 Disclosure. No representation or warranty of the Company contained
----------
in this Agreement or in the exhibits or schedules attached hereto or in any
written statement or certificate furnished or to be furnished to the Investors
pursuant hereto or in connection with the transactions contemplated hereby, when
read together, contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained herein
or therein not misleading in light of the circumstances under which they were
made. There is no fact known to the Company which materially adversely affects
the business, operations, affairs, or condition of the Company, or any of its
properties or assets, which has not been set forth in this Agreement or in the
exhibits or schedules attached hereto or in any such written statement.
3.18 Taxes. All tax returns and reports of the Company required by law to
-----
be filed have been duly filed, and all taxes, assessments, fees, and other
governmental charges upon the Company, upon any of its properties, assets,
income, or franchises, which are due and payable
8
<PAGE>
have been paid, other than those presently payable without penalty or interest.
The Company has not elected pursuant to the Internal Revenue Code of 1986, as
amended (the "Code"), to be treated as a Subchapter S corporation or a
----
collapsible corporation pursuant to Section 1362(a) or Section 341(f) of the
Code, nor has it made any other elections pursuant to the Code (other than
elections that relate solely to methods of accounting, depreciation or
amortization) that would have a material adverse effect on the Company, its
financial condition, its business as presently conducted or as presently
proposed to be conducted or any of its properties or material assets. The
Company has never had any tax deficiency proposed or assessed against it and has
not executed any waiver of any statute of limitations on the assessment or
collection of any tax or governmental charge. None of the Company's federal
income tax returns and none of its state income or franchise tax or sales or use
tax returns has ever been audited by governmental authorities. Since the date of
the Financial Statements, the Company has made adequate provisions on its books
of account for all taxes, assessments and governmental charges with respect to
its business, properties and operations for such period. The Company has
withheld or collected from each payment made to each of its employees, the
amount of all taxes (including, but not limited to, federal income taxes,
Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes)
required to be withheld or collected therefrom, and has paid the same to the
proper tax receiving officers or authorized depositaries.
3.19 Employees. To the best of the Company's knowledge, no employee of
---------
the Company is a party to any agreement with any previous employer that in any
way adversely affects his performance of his duties as an employee of the
Company or is a party to or threatened by any litigation concerning any patents,
trademarks, trade secrets, and the like. The Company does not have any
collective bargaining agreements covering any of its employees. The Company has
no employee benefit plans or agreements with respect to profit-sharing or
pension benefits. Each of the Company's employees, officers and directors has
entered into the Company's standard proprietary information agreement in the
form provided to the Investors or their legal counsel, and the Company, after
reasonable investigation, is not aware that any of its employees, officers or
consultants are in violation thereof. The Company is not aware that any officer
or key employee, or that any group of key employees, intends to terminate their
employment with the Company, nor does the Company have a present intention to
terminate the employment of any of the foregoing. The employment of each
officer and employee of the Company is terminable at will by the Company or by
such officer or employee.
3.20 Securities Act. Subject to the accuracy of the Investors'
--------------
representations in Article 4 hereof, the offer, sale, and issuance of the
Securities in conformity with the terms of this Agreement, constitute
transactions exempt from the registration requirements of Section 5 of the
Securities Act of 1933, as amended (the "Securities Act").
--------------
3.21 Permits. The Company has all franchises, permits, licenses, and any
-------
similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects, or financial condition of the Company, and the
Company believes it can obtain, without undue burden or expense, any similar
authority for the conduct of its business as planned to be conducted. The
Company is not in default in any material respect under any of such franchises,
permits, licenses, or other similar authority.
9
<PAGE>
3.22 Related-Party Transactions. Except as provided in Section 3.22 of
---------------------------
the Schedule of Exceptions, no employee, officer, or director of the Company or
member of his or her immediate family is indebted to the Company, nor is the
Company indebted (or committed to make loans or extend or guarantee credit) to
any of them. Except as provided in Section 3.22 of the Schedule of Exceptions,
to the best of the Company's knowledge, (i) none of such persons has any direct
or indirect ownership interest in any firm or corporation with which the Company
is affiliated or with which the Company has a business relationship, or any firm
or corporation that competes with the Company, except that employees, officers,
or directors of the Company and members of their immediate families may own
stock in publicly traded companies that may compete with the Company, and (ii)
no member of the immediate family of any officer or director of the Company is
directly or indirectly interested in any material contract with the Company.
3.23 ERISA Plans. The Company does not have any Employee Pension Benefit
-----------
Plan as defined in Section 3 of the Employee Retirement Income Security Act of
1974, as amended.
3.24 Insurance. The Company has in full force and effect fire and
---------
casualty insurance policies, with extended coverage, sufficient in amount
(subject to reasonable deductibles) to allow it to replace any of its properties
that might be damaged or destroyed.
3.25 Real Property Holding Company. The Company is not a real property
-----------------------------
holding company within the meaning of Section 897(c)(2) of the Code.
3.26 Year 2000 Compatibility. Software sold, marketed or otherwise used or
-----------------------
distributed by the Company shall not fail to perform any function specified in
the product specifications therefor, or otherwise be adversely affected in any
material respect, solely as a result of the date change from December 31, 1999
to January 1, 2000, including without limitation, date data century recognition,
calculations which accommodate same century and multi-century formulas and date
values, and date data interface values which reflect the correct century.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE INVESTORS
-----------------------------------------------
Each Investor hereby, severally and not jointly, represents and warrants to
the Company with respect to the purchase of the Shares as follows:
4.1 Experience. Such Investor has substantial experience in evaluating
----------
and investing in private placement transactions of securities in companies
similar to the Company so that such Investor is capable of evaluating the merits
and risks of such Investor's investment in the Company and has the capacity to
protect such Investor's own interests.
4.2 Investor Qualifications. Such Investor is an "accredited investor"
-----------------------
within the meaning of Rule 501(a) of Regulation D promulgated pursuant to 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. Such Investor, by
10
<PAGE>
reason of its business or financial experience or the business or financial
experience of its professional advisors who are unaffiliated with the Company or
any affiliate or selling agent of the Company, directly or indirectly, has the
capacity to protect its own interests in connection with the purchase of the
Shares.
4.3 Investment. Such Investor is acquiring the Securities for investment
----------
for such Investor's own account, not as a nominee or agent, and not with the
view to, or for resale in connection with, any distribution thereof. Such
Investor understands that the Securities 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 such
Investor's representations as expressed herein.
4.4 Rule 144. Such Investor acknowledges that the Securities must be held
--------
indefinitely unless subsequently registered under the Securities Act or an
exemption from such registration is available. Such Investor is aware of the
provisions of Rule 144 promulgated under the Securities Act which permit limited
resale 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" (as provided by Rule 144(f)) and (v) the number of shares
being sold during any three-month period not exceeding specified limitations.
4.5 No Public Market. Such Investor 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 Securities.
4.6 Access to Data. Such Investor 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 such Investor or its representatives. Any questions raised by such Investor
or its representatives were answered to the satisfaction of such Investor or its
representatives. Such Investor 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. Such Investor's decision to enter into the transaction
contemplated hereby is based in part on the answers to such questions as such
Investor and its representatives have raised and on such Investor'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 Article 3 of this Agreement or
the right of such Investor to rely thereon.
4.7 Authorization. This Agreement and the Rights Agreement, when executed
-------------
and delivered by such Investor, will constitute valid and legally binding
obligations of such Investor, 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
11
<PAGE>
indemnification provisions of Section 2.9 of the Rights Agreement may be limited
by principles of public policy.
4.8 Brokers or Finders. The Company has not incurred, and will not incur,
------------------
directly or indirectly, as a result of any action taken by such Investor, any
liability for brokerage or finders' fees or agents' commissions or any similar
charges in connection with this agreement or any transaction contemplated
hereby.
4.9 Tax Consequences. Such Investor 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. Such
Investor is relying solely on such advisors and not on any statements or
representations of the Company or any of its agents and understands that such
Investor (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.
ARTICLE 5
RESTRICTIONS ON TRANSFER
------------------------
5.1 Restrictions on Transfer. The Securities shall not be sold, assigned,
------------------------
transferred, or pledged except upon the conditions specified in this Article,
the Restated Articles, and the Bylaws, which conditions provide a right of first
offer in favor of the Company and are intended to, among other things, ensure
compliance with the provisions of the Securities Act of 1933, as amended (the
"Securities Act"). Any proposed transferee of the Securities held by such
--------------
Investor must agree (prior to transfer) to take and hold such securities subject
to the provisions and upon the conditions specified in this Article.
5.2 Restrictive Legend. Each stock certificate representing (i) the
------------------
Securities, or (ii) any other securities issued in respect of the Securities
upon any stock split, stock dividend, merger, consolidation, recapitalization,
or similar event (collectively the "Restricted Securities"), 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 ARE SUBJECT TO A RIGHT OF
FIRST OFFER IN FAVOR OF THE COMPANY AND 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 CORPORATION, THAT AN EXEMPTION THEREFROM IS AVAILABLE.
COPIES OF THE AGREEMENTS COVERING THE PURCHASE OF THESE SECURITIES AND
RESTRICTING THEIR TRANSFER, THE AMENDED AND
12
<PAGE>
RESTATED ARTICLES OF INCORPORATION OF THE COMPANY CONTAINING SUCH
RESTRICTIONS, AND THE COMPANY'S BYLAWS IMPOSING A RIGHT OF FIRST OFFER IN
FAVOR OF THE COMPANY, MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY
THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE
CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION.
Each Investor and holder of any Securities consents to the Company making a
notation on its records and giving instructions to any transfer agent of the
Securities in order to implement the restrictions on transfer described in this
Section.
5.3 Notice of Proposed Transfers. Prior to any proposed transfer of any
----------------------------
Restricted Securities, 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. Notwithstanding anything to the contrary contained herein, no
such registration statement or opinion of counsel shall be necessary for a
transfer (i) without consideration by a non-"affiliate" (as defined in the
Securities Act) Investor which is (A) a partnership to its partners or former
partners in accordance with partnership interests, (B) a corporation to its
shareholders in accordance with their interest in the corporation, (C) a limited
liability company to its members or former members in accordance with their
interest in the limited liability company, or (D) a natural person to the
Investor's immediate family member or trust for the benefit of such individual
Investor or (ii) with or without consideration by a non-"affiliate" (as defined
in the Securities Act) Investor which is an entity to an "affiliate" (as defined
in the Securities Act) of such Investor, provided that such affiliate is an
"accredited investor" (as defined in Regulation D promulgated under the
Securities Act); provided that in each case the transferee will be subject to
the terms of this Agreement to the same extent as if such transferee were an
original Investor hereunder. Each stock certificate evidencing the Restricted
Securities so transferred shall bear the appropriate restrictive legends set
forth in Section 5.2.
ARTICLE 6
CONDITIONS TO CLOSING OF THE INVESTORS
--------------------------------------
Each Investor's obligation to enter into the transactions contemplated
hereby at the Closing is subject to the fulfillment on or prior to the Closing
Date of the following conditions:
13
<PAGE>
6.1 Representations and Warranties. The representations and warranties
------------------------------
made by the Company in Article 3 shall have been true and correct when made, and
shall be true and correct as of the Closing Date.
6.2 Covenants. All covenants, agreements, and conditions contained in
---------
this Agreement to be performed by the Company on or prior to the Closing shall
have been performed or complied with in all respects.
6.3 Compliance Certificate. The Company shall have delivered to the
----------------------
Investors a Compliance Certificate in substantially the form attached hereto as
Exhibit D, executed by an officer of the Company, dated as of the Closing Date,
- ---------
and certifying to the fulfillment of the conditions specified in Sections 6.1
and 6.2.
6.4 Opinion of Company's Counsel. Fenwick & West LLP, counsel for the
----------------------------
Company, shall have delivered to the Investors an opinion in substantially the
form attached hereto as Exhibit E, dated as of the Closing Date.
---------
6.5 Securities Exemptions. The offer and sale of the Shares to the
---------------------
Investors pursuant to this Agreement shall be exempt from the registration
requirements of the Securities Act, the qualification requirements of the
California Corporate Securities Law of 1968, as amended (the "California
----------
Securities Law") and the registration and/or qualification requirements of all
- --------------
other applicable state securities laws.
6.6 Restated Articles. The Restated Articles shall have been filed with
-----------------
and accepted by the California Secretary of State.
6.7 Proceedings and Documents. All corporate and other proceedings in
-------------------------
connection with the transactions contemplated at the Closing and all documents
incident thereto shall be reasonably satisfactory in form and substance to the
Investors and their counsel, and the Investors shall have received all such
counterpart originals and certified or other copies of such documents as they
may reasonably request. Such documents shall include the following:
(a) Certified Charter Documents. A copy of the Restated Articles and
---------------------------
the Bylaws (as amended through the date of the Closing), certified by the
Secretary of the Company as true and correct copies thereof as of the Closing.
(b) Corporate Actions. A copy of the resolutions of the Board of
-----------------
Directors and, if required, the shareholders of the Company evidencing the
approval of the Restated Articles, the approval of this Agreement and the Rights
Agreement and the issuance of the Shares and the other matters contemplated
hereby.
(c) Secretary's Certificate. A certificate of the Secretary or other
-----------------------
officer of the Company certifying as true and correct the documents referred to
in subsections (a) and (b) above and certifying the names of the officers of the
Company authorized to sign this Agreement, the Rights Agreement and the
certificates evidencing the Shares.
6.8 Investors' Rights Agreement. The Company each Investor, and holders
---------------------------
of a majority of the Series B Preferred, Series C Preferred, Series D Preferred,
Series E Preferred,
14
<PAGE>
Series F Preferred and/or Conversion Stock representing or convertible into a
majority of all Registrable Securities under the Company's existing Investors'
Rights Agreement dated September 2, 1999 by and among the Company and the
persons and entities listed on Exhibit A thereto and Venture Lending and
---------
Leasing, Inc. (the "Prior Rights Agreement") shall have executed and delivered
----------------------
the Restated and Amended Investors' Rights Agreement in the form attached to
this Agreement as Exhibit F (the "Rights Agreement").
--------- ----------------
6.9 Existing Refusal Rights. The right of first offer provided in the
-----------------------
Prior Rights Agreement as it applies to the issuance and sale of the Shares
shall have been waived and released in writing or shall have been satisfied.
ARTICLE 7
CONDITIONS TO CLOSING OF THE COMPANY
------------------------------------
The Company's obligation to enter into the transactions contemplated hereby
at each closing is subject to the fulfillment on or prior to the Closing Date of
the following conditions:
7.1 Representations and Warranties. The representations and warranties
------------------------------
made by each Investor in Article 4 shall have been true and correct when made,
and shall be true and correct as of the Closing Date.
7.2 Securities Exemptions. The offer and sale of the Shares to the
---------------------
Investors pursuant to this Agreement shall be exempt from the registration
requirements of the Securities Act, the qualification requirements of the
California Securities Law, and the registration and/or qualification
requirements of all other applicable state securities laws.
7.3 Restated Articles. The Restated Articles shall have been filed with
-----------------
and accepted by the California Secretary of State.
7.4 Proceedings and Documents. All corporate and other proceedings in
-------------------------
connection with the transactions contemplated at the Closing and all documents
incident thereto shall be reasonably satisfactory in form and substance to the
Company and to the Company's legal counsel, and the Company shall have received
all such counterpart originals and certified or other copies of such documents
as it may reasonably request.
7.5 Investors' Rights Agreement. The Company, each Investor, and holders
---------------------------
of a majority of the Series B Preferred, Series C Preferred, Series D Preferred,
Series E Preferred, Series F Preferred and/or Conversion Stock representing or
convertible into a majority of all Registrable Securities under the Prior Rights
Agreement shall have executed and delivered the Rights Agreement.
7.6 Existing Refusal Rights. The right of first offer provided in the
-----------------------
Prior Rights Agreement as it applies to the issuance and sale of the Shares
shall have been waived and released in writing or shall have been satisfied.
15
<PAGE>
7.7 Minimum Shares Purchased. A minimum of 2,300,000 shares of Series G
------------------------
Preferred shall be purchased by the Investors at the Closing for a minimum
aggregate purchase price of $29,060,500.
ARTICLE 8
ADDITIONAL COVENANTS
--------------------
8.1 Employee Proprietary Information Agreements. The Company hereby
-------------------------------------------
covenants and agrees that it will cause each of the Company's employees,
consultants and independent contractors to execute proprietary information and
invention assignment agreements in the Company's standard form, which has been
provided to the Investors and their counsel or a form substantially similar
thereto.
8.2 Stock Vesting. Unless otherwise approved by the Board of Directors,
-------------
the Company hereby covenants and agrees that all future equity and option
issuances to officers, directors and employees shall be subject to a four year
vesting requirement, which shall also provide that no vesting shall occur until
a minimum of six months shall have passed from the vesting commencement date.
8.3 Indemnification Agreements. The Company shall enter into
--------------------------
Indemnification Agreements in the form provided to the Investors and their
counsel, or a substantially similar form, with the directors and executive
officers of the Company on or as promptly as possible after the date hereof.
8.4 Board Observer. The Company will permit a single representative (the
--------------
"Representative") designated by Bowman Capital Management ("Bowman") reasonably
--------------
acceptable to the Company's Board of Directors (the "Board") to attend all
-----
meetings of the Board (whether in person, telephonic or other) in a non-voting,
observer capacity and shall provide to Bowman or the Representative,
concurrently with the members of the Company's Board of Directors, notice of
such meeting and a copy of all materials provided to such members; provided that
the Board may exclude the Representative from any portion of any meeting and may
redact from any of such materials for or as to which the Board determines in its
reasonable discretion that (i) the subject matter of such portion of the meeting
or such portion of the materials involves matters for which a conflict of
interest exists between the Company and Bowman or their portfolio companies, or
(ii) such exclusion or redaction is necessary to preserve the attorney-client
privilege; and provided further that Bowman and the Representative shall execute
a confidentiality agreement substantially in the form attached hereto as Exhibit
-------
G. The board observation right of Bowman under this Section 8.4 shall terminate
- -
and be of no further force or effect upon the earliest to occur of (i) the
effective date of the initial public offering of the Company's securities or
(ii) the first date upon which Bowman, together with any affiliates of Bowman,
no longer holds at least fifty percent (50%) of the Securities purchased by
Bowman pursuant to this Agreement.
16
<PAGE>
ARTICLE 9
GENERAL PROVISIONS
------------------
9.1 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.
9.2 Survival. The representations, warranties, and covenants of the
--------
parties made herein shall survive the Closing and any Additional Closings and
shall in no way be affected by any investigation of the subject matter thereof
made by or on behalf of the parties.
9.3 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 an Investor to purchase Shares shall not
be assignable without the written consent of the Company.
9.4 Entire Agreement; Amendment and Waiver. This agreement and the other
--------------------------------------
documents delivered pursuant hereto 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 an
Investor and the Company and the holders of Shares and/or Conversion Shares
representing at least a majority of the aggregate number of shares of Common
Stock into which the Purchased Shares then are convertible and/or have been
converted (excluding any of such shares that have been sold to the public or
pursuant to SEC Rule 144). Any amendment or waiver effected in accordance with
this Section shall be binding upon each holder of any Purchased Shares and/or
Conversion Shares at the time outstanding, each future holder of such
securities, and the Company; provided, however, that no condition set forth in
-------- -------
Article 6 may be waived with respect to any Investor who does not consent
thereto; and provided further, that New Investors may become parties to this
Agreement in accordance with Article 2.2 without any amendment of this Agreement
or any consent or approval of any Investor.
9.5 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 an Investor, at its address set forth on Exhibit A, or at
---------
such other address as such Investor shall have furnished to the Company in
writing, and another copy to special counsel to the Investors, Sullivan &
Worcester LLP, One Post Office Square, Boston, Massachusetts 02109, or (ii) if
to any other holder of any Securities, 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
Securities 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 Investors, and
17
<PAGE>
another copy to the Company's legal counsel to the attention of Richard L.
Dickson, Esq. of Fenwick & West LLP, Two Palo Alto Square, Palo Alto, California
94306.
9.6 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.
9.7 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.
9.8 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 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.
9.9 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.
9.10 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.
9.11 Legal Expenses. The Company shall pay at the Closing in connection
--------------
with this Agreement and the issuance of the Shares, the legal fees and out-of-
pocket expenses of Venture Law Group, special counsel to Bowman Capital
Management, with respect thereto, such fees and expenses not to exceed $15,000.
The Company is under no obligation to pay any legal fees for any other Investor
besides Bowman Capital Management.
9.12 Waiver of Conflict of Interest. Each Investor and the Company is
------------------------------
aware that Fenwick & West LLP ("F&W") may have previously performed and may
continue to perform
18
<PAGE>
certain legal services for certain of the Investors in matters unrelated to
F&W's representation of the Company. In connection with its Investor
representation, F&W may have obtained confidential information of such Investors
that could be material to F&W's representation of the Company in connection with
negotiation, execution and performance of this Agreement. In addition, F&W
Investments 2000, an affiliate of F&W, is investing as an Investor under the
terms of this Agreement. By signing this Agreement, each Investor and the
Company hereby acknowledges that the terms of this Agreement were negotiated
between the Investors and the Company and are fair and reasonable and waives any
potential conflict of interest arising out of such representation or such
possession of confidential information and consents to the investment by F&W.
Each Investor and the Company further represents that it has had the opportunity
to be, or has been, represented by independent counsel in giving the waivers
contained in this Section 9.12.
[REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
19
<PAGE>
9.13 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 instrument.
Executed effective as of the date first set forth above.
Optical Networks, Incorporated
By: /s/ Terrence J. Schmid
-----------------------------
Name: Terrence J. Schmid
----------------------------
Title: CFO
---------------------------
INVESTOR
* * *
<PAGE>
EXHIBIT 23.02
The Board of Directors
ONI Systems Corp.:
The audits referred to in our report dated March 9, 2000, included the
related financial statement schedule of ONI Systems Corp. as of December 31,
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. 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.
KPMG LLP
Mountain View, California
March 9, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM ONI SYSTEMS CORP.'S
CONSOLIDATED FINANCIAL STATEMENTS FOR DECEMBER 31, 1998 AND 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 19,019,688 80,022,591
<SECURITIES> 0 0
<RECEIVABLES> 1,092,853 163,434
<ALLOWANCES> 0 0
<INVENTORY> 0 9,648,856
<CURRENT-ASSETS> 20,295,044 90,605,860
<PP&E> 1,016,698 5,314,990
<DEPRECIATION> 289,256 963,587
<TOTAL-ASSETS> 21,312,242 100,271,853
<CURRENT-LIABILITIES> 668,014 8,847,951
<BONDS> 0 0
0 0
26,015,177 123,290,546
<COMMON> 8,947,113 49,295,326
<OTHER-SE> (14,397,384) (81,528,674)
<TOTAL-LIABILITY-AND-EQUITY> 21,312,242 100,271,853
<SALES> 1,732,730 3,033,995
<TOTAL-REVENUES> 1,732,730 3,033,995
<CGS> 1,207,897 1,032,144
<TOTAL-COSTS> 1,207,897 1,032,144
<OTHER-EXPENSES> 9,558,880 45,902,837
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (8,851,342) (43,278,014)
<INCOME-TAX> 826 1,600
<INCOME-CONTINUING> (8,852,168) (43,279,614)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (8,852,168) (43,279,614)
<EPS-BASIC> (0.74) (2.40)
<EPS-DILUTED> (0.74) (2.40)
</TABLE>
